CNO Financial Group Inc (CNO) 2010 Q4 法說會逐字稿

Good morning. My name is Shaneka, and I will be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group fourth quarter and year-end 2010 earnings 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) I would like to turn the call over to your host, Mr. Scott Galovic. You may begin.

Thank you, operator. Good morning, and thank you for joining us on CNO Financial Group's fourth quarter and year-end 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, our Chief Investment Officer. Following the presentation, we'll also have several other business leaders available for the question-and-answer period.

During this presentation 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.cnoinc.com. This morning's presentation is also available at our website and was filed in a Form 8-K earlier this morning. We expect to file our year-end 10-K and post it on our website on or before February 25.

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 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. Throughout this presentation we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between 4Q 2010 and 4Q 2009.

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

Thanks, Scott.

We are very pleased to report another strong quarter of earnings, with fourth quarter net income of $168.2 million, compared to $18.2 million in 4Q 2009. 4Q 2010 net income reflects the $95 million reduction in the tax valuation allowance, primarily resulting from the utilization of capital loss carry forwards in 2010 and consideration of our recent higher level operating income. 4Q 2010 net operating income was $51.7 million, which was up 62% from a year ago, reflecting higher earnings in our other CNO business segment, partially offset by lower earnings in our Bankers Life segment, which we will discuss later in the call. On a per share basis net operating income was $0.18 per diluted share versus $0.15 per diluted share in Q4 2009. The 4Q 2010 per share amount reflects full dilution from the issuance of shares of common stock and convertible debentures in 4Q 2009 and the first half of 2010.

Our financial strength continues to improve. At year end, the consolidated statutory risk-based capital ratio of our insurance companies, a measure of their financial strength, was 332%, up 12 percentage points from September 30, 2010, driven primarily by our strong statutory operating earnings. Our liquidity at the holding company was $161 million at December 31, 2010, a decrease of $29 million from September 30, 2010, primarily reflecting the repayment of debt during the quarter. Our debt to capital ratio, as defined in our senior secured credit facility, reduced to 19.99% at year end from 21.17% at September 30, 2010. Finally, during the quarter, our accumulated other comprehensive income decreased by $449.8 million to $238.3 million at December 31, 2010, reflecting the increase in market interest rates and the corresponding decrease in value of our fixed maturity investments.

Slide 6 is a quick glance at the summary for the full year 2010. Net income for the year of $284.6 million was an increase of 232% over 2009. Net operating income for the year was $181.9 million, which was up 11% from a year ago. For the year, the consolidated statutory risk-based capital ratio of our insurance companies increased 23 percentage points to 332%, and liquidity at the holding company increased by $15 million during the year, and our debt to capital ratio decreased to less than 20%. Our accumulated other comprehensive income at December 31, 2010, increased by just over $500 million, compared to year end 2009. 2010 core sales of $366 million were down 5% from 2009, primarily a result of the significant Medicare supplement sales that we made in 4Q 2009, due to the conversion of Coventry and other PFFS policy holders who needed to find new coverage as of December 31, 2009.

Finally, I am pleased to report that during 2010, the improved controls that we established in 2009 continued to operate effectively, and as a result, the previous material control weakness no longer existed as of December 31, 2010. And with that I will pass it over to our CFO, Ed Bonach. Ed.

Thanks, Jim, and good morning.

Net operating income for the quarter was $51.7 million or $0.18 per share, compared to $32 million or $0.15 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 $168.2 million, which included $24.1 million of net realized investment gains, a $95 million release of the deferred tax asset valuation allowance, and $2.6 million loss on extinguishment of debt. This compares to net income of $18.2 million a year ago, which included $2.5 million of net realized investment losses, an increase in the valuation allowance for deferred tax assets of $3 million, and an $8.3 million loss on the extinguishment or modification of debt.

Net income per share for the fourth quarter was $0.56, including $0.08 per share of net realized investment gains, $0.31 related to the tax valuation allowance release, and $0.01 related to the loss on extinguishment of debt. This compares to net income per share of $0.09 a year ago, which included $0.01 per share of net realized investment losses, $0.01 per share for an increase in the valuation allowance for deferred tax assets, and $0.04 per share related to the loss on extinguishment or modification of debt.

