CNO Financial Group Inc (CNO) 2010 Q3 法說會逐字稿

Good morning. My name is Polly, and I will be your conference operator. I would like to welcome everyone to the third quarter 2010 earnings results conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. Mr. Galovic, you may begin.

Good morning and thank you for joining us on CNO Financial Group's third quarter 2010 earnings conference call. Today's presentation will include remarks from Jim Prieur, Chief Executive Officer, Ed Bonach, Chief Financial Officer, Scott Perry, President of Bankers Life, and Eric Johnson, Chief Investment Officer. Following the presentation we'll 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 at www.CNOInc.com. This morning's presentation is available at our website and was filed in a Form 8K this morning. We expect to file the 10Q on or before November 8th.

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 the related factors. Today's presentation also contains 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 to the presentation.

A couple of items I would like to note up-front. During the quarter we made several terminology changes to our financial reports which we believe make them more consistent with industry peers. A summary of these terminology changes can be found in the appendix to today's presentation. In addition, throughout this presentation we'll be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes from 3Q 2009 to 3Q 2010. And now I would like to turn the call over to our CEO, Jim Prieur. Jim?

Thanks, Scott. We're pleased to report another strong quarter with third quarter net income ahead of expectations, increasing 221% year-over-year to over $49 million. Third quarter net operating income was $47.1 million, which was down 13% from a year ago, reflecting approximately $12 million of third quarter 2010 after tax charges related to unlocking and recoverability of intangibles in the Other CNO Business segment. On a per share basis, net operating income was $0.16 per diluted share, and that included more than $0.04 per share of those intangible write-downs.

Our financial strength continues to improve. As of September 30, 2010, the consolidated risk based capital ratio of our insurance companies, a measure of financial strength, was 320%, and our liquidity at the holding company increased by $60 million during the quarter to $190 million. Our accumulated other comprehensive income at September 30, 2010 was $688 million compared to an accumulated other comprehensive loss of $264 million at year-end 2009. Our core sales for the third quarter of $86 million were down 7% from the third quarter of 2009.

This decrease was primarily driven by lower new annualized premium from Medicare supplement policies at Bankers Life, due to customer preference for products with lower premiums and lower benefits. Along with lower sales of long-term care policies following changes we made to improve the profitability of those products.

This is the first quarter where we are reporting under our new segmentation. The performance of our growing Washington National business is now separated from our Other CNO Business, which we will be referring to as OCB, which is comprised mainly of closed blocks of business. We will share much more on this later in the presentation. Next up is our CFO, Ed Bonach. Ed?

Thanks, Jim. Net operating income for the quarter was $47.1 million, or $0.16 per share, compared to $54.3 million, or $0.29 per share in the prior year. This quarter's EPS reflects the dilution of $0.10 per share from the issuance of common stock in 2009 and convertible debentures in 2009 and 2010. Net income applicable to common stock was $49.4 million, which included $2.3 million of net realized investment gains, compared to net income of $15.4 million a year ago, which included $38.9 million of net realized investment losses and valuation allowance for deferred tax assets.

Net income per share for the third quarter was $0.17, including $0.01 per share of net realized investment gains. This compares to net income per share of $0.08 a year ago, which included $0.21 per share of net realized investment losses and an increase in the valuation allowance for deferred tax assets. Here again, the prior year's figures were based on a lower share count diluting this quarter's results by $0.02 per share.

Turning to slide 11, EBIT for the third quarter decreased by 12% from a year ago to $93.8 million, with certain unlocking and legal charges that Jim mentioned in our OCB and Corporate segments offsetting earnings growth in the three segments where we're actively marketing business. Our Bankers Life segment showed the most significant improvement with pretax operating earnings of $95.5 million in the third quarter of 2010, up 12% over last year. 3Q 2010 results reflect favorable results across all continuing lines of business, benefiting from $20 million of additional earnings, primarily due to higher investment income from increased portfolio yields on a larger asset base, and improved Medicare supplement claims experience. Earnings in PFFS were $8 million for the quarter, compared to $21 million a year ago, a reduction of $13 million as this business runs off. It's important to note that the current period earnings largely related to IBNR releases on our quota share agreements with Coventry, the last of which expired at that time beginning of this year.

