CNO Financial Group Inc (CNO) 2011 Q2 法說會逐字稿

Good morning, my name is Crystal and I will be your conference operator for today. At this time I would like to welcome everyone to the second quarter 2011 earnings results conference call. (Operator Instructions). Thank you. Mr. Scott Galovic, you may begin your conference

Thank you, operator. Good morning and thank you for joining us for the CNO Financial Group's second quarter 2011 earnings conference call. Today's presentation will include remarks from Jim Prier, our CEO, Edward Bonach, Chief Financial Officer, Scott Perry Chief Operating Officer and President of Banker's 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 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 earlier this morning. We expect to file our second quarter 10-Q and post it on our website on or before August 2nd. Let me remind you 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. 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 within our 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 the second quarter of 2011 and the second quarter of 2010. With that I would like to turn it over to our CEO Jim Prieur, Jim?

Thanks, Scott. We're again pleased to report that CNO is continuing to generate earnings growth with net income in the second quarter of $59.5 million compared to $33.1 million in 2Q 2010. 2Q 2011 net operating income was $57.5 million which was up 28% from a year ago primarily reflecting higher earnings in our Banker's Life segment. On a per share basis net operating income was $0.20 per diluted share versus $0.16 per share in 2Q 2010.

We are also pleased that CNO's capital strength continued to grow primarily fueled by our earnings allowing us to pay down debt and buy back shares while still growing our RBC and increasing capital at the holding company. The consolidated statutory risk based capital ratio of our insurance subsidiaries increased 10 percentage points to 351% in 2Q 2011 driven by improved asset quality and statutory earnings of $78.7 million, which were partially offset by $78 million of dividend payments to our holding company.

Our unrestricted cash and investments held at the holding company increased $65 million to $234 million during 2Q 2011 primarily reflecting the aforementioned dividend payments from our insurance subs offset by $16 million used for common stock repurchases and $16 million for the commensurate prepayment of debt. The increase of the overall level of cash and investments of the holding company is the result of implementation of our program to invest excess capital at the holding company level in order to generate additional non-life income and further utilize our tax loss carry-forwards. Eric Johnson our Chief Investment Officer, will speak to this in greater detail later in the presentation.

Finally, our debt to total capital ratio was 18.7% down from 20% at year end reflecting our strong earnings and the common stock repurchases and debt repayments. Our total new annualized premium on core products was $92 million for the quarter. Although it was down 3% from the second quarter, it was up sequentially 7% from the first quarter of 2011. And now I would like to turn it over to our Chief Financial Officer, Ed Bonach.

Thanks, Jim. As Jim mentioned, net operating income for the quarter was $57.5 million or $0.20 per share compared to $44.9 million or $0.16 per share a year ago. Net income applicable to common stock was $59.5 million whichincluded $2 million of net realized investment gains and loss on extinguishment of debt. This compares to net income of $33.1 million a year ago which included $11.8 million of net realized investment losses and loss on extinguishment of debt.

Net income per share for the second quarter was $0.21 including $0.01 per share of net realized investment gains. This compares to net income per share of $0.12 a year ago which included $0.04 per share of netrealized investment losses.

Turning to slide seven, income before net realized investment gains, corporate interest and taxes or EBIT of $108.5 million was up 21% compared to $89.7 million a year ago. In our Bankers Life segment pre-tax operating earnings were $84.7 million in 2Q 2011 up 32% compared to 2Q 2010.

Results in the current quarter were favorably impacted by an increase in annuity income due to growth in the block reflecting continued favorable persistency, higher than average bond prepayment income, and additional spread earned on investments purchased with proceeds of borrowings from the Federal Home Loan Bank. Included in 2Q 2011 pre-tax operating earnings are bond prepayment income of $6 million and $3.7 million of premium adjustments from the PFFS business assumed through our reinsurance agreements with Coventry the last of which expired on Jan 1 of 2010 which we do not consider to be in the run rate for earnings.

For Washington National pre-tax operating earnings were $22.7 million in 2Q 2011 up 8% which results consistent with our expectations. Colonial Penn's pre-tax operating earnings of $7.6 million were flat with the prior year.

In our OCB or other CNO business segment pre-tax operating earnings were $4.8 million compared to $8.8 million a year ago. Results in this block are expected to fluctuate from period to period and the results in 2Q 2011 were within the range of our expectations. For our corporate operations which includes our investment advisory subsidiary and corporate expenses our net expenses excluding corporate interest expense were $11.3 million compared to $11.8 million in 2Q 2010.

Net realized investment gains were $2.4 million including total other than temporary impairment losses of $10.1 million all were recorded in earnings. This compares with net realized investment losses a year ago of $11.2 million which included total OTTI losses of $29.3 million of which $27.9 million was recorded in earnings and $1.4 million in accumulated other comprehensive income or loss. We will address investment results in more detail later in the presentation.

