CNO Financial Group Inc (CNO) 2011 Q1 法說會逐字稿

Good morning. My name is Jason and I will be your conference operator today. At this time I would like to welcome everyone to the CNO first-quarter 2011 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. I will now turn the call over to Mister Scott Galovic. Sir, you may begin.

Thank you, Operator. Good morning and thank you for joining us on CNO Financial Group's first-quarter 2011 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 will also have several other business leaders available for the question-and-answer 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 morning's presentation is also available on our website and was filed in a Form 8-K this morning. We expect to file our first-quarter 10-Q and post it on our website on or before May 6.

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 our 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 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.

Finally, throughout this presentation we will be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between the first quarter of 2011 and the first quarter of 2010.

And now I'd like to turn the call over to our CEO, Jim Prieur. Jim?

Thanks, Scott. We are pleased that CNO continued to generate earnings growth in the first quarter with net income of $53.9 million compared to $33.9 million in 1Q 2010.

First-quarter net operating income was $51.9 million which was up 36% from a year ago, primarily reflecting higher earnings in our Bankers Life and other CNO business segments. On a per-share basis, net operating income was $0.18 per diluted share versus $0.14 per diluted share in 1Q 2010. The first-quarter number reflects the full dilution from the issuance of convertible debentures in the fourth quarter of 2009 and the first half of 2010.

Our results were driven by solid performance of our core businesses and are at the high end of the preliminary earnings range that we announced last week.

Our financial strength, as measured by our risk-based capital ratio, holding company liquidity, and our debt to total capital ratio also continued to improve in the quarter. The consolidated and statutory risk-based capital ratio of our insurance subsidiaries increased 9 percentage points to 341% in 1Q 2011, driven by statutory earnings of $101 million, partially offset by $60 million of dividend payments to our holding company.

Our unrestricted cash held at the holding company increased $8 million to $169 million during 1Q 2011 reflecting the aforementioned dividend payments from our insurance companies offset by a $50 million prepayment of debt. And our debt to total capital ratio reduced to 19.2% from 20% at year-end.

First-quarter core sales were down 1% from a year ago, primarily as a result of a shift in consumer preferences for lower-cost products.

Last week, we announced that we are seeking to amend our senior secured credit facility to capitalize on the current favorable capital markets. The facility currently has an interest rate of 7.5% and an outstanding principal balance of $325 million.

In addition to seeking to reduce the interest rate on the facility, we are also seeking additional amendments which would increase operating flexibility. Ed Bonach, our CFO, will provide more detail on this later in the presentation.

And now I would like to turn it over to Ed. Ed?

Thanks, Jim, and good morning, everyone.

As Jim mentioned, net operating income for the quarter was $51.9 million or $0.18 per share compared to $38.2 million or $0.14 per share a year ago. Net income applicable to common stock was $53.9 million, which included $2 million of net realized investment gains and loss on extinguishment of debt. This compares to net income of $33.9 million a year ago which included $4.3 million of net realized investment losses and loss on extinguishment of debt.

Net income per share for the first quarter was $0.19, including $0.01 per share of net realized investment gains and loss on the extinguishment of debt. This compares to net income per share of $0.13 a year ago which included $0.01 per share of net realized investment losses and loss on the extinguishment of debt.

Turning to slide 7, income before net realized investment gains, corporate interests, and taxes or EBIT of $101.1 million was up 28% compared to $79.2 million in 1Q 2010. In our Bankers Life segment, pretax operating earnings were $63.9 million in 1Q 2011, an increase of 20%. Results in the quarter were favorably impacted by $14 million from annuity products, primarily reflecting growth in the business and increased spread.

In addition, first-quarter results reflect $11 million of favorable long-term care reserve impact from positive claims development and policyholder actions following rate increases.

Results for the quarter were unfavorably impacted by lower earnings from the Medicare supplement block due to $23 million of additional amortization of insurance intangibles, primarily resulting from higher policy lapses and conversions, partially offset by $7 million of favorable development of prior period claim reserves.

For Washington National, pretax operating earnings were $25.2 million in 1Q 2011, down 9% compared to a year ago. This is primarily due to $2 million of favorable impact of life insurance product reserve refinements in the first quarter of 2010.

Colonial Penn pretax operating earnings were comparable to the prior year.

In our OCB or Other CNO Business segment, pretax operating earnings were $7.1 million, compared to a loss of $1.9 million a year ago. Results for the quarter reflect favorable mortality. Results in 1Q 2010 were unfavorably impacted by changes in assumptions related to when certain non guaranteed elements are expected to be implemented. These changes resulted in increases to reserves and the amortization of insurance intangibles of approximately $8 million last year.

