CNO Financial Group Inc (CNO) 2009 Q4 法說會逐字稿

Good morning. My name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter and year-end results for 2009 conference call. (Operator Instructions)

I would now like to turn the conference over to Mr. Scott Galovic. Sir, you may begin.

Thank you, operator.

Good morning, and thank you for joining us on Conseco's fourth quarter 2009 earnings conference call. Today's presentation will include remarks from Jim Prieur, Conseco's CEO, Ed Bonach, Chief Financial Officer, Scott Perry, President of Bankers Life and Eric Johnson, our Chief Investment Officer. Following the presentation, we'll also have several other business leaders available for the question and answer period.

During this conference call, we'll be referring to information contained in yesterday's press release. You can obtain the release by visiting the Company news section of our website at www.conseco.com. We'll also be referring to a presentation that can be obtained and viewed from the company's website. This presentation was filed in a Form 8-K this morning. We expect to file our Form 10-K for 2009, which is due on March 15, 2010, on or before March 3. Our Form 10-K will be available through the investor section of our website.

Let me remind you that the forward-looking statements being made today are subject to a number of factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Please refer to yesterday's press release for additional information concerning the forward-looking statements and related factors.

On December 8, we issued a press release with our outlook for 2010, in light of the capital management actions that we took during the year, as well as the changes in the financial markets. We will not be confirming or updating that outlook today or going forward.

The presentation to which we'll be referring today contains a number of non-GAAP measures. These measures should not be considered as substitutes for the most directly comparable GAAP measures. The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures.

And with that, I'll turn the call over to Conseco CEO Jim Prieur. Jim.

Thanks, Scott.

We are very pleased to report our fourth consecutive quarter of net income. Our results show net income of $18.2 million for the fourth quarter and net income of $85.7 million for the year. This equates to $0.09 per share for the fourth quarter, and $0.45 per share for the year. Operating earnings per share were $0.15 for the quarter and $0.86 for the year.

Our core sales continued to be strong with fourth quarter core sales of $118.9 million, up 18% over the fourth quarter of 2008. Strong Bankers Life results and expected Colonial Penn results were offset by weaker CIG results. Our operating results for the fourth quarter were impacted significantly by charges related to accruals for legal and regulatory settlements. The impact of these charges on operating earnings per share was approximately $0.04 for the quarter.

Material control weakness remediation. We still have not yet had two quarters to prove that all the controls are working, and specifically on a very small portion of our specified disease reserves.

On slide 5. Capital management was our key focus for 2009, and our recapitalization plan was the most significant transaction related to this. During the quarter we raised $296 million through the sale of stock, public and private. We also repaid $198 million of our senior term debt and, in accordance with the amended credit agreement terms, which also changed the debt covenant so that they now gradually tighten over time, rather than having a snap-back in the third quarter of 2010. This provides us with additional flexibility.

During the fourth quarter we bought back $176.5 million of the old 3.5% convertibles, which had a put date of September 2010, using proceeds from the new 7% convertible debentures due in 2016. Subsequent to year-end, we repurchased another $64 million, leaving a balance of $52.5 million of the old convertibles outstanding, which are callable by the Company in October 2010. As a result of these transactions, our holding company liquidity increased from $85 million at September 30, 2009, to $146 million at year end.

The other capital management initiatives undertaken in 2009 have contributed to what is now a consolidated RBC level of 309% for the Company. As a reminder, these initiatives included reinsurance limiting Bankers branch expansion, and reducing certain elements of our direct response lead generation spending at Colonial Penn.

As part of our recapitalization, or as a result of our recapitalization and capital management, we are encouraged by seeing positive movements from some of the rating agencies. S&P upgraded our rating by two notches to B minus, and upgraded our outlook to Stable. And Moody's upgraded our outlook to Positive.

Turning to slide 6, we would like to update you on a couple of significant items on the legal and regulatory front. First, we're pleased to announce we have reached a settlement in principle, involving approximately 700 policy holders who had opted out of the previously settled R-factor class action litigation. We've also reached a settlement in principle, of the multi-state market conduct examination involving approximately 15,000 holders of Lifetrend life insurance products. This settlement revolves regulatory issues related to the sale and administration of Lifetrend policies, including Conseco Life's ability to manage non-guaranteed elements of its life book. We took a charge of approximately $16 million for these two items in the fourth quarter of 2009.

Next up is our CFO, Ed Bonach. Ed.

Thanks, Jim.

As we indicated in our press release, during 2009 significant improvements were made to the actuarial reporting internal control environment. The issues that resulted in the material control weakness have been identified, and now are reduced to approximately $230 million of our specified disease reserves in the CIG segment, which is approximately 1% of our total consolidated reserves. Although controls have been enhanced, not all of the improved controls have operated for a period of time necessary to demonstrate their effectiveness at 12-31-09. As a result, we continue to have a material control weakness. Given our enhanced controls and remediation projects, we believe that our total policy reserves are reasonably stated.