The Washington National segment recorded pretax operating earnings of $27.2 million in the third quarter 2010, down slightly compared to last year.

Last year's quarterly earnings were positively impacted by $4 million of reserve releases related to supplemental health products.

In Colonial Penn, pretax operating earnings were up 5.4% to $7.8 million, reflecting favorable mortality.

For OCB, our pretax operating losses were $24.4 million for the quarter compared to a loss of $7.5 million in the third quarter of 2009. The decline from the prior year's loss is driven by increased amortization expense from unlocking in the Interest Sensitive line and our writeoff of the PVFP on the runoff LTC block.

The Corporate Operations segment results for third quarter of 2010 reflect a $4.5 million legal settlement related to an obligation assumed in conjunction with the acquisition of the subsidiary in 1991.

The results for the third quarter of 2009 also reflected an increase to the deferred tax valuation allowance of $20 million that we established upon the completion of a reinsurance transaction last year with Wilton Re. We will cover the segment results in more detail later in the presentation.

Corporate interest expense reflects the lower average debt outstanding, partially offset by higher average interest rates on such debt. Net realized investment gains this quarter were $2.3 million, including total other than temporary impairment losses of $22.8 million. $24.5 million of the OTTI was recorded in earnings and $1.7 million recorded in AOCI.

This compares with net realized investment losses in Q3 2009 of $18.9 million, which included total other than temporary impairment losses of $162.4 million, and a $6.7 million increase to the deferred tax valuation allowance. $35.7 million of the Q3 2009 OTTI was recorded in earnings, and $126.7 million in AOCL. Eric Johnson, our Chief Investment Officer, will address investment results in more detail later in the presentation.

Slide 12 shows our trailing four quarters consolidated 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 L, and the value of net operating tax loss carry forwards.

ROE on a trailing four quarters basis decreased to 5.5%, primarily 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 non guaranteed elements, layering on new more profitable business, and by further improving our operational efficiency. We believe that our new segmentation will provide more line of sight into these improvements.

Third quarter 2010 net operating EPS was $0.16 per share versus $0.29 per share a year earlier. This reflects $0.10 per share dilution from the issuance of 65.9 million shares of common stock and $293 million of convertible debentures.

Turning to slide 14, book value per common share, excluding AOCI increased to $15.60 from $15.39 in the prior quarter, primarily reflecting third quarter earnings. As Jim mentioned earlier, AOCI almost doubled in the third quarter to $688.1 million reflecting the increase in estimated fair value of our fixed maturity investment.

Slide 15 is a summary of the pre and after tax GAAP operating income for 2008, 2009, and the last 12 months. We frequently get questions on our comparatively low stock price. 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's important to note that those metrics do not take into account the value of the Company's NOL. Under GAAP, our earnings are reported as if we're paying taxes at approximately a 36% rate, yet we pay no tax due to our NOL. When looking at price to book, in our opinion the value of the NOL must also be appropriately considered with the value of the NOL somewhere around $2.00 per share on a present value basis.

Slide 16 shows the statutory earnings power of the insurance companies, which are currently expected to generate approximately $200 million of statutory operating profits annually, excluding extraordinary items. The statutory dividend capacity of the insurance subsidiaries is in the range of $50 million to $125 million annually with the residual remaining at the insurance companies to maintain appropriate capital levels and fund their growth. 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.

Turning to slide 17, you can see that our financial strength continues to improve. As Jim mentioned, RBC increased by two percentage points to 320% in the third quarter, due to an 18 point increase from $83.5 million of statutory operating income, which was offset primarily by a decrease of 12 points due to net dividends of $56 million, paid to the holding company. The two percentage point increase in the third quarter RBC does not include the 9 point increase that we expect to realize in the fourth quarter related to the completion of the merger of two of our insurance subsidiaries into Washington National Insurance Company.