Turning to slide 8, income before net realized investment gains, corporate interest, and taxes or EBIT was $98.2 million, and that was up 38% compared to $71 million in 4Q 2009. In our Bankers Life segment, pre-tax operating earnings were $71.4 million in 4Q 2010, down 16% compared to the prior year. Results in 4Q 2010 were favorably impacted by $18 million from improved spreads and growth in the annuity block, which is partially offset by $4 million of unfavorable life mortality and an increase in amortization expense of $3 million, due to higher Medicare supplement lapses.

In addition, in looking at year-over-year results, the 4Q 2009 results were favorably impacted by $11 million of earnings from PFFS business we assumed from Coventry, the last of which expired on January 1, 2010. A reserve release of approximately $10 million due to positive development of long-term care reserves and the impact of policy holder actions following a rate increase, and a $6 million out-of-period correction, which increased 4Q 2009 earnings.

For the Washington National segment, pre-tax operating earnings were $28.7 million in 4Q 2010, up 25% compared to the prior year. This primarily reflects an increase in earnings of approximately $6 million from our supplemental health products, due to growth in this block of business and favorable claim experience.

The Colonial Penn pre-tax operating earnings of $5.8 million in 4Q 2010 were comparable to the prior year. In our other CNO business segment or OCB, pre-tax operating income of $6 million in 4Q 2010 compared favorably to a loss of $29.7 million in 4Q 2009. The results for 4Q 2010 reflect favorable mortality in this segment's life block, which increased earnings by $6 million. For the year-over-year comparison, the results in 4Q 2009 were negatively impacted by amortization of insurance intangibles of $15 million from unlocking and regulatory and legal settlements of $14 million. As we indicated last quarter, given that portions of this business in the segment are in loss recognition, we expect that the financial results for the OCB segment will continue to exhibit some volatility in the near term.

Our corporate operations, including our investment advisory subsidiary and corporate expenses, reflect slightly higher expenses. The results for 4Q 2010 included $2.6 million loss on extinguishment of debt net of income taxes related to the repayment of our previous senior credit agreement. The results for 4Q 2009 included an $8.3 million loss on extinguishment of debt net of income taxes, primarily related to the tender of our previous 3.5% convertible senior debentures.

Net realized investment gains in 4Q 2010 were $24.1 million, including total other than temporary impairment losses of $77 million, which was recorded in earnings. This compares with net realized investment losses in 4Q 2009 of $2.5 million, including total other than temporary impairment losses of $60.8 million and an $8.9 million decrease to the deferred tax valuation allowance. Last year $31.1 million of OTTI was recorded in earnings and $29.7 million in AOCL. Eric Johnson, our Chief Investment Officer, will address investment results in more detail later in this presentation. As Jim mentioned earlier, 4Q 2010 results reflect a $95 million reduction to the deferred tax valuation allowance. The reduction allowance primarily results from the utilization of capital loss carry forwards in 2010 in consideration of our recent higher earnings at the operating level.

Slide 9 shows our trailing four quarters consolidated operating return on equity. ROE on a trailing four quarters basis increased to 6%, primarily reflecting higher earnings offset somewhat by the higher equity balance following the issuance of common shares in the fourth quarter of 2009. We expect to continue to increase ROE by improving underperforming legacy blocks through management of non-guaranteed elements, layering on new more profitable business, further improving our operational efficiency, and effective capital deployment. As we indicated last quarter, we believe that our new segmentation will provide more line of sight into these improvements.

Fourth quarter 2010 net operating EPS was $0.18 per share versus $0.15 per share a year earlier. This increase also reflects the improved operating results of the Company, with EPS continuing to increase despite the $0.10 per share dilution from the issuance of 65.9 million shares of common stock and $293 million of convertible debentures in 4Q 2009 in the first half of 2010. Turning to slide 11, book value per common share increased to $16.28 from $15.60 in the prior quarter, primarily reflecting earnings in the fourth quarter.

Slide 12 is a summary of the pre- and after-tax GAAP operating income for the past three years. As mentioned last quarter, our current PE multiple could lead one to the conclusion that CNO's multiple is not out of line with peers. However, as is 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 minimal 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 per share on a present value basis.

Slide 13 shows the statutory earnings power of the insurance companies, which are currently expected to generate $200 million of statutory operating profits annually, excluding extraordinary items. Consolidated statutory net gain from operations before net realized capital gains was $261.5 million in 2010. 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 subsidiaries to maintain appropriate capital levels and fund growth. In addition to the 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 companies that annually total approximately $130 million.