Turning to slide 8, and fourth quarter results, collected premiums on a trailing four quarters basis declined, primarily due to the termination of PFFS group quota share contract, as well as the decline in annuity sales consistent with the overall fixed annuity market. Our net operating income of $32 million equated to $0.15 per share for the fourth quarter, compared to net operating income of $33.4 million in the fourth quarter of 2008 or $0.18 per share. As Jim mentioned, our 2009 fourth quarter operating results were negatively impacted by $0.04 per share due to legal and regulatory accruals.

For the fourth quarter net income applicable to common stock was $18.2 million, which includes $13.8 million of net realized investment losses, tax valuation allowance, and loss on extinguishment or modification of debt, compared to a net loss of $453.3 million in the fourth quarter of 2008, which also included losses related to discontinued operations. This equates to net income of $0.09 per share for the fourth quarter of '09, including $0.06 per share of net realized investment losses, tax valuation allowance, and loss on extinguishment or modification of debt, compared to a net loss of $2.45 per share a year ago, which also included losses related to discontinued operations.

Turning to slide 10, year-over-year total EBIT for the fourth quarter decreased slightly, from $78.1 million in the fourth quarter of 2008, to $71 million in the fourth quarter of 2009.

In our Bankers Life segment, pretax operating earnings were $84.6 million in the fourth quarter of 2009, up 112%, compared to $40 million in the fourth quarter of '08. Results for the fourth quarter of '09 were positively affected primarily by favorable PDP PFFS reserve developments, favorable reserve developments in the long-term care block, Medicare supplements, improved policy persistency, and growth in our overall business.

In our Colonial Penn segment, the pretax operating earnings were $5.9 million in the fourth quarter of 2009, down 12%, compared to $6.7 million in the fourth quarter of 2008. Results for the fourth quarter of 2009 were primarily affected by lower investment income due to lower yields.

In our Conseco insurance group segment, the pretax operating loss was $6.7 million in the fourth quarter of 2009, compared to earnings of $31.5 million in the fourth quarter of 2008. Results for the fourth quarter of '09 were negatively affected primarily by the aforementioned legal and regulatory accruals, lower investment income, and less business in force.

The corporate operations segment includes our investment advisory subsidiary and corporate expenses. Results for the fourth quarter of '09 reflect increased expenses, including a $4 million increase to the legal and regulatory accrual, and $2 million of expenses related primarily to increased corporate insurance expense. Corporate interest expense reflects the higher interest rate paid on debt, following the amendment to our credit facility in the first quarter of 2009.

Results for the fourth quarter of 2009 include the recognition of $8.3 million of extinguishment loss, net of income taxes, primarily related to the tender of $176.5 million of the 3.5% convertible debenture. The results for the fourth quarter of 2008 included the recognition of $13.8 million of extinguishment gain, net of income taxes, related to the repurchase of $37 million of the 3.5% convertible debenture.

With respect to investments, we recognized total other than temporary impairment losses of $60.8 million in the fourth quarter of 2009, of which $31.1 million was recorded in earnings, and $29.7 million in AOCL. Net realized investment losses in the fourth quarter of 2009 were $2.5 million, including other than temporary impairment losses of $31.1 million. Net realized investment losses in the fourth quarter of 2008 of $88 million, included $44.9 million of other than temporary impairment losses. Eric Johnson, our Chief Investment Officer, will address this in more detail later in the presentation.

The results for the fourth quarter of 2009 also reflect the net increase to the deferred tax valuation allowance of $3 million, consisting of the previously disclosed increase of $18 million that we established to fund the completion of a reinsurance transaction with Wilton Re, net of a $15 million reduction based on the higher income earned in recent periods, compared to amounts expected in our deferred tax valuation model.

Slide 11 shows our trailing four quarters operating return on equity, excluding increases to the deferred tax asset valuation allowance, losses related to the senior health transfer, and gain or loss on the extinguishment or modification of debt. ROE on this basis declined slightly, to 6.5% for the four quarters ended December 31, 2009, mainly due to the increased equity from our recent common stock offering. Improving under-performing legacy blocks of business by managing non-guaranteed elements, coupled with layering on new more profitable business, and further operational efficiencies and expense reductions, will all contribute to increasing ROE going forward.