Our unrestricted cash held at the holding company increased by $60 million to $190 million during the third quarter of 2010. This is primarily driven by the previously mentioned $56 million of net dividends paid from insurance subsidiaries. Had that money stayed in the insurance subsidiaries, RBC would have increased an additional 12 points. These dividends also increased our interest coverage ratio to 2.85 times in the third quarter, well above the current covenant of 1.5 times.

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

Thank you, Ed. For the quarter pretax operating earnings were $95.5 million, up 12% compared to third quarter of 2009. Results for the quarter compared to prior year reflect favorable results across all lines of business resulting in $20 million of additional earnings. Primarily due to higher investment earnings from higher average yields on a larger asset base, and an improved Medicare supplement benefit ratio. As mentioned earlier, earnings in private fee for service were $8 million for the quarter compared to $21 million a year ago, a reduction of $13 million. It is important to note that the current period earnings largely related to IBNR releases on our quota share agreements with Coventry, the last of which expired at the beginning of this year.

Sales for the quarter, excluding private fee for service and PDP, were $55.3 million, down 11%. We had sales declines in Med Supp, down 20%, and Long-Term Care down 26%, and annuities down 3%. Life sales were higher by 4%. I will discuss these results in more detail on the next slide. Also in the third quarter, we have begun filing for additional rate increases on certain segments of our Long-Term Care inforce block.

As I mentioned, third quarter sales were down 11% versus 2009. There are several factors that are affecting our year-over-year results. On our Long-Term Care line, we now have fully implemented our newest product series with higher prices to improve profitability. In Med Supp, we are seeing a shift from our more traditional plans to our new recently introduced lower cost sharing plan, Plan N. Our average Med Supp sales per policy is down 12% from a year ago, but our submitted applications are relatively flat to 2009 levels.

Annuity sales are down overall by 3%. This is ahead of industry results, and we continue to have success with our fixed index products. Sales of fixed index annuities were up 62%. Finally, our life sales are up 4% versus the prior year, with this quarter representing an all-time record sales quarter of $16.3 million in NAP.

Turning to slide 20, here you can see our new contracts on a year-to-date basis from 2008 to 2010. Overall recruiting is down from 2009 levels, and is trending to a more normalized level that we saw in 2008. We have roughly the same amount of recruiting locations that we had in 2008, which has enabled our field management staff to train and develop this volume of new producers more effectively. The graph on the right shows how the total number of producers has remained relatively stable over the past several quarters.

I would like to spend some time discussing developments occurring in the Med Supp market and how we are reacting to them. In 2010, there has been an influx of carriers, including several major healthcare plans, that are using Medigap modernized plans to grow market share through aggressive pricing. Additionally, several of the carriers are offering no questions asked guaranteed issue plans up to age 71. We expect even greater competition as regional carriers exit the Medicare Advantage market and distributors move away from individual major med due to compressed margins.

At Bankers, our strategy is to maintain our pricing discipline, and as I mentioned, we have introduced a low-cost cost sharing option that has been successful. While these sales produce lower per policy premiums, they still maintain our target margins, and allow us to continue to grow our customer base. We're also well positioned to capitalize on changes occurring with private fee for service plans during the fourth quarter of 2010, and into the first quarter of 2011.

Finally, we will be evaluating the introduction of a more granular rate structure and tighter underwriting to provide greater capacity for further rate reductions, if necessary. However, it is important to note that our focus is on serving this market for the long term, and we will resist knee-jerk reactions to short-term market disruptions.

Moving on to LTC, in the third quarter we began to file for additional rate increases on certain segments of our long-term care business. For policies generally sold between 1992 and 2003, our legacy block, we will be filing for additional increases only on inflation protection plans. For policies generally sold between 2002 and 2005, we will be filing for an additional increase on all plans. We expect the financial impact to be in the range of $22 million to $27 million after all states have been approved and premium increases are fully implemented.

Slide 23 shows the impact of the earnings items previously discussed, producing a return on allocated capital on a trailing four-quarter basis of 12.6% for Bankers. Now I will turn it back over to Ed to cover the other operating segments. Ed?