Turning to slide 14, you can see that our financial strength continues to improve. Consolidated statutory risk-based capital increased to 332% in 4Q 2010, primarily as a result of a 22-point increase from statutory operating income and an 8-point positive impact from the merger of two of our insurance companies into Washington National Insurance Company. These positive impacts were partially offset by 7 points, due to net capital losses and other impacts, including surplus debenture interest and an increase in total investments accounting for 11 points of RBC reduction. The NAIC mandated modeling of CMBS portfolios by BlackRock had a less than 1-point impact on our RBC ratio in the quarter.

With respect to liquidity, our unrestricted cash held at the holding company, as Jim mentioned, decreased $29 million to $161 million during the fourth quarter of 2010, primarily reflecting repayment of debt. Our current capital position is strong, with excess capital over management targets totaling now more than $200 million. And as a reminder, current management targets are 300% RBC while maintaining at least $100 million of liquidity at the holding company.

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, pre-tax operating earnings were $71.4 million, down 16% compared to 4Q 2009, but ahead of expectations. Results for the quarter reflect improved spreads and growth in the annuity block. Fourth quarter results were negatively impacted by $4 million due to unfavorable life mortality and a $3 million increase in amortization expense due to lower persistency in Med Supp. The fourth quarter of 2009 included $11 million of private fee for service earnings through our quota share agreements with Coventry, $10 million of lower incurred claims due to the positive development of long-term care reserves, and the impact of policy holder actions following rate increases. And a $6 million out of period correction that positively impacted results.

Sales for the quarter, excluding private fee for service and PDP, were mixed but overall were in line with expectations. Med Supp sales were down for the quarter, but it is important to note that the record level of sales achieved in 4Q 2009 included sales to former private fee for service policy holders. Including, $14 million from Coventry exchanges who, because of disruption in the marketplace, opted to return to traditional Med Supp products. Also contributing to the decline in sales was a shift to our newer plan end product, which we also discussed in last quarter's call. Development of our plan end product reflects consumer preferences for a lower priced cost sharing plan design. As a result, on a per policy basis, Med Supp NAP was lower by about 7% in 4Q 2010, compared to 4Q 2009.

In spite of these factors, 4Q 2010 Med Supp results were still the second highest in Bankers' history. We are confident our Med Supp strategy will allow to us successfully compete in 2011 and beyond. We are committed to providing a long-term value to this market, which includes reasonable pricing at the time of issue and in renewal years. Sales so far in 2011 are ahead of expectations.

Annuity sales were up 15% for the quarter, in spite of the continued low interest rate environment. And life sales were higher by 16%, due in large part to successful cross-sell activity. Both of these lines performed better than industry trends. Finally, Long-Term Care sales were in line with our expectations. As a reminder, also occurring during this time period was the 2011 annual Medicare advantage election period, which ran from November 15 to December 31. These results will be reported as non-core sales results during the first quarter of 2011.

I would like to spend some time discussing Bankers' value proposition. Bankers' well-established career distribution model, with its unique market driven approach, focused on the boomer and retiree middle market, differentiates us from the competition. Our established branch network that we continue to grow through satellite expansion drives a high success rate in local, community-based recruiting. Even though our recruiting was down in 2010 compared to the record levels achieved in 2009, over the last five years we have steadily increased the number of recruits at a 4% annual growth rate, which enabled us to grow our overall producer count.

These local branches provide added value through personalized face-to-face service that is unmatched in the marketplace. The branches are supported by a strong centralized lead generation capability that allow our agents to access and serve our market in a manner that is economically viable. Through a needs-based process, our agents are able to identify a customer's area of concern across the entire spectrum of Health, Life, and Retirement needs, and recommend products or services that best address their concerns. This means our agents and our strategy is not dependent upon one or two product or product lines. For instance, we have demonstrated the ability to nimbly adjust to product opportunities like PDP and Medicare advantage while maintaining our Medicare supplement capabilities, ready when market demand shifted back. This unique, proven, holistic approach places us in an ideal position to serve the boomer market and continue to grow our business.