As indicated earlier, fourth quarter net operating EPS decreased to $0.15 per share versus $0.18 per share a year earlier. The $0.15 per share calculation takes into account, on a pro-rated basis, the shares issued in the fourth quarter of 2009, as well as the dilutive effect of the $176.5 million of 7% convertible debentures that were issued in the fourth quarter. Operating EPS for the fourth quarter, calculated on the diluted shares outstanding for the first nine months of 2009, would have been $0.17 per share. In addition, the legal and regulatory accruals reduced operating EPS by $0.04 in the fourth quarter.

Book value per common share at the end of 2009, excluding AOCL, was $15.14, compared to $18.41 at December 31, 2008, primarily reflecting the increased number of shares outstanding following the completion of the common stock issuances in the fourth quarter of '09. As you can also see from this slide, AOCL decreased from almost $1.8 billion at 12-31-08 to $264 million at year-end '09.

Turning now to slide 14, holding company liquidity increased by $60.5 million during the fourth quarter, with just over $146 million of cash as of December 31, 2009. An increase of almost $296 million of net equity proceeds from the private placement and public equity issuance was partially offset by $198 million of paydowns on the senior credit facility. In addition, we made the first scheduled principle payment of $25 million on the senior health note in November.

To remind you, our liquidity at the holding company is impacted by the performance of our insurance subsidiaries. Our insurance companies currently are expected to generate approximately $200 million of statutory operating profits annually, excluding extraordinary items. Our statutory operating income for 2009 was approximately $264 million. The statutory dividend capacity of the insurance subsidiaries is in the range of $50 to $125 million annually. In addition to dividends from the insurance companies, the holding company also generates cash, from interest payments on surplus notes and fees for investment and administrative services provided to the insurance company.

As indicated earlier our consolidated RBC ratio increased in the fourth quarter, by 57 points to 309%. The change in Q4 was impacted by several factors. The most significant impact was the NAIC initiative on risk-based capital factors for RMBS investments. The rerating of our $782 million in RMBS investments, from an average rating of NAIC 3 to an average rating of NAIC 2, improved our consolidated RBC ratio by 35 points. Also positively impacting the ratio during the quarter were the Wilton Re reinsurance transaction and the fourth quarter statutory operating results. Our statutory operating income for the fourth quarter of 2009 was approximately $35 million.

Slide 16 is a waterfall chart showing the major impacts to RBC for all of 2009. Our RBC increase during the year was driven by positive impacts of operating performance, the aforementioned RMBS re-rating, the NAIC changes related to the mortgage experience adjustment factor, and our reinsurance transactions completed as part of our capital management efforts. Partially offsetting these improvements was a decrease due to credit rating migration and net statutory investment losses over the past year.

Let me now turn it over to Scott Perry, President of Bankers Life, to cover that segment's results.

Thanks, Ed. Good morning.

For the quarter, Bankers' earnings were $84.6 million, 112% improvement over the prior year. The main drivers positively affecting earnings versus the prior period were higher PDP and private fee for service income, due to favorable IBNR developments, higher long-term care income of $7 million, due to favorable development of prior period reserves, and policyholder actions following recent rate increases, favorable Med Supp claims, along with higher persistency, and a favorable reserve release on our UL line of business. This quarter's income results are in line with established EBIT expectations of approximately $60 million per quarter for Bankers, with the exception of the following items that we do not expect to repeat. First, quota share income of $9 million, the UL reserve adjustment of $6 million, and higher income of $10 million in long-term care related to positive prior period reserve development.

Our core sales for the quarter were $91.7 million which was up 28% over the same period last year, and also represented a new quarterly sales record. Bankers also had continued success in the recruitment of agents, with new agent recruits up 12% on a year-to-date basis.

The next slide has more details on our sales results. Fourth quarter sales were led by Med Supp, which was up 104% versus the fourth quarter of 2008. A contributing factor to this increase was the conversion of Coventry private fee for service policyholders that needed to find new coverage as of 12-31-09. I will discuss this in more detail on the next page.

Also contributing to the strong sales results were life products, up 20%, which established a new record level of quarterly sales and long-term care sales up 6%. These favorable results were offset by lower sales of annuities, which were down 49% versus last year. This was consistent with overall declines in the industry, as well as a result of a 200 basis point rate reduction in our top selling bonus product, which we implemented at the beginning of the quarter to preserve full margins as earned rates declined. During the quarter we filed a lower guarantee right on our bonus product, which allows us to reinstate the full bonus rate while achieving full margins. This product was filed in all states and we received approval in most states and began selling in 45 states effective February 1.

We have continued to have success recruiting, in both the volume and quality of candidates. Our agent force, on average for 2009, was 5,143 which represents a 9% increase versus 2008.