For our Corporate Operations, which includes our investment advisory subsidiary and corporate expenses, results for 1Q 2011 were favorably impacted by trading account activities and the income related to Company-owned life insurance or COLI. COLI is utilized as an investment vehicle to fund our agent-deferred compensation plan and we began to record the difference in financial impact of this investment compared to our overall portfolio yield in the Corporate segment effective January 1, 2011. During the first quarter of 2011, we recognized $6.2 million of income and trading account activities in COLI compared to $1.6 million a year ago when they were recorded in the Bankers Life segment.

Net corporate expenses, excluding corporate interest expense were $500,000 compared to $5 million a year ago while corporate interest expense increased primarily due to a higher average interest rate in 1Q 2011 compared to 1Q 2010. Results for this quarter include a $900,000 loss on extinguishment of debt, net of income taxes, related to the $50 million principal prepayment under our senior secured credit agreement. The results for 1Q 2010 included a $1.2 million loss on extinguishment of debt, net of income taxes related to the repurchase of $64 million of our 3.5% convertible senior debentures.

Net realized investment gains were $2.9 million, including total other than temporary impairment losses of $13.3 million, all of which were recorded in earnings. This compares with net realized investment losses a year ago of $3.1 million which included total OTTI losses of $17.7 million recorded in earnings.

Eric Johnson, our Chief Investment Officer, will address investment results in more detail later in the presentation.

Slide 8 shows our trailing fourth-quarter consolidated operating return on equity. ROE on a trailing four-quarter basis increased to 6.3%, primarily reflecting higher earnings. We expect to continue 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.

First-quarter 2011 net operating EPS was $0.18 per share versus $0.14 per share a year earlier. This increase reflects the improved operating results of the Company, more than offsetting the increase in average diluted shares.

Turning to slide 10, the book value per common share excluding AOCI increased to $16.48 from $16.28 at year-end 2010 and $15.24 a year ago, primarily reflecting our earnings.

On the next slide is a summary of the pre- and after-tax GAAP operating income for years 2009 and 2010, along with the last 12 months. It is important to note that under GAAP, our earnings are reported as if we are paying taxes at approximately a 36% rate. Yet we pay minimal tax due to our NOL. This valuable tax asset should be considered when evaluating the Company based on a PE multiple or price to book.

Slide 12 shows the statutory earnings power of the insurance company with growth and statutory earnings largely tracking GAAP. We have noted in the past that the statutory dividend capacity of the insurance subsidiary 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. With increased statutory operating earnings and realized capital gains, our dividend capacity is now higher.

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 companies that annually total approximately $130 million.

Annual holding company interest and operating expense are currently about $120 million.

Turning to slide 13, you can see that our financial strength continues to improve. As Jim mentioned, consolidated statutory risk-based capital increased another 9 points in the quarter to 341%, primarily as a result of a 21 point increase from statutory operating income, partially offset by a 13 point decrease due to dividends paid up to the holding company.

With respect to liquidity our unrestricted cash held at the holding company increased $8 million to $169 million during the first quarter, primarily reflecting the aforementioned dividend payments offset by $50 million of prepayment of debt.

Our current capital position is strong with excess capital over management targets totaling now more than $200 million. As a reminder, current management targets are an RBC of 300% 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?

Thanks, Ed. For the quarter, pretax operating earnings were $63.9 million, up 20% compared to 1Q 2010. Results reflect an increase of $14 million due to improved spreads and continued growth in the annuity block.

In the quarter, we also had an increase of $18 million from favorable reserve development in both our long-term care and Med supp blocks. The results were negatively impacted by $23 million of higher amortization expense from higher lapses and conversion activity in the Med supp line.

Sales for the quarter, excluding private fee-for-service and PDP were mixed. We continue to see strong sale of our life products, up 5% versus the prior year. Med supp sales were down for the quarter by 5%, mainly due to lower sales per policy than 2010 as we continued to see a higher demand for our lower-priced plan N product. On an issued policy basis, sales increased 7% and our inforce continues to grow.

Long-term care sales have decreased by 19%. This decline also partly reflects a shift in consumer preferences to lower cost products. I will discuss long-term-care in more detail later in the presentation.

Annuity sales were down 3% and, considering the continued low interest rate environment, were in line with our expectations.