Thanks, Scott. As Jim mentioned earlier, beginning with this quarter, we have split the former CIG segment into Washington National, which includes the business we are actively marketing, and OCB, our business which is largely in run-off. Our new segment presentation is consistent with how we are managing our business.

Washington National markets and distributes supplemental health and traditional life insurance to middle income consumers at home and at the work site. These products are marketed through Performance Matters associates, or PMA, our wholly owned subsidiary, and through independent marketing organizations and insurance agencies. Products being marketed by the Washington National segment are underwritten by Washington National Insurance Company.

OCB consists of blocks of interest sensitive life and traditional life insurance, annuities, long-term care and other supplemental health products. These blocks of business are not being actively marketed and were primarily issued or acquired by Conseco Life Insurance Company and Washington National Insurance Company. Our new segment reporting is another step towards increased transparency. Not only will it provide greater visibility into the performance of our actively marketed lines of business, but it will also sharpen focus on improving results of our closed blocks of business.

Turning to slide 25, Washington National's earnings were $27.2 million for the quarter, down 6.5%. Third quarter 2009 earnings, however, were favorably impacted by reserve releases related to supplemental health of approximately $4 million. Overall NAP decreased by 4%. The decrease was due to the de-emphasis of Med Supp and annuity sales. Supplemental health sales however, continued to be strong with solid growth in both the Washington National independent and PMA channels supported by strong recruiting results.

Slide 26 illustrates continued strong sales growth in supplemental health, with sales up 11%. Voluntary work site sales results continued to gain momentum, with new Washington National independent work site NAP up 8% for the quarter and up 22% year to date. Slide 27 summarizes Washington National's operating earnings by period. It has had steady earnings and has a trailing four quarter operating return on allocated capital of 9.4%.

Moving now to Colonial Penn's results on slide 28. Its pretax operating earnings were $7.8 million in the third quarter this year, up 5.4% compared to a year ago. Results for this quarter reflect favorable mortality. Overall. Colonial Penn continued to experience sales growth with NAP increasing 8% compared to 3Q 2009. Year to date sales are up 10% over the prior year, and year to date lead generation was up 42% over the same period. Slide 29 summarizes Colonial Penn's operating earnings by period, producing a trailing four quarter operating return on allocated capital of 7.7%.

Turning to slide 30, we see a third quarter loss of $24.4 million for OCB. These results reflect reduction in earnings of approximately $13 million, primarily due to additional amortization expense from decreased projected future investment yields related to interest sensitive insurance products, a reduction in earnings of $6 million from the write-off of the present value of future profits related to this segment's remaining closed block of long-term care insurance, and a reduction in earnings of approximately $4 million due to increased legal settlements.

The creation of OCB provides increased transparency regarding the results of management actions. For OCB, those actions will be focused in such areas as NGE changes and expense management, along with an emphasis on mitigation of risk with respect to such things as regulatory and legal matters. The importance of risk mitigation calls for a methodical approach to identifying and executing on actions to improve results for this business. Slide 32 illustrates the volatile results that this legacy closed block has produced. We expect financial results for OCB to continue to exhibit some volatility in the near term, given that portions of the business are in loss recognition.

Moving to slide 33, we recognize that the current interest rate environment continues to be of great interest to our stakeholders, and that the spread of persistent low interest rates remains a concern. We have undertaken several initiatives to address the effects of the low interest rate environment. We have reduced guaranteed minimum interest rates, and have been lowering credited rates on new and in force business. In addition, we have been managing our pricing of renewals and new products, and have been changing the commission structures where appropriate.

We have factored future premium flows into our LTC liability duration calculations and have invested to match these longer durations. While our LTC liability durations are long, we can find investments to support them, as our LTC duration is shorter than companies primarily selling to those under the age of 65. We have factored into our third quarter loss recognition testing the continuation of the current relatively low interest rates through 2011. The impact is immediately obvious and reflected in the OCB interest sensitive block that are largely in loss recognition, resulting in an unlocking charge in the quarter of approximately $13 million.

