CNO Financial Group Inc (CNO) 2010 Q2 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the CNO Financial Group second quarter 2010 earnings results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you, Mr. Galovic. You may begin your conference.

Thank you, Operator. Good morning and thank you for joining us on CNO Financial Groups second quarter 2010 earnings conference call.

Today's presentation will include remarks from Jim Prieur, our CEO; Ed Bonach, Chief Financial Officer; Scott Perry, President of Bankers Life; and Eric Johnson, Chief Investment Officer. Following the presentation we will also have several other business leaders available for the Q&A period. During this conference call we will be referring to information contained in yesterday's press release. You can obtain the release by visiting the Company's news section of our website at www.cnoinc.com. This mornings presentation is also available at our website and was filed in a Form 8-K the morning. We expect to file our second quarter 10-Q and post it on our website on or before August 9.

Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Please refer to yesterday's press release for more information about the forward-looking statements and related factors. Today's presentation does contain a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures. You will find a reconciliation of the GAAP measures with the non-GAAP measures in the appendix of the presentation. One final note throughout this presentation we will be making performance comparisons, unless otherwise specified any comparisons will be referring to changes from 2Q 2009 to 2Q 2010.

And now, I will turn the call over to our CEO, Jim Prieur. Jim.

Thanks, Scott.

We are very pleased to report a solid profitable quarter for CNO Financial Group, reflecting our continued steady increase in sales and with results ahead of expectations. Our net income for the quarter increased 20% year-over-year and there were few unusual items. Core sales continued to be strong with second quarter 2010 sales of $95.3 million, up 5%. At Bankers Life, our career distribution channel, total new annualized premium (NAP) excluding PFFS and PDP was $64 million, up 3%. At Colonial Penn, our direct distribution channel, total NAP was $12.2 million, up 16%. At CIG, our PMA and independent distribution channel, total NAP was $19.1 million, up 6%.

Second quarter net operating income was $44.9 million, up 10% from a year ago. On a per share basis, net operating income of $0.16, was down compared to the second quarter of 2009. Keep in mind however that this decrease reflects the dilutive impact of the issuance of common stock and convertible debentures during the last three quarters. By issuing these securities, we were able to significantly enhance our capital position and support the Company's growth. Asset values increased with the accumulated other comprehensive income of $319 million at June 30, compared to an accumulated other comprehensive loss of $264 million at year-end 2009.

The combined risk-based capital ratio of our insurance companies, a measure of their financial strength, was at 318% at June 30. At quarter end, liquidity at the holding company was $130 million and book value per common share, excluding AOCI, was $15.39, up 2% since year-end 2009. As we continue to deliver results and build value for our shareholders we also continue to see positive signs on the rating agency front. During the second quarter, we had an upgrade from Moody's and an outlook revision from negative to stable by Fitch. As with many of our competitors, we recognize the current interest rate environment is of great interest to our stakeholders and that the threat of persistent low interest rates is a concern. Ed Bonach will address this topic in more detail later in this presentation.

Next up is our CFO, Ed Bonach. Ed?

Thanks, Jim.

As Jim mentioned our net operating income was $44.9 million, or $0.16 per share compared to $40.8 million, or $0.22 per share in the prior year. This reflects dilution of $0.07 per share from the issuance of common stock and convertible debentures. Net income applicable to common stock was $33.1 million which included $11.8 million of net realized investment losses and loss on extinguishment of debt compared to $27.6 million a year ago, which included $13.2 million of net realized investment losses. Net income per share is $0.12 per share including $0.04 per share of net realized investment losses. This compares to net income of $0.15 per share a year ago, which included $0.07 per share of net realized investment losses.

Here again, the prior year's figures were based on a lower share count diluting this quarters results by $0.05 per share. Turning to Slide seven, earnings before interest and taxes increased by 3.5% year-over-year to $89.7 million. In our Bankers Life segment, pretax operating earnings of $64 million were essentially flat with a year ago. Looking at our Colonial Penn segment, pretax operating earnings were $7.6 million, down 31%. However, excluding the impact of a $3 million gain related to the termination of a group insurance pool recognized in the second quarter of 2009, the results were consistent with the prior year. In our Conseco Insurance Group segment, pretax operating earnings were $29.9 million, up 41%.