On the recruiting front, we have been pleased with the results thus far in 2011. Off from the record highs we saw in 2009 and early 2010, our agent force has remained stable versus the fourth quarter of 2010. New contracts are up 27% versus the fourth quarter and first-year productive agents are up 3%.

Finally, we are ahead of schedule in our effort to expand our recruiting locations. As of the end of March, we have opened 10 of 15 planned locations.

Moving to page 16, in the first quarter of 2011, there was an important development in the Medicare supplement market. As a leading competitor announced plans to pull its Plan N from the market and has filed rate increases on in force and new business exceeding 15% in many states. Bankers' experience-based pricing approach and gradual rate changes has resulted in solid, consistent profitability and kept our agents engaged with consumers, delivering value beyond simply a low price.

As mentioned, we have experienced a 7% increase in the number of policies issued and continued market demand for the lower priced risk-sharing Plan N.

Also during the quarter, we experienced a rate reduction in the number of policies returned during our free look period. This is further validation of our long-term marketing and pricing strategy.

I would also like to discuss recent activities in our long-term care business. Long-term care financial results remain stable as we continue to diligently manage the business. We continue to benefit from claims management improvements that have been made over the last several quarters and recognized $11 million of favorable reserve impacts from claims and policyholder actions following rate increases.

We continue to seek rate increases where necessary. We are currently filing for increases on most plans sold between 2002 and 2005. We are also filing for increases on inflationary plans sold between 1992 and 2003.

In total, we expect rate increases of approximately $37 million when fully implemented over the next several quarters. As of the end of the first quarter, we are slightly ahead of schedule with approximately $11 million of filings for these rate actions already approved.

As previously mentioned, long-term care sales for the quarter were down year over year and this was fully anticipated. We continue to see a mix shift toward our short-term care product. This product accounted for 48% of total long-term care sales in 1Q of 2011 versus 40% in 1Q of 2010.

Short-term care premiums are on average half of long-term care premiums. First-quarter sales also reflect the launch of our new long-term care Simple Choice product which is priced to achieve higher margins and reduced risk.

Also as a reminder, since 2008, new long-term care sales have been partly reinsured with a leading reinsurer.

Slide 18 shows the impact of the earnings items previously discussed, producing a return on allocated capital on a trailing four-quarter basis of 12% for Bankers.

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

Thanks, Scott. Turning to slide 19, Washington National's earnings were $25.2 million for the quarter, down $2.4 million primarily due to last year's results being favorably impacted by life reserve refinements. Overall NAP increased by 3% with supplemental health sales up 7%. Sales momentum has been driven in part by solid recruiting results from the WNIC Independent channel.

You can see our continued strong sales growth in supplemental health on slide 20 with sales up 7%. Life sales were also up 7%.

Slide 21 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 9.4%.

Moving to Colonial Penn's results, its pretax operating earnings were $5.4 million in the first quarter compared to $5.3 million a year ago. Results for first quarter were comparable to last year.

Overall, Colonial Penn continued to experience sales growth with the first-quarter NAP increasing 4%.

Slide 23 summarizes Colonial Penn's operating earnings by period, producing a trailing four-quarter operating return on allocated capital of 7.5%.

Turning to slide 24, OCB earnings were $7.1 million compared to a loss of $1.9 million a year ago. Results this quarter reflect favorable mortality. First-quarter 2010 results were unfavorably impacted by changes in assumptions related to when certain non-guaranteed elements are expected to be implemented. These changes resulted in reserve increases and additional amortization of insurance intangibles of approximately $8 million last year.

Slide 25 illustrates the volatile results that this legacy closed block has produced over the last five quarters.

As Jim mentioned earlier, last week we announced that we are seeking to amend our senior secured credit facility. We will maintain the existing outstanding term loan balance of $325 million, as well as the current amortization schedule.

The facility currently has an interest rate of LIBOR plus 600 basis points with a LIBOR floor of 150 basis points which equal the current interest rate of 7.5%. Our amendment seeks to reduce spread by 100 basis points to LIBOR plus 500 and reduce the LIBOR floor by 25 basis points to 1.25% for an all-in rate of 6.25%.

In addition, we are requesting an amendment to add stepdowns for mandatory pre-payments resulting from any Restricted payments, which could include share repurchases or shareholder dividends. If approved, the mandatory prepayments requirements would step down to a $0.50 prepayment for every $1 of restricted payments if debt to total capitalization is less than or equal to 17.5% and there would be no required prepayment if debt to total cap is less than or equal to 12.5%.