Slide eight shows our trailing four quarters consolidated operating return on equity. ROE on a trailing four quarters basis increased to 6.5% primarily reflecting higher earnings which more than offset the 15% increase in average equity over the last four quarters. We continue to expect to increase ROE by improving under-performing legacy blocks through management of non-guaranteed elements, layering on new, more profitable business, effectively deploying excess capital, and by further improving our operational efficiency.

Second quarter 2011 net operating EPS was $0.20 per share versus $0.16 per share a year earlier. This increase reflects the improved operating results of the company. I would note that weighted average shares for the quarter were up as the increase due to the dilutive impact of stock options and warrants exceeded the decrease as a result of the share repurchases made during the second quarter.

Turning now to slide10. Book value per common share excluding AOCI increased to $16.80 from $16.28 at year end 2010 and $15.39 a year ago primarily reflecting earnings.

The ongoing improvement in our profitability is evident in slide11 which is a summary of the pre- and after-tax GAAP operating incomes 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're 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 P/E multiple or price to book.

Slide 12 shows the statutory earnings power of the insurance companies with growth in statutory earnings largely tracking GAAP. We have noted in the past that 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. With increased statutory earnings our dividends capacity is now in the $75 to $200 million range annually. In addition to dividends from the insurance companies the holding company also generates cash from interest payments on internal 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 is currently about $115 million.

Turning to slide 13 you can see that our financial strength continues to improve. Consolidated statutory risk-based capital increased another 10 points in the quarter to 351% primarily as a result of a 20-point increase from statutory operating income and a 7-point increase due to reduction in NAIC 5 and 6 securities when were partially offset by a 17-point decrease due to dividends paid up to the holding company. With respect to liquidity, unrestricted cash and investments held at our holding company increased $65 million to $234 million during the quarter. Increase in the quarter includes the impact of the aforementioned dividend payments from our insurance subsidiaries partially offset by $16 million used for common stock repurchases and $16 million for the commensurate pre-payment of debt.

As Jim mentioned earlier, the increase of the overall level of cash and investments at the holding company is a result of our program to invest excess capital at the holding company in order to generate additional non-life income and further utilize our tax loss carry-forwards. We will touch on our excess capital position later in the presentation. Let's me now turn it over to Scott Perry our newly named Chief Operating Officer and President of Bankers Life to cover the results of our three segments where we actively market and sell new business, Scott.

Thanks Ed. For the quarter Bankers' pre-tax operating earnings were $84.7 million up 32% compared to 2Q 2010. Results in the quarter were favorably impacted by higher annuity income due to growth in the block driven by continued favorable persistency, higher than average bond pre-payment income and additional spread earned on investments purchased with proceeds of borrowings from the Federal Home Loan Bank. Included in Bankers 2Q 2011 pre-tax operating earnings are bond pre-payment income of $6 million and $3.7 million of premium adjustments from the Private Fee-For-Service business assumed through our reinsurance agreements with Coventry, the last of which expired on Jan 1st 2010 which we do not consider to be in our run rate for earnings.

Sales for the quarter excluding Private Fee-For-Service and PDP, were mixed. Although 2Q 2011 results were down 6% compared to 2Q 2010 we did experience sequential growth of 9% compared to 1Q11. This increase is consistent with seasonal expectations and was spread across all major product lines with the biggest increases coming in life, which was up 12%, and annuities up 16%. Although annuity sales were down 8% compared to the prior year as result of favorable persistency experience over the past several quarters the block grew by 6%.

On the recruiting front, we are encouraged with our recent results. New agent contracts increased by 9% versus 1Q 2011 and our overall agent force increased by 6%.

Lastly, our branch expansion initiative for 2011 is on schedule.

Last quarter we provided an update on the Medicare supplement market. As a follow-up, I would like to share additional thoughts based on some developments over the past several months. As was the case last quarter we continued to see our competitors taking significant rate increase actions in most markets. As our products continue to perform to profit expectations we do not expect to take any rate increases this year.

Also during the quarter we began product filings for plans that incorporate a four-tier structure, offering gender-specific and preferred rates. These new plans will be available in most states by the fourth quarter of this year. Taken together all of these developments should improve our competitive position in the marketplace. Sales results in this product were mixed although sales through the first 6 months in 2011 were down 8% compared to 2010 on an issued policy basis, our results were flat compared to the prior year reflecting consumer preferences for our lower priced Plan N. Compared to Q1 2011 NAP increased by 2% and policies issued increased by 3%.

Finally we continue to see a reduction in policies returned during the free-look period. This further validates our improving competitive position.