The impact on other lines is primarily a reduction in recoverability margin with no significant intangible charges expected in the line of business, based solely on sustained low interest rates over the next year. To offset the earnings impact of low interest rates, we have been seeking and achieving additional yields in selected asset classes. As a result, our year to date portfolio earned rate increased despite the declines in market rates. 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. Let's-- going straight into it, let's go to slide 34. In the third quarter we earned investment income of $326 million, compared to $321 million in the second quarter. Our portfolio generated an earned yield of 5.86% compared to 5.83% in the second quarter.

Our yield improved due to higher yields on new investments, which were roughly 6% in the quarter compared to 6.3% in the second quarter. Here's what we've been buying. Senior CMBS, current pay non-agency RMBS, investment grade corporates, taxable munis, selected ABS. In addition, during the third quarter, average invested assets were up approximately 1% over the second quarter, and almost 2% over the third quarter of last year, which positively impacts the investment income comparison.

Let's go to slide 35. Slide 35 summarizes realized gains and losses in the third quarter. What this says is we recognized roughly $101 million in gains offset by $73 million in realized losses, $1.6 million in post-quarter end sales and roughly $23 million in OTTI, recognized in earnings.

It's worth noting that a very substantial portion of that OTTI reflected a proactive recognition effort to improve the quality of our commercial mortgage portfolio by liquidating certain loans that had, over the long term, a higher propensity for default, though had a reasonably high market value in the current environment. So, we've contracted for the sale of those loans and recognize the deficit in the current period. That transaction will close in the very short near term future. Absent that, OTTI would have been very small for the quarter.

Let's go on to slide 36. During the third quarter the unrealized gain in the portfolio increased to roughly $1.3 billion, at September 30. That's all about lower market rates and spreads being what they are. Slide 37 breaks down third quarter impairments. I basically just described the bulk of it, which were predominantly small balance, low DSCR loans.

We also wrote down two financial hybrids that have rate reset provisions, which will take effect in the near term that will cap their market value. Good credits, have had very high fixed book yields over the years which is why we own them, but we'll swap the floating and they will probably be capped out. So we proactively took those down the market.

Let's go on to the next slide, which is slide 38, which illustrates our asset allocation which looks a lot like it looked this quarter and the last quarter before. Slide 39 is about our investment assets by rating. As you can see, our below investment grade ratio is essentially unchanged, about 8% at quarter end. The relationship of upgrades to the downgrades has generally improved. The absolute number of downgrades has decreased.

If you look back year-over-year, it's quite striking. now, non-agency RMBS will continue to be susceptible to downgrades through the remaining lives of securities. That's something we have to watch carefully. Obviously, there appears to be a higher level of M&A activity in corporate and at-risk that could affect this ratio in the coming quarters. It's a ratio we watch very carefully.

Slide 40 is about our Alt-A portfolio. Represents about 1% of assets. At September 30, it's a portfolio that obviously reflects significant delinquencies and collateral losses, but a lot of it has been purchased at discounts, which reflect current expectation for collateral performance. And because we value the collateral on market consistent assumptions, the current balance is reflective of our recovery estimate in the long term.

Going to slide 41, which is about prime jumbos, that represents approximately 3.5% of invested assets. Again, a lot of this has been purchased at discounts, reflecting current expectation for collateral performance. We're very satisfied with the performance of this allocation. On a general note, in regards to non-agencies, there's various issues around mortgage foreclosures that have been very widely publicized. And since we've had some questions about this, here's our general view.

There's clearly the potential for some temporary slowing of liquidations and a related increase in severity. We would expect the cumulative effect on cash flows to senior security holders over the long term to be relatively moderate. It would be purely conjecture to try to quantify it at a security-specific level at this point. As that circumstance becomes clearer, we'll assess whether it warrants any adjustment to our cash flow projections.

Now, with regard to a second issue, which is about mortgage put-backs, I do believe we'll benefit there to some degree. It's a very complicated issue and process, especially because we're a very small holder in any given securitization, and there are significant hurdles, time frames, and possibly expenses involved in recovering on any related claims. We're reviewing our current holdings as well as our past holdings to see if there's any particular circumstance that would merit a particular action, either on our own or as part of a group. We're not currently assuming any benefit from that in any of our cash flow projections.