Finally, we are seeking to make two amendments regarding investing activities allowed under the facility. The first would allow us more flexibility to make permitted investments at our holding company in an effort to generate income to more fully utilize our non-life NOL. The second amendment would increase the cap regarding non-investment-grade investments to 12%.

While we expect to successfully complete the amendment process this week, there can be no assurance that the proposed amendments will be achieved.

Our earnings power, coupled with our valuable NOL tax assets, provide us with several opportunities to effectively deploy excess capital. Some of these options are already being acted on with our recent $50 million debt prepayment and the opening of 10 new Bankers branch offices.

Slide 28 is a graphic breakdown of our NOL on a gross and net basis. Accounting should not be confused with economic value. GAAP valuation allowances do not impair our ability to recognize economic benefits from the carryforward. This has been demonstrated in recent quarters as we have realized capital gains and still utilized part of our capital loss carryforward not paying tax on those realized gains.

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

Thank you, Ed. Good morning, everyone.

In the first quarter, we earned investment income of $336 million compared to $332 million in the fourth quarter of last year. Average invested assets increased slightly less than 1% over the fourth quarter, positively impacting investment income comparisons. Our portfolio generated an earned yield of 5.79% compared to 5.77% in the previous quarter.

During the first quarter, our new purchases centered in high-grade corporates, current paying non-agencies, selected CMBS and taxable MUNIs. Our new money rate was 5.6%.

Slide 30. Slide 30 summarizes realized gains and losses. In the first quarter, we recognized $5.1 million in net realized gains. This included $43.5 million in gross realized gains, principally taken in lower yield corporates offset by $25.1 million in realized losses and $13.3 million in other than temporary impairments recognized in earnings.

As you will recall, in the fourth quarter 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. In that the GIC earned a very low yield about 1.33% and had a very long maturity date, 2029. The commutation should mean higher investment income in future periods.

During the first quarter, we completed the commutation in part as we exchanged approximately 35% of the GIC for certain assets of the issuing insuring, including agencies and a preferred interest in the insurer's single largest corporate investment.

Current information relates to this corporate holding and certain other investment assets still held by the issuer of the remaining portion of the GIC resulted in impairment charges of $6.4 million in the quarter.

Going on to slide 31. During the first quarter, the unrealized gain in our portfolio increased from $472 million at 12/31 to $512 million at 3/31. This can be attributed to tightening credit spreads in many markets offset by increases in treasury yields.

Slide 32 breaks down first-quarter impairments. Excluding the GIC, impairments continued to be low, totaling $6.9 million.

Slide 33 illustrates our asset allocations, substantially unchanged in the quarter.

Slide 34 segments our invested assets by rating. As you can see our below investment-grade ratio was approximately 9.6 at quarter end, up from 8.7 at 12/31/10.

In Corporates, the relationship of upgrades to downgrades has improved and overall -- and overall, the absolute number of downgrades has decreased. Higher levels of M&A activity and other corporate actions may impact this ratio in coming quarters.

However as we discussed -- as we described last quarter, certain non-agencies have been and will continue to be susceptible to downgrades during the life of the securities as collateral seasons and credit support inherently diminishes in many structures. These downgrades typically won't impact our RBC requirements.

As slide 35 shows, Alt-A securities represented approximately 1.3% of invested assets at 3/31. While our Alt-A portfolio reflects significant deficiencies, delinquencies, much of these portfolios have been purchased at discounts reflecting current expectations for collateral performance.

Our security level collateral projections are based on market consistent assumptions, and they support full recovery of our carrying value.

Slide 36 summarizes our prime jumbo investments which -- represent about 4.5% of invested assets. Again, much of this portfolio has been purchased at discounts, reflecting current expectations for collateral performance.

Slide 37 breaks down our CMBS exposure by vintage. This portfolio has significant seasoning and it is also highly rated -- approximately 94% in the AAA and AA categories, using current ratings.

While rising delinquencies for the CMBS markets are and continue to be a reality, the delinquency rate of our CMBS collateral is 5% approximately which compares very favorably to 8.9% for the overall market.

Slide 38 illustrates that our CMBS exposure has very significant credit support compared to collateral delinquency levels.

Our securitization level projections which are based on market consistent assumptions tell us that this portfolio has sufficient credit support to produce the expected earnings and cash flows.

Slide 39 breaks down our commercial mortgage loan allocation by vintage and property type and provides some high-level summary statistics. This portfolio was approximately $1.8 billion or 7.3% of invested assets. There was not much change in the quality of the characteristics of this portfolio in the first quarter. Last year, we took various actions to improve the quality and stability of the portfolio and those appear to be paying off. We expect in the future, losses will be moderate and manageable.