I would also like to address our position on Long-Term Care, given some of the recent actions in the industry. I want to emphasize that Bankers is committed to this product line because it enables us to meet an important need of our target market. We are able to compete effectively in this line through our experience and strategy. We actively manage all key profitability levers, with emphasis on stringent underwriting, low exposure to high risk product designs, proactive in-force rate actions, and rigorous claims management. Additionally, our new business is priced for higher returns and is positively impacted by our career distribution as a single source sales channel.

As a result of these factors, we have successfully been partnered with a leading reinsurer for new business since 2008 and have achieved stable financial results over the past two years. Slide 19 shows the impact of the earnings items previously discussed, producing that return on allocated capital on a trailing four quarters basis of 11.8% for Bankers.

Now I will turn it back over to Ed to cover the other operating segments' results. Ed.

Thanks, Scott.

Turning to slide 20, Washington National's earnings were $28.7 million for the quarter, up 25% from a year ago. Earnings were positively impacted by growth and favorable claims experience in the supplemental health line. Overall NAP increased by 3%, with strong supplemental health sales growth in both the WNIC Independent and PMA channels. You can see our continued strong sales growth in supplemental health on slide 21, with sales up 15%. PMA supplemental health sales were up 18%, while WNIC Independent supplemental health sales were up 8%. Voluntary work site sales results continue to gain momentum, with WNIC Independent work site NAP up 20% for the quarter, offset by a slight decline in PMA work site sales.

Slide 22 summarizes Washington National's operating earnings by period. It continues to have consistent earnings, producing a trailing four quarter operating return on allocated capital of 9.9%.

Moving to Colonial Penn's results on slide 24, its pre-tax operating earnings were $5.8 million in 4Q 2010, compared to $5.9 million a year ago. Results for this quarter reflect increased earnings in core life products due to growth and higher investment yields, offset by unfavorable mortality. Overall, Colonial Penn continued to experience sales growth, with 4Q 2010 NAP increasing 13% compared to 4Q 2009. Sales for the full year were up 11%, and lead generation was up 35% over the prior year. Slide 24 summarizes Colonial Penn's operating earnings by period, producing a trailing four quarter operating return on allocated capital of 7.6%.

Turning to slide 25, OCB had fourth quarter earnings of $6 million versus a fourth quarter loss in the prior year of $29.7 million. Results for 4Q 2010 reflect favorable mortality in this segment's life block, which increased earnings by $6 million. Last year's results were negatively impacted by amortization of insurance intangibles primarily related to unlocking and regulatory and legal settlements. The creation of OCB provides increased transparency regarding the results of management actions. These actions will continue to focus on NGE changes and expense management, along with an emphasis on the 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 NGE changes to improve results for this business. As we indicated earlier, given that portions of the business are in loss recognition, we do expect the financial results for this segment to continue to exhibit some volatility in the near term.

We have received a lot of inquiries related to the recently announced decision in the Yue versus Conseco Life case. The rate increase in question had been previously withdrawn, and we are appealing the court's declaratory judgment as to what items could be considered in future cost of insurance or COI rate increases on these value life, value term policies. It is important to note that no reserve increase or intangible write off resulted from the court's decision. With respect to other ongoing rate increases, Conseco Life is preparing COI rate increases consistent with the 2010 regulatory settlement agreement. Slide 27 illustrates the volatile results that this legacy closed block has produced.

Turning to slide 28, during the fourth quarter, we refinanced our previous senior credits agreement, which was scheduled to mature in 2013 with a $275 million, 9% senior secured note, due January 2018, and $375 million senior secured credit facility amortizing through September of 2016. This refinancing further enhances CNO's financial flexibility, including extending our maturity profile by over three years and diversifying our sources of financing. The graphs on slide 29 demonstrate the change in the maturity profile from the prior to the new debt structure. As you can see, the debt maturity profile has been significantly improved, with the first significant debt repayment not due until 2016, which is from our outstanding convertible debentures with a conversion price of $5.49. Furthermore, after June 2013, CNO can force conversion if our stock trades above $7.69 for 20 or more days in the consecutive 30-day trading period.

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

Thank you, Ed. Good morning, everybody.

I am on slide 30 now. In the fourth quarter, we earned investment income of slightly north of $332 million, compared to $326 million in the third quarter. Fourth quarter average invested assets were up approximately three quarters of 1% quarter-over-quarter, which possibly affected the income comparison. The portfolio generated an earned yield of 5.77% in the quarter, compared to 5.86% in the third quarter. These figures are not comparable. During the fourth quarter, we expanded a floating rate matchbook program, which increased invested assets and overall investment income. But because of the gross floating yields that are currently achievable in a floating market, that's lower than the portfolio rate, so it is a dilution factor.