This increase was primarily driven by higher investment spreads resulting from bond prepayment income along with higher book yields on our investment portfolio and improved annuity persistency. We will cover the segment results in more detail later in the presentation. The corporate operations segment includes our investment advisory subsidiary and corporate expenses. Results for the second quarter of 2010 reflect increased expenses including $2 million related to the termination of a lease obligation and CNO rebranding expenses. Corporate interest expense reflects the lower average debt outstanding partially offset by higher average interest rates on such debt.

The results for Q2 2010 included the recognition of the $600,000 extinguishment loss net of income taxes related to the repurchase of $52.5 million of our 3.5% convertible senior debenture. Net realized investment losses were $11.2 million including total other than temporary impairment losses of $23.9 million, of which $27.9 million was recorded in earnings and the balance in accumulated under comprehensive income. Net realized investment losses in the second quarter of 2009 of $13.2 million included $53.7 million of other than temporary impairment losses of which $36.6 million was recorded in earnings and the balance in accumulated other comprehensive income or loss. Net realized investment losses last year also included a $4.6 million increase to the deferred tax valuation allowance. Eric Johnson, our Chief Investment Officer, will address investment results in more detail later in the presentation.

Slide eight shows our trailing four quarters operating return on equity. Our calculation excludes changes 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. Our equity base for operating ROE excludes both AOCI, or AOCL, and the value of net operating loss carry-forward. ROE on a trailing four quarters basis decreased by 0.6 percentage points to 6% from a year earlier, reflecting the higher equity balance following the issuance of common shares in the fourth quarter of 2009. We expect to increase ROE by improving underperforming legacy blocks through management of nonguaranteed elements, layering on new, more profitable business and by further improving our operational efficiency. As we discussed on last quarters call, we plan to split CIG into two segments next quarter, which will provide more line of sight into these improvements.

Second quarter 2010 net operating EPS was $0.16 per share versus $0.22 per share a year earlier. These results reflect about $0.07 per share of dilution from the issuance of 65.9 million shares of common stock and $293 million of convertible debentures. Turning to Slide 10. Book value per common share, excluding AOCI, AOCL, increased to $15.39 from $15.14 at year-end, primarily reflecting earnings in the first half of 2010. As Jim mentioned earlier, our investment portfolio values rose during the first half of 2010 with accumulated other comprehensive income of $319 million, compared to an accumulated other comprehensive loss of $264 million at year-end 2009.

Risk-based capital, or RBC, decreased 1 percentage point to 318% in 2Q 2010, including an 8 point decrease from the adoption of the modified temporary mortgage experience adjustment factor, or so-called MEAF relief. During the second quarter the NAIC Capital Adequacy Task Force approved a proposal to revise the MEAF calculation for year-end 2010 and 2011. The long-term replacement for MEAF which is expected to be based on a risk charge for each loan is still under development.

Let me now turn it over to Scott Perry, President of Bankers Life, to cover that segments results. Scott?

Thanks, Ed.

For the quarter, Banker's earnings were $64 million which was essentially flat to prior year. Results for the second quarter of 2010 compared to the same period of 2009 reflect the following items; higher spreads in annuities, favorable IBNR development in private fee-for-service and stable earnings in long-term care with favorable claims experience in the current quarter, partially offsetting the benefit experienced in the second quarter of 2009, as a result of policyholder actions following rate increases. Sales for the quarter, excluding private fee-for-service and PDP, were $64 million, up 3%. The total agent force has declined slightly, which was expected considering the record recruiting results we experienced in 2009.

As a result of a decrease in recruiting we have seen a slight decrease in our total agency force. And although the agency force is slightly lower, we have experienced an improvement in agent productivity. New agent productivity is up 12% and better agent productivity is up 6%. Also importantly the number of productive veteran agents is up 8% year-over-year. We expect to be able to maintain our agency force size in 2010 through a combination of steady recruiting and improved retention. Improving productivity in the force will increase retention and position us well to grow the agency force in 2011.