Moving to page 19, I'd like to spend a minute to expand on the Medicare supplement results during the fourth quarter. As previously announced, Coventry exited the private fee for service business effective 12-31-09. This termination affected approximately 51,000 Bankers-sold private fee for service members, which we were partially reinsured by Bankers. During the quarter, we converted 18% of these policyholders to traditional Med Supp. These sales are reflected in the fourth quarter sales results. Additionally, we converted another 17% of these policyholders to Medicare Advantage plans we are now offering through our partnership with Humana. This partnership is a fee-only arrangement for Bankers, unlike the Coventry quota share arrangement.

Also occurring during this time period was the 2010 annual election period, beginning in November 15 through December 31, for Medicare beneficiaries. The sales results have been positive, and along with the Coventry conversions, will be recognized in the first quarter of 2010.

Finally, regarding our Medicare portfolio. In the quarter we filed Medicare modernization qualified products in 49 states, in advance of the changes in plan design that go into effect for new sales this June. We priced these new plans consistent with the competitive levels and target margins of our current block. As of today, we have received approval in 40 states, and we are already selling plans for 6-1 effective dates.

Lastly, on slide 20, we see the impact of the earnings items previously discussed producing an ROE on a trailing four quarters basis of 11.5% for Bankers.

Now I will turn it back over to Ed to cover Colonial Penn and CIG results. Ed.

Thanks, Scott.

Turning to slide 21, Colonial Penn's earnings in the fourth quarter were $5.9 million, a 12% decline from the fourth quarter of 2008. The decrease is driven primarily by lower investment income, partially offset by lower operating expenses. Life sales for the fourth quarter of 2009 were $8.4 million, which is down 22% from a year ago. As communicated in previous earnings calls, this is consistent with expectations associated with the advertising cost reductions that were part of our capital management initiatives for 2009. We are increasing our advertising spend in 2010. Despite the 2009 emphasis on capital management, collected premiums showed consistent growth, with 10% growth compared to the year ago quarter and 6% growth for the full year.

Turning to the next slide, we see that Colonial Penn's trailing four quarter return on equity of 13.9% continues to be in its targeted range.

Looking at CIG results on slide 23, overall net increased by 4% over Q4 '08, which is the second consecutive quarter of positive sales comparisons, with the segment showing sales growth in both the CIG sales and PMA channels. Full year NAP for 2009 was also up over 2008, further evidence that the repositioning of CIG is taking hold overcoming $10 million of NAP in 2008 from lines we no longer emphasize. Work site sales increased 11% for the year, which continues to demonstrate our increased traction in this important market. As indicated earlier, CIG did show a loss in the fourth quarter primarily as a result of legal and regulatory accruals. As a reminder, a significant portion of the CIG universal lifetime products in force are in loss recognition status, which will lead to volatility in earnings on a quarter-to-quarter basis.

We continue to take action to increase our earnings in this segment, by improving under-performing legacy blocks through managing non-guaranteed elements, layering on new more profitable business, and further operational efficiencies and expense reductions. We believe these will positively impact increasing CIG's ROE to the mid-single digits over the next two to three years.

Slide 24 illustrates the targeted shift in CIG's sales mix, with specified disease sales up 20% over Q4 '08, and life sales up 163%, driven primarily by the independent channel.

Slide 25 summarizes CIG's operating earnings by period. You will note the higher operating costs in Q4 '09 from the aforementioned $12 million increase to the legal and regulatory accrual resulting in CIG's loss. CIG's operating return on equity for the trailing four quarters is negligible.

And now, I'll hand it over to Eric Johnson, our Chief Investment Office, who will discuss the CNO investment portfolio. Eric.

Thank you, Ed. And good morning, everybody.

I'd like to start with a few minutes reviewing the key components of our investment results for the quarter.

First, activity during the quarter. We reduced our cash position and purchase spread assets as markets stabilized. Our overall book yield during the quarter was approximately 5.6%, comparable to the third quarter. During the quarter yields on new investments were in the low 5s and consistent with market rates and tighter credit spreads. Taken together, the yield curve and low volatility didn't promote an environment that would support substantial increases in risk or, spoken broadly, provide attractive compensation for that risk. At the same time, we're giving much emphasis to investing new money at yields consistent with the company's operating plan and product needs. We think our need to do that in a very smart way, but protect the quality of the investment portfolio, we think those two objectives are consistent and both achievable.

Let's go to slide 26. Slide 26 is about our unrealized gain/loss position at 12-31. That position during the second half of the year improved substantially, from a deficit of roughly $2.9 billion at the beginning of the year to roughly $500 million at the end of the year, and continues to bump along in that range at this time. In general, we saw improvements in many asset classes during the second half of the year, as liquidity came back to the structured securities marketplace and corporates certainly tightened during that time as well.

Moving on to slide 27. Slide 27 presents realized gain/loss for the fourth quarter. As you've heard, we had substantial amount of gross gains offset by losses on sales, as well as temporary -- other than temporary impairments of $31 million recognized in earnings, leaving the net as presented on the slide.