During the quarter, new purchases centered in corporate, senior CMBS, current pay non-agencies, selected ABS, and taxable municipals. The new money rate during the quarter was 5.96%.

Slide 31 summarizes realized gains and losses in the fourth quarter. We recognized $37 odd million in net realized gains. This favorable result included $138 million in realized gains. We took these gains principally in low yielding corporates, and this will not substantially affect portfolio yields going forward. To anticipate a question, this affected book yield by approximately 2 basis points overall. These gains were offset by approximately $13 million in realized losses and $77 million in other temporary impairments recognized in earnings.

With regard to this latter matter, we decided to pursue the early commutation of a $305 million segregated account GIC in exchange for interest in the underlying invested assets held by the insurer. Current information related to the underlying invested assets supporting the GIC, obtained late in 2010 and early in 2011, resulted in an impairment charge of $70 odd million. Because the GIC earned a very low yield, about 130 basis points, and had a very long maturity date, 2029, the commutation as completed would mean higher investment income in current and future periods. As with any negotiated transaction, there can be no assurance the commutation will be completed.

Going on to slide 32. During the fourth quarter, the unrealized gain in our portfolio declined from $1.3 billion at September 30 to approximately $470 million at December 31. This can be attributed to general market movement in treasury yields and credit spreads; treasury yields up, credit spreads tightening.

Slide 33 breaks down fourth-quarter impairments. Obviously, the big item there is the GIC I just described. Excluding that, impairments declined considerably to approximately $6 million. That included the write down of two performing commercial mortgage loans to estimated market value pending sale and a smattering of other small items.

Going onto slide 34, which is about asset allocation, hasn't changed very much in the quarter based on the composition of what we purchased.

Slide 35 is about investment quality, and it really segments the invested assets by rating. As you can see, our below investment grade ratio is approximately 9% at quarter end. Certainly, in the last couple of quarters, the relationship of upgrades to downgrades has improved, and the absolute number of downgrades has decreased. Non-agency RMBS will continue to be susceptible downgrades through the lives of the related securities. Also, there is a higher level of M&A activity and corporate actions in general, and that's likely to impact this ratio in coming quarters. These are factors we watch and anticipate as carefully as we can, and their impact on portfolio quality and RBC overall.

Slide 36 is about Alt-A securities, which represented approximately 1.2% of invested assets at December 31. This is a portfolio that reflects significant delinquencies and collateral losses. Much of it has been purchased at discounts reflecting current expectations for collateral performance. Our security level projections are based on market consistent assumptions updated currently and quarterly, and they support full recovery plus some of our carrying value.

Slide 37 is about Jumbos at December 31. And that summarizes about 3.8% of our invested assets. Again, much of this portfolio has been purchased at discounts, reflecting current expectations for collateral performance. And we are satisfied with the ongoing performance in this area.

Going on to slide 38 about CMBS. This is a portfolio here that has significant seasoning and is very highly rated, approximately 95% in the triple current ratings, and the triple- and double-A categories. As Ed mentioned, NAIC had BlackRock assist in risk based capital modeling in CMBS during the quarter, and that process involved developing expected losses for a lot of cusips. Then, having insurers mapping their holdings and prices to the appropriate RBC designations. As Ed mentioned, they've had very little impact here, less than a half of one RBC point. I actually think less than a quarter of one RBC point. So, much ado about nothing.

While rising delinquencies for the CMBS market as a whole are certainly a reality, our collateral, on the other hand, performed very well. And delinquency rate in the collateral is under 5%, which obviously compares very favorably to the market overall. Slide 39 is also about CMBS. And what that tells you is that our exposure there has significant credit support relative to the collateral delinquency rate or performance, both current and projected, and we believe it has sufficient credit support to produce the stated earnings and cash flows.

Slide 40 is about commercial mortgage loans, and it breaks down our allocation by vintage and property type and provides some very high-level summary statistics. This portfolio is approximately a billion eight or 7.5% of invested assets. It is very diverse, approximately 400 loans, average loan size under $5 million. There hasn't been much change in the qualitative characteristics of this portfolio in the fourth quarter.