The next slide has more details on our sales results. Second quarter sales growth of 3% was driven by strong Life sales, up 11% and Medicare Supplement sales up 10%. These increases were partially offset by a decrease in long-term care sales of 11% and annuity of sales of 5%. While annuity sales are down overall we have had success in the second quarter with our fixed index products, some of which offer the customer the option of putting a portion into a fixed fund account. Sales of FIAs (fixed index annuities) were up 38%. Slide 14 shows the impact of the earnings items previously discussed producing an ROE on a trailing four quarters basis of 11.6% for Bankers.

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

Thanks, Scott.

Turning to Slide 15, Colonial Penn's earnings were $7.6 million, down 31%. The second quarter of 2009 benefited from the recognition of a one-time $3 million gain on the termination of a reinsurance pool in which the Company had been participating. After adjusting for this one-time gain, earnings for both the quarter and the year-to-date periods were essentially flat. Building on a 7% sales increase in the first quarter, Colonial Penn's $12.2 million of sales in the second quarter reflected a 16% increase over the year ago period. This growth was primarily driven by the restoration of direct response advertising that had been reduced last year as part of the capital management initiative.

Turning to the next slide, we see that Colonial Penn's trailing four quarters return on equity of 12% continues to be in this targeted range. Looking now at CIG results on Slide 17, their earnings were $29.9 million for the quarter, up 41%. The increase can be partially attributed to higher investment spreads due to bond repayment income which was $2.8 million in the quarter. Improved annuity persistency also contributed to the increase in earnings this quarter. Overall NAP increased by 6% which is the fourth consecutive quarter of positive sales comparisons for CIG. We had sales growth in both the independent and PMA channels driven in part by continued strong agent recruiting.

Slide 18 illustrates the targeted shift in CIG sales mix, with specified disease sales up 19%. Worksite sales results continued to gain momentum with new independent worksite NAP up 32%. Slide 19 summarizes CIG's operating earnings by period.

Moving to Slide 20. As Jim mentioned earlier, the threat of persistent low interest rates is a concern for the life insurance industry. As a reminder, our 2010 outlook we issued in December of 2009 assumes the continuation through 2010 of the relatively low interest rate environment. To offset the earnings impact of low interest rates, we have been seeking and achieving additional yields in selective asset classes.

In addition, we have tightened the match between our assets and liability. As a result of these two actions, our results for 2010 show a year-to-date increase in our earned rate despite the decline in market rates.

Last week, the EITF FASB task force announced proposed changes to deferred acquisition cost, or DAC accounting, primarily related to which cost would qualify as acquisition costs and be capitalized as part of DAC. We expect that we will continue to be able to defer essentially all of the commission-related expenses which comprise approximately 65% of the DAC on our balance sheet as of June 30, 2010 along with being able to defer some portion of the noncommission expenses including direct advertising.

The proposed changes would have no impact on the value of policies in force. We plan to retroactively adopt the proposed changes in 2012 and restate prior periods. Please keep in mind that EIPF 09G is an accounting change that only impacts timing and not the underlying profitability or cash flow of the business. It also does not affect our statutory earnings and will not have an impact on the cash that we are able to dividend up to the parent company. On another note, the second quarter brought about the advent of the Dodd-Frank Wall Street Reform and Consumer Protection Act. We do not see this legislation as materially impacting our business.

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

Thank you, Ed, and good morning, everybody.

In the second quarter we earned investment income of $321 million compared to $315 million in the first quarter. Our portfolio generated an earned yield of 5.83% compared to 5.76% in the first quarter. Our yield improved due to higher yields on new investments. Our new money rate was 6.26 for the second quarter which is consistent with the first quarter. Our new investments balanced income with quality as Ed described earlier. Here is what we have been buying; Senior CMBS , current paying nonagency RMBS, investment grade corporates and taxable MUNIs.