Speaking generally, current investable yield reflects strong real money liquidity and demand for risk and leverage coming back into the market. However, we continue to generate yield on new investments which support the Company's earning objectives while at the same time we are not stretching the Company's capacity and appetite for risk.

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

Thanks, Eric. We are pleased that our core businesses continued to perform well with solid earnings and that the key measures of financial strength including RBC and our debt to total capital ratio also continued to improve during the first quarter of 2011. While the Company 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 and the Company is generating significantly greater earnings and cash flow.

This generation of excess capital and our unusual position of having tax loss carryforwards make capital management a priority for us. At the current rate of excess capital generation, the Company is generating enough cash flow to support internal growth and to be able to repay all of its outstanding non-convertible debt over the next three years if it chose to do so.

The Company also has a significant amount of tax loss carryforwards for non-life income. A significant portion of that, we had not expected to be able to use. Building more capital and a solid investment portfolio at the holding company will enable us to take advantage of that tax position.

CNO Financial Group is a market-driven company, not product-driven. We focus on serving middle market customers through the three businesses where we are currently marketing -- Bankers Life, Washington National, and Colonial Penn.

Growing these businesses profitably is our top goal. Many of our customers are retirees who rely on investment income as a major source of their total income and in this low interest rate environment, we see that they are choosing less expensive products, products that necessarily offer less protection.

This is having an impact on our rate of growth. Nevertheless, the demographics of our 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.

2011 is the first year that some of the members of the baby boomers turn 65 and become Medicare eligible. In 10 years, the number of people 65 years and older will increase by 50%.

We continue to extend our sales reach with Bankers Life planning 15 new locations as Scott mentioned with 10 new locations already opened and with the expansion of PMA's recruiting capacity and sales management team. So we confidently probably expect to show sales growth over the balance of the year.

We are also continuing to work at improving the old legacy business of the Company and the OCB segment through price increases where justified and through improvements in technology and in service.

And now, we'll open it up for questions. Operator?

(Operator Instructions). Randy Binner.

Thank you very much. Yes, Jim, or Ed, I don't know if you are in any position to comment on the amendment process since it is ongoing, but any color there would be interesting if you can provide it.

Can't really say too much more. It is being led again by Morgan Stanley with Barclays. We do expect the process to be completed this week and as I said in our comments, we expect it to be successful even though we can't absolutely assure that.

Sure, okay, so assuming you get the capital flexibility piece as you want and especially following Jim's comments there at the end, is there any way to explain -- it's probably better for Jim -- what your preference or the kind of the split between this investment fund concept at the holdco and buyback might be and how you might think about allocating capital between the two options?

Well actually, I think there are more than just two options. I was trying to point out that we are currently generating a lot of excess cash flow and of course, over a number of years, that will change as market conditions change.

But we can reduce the amount of debt outstanding over time, buy back some shares, and as more through the non-life holdco and build the RBC. So we'll be taking a look at those. And some of those things, of course, are price-dependent. So over the next few years, I think we really want to signal to the market that there's been a sea change in the Company and we are now in a position where we are producing a lot of excess cash flow and that's going to be more the issue going forward, rather than the challenges we had two and three years ago.

Oh yes, that's right. I guess I should have said what I thought would be the best two options, but that is my opinion. And then just on details and real quick and I will get back in the queue, just on how RBC and holding company and liquidity work out, you know, the statutory earnings were high in the quarter. Is it possible to characterize what drove that $101 million number and can you just confirm that will be -- yes, I imagine there is going to be a lower quarter sometime in the rest of the year to kind of keep the annual statutory earnings in the high $200 million range.

Yes, you're right. I wouldn't annualize the first quarter statutory results, but that said, the favorable persistency in claims development that we had in several lines like Bankers, long-term care, the growth in the annuity book, etc., transfer over to statutory. And of course, with any intangible amortizations that we've had in GAAP, those of course are not applicable to statutory, hence the higher statutory income in a quarter like this.

And I would say it's the growth in the business. I'd also point to the fact that if you look at our balance sheet, year over year, our assets under management, our investments are up almost 10%. So I think that's another indicator of we're still growing and that helps to grow both GAAP and statutory income.

Okay. So maybe it can push a little bit higher than we would've thought before then. Is that what I'm hearing then?