Going to slide 28, which provides a breakdown on impairments. Commercial mortgage loan impairments totaled roughly $8.8 million. Also, due to an increase in our cumulative loss expectations for certain RMBS, we recognized approximately $6 million of prime jumbo impairments and roughly $4 million of Alt-A impairments.

Let's go on to slide 29. Slide 29 illustrates our asset allocation and mark-to-market trends by each asset class. I've discussed the trends in terms of the mark-to-market. Our asset allocation was substantially unchanged in the fourth quarter, although we did put a little more money to work in spread assets, and I do think that as market conditions change, you make the opportunities for the allocation to change, which hasn't happened yet.

Going onto slide 30, which presents our investment assets by rating. As you can see, our year-end below investment-grade ratio was essentially unchanged at around 7%, 93% investment-grade, which is consistent with prior period. And the pace of down-grade certainly slowed during the fourth quarter and remains today below levels earlier in 2009.

Going on to slide 31, Ed described -- as Ed described earlier, the action the NEIC took to amend the risk-based capital factors applied to RMBS investments, and slide 31 breaks down the impact on our portfolio. And as Ed described, we have roughly $800 million in RMBS investments that were affected by this re-rating activity and bumped them up from level three to level two, which had a substantial impact on the RBC ratio. Speaking generally, really what made the difference were investments at the lower end of the rating scale, which had been punished by the approach taken by the major rating agencies, which is to push things into the NAI six bucket, if they had a prospective loss of a single dollar. And so, when you took a fairly large cohort of securities and moved them from five and six categories to one's and two's, that had a major impact.

Slide 32 shows -- breaks down our Alt-A holdings at year-end, which represented approximately 70 basis points of invested assets. That's an allocation that we reduced considerably during 2009, with really the emphasis on improving the quality and the stability of that allocation. And while that had a material impact on realized gains and losses during the year, we think it set us up pretty well for sustaining a good income stream over the coming years.

Going on to slide 33. Slide 33 similarly breaks out our prime jumbo investments, which represents about 175 basis points on invested assets -- 1.75%, rather. Prime trends, delinquency trends, have continued to be somewhat unfavorable during recent periods and so we increased our [accum.]loss expectations on many jumbos, leading to the roughly $6 million of impairments I described earlier, which touched ten securities. On balance we're satisfied with the ongoing performance of this allocation, but obviously we'll continue to monitor it very carefully.

Going on to slide 34 which covers CMBS and breaks down our CMBS exposure by vintage. This is a very good portfolio which has significant seasoning. It is highly rated, over 90% in double- and triple-A categories. Obviously in the CMBS marketplace, rising delinquencies are a reality and will have some impact on this portfolio. However, the delinquency rate of our collateral is substantially lower than the market as a whole. It is below 2%, compared to 4% and 5% for the market as a whole. And recent mark-to-market trends have been favorable, as well as liquidities returned to particularly the higher rated CMBS sectors, and this is an area where we feel very comfortable with our investment.

Slide 35 has a little more information on our CMBS portfolio, which illustrates really that that's an exposure that has very significant credit support, compared to its delinquency performance. And so it is very likely in the long run, this is a portfolio that will perform exactly as expected.

Slide 36 touches on our commercial mortgage loan allocation really by vintage and property type, and provides some high-level summary statistics. It's approximately a $2 billion portfolio, which is about 9% of invested assets. Very diverse, over 400 loans. And obviously, a very small number of large loans, and a large loan to us would be $30 million or $40 million. While commercial mortgage fundamentals and valuations remain pressured, and we all read a lot about it in the newspaper, we recognize that roughly $8 million in fourth quarter impairments, which enabled us to resolve four delinquent loans. There hasn't been very much change in the performance or the status of this portfolio in recent months. It is a portfolio we monitor very carefully. This is probably not the end of delinquencies or future impairments in this portfolio, but we expect future amounts would be manageable, in total.

One general statement, which is that, obviously as the economy returns, with condition of some growth, and spreads in most sectors are pretty tight, government support has been significant and profound, and has really affected the price of money. And the expected withdrawal of that support is already affecting the marketplace, with many people expecting higher rates. While the current level of rates reflects very strong demand for risk, and the anticipation of higher rates will certainly help us generate the income we need in relation to my earlier comments.

So on that note, I'll turn it back to Jim.

Thanks, Eric.

On slide 37, we continue to generate solid operating earnings. This is the fourth quarter in a row with net income. Our core sales and agent recruitment continue to improve both at Bankers and at CIG, in spite of the tough economic environment.

Our recapitalization addressed our most pressing financial priority, the refinancing of our old 3.5% convertible debentures. The transactions were structured to protect our NOL, and allowed to us raise additional common equity and improve our financial covenant margins and liquidity. We believe the ability to complete such a transaction clearly demonstrates investor confidence in the Company.