Let's go on to slide 42, which is about CMBS, and it breaks down our CMBS exposure by vintage. It's as very good portfolio. Significant seasoning, highly rated, approximately 94% in the AA and AAA category. Obviously CMBS market, a lot of noise around it. Higher delinquencies to the market as a whole, but the delinquency rate and the collateral behind our securities is only around 4.1%, which compares very favorably to the market as a whole, which is north of 8%.

Slide 43 illustrates what I just described to you; the fact that our CMBS holdings have significant credit support compared to the collateral performance and current, what we think to be future, delinquencies. We use market consistent assumptions and we think this portfolio has more than enough credit support to continue to do very well.

Slide 44 breaks down our commercial mortgage loan portfolio by vintage, property type, and gives some high-level summary statistics. It's about $1.8 billion, 7.5% of invested assets. Very diverse lots of loans, north of 400. Small, typical loans, as I described earlier, that we-- We combed the portfolio pretty carefully during the last several months, to identify certain loans to carve out and liquidate, which we did, recognizing impairments to accomplish that. Absent that, there hasn't been a lot of change in the performance of this portfolio in recent periods, which is good, and this transaction should improve the quality and stability of the portfolio. It may or may not be the end of our work to improve it, but we like where we are.

Speaking generally, and back to the point Ed made, yields in the market have been low. Spreads have been tight. Yields are low in the market, reflecting very strong demand for risk and lots of liquidity, but we have continued to generate yield on new money, which has been supportive of the Company's earnings objectives and product needs. And at the same time, I'm comfortable that we aren't doing anything that will stretch our ability and appetite to take risk. And with that. I will turn it back to Jim.

Thanks, Eric. A year ago, we completed a major recapitalization of the Company following the prior year's spin-off of our most volatile business, the legacy LTC business. If you look at our operating record over the last year and a half, operating earnings have become much more stable, and the Company is generating significantly greater earnings and cash flow, obviously helped by the large tax asset we have with our NOL position.

We completed several important foundational steps to improve CNO this quarter. Notably, gaining the regulatory approval of the Washington National Insurance Company redomestication and merger and completing the resegmentation. In one case, there were cost savings and capital efficiencies in merging three entities into one, and with the resegmentation, there will be greater transparency for investors to see improvements in the OCB business and to see the profitable future growth of Washington National.

As you know, CNO Financial Group is a market-driven company, not a product-driven company. We focus on serving middle market customers through our three businesses where we're actively marketing. Bankers Life, Washington National, and Colonial Penn. Growing these businesses profitably is our top goal. In the OCB segment, we're continuing to work at improving the old legacy businesses of the Company through improvements in technology and service, and where justified, through price increases.

With our liquidity position building, and the RBC ratio improving, we are in a position to consider various alternatives to refinancing and/or paying off our senior debt. While the senior debt maturity is almost three years away, and could be largely handled through internal cash flow, it's to our advantage to consider action earlier, to the extent that circumstances make doing so attractive.

So with that, we'll now open it up for questions. Operator?

(Operator Instructions). We'll pause for just a moment to compile the Q and A roster. And your first question comes from the line of Randy Binner.

Hi, thanks. I guess I will just jump right in at Jim's last comments there on the potential of refinancing of the bank debt. Obviously this is something that has been contemplated for some time, and so I just look for you to potentially expand, if you can, on what the timing would be. There's potential pay-down, then there's the potential reaction by the rating agencies, and would it follow that path to get to kind of step three, which would be the potential refinancing itself?

Thanks, Randy, for the question. Essentially, the market conditions have improved significantly, and the Company is getting stronger with every passing quarter, and you will note that the RBC ratio moved up by two points without counting the benefits of the WNIC merger, which is another nine points. And that was after we had dividended a substantial amount of money to the holding company. So the holding company is now holding $190 million in cash.