Yes, and of course the fact that we have been realizing capital gains net of impairments and any losses, that is also favorable for capital as well in dividend capacity.

Great. Thank you.

Sean Dargan.

Good morning. Can you maybe just go into a little more detail about how you can utilize the non-life operating loss carryforward and what that allows you to do with the holding company level?

Yes and good morning. The simplest example is the fact that to the extent we invest money that the holding company generates investment income and/or realized gains, those would be non-life income because it would be in the holding company which is a non-life entity and those generating non-life income would help us to more fully utilize our non-life NOL which, as you know, most of that NOL we do have an allowance against because we are primarily a life company. So ways to generate non-life income are valuable to us.

Okay. And then can you just describe maybe the sales environment Bankers is facing? We would like to see some level of topline growth, but you mentioned the consumers preferring lower cost products in Met supp and LTC. Can you maybe talk about your strategies to address that?

Sure. And actually consumers are making -- wherever they are -- wherever they can, they seem to be making a choice. Our target market is making a choice towards the lower cost products.

So it's happening across the business. Even at Colonial Penn we are selling smaller face amount policies per policy in this kind of environment. So but you're right. It is happening in Met supp, it's happening in LTC and so but for more detail I'll pass it over to Scott.

Yes, Scott Perry. One of the value of a career distribution organization is that during -- when things slow down, you don't slow down quite as fast and that was what we experienced during the last couple of years when a lot of our noncareer competitors had significant decreases in sales, our sales were relatively flat to slightly up to some extent.

Well, the same is true as things pick up, is you don't pick up maybe quite as fast. So, the dips aren't as low and the recoveries aren't as quick. So our comparison year over year is to relatively flat sales where a lot of the industry is compared to sales that were off quite a bit the last couple of years.

However, having said that, we have stabilized our agency force and we do expect it to begin to grow again and as the agency force grows, I think we will begin to see some topline growth. As Jim pointed out, the consumers are preferring a lower priced product and where we can, we are providing that. And it is important to note as Ed mentioned that we are growing the blocks. So even though the topline, a new business might not be growing as fast as we would like to, our retention is strong, our agent engagement with the consumer is strong and therefore our persistency is good and it is allowing us to grow the blocks.

We are seeing positive signs on the agent front, as I mentioned. Recruiting is up sequentially. Agency force, productivity, our agents is up 3% from the end of the year.

Couple of other positive signs we're seeing is our new agent success conversion ratio, so that the agents that we contract, a percentage of those that become successful. That is up since the fourth quarter.

We are seeing an increase in the number of our new agents and our developing agents achieving bonuses that's up 5%. And that's a good sign for retention down the road. And the overall productive agent count is up and that is another good sign for retention.

And as we continue to recruit improvement, see recruiting improvements with improvements in retention, we will see the agency force growing. And then we expect to start to experience the topline growth that we'd normally expect which would be in the 5% to 8% range.

Thank you.

Paul Sarran.

Good morning. Just a follow-up on the holding Company investment portfolio strategy you mentioned. What kind of investments are we talking about here? Is this mainly plain vanilla fixed income securities? Or are you looking at something more exotic?

I think current thinking really could be segmented into three or four allocations. Obviously, there is an ongoing operating business here that has to be supported with cash and liquidity. So one component or one allocation would be basically a money market allocation. It would be very short, very high quality and very liquid. So if a company needs money or currently or prospectively, you've got a ready source of it.

Second, allocation would really be a fixed income allocation, crossing all the traditional segments, mortgages, governments, corporate, high yield, etc. That would probably be rather conservatively leveraged. So you know, you are -- in a sense your risk is in the leverage, not in the credit.

And then the third component would be an alternative investment bucket that would perhaps be less liquid, generate higher returns and maybe have some equity component to it. So that on balance, I don't think we are looking at -- in other words anything that is particularly racy, but something that can deliver reasonably predictable returns and income.

Okay. Was there a reason in the quarter that you didn't further release any of the NOL valuation allowance? Or is it just purely that [that's treated] as it did once a year at year-end?

Yes, Paul, primarily it's a once a year more comprehensive analysis as we indicated in Q4. It would take some type of significant extraordinary event before the end of the year to where we would revisit it.

Okay. On Colonial Penn, with the sales growth in the quarter of 4%, that still lags the pretty strong lead generation you've shown over the last few quarters. I don't think you gave a number for lead generation this quarter, but just thinking about the implications. If you are generating more leads for every $1 of sales that you are ultimately bringing in the door, should there be negative implications for the margins that you are getting on this business?