Capital and risk management will continue to be significant priorities. We anticipate a successful completion of the merger of three of our insurance companies, which will benefit the Company on a consolidated basis, by reducing operating expenses and by reducing capital requirements.

The demographics of Conseco's target market are very attractive. As a result of the baby boom, the number of Americans turning 65 each year will grow steadily over the next decade. The first of the boomer population becomes Medicare eligible next year. In ten years, the number of people 65 years and older will increase by 50%. Over the next 19 years, about 4 million boomers turn 65 each year. Consumer research shows the boomers are unprepared for retirement, and they're greatly concerned about unforeseen healthcare costs and the adequacy of retirement income. Also, the research shows that as consumers move towards retirement, they're open to new or additional financial relationships.

Bankers' community-based branches create unique access to under-served markets. Recent evidence of this is that both Medicare and Life sales have had double-digit percentage growth rates over the previous year, and they're projected to continue to grow steadily.

The outlook is bright, and we will continue to invest in our growth. At Bankers, we are now reinsuring less of our new business, and we will continue to expand the sales force. By retaining more of the business at Bankers, we are effectively investing more in this business.

In the case of Colonial Penn, our plans include refocusing on the Company's demonstrated growth capability that was curtailed as part of our 2009 capital management efforts. These plans call for an increase in funding for advertising for this direct response business, with an expectation of a year-over-year increase in sales as a result.

For CIG, we will continue to focus on improvement of the under performing blocks of business and grow our new, more profitable sales. You will note that in 2009, CIG started to show net growth in its business, and we expect that that growth in sales will accelerate in the future.

And now, we will open it up for questions. Operator.

(Operator Instructions) Your first question comes from the line of Kevin Barker.

Good morning. This is Kevin Barker, filling in for Randy Binner.

Just had a quick question on realized investment losses. I notice that you reported $31.1 million OTTI in earnings, and net $2.5 million in realized investment losses, with significant amount of sales -- gains on sales and gains on losses. Just wanted to know where some of those losses were coming -- the losses on the sales and the gains on the sales, where they were coming from, what asset classes, specifically?

This is Eric Johnson. Sure.

Let's start with the gains. Probably most gains came from the corporate sector -- investment grade corporates. That's a big allocation, it's about 60 odd percent of our invested assets, and has also the greatest duration of any of the sectors we invest in. So as rates tightened significantly during the fourth quarter and spreads tightened as well, that would have been where there were opportunities to realize some over-valuations, and recognize gains.

In terms of losses. While there were also losses in corporate, I would think the -- in fact, I know -- the majority of the amounts were in structured securities, which had also similar good strong runs during the second half of the year and where there were opportunities to get off, you know, slightly under-performing Alt-A's and jumbos and a couple of Med CMBS pieces as well, which -- and reinvest the money at better prospectively realized yields and improved credit and ratings quality, those seemed like pretty easy trades to do.

Many securities, as you know, in structured maturities in that sector even doubled and tripled in value during the course of the year, and provided pretty easy exits, in some cases, as there was a lot of liquidity looking for places to go during that time. So, while I realize I haven't been numerically specific, I think I've given you a very good sense of how -- where the money came and went.

Absolutely. I notice that your jumbo RMBS exposure almost dropped by half. Was that a strategic move, or what was the reasoning behind that?

I would characterize it, Randy, as more tactical and responsive to market conditions, and not really strategic in the sense of making a call on the sector fundamentally. But I think as I described, as liquidity came back into the space yet we did see some continued ramping in delinquency trends and in transition rates within securities where you -- we did see unemployment has been sticky. You've seen faster, or at least not enough slowing, in the transition rates within delinquency buckets, so you're seeing 60 plus delinquencies going up further, faster, I think, than anybody expected. Certainly the rating agencies continue to relook that sector, and up their cum loss expectations.

You've got big pipelines out there of foreclosed properties and people are uncertain as to where severities are going to land. Having said that, there's a lot of good opportunities in that space, but there have also -- there had also emerged at that time -- circumstances where some securities were over-valued, relative to probably their terminal value. So looking at our exposure on a security-by-security basis, you know, I think we've tried to be smart about understanding we're a long-term investor and responding accordingly.

Okay. One quick follow-up on statutory operating results, and I'll get back in the queue.

I noticed that you had a significant amount of statutory income contributing to the RBC ratio, and I estimated about $100 million worth of statutory income, give or take. Is that a good run rate? How would I look at that going forward, as far as statutory operating results?

Kevin, this is Ed. We had about $260 million of statutory operating income for the full year. That's a little higher than what we would expect on an ongoing run rate. Our expectation is more in the $50 million per quarter or $200 million per year.