Going on to Slide 22, which summarizes real life gains and losses in the second quarter. We recognized $61 million in gains offset by approximately $50 million in realized losses, $8 million in close quarter end sales and $20 million in other than temporary impairments recognized in earnings. Going on to Slide 23. Slide 23 shows you that during the second quarter, due to lower market rates our portfolio transitioned from an unrealized loss where it had been for a couple to years, to unrealized gain of $650 million at 06/30/10. Going on to Slide 24 which really breaks down - - provides a little more detail on second quarter impairments. Commercial mortgage loan impairments totaled approximately $13 million, which is in line with our expectations going into the year.

We also revised some cum loss expectations on a handful of nonagencies resulting in impairments of approximately $5 million. In sum, the quarter came out about as we expected there. Going on to Slide 25, which shows our asset allocation at June 30. So essentially unchanged in the quarter. There were a couple of small call-outs which may be difficult to see here. You would see a lower agency balance, probably a higher balance in financials and CMBS and nonagency RFBS, particularly jumbos and Alt-A's.

Let's go on to Slide 26, which is about investment quality. As you can see, the low investment grade ratio is essentially unchanged, approximately 8% at quarter end. Certainly, you can see a, a much lower pace of downgrades compared to a year ago, and actually seeing upgrades, some upgrades, particularly in corporates and that's a trend that continues I think into the second, into the third quarter. However, nonagency continued to be susceptible to downgrades of course through the lives of the securities and that's something we have to monitor very carefully. Speaking of nonagencies, Slide 27 is about Alt A's, represents a little less than 1% of the invested assets at June 30. This is the portfolio that is, it is relative to the world of Alt A's has done pretty well. But in sim still reflects delinquencies and losses in excess of our original expectations.

We model each security using market assumptions for things like delinquencies and severities and losses ultimately. And those are the cash flows suggest or support recovery for our full carrying value. And that's a, a monthly analytic process that we go through and we will continue to do it with great granularity until this portfolio seasons out. Slide 28 is about jumbos, and this scenario that's about 3.5% of invested assets, we are very satisfied with how that is performing. Slide 29 is about CMBS. It is a very good portfolio here, significant seasoning, very highly rated. While there are certainly rising delinquencies in that space, and those are reflected in this portfolio. The liquids are rated, the collaterals of approximately 3.8% at June 30, but you compare that to the market as a whole which is a little north of 6% and I think towards 7%. It suggests that it is a well, - - there's been positive selection in that portfolio. And certainly that's reflected in the mark-to-market trends.

Let's go on to Slide 30, which is also about CMBS and what that tells you is that our exposure there has very significant credit support compared to the collateral performance. And again, we do market consistent analysis of projections for each of these securities. And those projections tell us that this is the portfolio that should do very, continue to be very well. Going on to Slide 31, which is about commercial mortgage loans, whole loans. And what Slide 31 does is it breaks down our portfolio which by vintage and property type and gives you some very high-level summary statistics. Now this portfolio is about $1.9 billion, about 9% of invested assets. That comes in two pieces. One piece is CTL which is about $400 million, $1.5 billion would be traditional commercial mortgage loans, very diverse portfolio, over 400 loans. The average loan is about $5 million, a little bit less.

As I mentioned earlier, we recognized [two-year] $13 million of second quarter impairments, which was in line with our expectations affecting two loans, which are being sold or restructured, more likely sold. There hasn't been much change in the performance of this portfolio in recent periods. And while this is not the end of delinquencies and losses I would expect - - future losses to continue to be, A manageable, and B within the context of what we expected at the beginning of the year. And its capital and liquidity return to this sector which is pretty obvious in market pricing. We may be, we may become more actively involved in some rebalancing in this area that will just enhance the quality and consistency of this allocation, but not drag the income. There may be some good opportunities there.

Speaking generally, spreads are pretty tight and for those who follow the CMBS market for example there have been a couple of recent deals that really underscore it, how strong the technicals are in this area and a lot of areas. And current investable yield is, reflects very strong demand for risk. However, as has been described to you, we are generating yields on the new money which is supports the Company's goals and objectives and are consistent with the expectations going into the year. At the same time I am very comfortable that we are not stretching the Company's capacity or appetite for risk. So I think we are striking a good balance.

And with that note I will turn it back

Thanks, Eric.