We've been telling people for quite some time now that our target RBC ratio is 300%, and that our target cash amount is $100 million. So, we're clearly much closer today to doing something and considering alternatives than we were even a quarter ago.

And, Randy, this is Ed, I would say that in our mind, there's no necessary clear path as to the sequence. Meaning that paydown does not have to precede necessarily other things, nor do ratings upgrades, but they all are factors that we're considering. Market conditions, the ability to pay down where ratings are, and likely to go where all important factors that we're evaluating in our refinancing or pay down decision.

Okay. That's great. So, I take from the liquidity comments that, all things being equal, you would still have the $100 million target for the hold co.

Yes, that's correct. And also two other things I will note with holding company liquidity is, all things being equal, we manage capital to get capital as high as we can in the structure. It just gives us maximum flexibility while at the same time, as Jim mentioned, maintaining our 300% consolidated RBC target for the insurance companies.

The other thing is and I think we briefly touched on it last quarter, generate-- having excess capital at the holding company generates non-life income, which dollar for dollar is more advantageous to us in utilizing our NOLs, given all the life income that we normally generate from our business.

Okay. Let me ask one more, and I'll drop back into the queue. So if we think about the risk-based capital ratio, assuming credit stays benign and your earnings are on target, I guess it would be in the high 320s. So, what would potentially bring that down? Are you thinking that you may have any kind of statutory capital posting requirements relative to the lower interest rate environment or any other kind of RBC bogeys we should think about going into year-end?

Nothing significant that we would envision now, and to our comments on the statutory earnings power and dividend capacity that we look at on a quarterly basis. We should be generating anywhere from 3 to 10 positive RBC points, all things considered, on a quarter by quarter basis.

I'll drop back in the queue. Thank you.

And your next question comes from the line of Paul Sarran.

Good morning. A question on the OCB business. With the DAC and present value future profit write-offs, should we expect higher amortization rates on those going forward?

No, actually I guess I would say the contrary, because given that we have now, in the case of the LTC business, that PVFP written off, there is no more PVFP to write off there. And the fact that we took the roughly $13 million unlocking write-down for the interest sensitive business, there's that much less to write down going forward.

Okay. Then is there any read to statutory year end cash flow adequacy testing for the same business?

Not at this point, but certainly the fact, again that overall we're generating strong statutory income across the insurance companies, is certainly a positive mitigating factor.

Okay, thanks. Then just to jump to Bankers, if I could. It looked like, just versus my expectations, the stronger earnings at Bankers Life was mostly attributed to annuity earnings. So, one, is this your impression as well? If so, is there anything on the liability or expense side that you're doing or did to improve earnings on annuities? Or is it mostly attributable to just improved investment income?

Paul, it's Scott. Mostly attributed to investment income based upon the growth of the assets. Nothing particular on the expense side, other than just as Ed mentioned when he talked about crediting rates, just managing the spreads on new business as well as on the in force.

But I would say, Paul to your question, no, we would not see that as the main driver, and as we did indicate in both the call and the press release, that investment income benefits all lines. It's maybe most visible in the annuity line. But we had an improvement in the Medicare supplement loss ratio, which also is a contributor, and the Life and Long-Term Care lines operated in line with our slightly better than expectations as well. So, all in all, we would say across the board on our Bankers business, we had expected or slightly favorable results.

Okay. Then one last one still on Bankers. I know there was $6 million or so of private fee for service reserve releases that I don't think we should expect to continue. But outside of that, earnings in the $90 million range is meaningfully ahead of where it had been. Kind of on a normalized basis, in the $60 million range over the last year or so.

Can we expect Bankers' earnings to remain in that $90 million range, or is there any reason to think that that's unusually high for this quarter and that it should drop back down in the next few quarters?

I would say $90 million is somewhat high from a quarterly basis. That said, I wouldn't necessarily expect to the go all the way down to $60 million. But why I say that it's slightly high is that to my prior comments, that things relative to prior quarters and expectations, such as mortality, morbidity, persistency, and investment income all were on the favorable side in the quarter. And every quarter there is normal fluctuation in that experience, plus and minus. This just happened to be a quarter where those were largely all on the positive side, which one shouldn't expect going forward.