Okay. I'll get back in the queue. Thank you.

Thanks, Kevin.

Your next question comes from the line of Paul Sarran.

Good morning.

To start, unless I missed it, I don't think you mentioned 2010 guidance on the call. Are you maintaining the guidance range of $0.55 to $0.65 that you gave in December? Do you still consider this a reasonable target for 2010?

It's Jim.

We're not providing guidance. We tried to say that the beginning of the call.

The earnings outlook that we provided in December, I mean the reason we did that was that, we had done a series of transactions during the year, and in particular in Q3 and Q4, reinsurance, debt issues, repayments. And we were, at that point, talking about doing a public equity issue. The average analyst's earnings on the street was quite far away from where we thought the earnings would be, and so we felt we had to provide an earnings outlook at that point. But as a -- we don't provide earnings guidance, and we're not going to be providing earnings guidance going forward.

So you may not answer this question either, but do the results of this quarter change your view, in any way, on the outlook that you gave?

You know, what we've tried to do is, we've tried to talk about the items that we think are somewhat nonrecurring, and talk about what the earnings power of the various businesses is, and so that's the kind -- that's the form of color that we're providing to everybody going forward.

Okay.

Well, just to drill down on CIG in particular, for a little, for a question or two. Even adjusting for the legal and regulatory settlement accruals, say earnings were surprisingly weak, well below recent trends, is there any reason you would expect earnings to come back in 2010, or should we expect CIG earnings to trend, not at these lower levels, at least until you start to see benefits from NGE adjustments?

Paul, this is Ed.

Certainly, to your last part of your statement, we do expect to see positive impacts going forward, as we're resuming our management of the non-guaranteed elements. Secondly, as I mentioned briefly, and as we've talked about in prior quarters, because of the lack of margins on a lot of CIG's business, the universal life type business in particular, a lot of that block is in loss recognition. And so any negative developments in its experience, be that investment earnings, mortality, persistency, we have to immediately unlock and recognize that in the quarter. So that to the extent that we're able to help to improve margins, then that will help to mitigate those types of volatility and unlockings in the earnings of CIG as well. So I think those are a couple of things, why we would think, besides the legal and regulatory accruals, there's reason to think that CIG can perform higher than that.

Was there a meaningful unlocking, that's in this quarter, due to the lower investment income, that you wouldn't expect to see repeated?

Yes. There was definitely some unlocking in the quarter, about $12 million.

Okay. That's actually very helpful.

One, just longer term, question on the CIG outlook. Your expectation of mid- to single-digit ROEs over the next two to three years, does that rely on any increase in investment yields, or I guess what happens to this projection if rates remain low, where they are now, and spreads narrow?

When our outlook was provided, that was with the expectation that there would be some continued lower investment rate. So no, if rates stayed low we don't expect any significant change from what we communicated previously.

Okay. So then conversely, is there upside if rates go up?

In general, yes. Certainly, for the interest-sensitive businesses, there is some offsetting adjustments of either credited rates to maintain an appropriate rate to the end consumer and be competitive to keep the business in force, as well as you do amortize more for those blocks that aren't in loss recognition, but all in all higher rates should translate to higher earnings.

Okay. And then, one last quick question.

Traditionally, you've talked about the seasonality of your business. I think most recently you said you would expect the fourth quarter to generate 26% to 31% of annual earnings. Are there any change to this in the way you look at the business, or is that metric still sound reasonable? It's going to change a little bit, and that's because of the decrease of the importance of PFFS going forward. So it won't be quite the same as it has been over the last two years. In the past, we would have huge amounts of PFFS sales booked in Q1, which would tend to drive earnings down in Q1, and sales activity in Q4 would look weaker because we were selling PFFS which only got booked in Q1. So you had a big shift there that is much less important now as PFFS diminishes in terms of its share of the Medicare-type market.

Okay. Thank you.

Your next question comes from the line of Kevin Barker.

Thanks again.

Just wanted a little update on how we should look at CIG going forward. Maybe you can provide a little more color around how we would look at operating EBIT going forward, see if you can provide a little bit more guidance around that. I know you're trying to not to touch on the guidance too much, but maybe you could just provide some more data points around how we would look at that, especially considering this last quarter?

Yes. Kevin, I think as I tried to communicate in my response to Paul, from the Q4 '09 standpoint I would see beyond the $12 million of legal and regulatory accruals, approximately $12 million of unlocking that may occur in the future, but shouldn't be something that would normally and regularly happen. And then, beyond that, we do expect to improve margins -- or restore margins is maybe a better term -- going forward over the longer term, as we resume managing our non-guaranteed elements on this business after the Lifetrend's tentative settlement.