As you'll remember during last year, we took various actions to improve the stability of that portfolio, and we think those actions are reflected in the fact that there isn't much change currently in how the portfolio is performing. There is one delinquent loan, which is about $100,000 in total. And we expect future losses in this area will be very, very moderate and manageable.

Speaking generally and away from commercial mortgage loans, certainly yields are low and spreads are continually tightening. I think this is a trend which, subject to what the Fed decides to do and what happens in the Middle East, will probably continue. Certainly reflecting strong demand for risk. Given that, we last year and currently are generating yields on new investments that are supportive and consistent with the Company's earnings objectives. At the same time, we feel we're operating within the Company's capacity for risk.

And with that, I will turn it back to Jim.

Thanks, Eric.

On slide 41. We're pleased that our core business has continued to perform well and that our key measures of financial strength, including risk-based capital and debt to capital, also improved during 2010. It is also notable that we have now had eight consecutive quarters of net income. While the Company has had a history of volatile earnings, if you look at our operating record over the last couple of years, operating earnings have become much more stable. The Company is generating significantly greater earnings and cash flow, obviously helped by the large tax asset we have in our NOL position. In addition, in late 2010, as Ed mentioned, we refinanced $650 million of debt, which provides us more flexibility going forward.

The improvements at CNO are being recognized. In addition to getting upgrades from three major rating agencies in late 2010, we were also able to release $95 million of our tax valuation allowance, given the improved financial performance in recent years. As we've stated in the past, 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 are actively marketing; Bankers Life, Washington National, and Colonial Penn. Growing these businesses profitably is our top goal.

We're also continuing to work in improving the old legacy businesses of the Company and the OCB segment through improvements in technology and service and, where justified, through price increases. The demographics of CNO's target market are very attractive. We will continue our focus and emphasis on profitable growth. 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. 2011 is the first year that the boomer population begins to turn 65 and becomes Medicare eligible. In ten years, the number of people 65 years and older will increase by 50%.

In addition, we are expanding our sales reach, with Bankers Life planning to add 15 new locations in 2011, and with PMA expanding the recruiting capacity and their sales management team as well.

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

(Operator Instructions) Your first question comes from Randy Binner from FBR Capital Markets.

I just wanted to start off with capital management. Just wanted to get a sense, now that the debt-to-cap ratio is below 20%, to get a sense of how you may approach both share repurchase and additional debt pay down. If there is milestones you need to pass, if you need to wait until you get farther in the year, et cetera.

Well, Randy, thanks for the question. I mean, it is something we're obviously going to be looking at as we move forward and reviewing with the Board. And so capital management will be, we think, a contributing factor to earnings per share growth in the future, and we'll let the market know as soon as we have made a decision.

Okay. Just a quick follow-up there. It has to be dollar per dollar with debt pay down, so do you have to pay down the debt first, or can that kind of happen at the same time?

Yes. To make sure everyone understands, the senior debt of the Company has got a provision in that we are allowed to make some restricted payments, which include either dividends or share buybacks. And it has to be dollar per dollar, and you would do it simultaneously.

And did I hear Ed correctly, is the buffer at the Hold Co now 120 versus 100 before?

What Ed tried to relate, Randy, is that we have over $200 million of what we would define as excess capital. That means capital in excess of our $100 million of liquidity at the holding company. We currently have $161 million and capital in excess of a 300% RBC target. We have 332% RBC, and those 32 points of excess RBC equate to roughly $160 million.

Okay. Very good. Understood. Just one more on the deferred tax allowance, the release there. I would be interested in getting a sense of, one, is that a year end process, or do you review it more frequently? And the second part of the question is, how much more tax valuation reserve theoretically could be released in future periods?

Let me answer the first question first. Generally speaking, yes, it would be a more thorough annual review. But that said, if there were significant events occurring during the course of the year, we certainly will be reviewing the tax valuation allowance on a quarterly basis, but it would be more event-driven, changes to it, and then an annual, more comprehensive review.

As far as what future releases might be, I can maybe answer it best by what the release was comprised of in this period, and this is also outlined in the K that we'll be filing later this week. Of the $95 million that was released, $47 million was released from future profits expected to be generated in taxable income. $18 million was from current period taxable income being higher, and $30 million was from capital gains.