We are continuing the trend of generating solid operating earnings in our core sales and lead generation also continue to be strong. The demographics of CNO's target market are very attractive. As a result of the baby boom, the number of Americans turning 65 each year will grow by nearly 4% per year over the next decade. The first of the boomer population become Medicare-eligible next year. And in ten years the number of people 65 years and older will increase by 50%. Our focus remains sharp on the task before us, we will continue to work to expand the sales forces and drive sales growth across all of our channels.

During the second quarter, we finalized the multi-state settlement agreement on Life Trends. We established a $10 million fund and paid a $1 million assessment, both of which were fully accrued for at year-end 2009. This settlement is extremely important to the Company, in that not only does it resolve the regulatory issues related to the sale and administration of Life Trend policies, but it also establishes a process for Conseco Life to manage nonguaranteed elements going forward. 45 jurisdictions representing almost 98% of the policyholders have now signed the settlement agreement. And we have started the process of notifying customers of the settlement and the increase in their NGEs.

Splitting CIG into two segments, Washington National and other business, or OCB, will give greater line of sight into the performance of our new business and will also help sharpen the focus on improving the results of the underperforming blocks of business. At the end of the next quarter, as Ed mentioned, we will begin reporting on this new segmented basis, providing both current and restated financial information for both segments. In May shareholders approved the change in the holding company name to CNO Financial Group. This name change reflects the profound transformation of the Company over the past three years, including our significantly improved financial stability and refocused business strategy. We have recapitalized the Company to reduce debt, increase liquidity and capitol, provide more flexibility to weather economic storms and to enhance our ability to grow profitability.

We frequently get questions on our comparatively low stock price, especially around book value. At first glance our current PE multiple could lead one to the conclusion that CNO's multiple is not out of line with peers. However, it is important to note that these metrics do not take into account the value of the Company's tax asset. Under GAAP our earnings are reported as if we are paying taxes at approximately a 35% rate, yet we pay no tax due to our NOL. When looking at the CNO share price, in our opinion the value of the NOL must be factored in with the value of the NOL being somewhere around $2 per share on a present value basis. We've streamlined our Company to focus on businesses where we have a true competitive advantage, and we've become customer-driven rather than product-driven. We are focused on continuing profitable growth from our well established operating companies while fixing our older legacy business.

And with that we will now open it up for questions. Operator?

(Operator Instructions). We will pause for just a moment to compile our Q&A roster. Your first question comes from Randy Binner with FBR Capital Market.

Oh, hi. Thank you. First question is just on 09G, thanks for the disclosure there. Just wanted to dig in a little bit more. Is the at-risk portion of DAC there, the 35% of the $1.7 billion. Is that, does that tend be in any of the segments in particular, especially CIG? And the second part of question is, would that new accounting rule affect at all how you report and manage the potential unlocking with OCB business, the old interest rate-sensitive business?

Yes, Randy. This is Ed. As far as the proportion of the noncommission expenses in DAC, as of the end of June. That would follow pretty much the, the sales of the different segments. So Bankers has about 70% of the sales and roughly 70% of that's noncommissioned expense would also be with Bankers. As far as - - unlocking and going forward, one of the things that we would expect with 09G is that there will be less expenses capitalized and so there will be some write-off by us and virtually every company that has to adopt this.

And so from that standpoint it will actually lesson the pressure on unlocking and those blocks that are in loss recognition now that are largely in OCB would actually benefit in margin in that, in the future margin going forward are unchanged but will have a smaller balance than - - for those margins to cover. So it actually will improve the stability or it should improve the stability of our earnings going forward and lessen the need for unlocking.

That's helpful. And then moving over to the comments on low interest rates. - - it is very clear that that was anticipated with the 2010 guidance. But I was wondering if you could just provide a little more commentary looking potentially farther out than that. I know that you have not provided guidance for 2011. But how long can new money yields stay this low as measured by the 10-year or whatever proxy you think is best before you would see a significant impact either on earnings or potentially DAC.