That's a good question. You know, essentially, the margins we are getting on the business that we sell have increased because we put in significant price increase in, gosh, is it a year and a half ago?

Two years ago.

Almost 2 years, yes, ago. And so the margins are pretty attractive when we make the sales. And you know we expect that we will -- our sales growth will be stronger over the balance of the year. So there will be some catch-up on lead generation.

During the period of time when we were short of that capital a number of years ago and we didn't do advertising, there was, you know we cut back a lot on the advertising budget and we didn't built -- you need a certain inventory of leads to be working on it. So we have been rebuilding that inventory of leads going forward.

Okay and then just one last question. On the closed block, you have now got a couple of decent quarters in terms of earnings coming out of that. Should we be thinking that the block is becoming more stable, maybe because of some of the NGE adjustments you've already put in place? Or has it just been a couple of favorable quarters and that plus or minus $10 million that I think you talked about in the past is still a decent kind of near-term range for what to expect out of that block?

I think the plus or minus $10 million per quarter is a good working assumption for that block. And we've had a couple of okay quarters. As we continue to make progress, I think we have been leading people to think that trying to lead them to think that we will be at breakeven going forward and then we will be building from there.

So we've had a couple of price increases that we put through, and we will continue to work on that block going forward.

Thanks.

Andrew Kligerman.

Good morning. Question on the excess cap, I think I heard $200 million, correct?

Excess capital, Andrew?

Yes.

More than $200 million. (multiple speakers). So if you take that 300% RBC and the $100 million in liquidity, you know it's in the $275 million range as of the end of the first quarter.

275. And then you had that slide 27 with the different potentially utilization opportunities. Investing in additional growth, you plan to have a total of -- 15 new agencies at bankers. What are some of the other potential investments?

Well, the easiest ones to do are simply spending more money at Colonial Penn to invest more in advertising and we'll see how that works out. And then there may be opportunities from time to time to do recapture of our insurance blocks that we had reinsured. And so it's that sort of thing in terms of using capital to invest in business for additional growth.

And, Jim, that doesn't sound like a lot of spend, though, (multiple speakers).

No but it's clearly something that can be very attractive and so it's on the list.

Absolutely. And then any small M&As as a possibility or is that not really on the radar screen?

Well, it would have to be pretty small, obviously.

And then with regard -- yes and then to slide 26, I'm assuming on that proposed amendment what you are indicating is that those mandatory prepayments, that just would apply to dividends and share repurchases. Correct?

There are a couple of other restricted payments, but those would be the most significant items, Andrew.

So if that proposal goes through, when might you anticipate a time when there is a fair likelihood that you could start buying back stock? When might that be, the fourth quarter, the third, next year? When do you think that could happen?

That's something that is going to be on the list and it will be -- we will let you know when it happens.

Yes and the other thing, as Jim mentioned before, Andrew, share repurchase as well as other alternatives are price-sensitive. So one of the things that we are on a regular basis are doing are looking at the potential returns of these different alternatives. And as you might expect buying back $8 is a different economics than buying it back at a price higher or lower than it as well.

Do you think the stock is attractive at $8.28 to buy back?

Well, (laughter) it's better we don't comment. It's better we wait and welcome the increase in the stock price, but it's best we don't comment beyond that.

Okay. All right, I won't push on that. With regard to the salesforce, so Bankers had a 27% increase in new contracts. Productive agents up 3%. One thing I'm trying to reconcile you know is one of your -- Primerica may be going toward a similar market and they have seen a drop-off in recruits and productive agents. They indicate that there are economic pressures on them and, hence, it is still a difficult time for them to grow the sales force. And then I look at your numbers, which are terrific, and I wonder are there economic pressures? Is it just that you are expanding the agencies and they are not --? Give us a little color on the economy and whether you -- we can actually expect this continuation.

I would say that we did experience some of the pressures of the economy the last couple of years. We had a boom in recruiting in 2008, 2009, beginning of 2010, and we saw a significant drop-off in recruiting and even in the net agency for us so this is kind of -- we feel the fourth quarter, we kind of bottomed out. And this is the beginning of a recovery.

But I think we still have a ways to go. You know the sales will lag the recruiting and as you get the recruits trained and developed -- now, I will say -- important to note -- you mentioned the Primerica example, we are in very different markets and have completely different models. They are in the middle market, but in the underage middle-market. And their model is more of a part-time agent model selling to friends and family. And that is very different than our model.