Okay, that's fair. That's helpful, thanks.

And your next question comes from the line of Sean Dargan.

Thank you and good morning. Piggybacking off the last question, if we accept in that the three operating segments with ongoing business that earnings were on the high side of a normal range, and we kind of back out some of the things that impacted other CNO business--. I mean, that places EBIT above $100 million, and once you tax-deduct and take out the corporate interest expense points to operating EPS, high teens, $0.20 range. Why shouldn't we look at that as sort of the starting point for our estimates going forward?

Sean, thanks for the question. First of all, I would say Bankers was definitely the one that was on the high side of expectations. We would see Washington National and Colonial Penn being largely in line with expectations. That said, Bankers is certainly the largest segment on most fronts. One of the things I would say why there should be potentially some caution to use that high of a number going forward, is the other subject that we've talked about this morning, of the chance that interest rates continue to be at these relatively low levels.

So, that is a headwind, as Eric Johnson covered, we've been able to overcome that headwind, but we in no way would expect that we would continue to outperform at the levels that we have for every quarter into the future.

Okay. And is there any way to quantify what the impact of rates are? I think you said you assumed that they stay where they are now throughout 2011. Is there any way we can think about what that impact would be?

Well, the best way I would point to it is, it was roughly the $13 million charge in OCB, so that would be the best way to quantify it. Certainly, though, unlocking write-offs of DAC or PVFP are based on more than just interest rates. They consider all the assumptions and experience, mortality, morbidity expenses and persistency. So, if we isolate interest rates only, the $13 million would be the best way to look at that.

Thank you.

For the next year.

Thanks.

(Operator Instructions). You do have a follow-up question from the line of Randy Binner.

Thanks. Just piggybacking on Sean's question on DAC, just to make sure I understand that correctly. As of the third quarter 2010, your DAC across the enterprise is updated relative to the current low interest rate environment over kind of a 12 month horizon. Is that a fair statement?

That's correct, yes.

Okay. And is there -- do you do a special study in the third quarter, or is that a fourth quarter thing, or do you do the same kind of weighted study every quarter?

We review our experience and assumptions every quarter.

Okay. And then, I want to dig in if I can, into the Bankers issue. I'm looking at slide 22, so maybe this is for Scott. Thanks for breaking out kind of the years, the vintages where you're looking for long-term care pricing increases. I just want to understand, you said the financial impact is expected to be $22 million to $27 million. What is that a financial impact to? Is that to earnings or to premiums?

It's estimated earnings impact.

Okay, so that would be pretax, so basically EBIT impact, to Bankers on an annualized basis.

Right. But that's once they're fully implemented, which will take, given approval timing, will take at least a full 12 months to take hold.

Okay. But, I mean, I guess for 2012, that would be something that would be maybe -- that number better on EBIT in Bankers if you're able to get the rates through. So is that the right way to think about timing?

Yes. And, Randy, just to add to the financial impact, if you will recall, some of that would be expected to come through the premium income line but then there are also options offered to the insurers to change their benefits. So, some of that would come through on the benefit line, or reserve line.

Yes. Fair enough. Understood. And so what states are those in? And do you feel comfortable with the regulatory environment there? Is this -- you've gotten stopped from doing rerate in the past. So, just curious on the background there.

Right. We've attempted to take that into account, when we came up with this estimate. So, they're nationwide, but when we went through the assumptions on it, we took into account the regulatory environment when we made the assumptions around approvals.

How much of it is in Florida?

I don't know specifically. I'd have to get back to you on that.

Maybe we'll follow up on Florida after the call. As long as I have you guys -- no, that's DAC. Actually, I'm good. I think the other guys covered it. Thank you very much.

Thanks, Randy.

(Operator Instructions). And at this time there are no further questions.

Thank you, operator. And thanks to everyone on the call for your interest in CNO financial group.

Thank you. This concludes today's conference. You may now disconnect.