Actually, Randy, this is, Jim. I think a better question is how long can interest rates stay this low with the Government borrowing the kind of money it has to borrow over the next decade. - - having said that, it will - - to the extent the Companies are well matched, then new money interest rates aren't as big of a factor going forward. But on the margin it would tend to push down the income for insurance companies year-by-year. But again - - if you look at history, I wouldn't be betting that interest rates will stay this low for any serious length of time.

Fair enough. I mean I think that most people would hope that rates go up. But I guess, I think the comfort that most investors in the insurance business are looking for is that - - if we get to December of 2011 and the tenure is still 295 basis points, is it something that is manageable from earnings and DAC perspective, or is there a point where things really would drop off?

No, it is rather - - there would tend to be less earnings growth than you would otherwise have and it would relate more to the older blocks of business than the newer blocks of business because the older blocks of business are the ones where you have spread compression because of - - some of the older blocks have got high minimum guaranteed rates. So, it depends on the size of your old block of business, and how much new business you are bringing in. So it is - - overall it will have an effect on the whole industry of being slightly negative over time.

Said another way, Randy, one more year at these relatively low levels should not be a significant impact. The issues would be for the industry and us if it is multiple years at this level.

Right. And just to clarify on Jim's comments. It would be the biggest challenge in OCB, right?

The biggest challenge with old blocks. I guess that's right. In OCB and somewhat in Bankers I guess.

All right. Fair enough. I will get back in the queue. Thank you.

Sure.

Your next question comes from Paul Sarran with Macquarie.

Hi. Good morning. Just to get a kind of a more complete understanding of the overall capital position. How much capital was held at the holding company at quarter end? And can you also tell us how much in dividends you took out of the subsidiaries during the quarter and how much you put back in? And if possible kind of which stat companies were involved? That's my first question.

All right, Paul. Basically liquidity remains at level at about $130 million. We had a $30 million round trip basically of dividends that came up from the insurance companies to the holding company and then were contributed back down. That is in support of our interest coverage ratio which is something we can and do regularly manage. And that is really from Conseco Life of Texas, which is the holding company over Bankers and Colonial Penn.

So it came out of Texas and then went back in to Texas?

Yes.

Is that a - - are those special dividends that require regulatory approval?

Dividends from Conseco Life of Texas require the regulatory approval from the Texas Department, which obviously we received in this case as we have in past dividends.

Okay. And then, on specified disease, sales have been growing at a pretty solid pace, double-digits for several quarters now. It seems like premium growth is starting to pick up a little bit. It was up 5% year-over-year this quarter. In knowing that there's a bit of a headwind, to kind of overall premium growth from lapses of older specified disease policies. Can you talk about what we might expect from top line growth potential for this business kind of over the near to medium-term future?

For CIG work, soon to be Washington Nationals specified disease, I would expect that we will continue to have somewhat of a headwind, but it is not so much from lapses as it is the return of premiums. And on those products that's a key feature to them with a lot of them having returned to premium at 20 years from issuance, some of them are at different periods. But the preponderance are 20 years. So with those you see - - the premiums then reduce going forward, and the new sales though are overcoming that. So very modest growth for the near-term is what we would expect in premium.

Okay. And then just one more if I could. Would it be possible to get a little more color on the commercial mortgage loan portfolio, specifically in volume of loans that are currently delinquent, the volume of loans that have been restructured and are still in portfolio? And then, rough idea of your expectations for future losses out of the portfolio?

I am going to answer two of your three questions. The third one I am not going to touch. The first one, the first number is around $30 million. The second number is around $70 million, and I am not going to touch the third.

Okay. Thanks.

Your next question comes from Alec Ofsevit with Credit Suisse.

Hi. Good morning. A couple of questions I would like to ask on the Bankers long-term long-term care business. I guess first off, can you just discuss the trends going on with the interest adjusted benefit ratio ticking up a little bit? I know there was some good guide last year but it looks like you've got slightly declining premiums and the benefit ratio going up. Also on the long-term care, do you think we can discuss the DAC policies relative to how much margin you have in the block of business? And potential impacts from a statutory cash flow testing at year-end?