Okay. I guess that's helpful, but I am kind of going back to the filings here. It just seems like the all-in valuation allowance number is big. It is like $1 billion. I don't think all of that would potentially be in play. I am just trying to get a sense for how big a body of potential valuation allowance the $95 million came out of.

Well, our net NOL is around $850 million, if that helps, and that net NOL decreased by about $35 million in the period. But that's because we used about $131 million, and then we released $95 million of allowance, so a net decrease in the NOL of just over $35 million.

All right. That's helpful. Thank you.

Your next question comes from Paul Sarran from Macquarie.

Can you comment on how much seasonality you expect is kind of remaining in the business at this point?

Well, yes. There is a fair bit of seasonality, and the way the seasonality works is that Q1 will be our lowest earnings quarter. You can look at last year as sort of a guide to give you a rough idea, a rough approximation of the seasonality of earnings. And the bulk of that occurs through the Bankers block. Yes, I think a lot of people, when they're looking at the beginning of the year, a lot of the analysts on the street just come up with a good number for the whole year and divide it by four, and it is clear that Q1 is always our weakest quarter.

Okay. But there was -- kind of throughout this past year, 2010, there was some -- I don't know if you would call it secular improvement in profitability, so it wasn't all seasonality if we look back at 2010. Specifically in the Bankers Life segment, is that fair to say?

Definitely, Paul, as you look at the whole year, there was continued growth in the book of business, not just at Bankers but at Washington National and Colonial Penn as well. But Bankers grew the most, and we continue to have improvement, and as we noted, increased spreads on annuity business in Bankers. We had better supplemental health benefit ratios in Washington National, just to call out two items.

Right. Okay.

Just one more, kind of a higher level question. Can you update us on where you see kind of the overall ROE potential over the next two or three years?

Yes. I think consistent with prior discussions here that we see where the segments' ROEs can improve by two to three points over the next two to three years, which all-in for the Company would mean 1 to 2 points of overall ROE improvement.

Would you need any capital deployment to get there, or is that 1 to 2 points of ROE improvement assuming that you basically hold onto all the capital that's generated organically?

I would say it does include some capital deployment, because as we have indicated and I believe demonstrated, we generate a considerable amount of excess capital pretty much every quarter. And so if we did hold onto all of that and didn't deploy it in some way, including potentially growing faster in some of our businesses, it would put a strain on ROE, assuming investment yields continue to be where they are now in the 6% range. That would not serve to hold onto it and improve ROE.

All right. Okay.

Actually just one last one. How many shares could you buy back today without triggering a Section 382 ownership change?

We haven't disclosed that publicly, but we do have room. And actually, as the calculation is done, it is on a rolling three-year basis. And since we did, with shareholders' approval, put in some provisions and restrictions on not allowing additional 5% shareholders, we will be freeing up more room on 382 in quarters going forward, as well as a previous 5% shareholders roll-off of that calculation.

Okay. Thanks.

Your next question comes from Sean Dargan from Wells Fargo Securities.

I have a question about Long-Term Care. Your results in Bankers Life, with a 71.5% interest adjusted benefit ratio, within the range of expectations. This is not the experience that all of your competitors have seen, and one large company has just pulled out of the market. Can you just tell me about what you're seeing in the LTC market?

Yes, Sean, this is Scott Perry. As I mentioned in our comments, we have been at this for a while, and that experience has allowed us to develop operational tactics and strategies that have allowed us to be a bit ahead of the market. As a reminder, we were the first active writer to begin implementing re-rate actions back as far as 2004, and some of that has begun to benefit us, and we're now in some blocks of business in our third round of implementing re-rates. And our success with re-rates has been evident as well. We have always achieved our targeted levels or above our targeted levels of re-rates.

I think the other contributing factor that differentiates us is our product design. We have virtually no high risk, or what I describe as the lifetime benefits, and very low percentage of inflation business in our block, and I think that generally enables our business to perform slightly better.

The last thing I would say, we also have a mix of business that's somewhat unique in the industry. A third of our new sales are evenly distributed between comprehensive, short-term care and home healthcare, and that's also unique, as those short-term care and the home healthcare have a much lower risk profile and provide lower exposure to the Company.