Okay.

Back on the Lifetrend. Can you provide a little color around how you would go about maybe rerating some of those policies, especially considering the legal ramifications and what occurred in the past quarter?

Sure. I mean, we have a process through which we create justifiable rate increases and if indeed we can justify them, we will proceed with rate increases. And given the complexity of the block and the multiple types of blocks within the life side of CIG, it will take some time, and -- but it will start to make a positive contribution before the end of the year.

And just to add to that, with the business we're talking about in CIG here, the primary non-guaranteed element is the cost of insurance charge on the universal life type contracts. So it is mortality experience that would justify a change or, in this case, an increase to the cost of insurance that the policy holder would pay. That's not the only non-guaranteed element. There also are, of course, interest rate credited and expense and administrative charges, and we will as -- again justified and supportable, look and adjust any and all of those.

So, any impact, if you were, would probably be expected in the latter half of this year?

Yes.

Possibly.

Yes.

Okay. Thank you.

If there are no more questions, I'd like to thank everybody for your interest in Conseco --

We do have one additional question.

Sorry. Go ahead.

It comes from the line of Richard Glass.

Hi, guys. Nice quarter if you back out the charges and noise here.

My question is regarding the guidance you had given, I realize not wanting to update or really reflect on that, but is there a reason, and I've been on and off the call, so maybe you've gone through some of this. But is there a reason that we shouldn't think about a $0.20 run rate, if you take your quarterly results and back out some of the legal settlement issues, which are positive to get that behind us anyway? But is there a reason that that something near $0.20 isn't the right number to think of?

Well, I think $0.20 multiplied by the current number of shares, but remember that in Q4 we're edging into having more and more shares outstanding, so the dilution gets bigger as you go forward. But, yes, somewhere around $0.20.

On that share count.

On that share count was about the right number. And when you look at CIG, if you just take the numbers that Ed was talking about, you end up with sort of a $20 million to $30 million EBIT per quarter. It is sort of in that range. With a lot of volatility because, as Ed pointed out, we're in loss recognition on the life side, so small changes in mortality experience can have an impact that will get directly pushed through the earnings statement.

Okay.

Was there any unusually good in Bankers as well?

Yes. We had positive reserve developments in both the private fee for service PDP and the long-term care block.

Right. But, in terms of the growth is more what I was thinking of, not just the reserve development, things like that.

No. I think the growth is genuine.

If you look over the last five years, the growth in the agent force is around 4% or 5%, and the growth in sales per agent is around 5%. So we end up with a 9% to 10% growth rate. And this year, the growth in the agent force is much larger than that, and so that should support greater growth going forward.

The only other thing I would mention, Richard, is sort of in conjunction with the Med Advantage or private fee for service not being as attractive in general in the marketplace. We and other companies have seen a shift in that Medicare space more to Medicare supplement products, and we certainly saw more Medicare supplement sales in the fourth quarter, but we would expect to continue to see Medicare supplement sales be relatively stronger than the private fee for service.

Some of that growth in the fourth quarter Medicare supplement was over 100%, as people shifting from the Med Advantage product.

My last question is in terms of the legal settlements were those legal issues getting in the way of you guys doing anything? Were they getting in the way of sales in certain territories or to certain parties, or was that really hampering your business in any ongoing fashion?

Well, they were both legal and regulatory. So the legal settlement was the cleanup on the R factor, and it's still a settlement in principle. It's been agreed to, but it still has to be signed off by the various policyholders. We just made the provision, because we're pretty certain it is going to take place. And that really wasn't getting in the way. It's just a clean up of a legacy issue that goes back to-- the original settlement was in 2006.

The Lifetrend issue was more serious, because of course you don't want to be disagreeing with your regulators. And so reaching a settlement with the regulator was very important. It was clearly a very time consuming process, and very good to have behind us.

Great. Congratulations .

Thanks.

Your next question comes from the line of Paul Sarran.

Okay.

Just a follow-up on CIG.

Can you give a little bit more color about how you get to a $20 million to $30 million range? Just simplistically, if I take what you reported at minus $6.7, add back $12 million for the legal and regulatory accruals, and another $12 million for the policy unlocking, I get to about $17 million. Based on that, that $30 million run rate would seem fairly generous. Is there anything else in there?

And then the resumption of managing our non-guaranteed elements.

Is that something you think it is realistic, could realistically add $10 million a quarter within the first year?

Probably not.

You're at 17, you're close to the bottom of the range, and we think we can get at least into the range going forward.

Okay. Thanks.

I think that should be it. We're through our time, and thank you very much, operator, and thank you, everyone, who's been on the call for your interest in Conseco.

That's great. Thanks.

Ladies and gentlemen, this does conclude today's conference call. At this time you may disconnect.