I think I can answer most of those, Alec. From the standpoint of the benefit ratio and in particular the interest adjusted benefit ratio. Yes, the year-ago ratio was lower than would be the normal trend, or the normal level, because of the rerate actions that we had in 2008 and 2009 which caused additional lapses. And then when there are the additional lapses, we release reserves and then that benefit ratio is reduced.

The levels of that ratio over the last four quarters being just over 70% are very much in line with our expectations and they have been quite stable that way. As Scott Perry mentioned, we did even have some positive reserve in claim developments in that line. As far as - - margins for cash flow testing or asset adequacy, we don't disclose those. But the, the fact that we do have an interest-adjusted benefit ratio in the low 70% range I think does give you an indication of margin. And even in your write-up of where you attributed approximately a 10% of premium margin - - was not a bad measure to think of adequacy of the reserves going forward.

Okay. Great. Maybe just one follow-up question on what Randy was asking about EITF 09G. So I just wasn't clear, when we talked about I guess you were talking about the 35% of what's on the balance sheet already. Can we, did we talk about the prospective EPS impact if we can no longer capitalize 35% of new DAC?

No. We didn't talk about that and in keeping with not providing guidance at work, not ready to say anything about that. And also we have got a lot of analysis to do as I believe most companies in the industry to really break apart that 35% and determine under the proposed new requirements what is that bullet and what is not. Now, that said, the impact for us and any other industry going forward will be determined in part by the rate of growth. Those companies growing faster will have somewhat of a drag from not being able to capitalize as much as we currently do, and the converse is also true. But again, I want to remind everyone that the fundamental profitability and cashflows of the business are not changed by the accounting, whether it is in force or new business.

Thank you very much.

Your next question comes from Jimmy Bhullar with JPMorgan.

Hi, Jimmy.

Jimmy, your line is open. The question has been withdrawn.

The next question comes from Andrew Kligerman with UBS.

Hi. Good morning. Just a few clarifications on benefits and expenses. So just kind of going back to Bankers and the long-term care loss ratio of about 113% in the second quarter, down from 114% in the first quarter. Just wondering - - where does this trend and then - - I know you like to focus on the interest adjusted one. Have you hedged interest rates on the long-term care portfolio? I noticed that Genworth did that. And then I have a few follow-ups.

Yes. Andrew, thanks. No, we haven't hedged interest rates. And on the noninterest adjusted benefit ratio at 113%, it is very much in line with our expectations. And as we have mentioned in the past, and even refer back to, now I guess it is a couple of years ago when we did the LTC primer, is that the benefit ratio noninterest adjusted will increase over time.

As the - - book of business ages as the policies age, that is the way the products constructed, but that's why you build-up the active life reserve and then generate investment income. So the combination of premiums and investment income are really key to covering the benefit and expenses of the policies. So therefore our focus and hopefully, your focus, would be on the interest adjusted benefit ratio.

Fair. CIG, I guess the last quarter of CIG then. So DAC amortization expense. I know you touched on DAC through this call. It was really low at $17 million versus $27 million in the prior quarter, and then last year it kind of ranged from $32 million to $37 million. So I mean, where do you think a normal amortization level is,- - going forward on a quarterly basis.

Well, under the current accounting requirements, this quarter is artificially low. There was some geography change between sales inducement assets and DAC. And so it really is netted in the reserve items versus DAC. So from that standpoint this quarter is abnormal but the run rate under the current accounting requirements is more the prior quarters.

Okay. That's great. And then in CIG's specified disease business. I will focus on the interest adjusted loss ratio then which was 52% versus about 49% in the prior quarter. Where do you see that kind of flushing out over time? Does that one kind of hold steady? Because it is shorter?

- - it is somewhat shorter than long-term care. But again, to the comments on the return of premium feature being an important part of that. A lot of this business is 20 years or 20 years plus in duration, or length of time. But yes, the interest adjusted is the rate focus there somewhere just north of 50%, or around 50%, is appropriate given again our age of business and meaning both the issue agent as well as the length of time that business has been in force.

Okay. Then just lastly with Washington and CIG splitting into Washington National and OCB. Should we be anticipating any, any costs or restructuring charges relating to that?