Sean, this is Ed. I will add a couple more things, in that at least some of the players or former players in the market that have withdrawn also had group products. We don't do group products, and group underwriting is very different than the individual underwriting that we do. And also want to underscore again, what Scott mentioned in the slide walk-through, is our distribution in that having the career distribution force does help to mitigate anti-selection, when other products sold through independent distribution do have at times a shopping process.

All right. Thank you. And I have one for Eric regarding commercial real estate and mortgage loans. There was an article in the Wall Street Journal this morning, on Bloomberg I saw another insurance company CIO talking about putting money to work in this asset class. It seems that others feel that there is some attractive yields. Can you just talk about your outlook on commercial real estate going forward?

Sure. I think we are interested in prudently growing our allocation in this area, with particular focus on A-quality properties in A-quality locations with good sponsorship and at reasonable levels of equity participation and leverage. And what I've just described is something anybody would want, but that's what we want. We are, I think, not planning to take the allocation to unusual levels, but we're about 8% today in commercial mortgage loans.

If you look across this industry, for those insurers who participate, that would be on the lighter end of allocations, though not the lightest. There is still--. Spreads have come in a pretty good ways for the kind of property-- lending to the kind of property I described. It is kind of a bifurcated market, kind of the best of worlds and the worst of worlds for poorer quality properties. And there is still a lot of stuff out there that is over leveraged, that the banks are maybe holding mortgages on, or where you've got loans maturing where 2006, 2007 vintage original transactions where there is still air in the balloon that has got to come out. And something has got to happen. Either someone has got to take a loss or sell the property down or take a loss on a loan or something before you could right size the capital structure.

For good business, you know, certainly we're looking for that. Both in terms of yield and in terms of duration, and it works well against certain of the liability blocks here. And certainly the yield curve where it is, it is a good fit for us. So, don't expect to see large increases in that allocation, but you may see some small increases over time.

Now bear in mind, we do also invest in CMBS, which is susceptible -- it is pretty highly correlated, and we kind of try to look at that in sync and we're about 4% more or less in CMBS. So these are just giving you context. We invest in banks and we invest in insurance companies, so we do look at these exposures on a pretty coordinated basis. And commercial real estate is an area we have to know well, because it profoundly affects the value of our investment portfolio.

Thank you.

You're welcome.

(Operator Instructions) You have a follow-up question from Randy Binner from FBR Capital Markets.

Great. Thank you for taking the follow-up.

I wanted to touch on -- as long as we're near the Bankers in the conversation here, Scott, I can't tell if the disclosure in the presentation here is the same as the commentary you made before last quarter about the EBITDA pickup you were hoping to get from the re-rate in the current round of re-rates on Long-Term Care at Bankers. So, I was hoping to get an update on that. I think before you were talking about $22 million to $27 million of EBIT improvement, I think by 2012 there.

Right. This year's -- the 2010 results reflect a portion of that, but as you know, the re-rates kind of funnel in over time.

Right.

And it takes time, and so it will be spread out between 2010, 2011, and 2012 before it is fully realized.

But by 2012, is that still kind of mid-20s EBIT improvement? Is that still on target?

Yes, from the REITs yes, right.

Okay. Very good. Then I just wanted to clarify something on the California legal case. Appreciate the commentary there. I just want to understand the recent activity in that case. I think it is just one step and a long process. So is there still a risk that the COI increases could be denied, or is it more an issue of kind of the criteria that can be used if you do COI changes?

Well, like every case, it is very specific to the actual policy form that is being talked about. So, it relates to this one block of insurance policies and the actual language in the policy form. And the court disagreed with the way we were defining two terms when we looked at it, and this would be -- it doesn't really effect it. It is unrelated to other policy forms, I guess is the short answer.

Okay. But in this case, though, again -- I guess I am trying to figure out is there still a risk that you won't be able to move forward with the COI change, or is it more just that the criteria used might be different than the criteria that you tried to use before?

Sorry, yes. Thank you for the follow-up question.

Yes. Even if the court ruling did stand, ultimately, it wouldn't prohibit us from implementing an increase on that block of business on those specific policies. It is only that the COI increases on that specific block would follow the definitions in the ruling, and so that's what it means.

That's what I was looking for. Thank you.

You're welcome.

At this time, there are no further questions.

Well, terrific. Thank you all very much for attending, and thank you, operator. And thanks to everyone on the call for your interest in CNO Financial.

Thank you for participating in today's conference call. You may now disconnect.