So there are some similarities. relative to just the impacts to the economy. And I'd say we kind of felt the same effects as they did, maybe just not quite as severe and our recovery may be a little bit sooner, but it probably won't be as rapid either.

So I expect recruiting results to be better than they were in the fourth quarter of last year and, sequentially, we hope to post some marginal improvements in recruiting, stabilize the agent force which we have and then see some agency force growth in the second half of the year. But I think we are feeling some of the impacts of the recession and as Jim mentioned, and I mentioned, that's pointed out in consumers' demand for lower price points in their products. So even though we may be selling and issuing more policies than we have in the past, the NAP impact or the premium impact may be either slightly lower or flat.

And that brings me to my last question. Just on these lower price products, I think I heard in some Bankers that some of these products are half the price of previously sold products. Is that correct?

What the comparison was, Andrew, was a comprehensive long-term care product sells through three years of benefits versus the short-term care being half the price.

Okay. Got it.

And we have been selling that product historically. So the short-term care product we have been selling for a number of years. We are just selling more of it now. So and we report long-term care sales altogether. We report the short-term care, the comprehensive product and the home health care product altogether. And as the mix shifts towards the lower benefits and lower priced product, that brings down the overall average premium for policy.

And has this been happening gradually or did you see sort of a sharp pickup in the last quarter (inaudible)?

It has been -- I wouldn't call it gradual, but I would say it's been more than the last quarter. It has been probably about the last 18 months.

Excellent. Thanks a lot.

Sure.

[William Matthews].

The $60 million of dividends from the insurance subsidiaries, how should we be --? Can you give us some color on -- is there seasonality to that? Or is that something we can think about on an annualized basis?

No, it shouldn't be thought about an annualized basis, but you know it should be thought of in the context of having dividend capacity of the insurance subsidiary historically between $50 million and $125 million as I mentioned. And that is annually.

We see that being somewhat higher now because of our recent statutory earnings, including realized capital gains. So somewhat up from $50 million to $125 million a year is what we would say is reasonable to expect.

Got it. Okay and the surplus debenture interest, I do annualize -- I'm pretty confident that that number should be annualized. Is that correct?

That's correct. As well as for the most part the management service fees. Those can be annualized and those combined annually are about $130 million.

Well, that was my third -- the service invest piece seems much lower than what I had as my previous estimate [being otherwise]. The $3.4 million. Is that much lower than what we should think about annually?

That was just actual -- that is cash as opposed to what the -- I'll say the accrued fees are that eventually will be paid in cash.

And when it does eventually get paid?

They are trued up usually within a month or two.

Okay. And so on an annual basis, how should we think about that third bucket?

Again, I would say the annual cash flows from the insurance companies excluding dividends should be thought of annually at $130 million.

Got it. Okay, that's great. Thanks, Ed.

Randy Binner.

This question might be for Eric, and the question is what the holding company funds -- I'm not sure if you mention this in your explanation to Paul, but leverage, yes. Have you thought about whether that holding company fund might employ leverage as a way to kind of decrease the amount of credit risk you would need to take?

Yes, I did. I think I did mention that although it might have been somewhat parenthetically. But one of the allocations, the fixed income allocation we would probably contemplate a modest amount of leverage against it. And in fact I think I mentioned that we see that as really the risk and the trade being the leverage as opposed to being the credit on the investments.

So, yes and now that would just be one of the allocations of the holding company money and probably not the predominant one.

Okay, so I'm taking away kind of a moderate use of leverage and what would the source of that leverage be?

In other words you know where would the borrowings arise?

Yes.

You can do it in various ways, it you can do a TRS transaction. You could do a short repo, you can do term repo. You can do a more structured investment borrowings and we would do any and all of those that made the most sense in the circumstance for the Company.

Okay, but again, just for a portion of it, not kind of a broad leverage on the whole portfolio?

Absolutely not. I mean some of it wouldn't make any sense to leverage the money market. Obviously you (multiple speakers).

Fair enough. Okay.

And also probably the alternative, the risk is in the investment. So you are absolutely right.

One more, if I may, just on down at Bankers with the reserve release. Could you disclose what policy years those were concentrated in?

No.

Fair enough. Thanks, Ed.

[Cynthia Brown].

I have a quick question on OCB. What is the remaining or estimated remaining duration of those policies? When do you expect to see a significant portion run off?

The half-life of the policies there are in the 10-year range. They are long-duration contracts primarily life insurance.

There are no further questions.

Thank you, Operator. And thank you to everyone on the call for your interest in CNO Financial Group.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.