I will answer it in two ways. I mean there are - - it is not so much splitting - - the segments from an accounting standpoint. But having a Washington National brand be our - - consumer-facing agency business and the insurance companies being merged into Washington National. There are expenses related to those that we have been incurring to some degree, but we will incur more here over the next year, which includes refiling products on the Washington National Insurance Company paper that are currently in either Conseco Insurance Company or Conseco Health Insurance Company. And - - but those should be in the single-digit millions, low single-digit millions, and will not be incurred all at one time. So they will be spread out over the year and also we are - - largely anticipated in our 2010 outlook.

Perfect. Thanks a lot.

Sure.

Your next question comes from Randy Binner with FBR Capital Market.

Thanks for the follow-up. I guess just picking up on where Andrew left off there with the Washington National piece. We can assume that the consolidation there of the other Conseco Insurance Companies, is that still on track? Should we, can we expect that to come in the third quarter with the kind of official split off of Washington National? And would it still be 11% roughly on the RBC ratio?

We expect it to be completed by the end of the year, not necessarily coincident with our GAAP reporting segment change. But it is proceeding along, we have made the regulatory filings, we are in the responding to questions phase with the insurance companies merger.

Okay. Fair enough. Then just picking back up on the kind of back and forth between the holding company and insurance companies. In the 10-K, the 2009 10-K, there was a disclosure that a lot of the - - the dividends that upstream would go back down and you would end up with a balance just over $100 million of holding company liquidity at year-end. Now that you are halfway through the year, is it still fair to kind of plan on that kind of holding company back and forth and then year-end liquidity at the year-end 2010?

Definitely you should count on that back and forth. That is again the way that we satisfy the interest coverage ratio as part of our debt covenants. The thing I would say is that we are somewhat ahead on the liquidity at the holding company, but I don't see any significant change from what we had in the 10-K.

Okay. Great, then actually a quick one for Eric Johnson. You mentioned that the, I think you said that the new money yield is 626 basis points. Do you have a rough estimate of what kind of the run off yield of the book is? So, kind of what your GAAP is there?

When you say run off yield,.

Well I mean - - the assets that are running off the book. What rate are you replacing them?

Sure. What I can tell you is that basically you are looking at a spreads that is probably year-to-date averaged slightly north of 100 basis points.

So what is running off is 100 basis points higher than new money yields, is that right?

No, no, no, the converse.

So you're better than what's running offer?

Yes.

Oh, wow.

Which attributes or explains why the total earn rate has increased year-to-date.

Yes, okay. Then how about just how do you quote the apples-to-apples to 626, what in the quarter, what was your total yield on the portfolio?

You mean what was the book yield at the end of the quarter?

Yes.

Into the 590s, I don't know if we can report that number. But into the 590s.

I think that was a better way to ask that question. As long as I am - - any, Jim, any or anyone - - class act. I would just be curious if there has been any change from kind of the initial conversations around that?

No, no. As with many things with healthcare, everything is going to depend upon the actual regulations and when they come out.

But has there been any milestones or any progress on that, or is it still just kind of in the initial phase?

It is still the initial phase. I mean they still haven't really come out with the design and I mean there's a lot to do. The administration - - it is a very big task trying to put regulations in place that make the the health reform actually work. So there is - - I believe they're still right at the very beginning of that.

Do you think that there's any potential that could, the implementation could slip past 2011?

Yes. This is Scott Perry. That is a potential. There has been recent proposed legislation that would put some actuarial rigor, or requirements, around the performance. And I think that's the first of probably a few challenges. And some of those whether they emerge exactly as they're written, certainly are drawing some attention to some of the weaknesses in the legislation and that could cause it to be - - push out the implementation as things are being finalized, absolutely.

All right. Great. Thank you.

Well, and just one other comment on the class act, we are not at all certain whether or not - - having this type of insurance LTC insurance would actually hurt the industry or help the industry. I mean if it makes consumers more aware of long-term care, it may help the industry in the long run.

So, operator, are there any other calls?

There are no further questions at this time.

Thank you very much operator. And thank you to everyone on the call for your interest in CNO Financial. Thank you.

This concludes today's conference call. You may now disconnect.