I would also like to provide an update on our long-term care business. As we have discussed over the past several quarters our long-term care financial results remain profitable as we continue to diligently manage the business.

We continue to benefit from claims management improvements and the success we have had in gaining approval for rate increases where actuarially justified and necessary. As a result, over the last several quarters long-term care interest adjusted benefit ratio, a key measure of financial health, has been in the 70% to 75% range. Rate increase activity continued during the quarter. We have filed for the third increase on inflationary plans sold between 1992 and 2003 which is approximately half of this block. We also filed for the second increase on most plans sold between 2002 and 2005. In total we expect rate increases of approximately $37 million when fully implemented. As of the end of the second quarter we have received approximately $15.6 million of approvals. Although the rate increase has slowed over time we still expect to receive most approvals within the next 24 months. This is reflective of the relatively small number of product types within our block and our experience in navigating the increase approval process.

Slide18 shows the impact of earnings items previously discussed producing a return on allocated capitol on a trailing four-quarters of 12.7% for Bankers.

Turning to slide 19, Washington National's earnings were $22.7 million for the quarter and were in line with our expectations. NAP for our core supplemental health and life products increased 3% and we experienced solid recruiting results in both the PMA and WNIC Independent channels. During the quarter supplemental health sales increased 2% versus 2Q 2010 an increase sequentially by 14% compared to 1Q 2011. Life sales were up 23% compared to 2Q 2010 and up sequentially by 15% compared to 1Q 2011.

I would like to spend time talking about some of the growth initiatives currently underway at Washington National. At PMA we are increasing our agent recruiting capacity, training agents to sell life insurance and developing more sales leaders to support a larger agent force and future geographic expansion. In our WNIC Independent channel we are increasing our IMO recruiting capacity and expanding our geographic coverage with more wholesaling feet on the street. In 2010 we added two experienced work site field directors and plan to add two more by the end of this year.

Lastly we plan on increasing the number of business-to-business partnerships. These are carriers with high distribution that do not manufacture supplemental health products but want to add products like critical illness to their portfolio. Slide 22 summarizes the Washington National's operating earnings by period. It continues to have consistent earnings producing a trailing four-quarters operating return on allocated capital of 9.3%.

Moving to Colonial Penn's results in slide 23. Its pre-tax operating earnings were $7.6 million in 2Q 2011 and were relatively flat compared to 2Q 2010. Colonial Penn continued to experience sales growth with 2Q 2011 NAP increasing by 5% versus 2Q 2010. NAP was down 6% compared to first quarter 2011 due to the seasonal nature of the segment's sales model. Slide 24 summarizes Colonial Penn's operating earnings by period producing a trailing four-quarters operating return on allocated capital of 7.3%.

I would like to make a few comments about the recently announced change in my role. The Chief Operating Officer role was created for the specific purpose of optimizing profitable organic growth and to leverage the skills, products and processes across business segments and within the back office. Due to the strong financial performance over the past 10 quarters today the company finds itself with a much improved balance sheet and capital position. Because of this enhanced position I will be leading the business segments and developing and evaluating growth initiatives as part of the Company's broader strategy for deploying its excess capitol over the next several years.

We are currently evaluating initiatives for 2012 that will generate profitable business growth. We will continue to provide updates on these initiatives. I will now turn it back to Ed to cover OCB's results and for a few additional comments on our financial and capital position. Ed?

Thanks, Scott. Turning to slide 26, OCB earnings were $4.8 million compared to $8.8 million a year ago. Earnings in this block are expected to fluctuate from period-to-period and the results in the quarter were within the range of our expectations.

As we have previously stated we continue to review the OCB business for justified changes to non-guaranteed elements. In order to appropriately manage risk in this area, we are taking a measured deliberate approach. Progress has been steady and in line with our plans.

Slide 27 illustrates the volatile results that this legacy closed block has produced over the last five quarters.

Our current capital position is strong with excess capital over management targets totaling more than $377 million. As a reminder current management targets are 300% consolidated RBC while maintaining at least $100 million of liquidity at the holding company. Our long-term goal is to be an investment-grade credit. Managing excess capital at the holding company while maintaining appropriate capital at the insurance subsidiaries are priorities for us. Our consolidated RBC management target will likely increase over time in support of higher ratings.

It is important to note that the excess capital at the holding company can be contributed down to the insurance subsidiaries at anytime if needed. Had the holding company excess capital at June 30th 2011 been contributed to the insurance subsidiaries instead of being held at the holding company our consolidated RBC at June 30th would have increased by another 28 points to 379%.

Our earnings power coupled with our valuable NOL tax assets provides us with several opportunities to effectively deploy excess capital. Some of these options are already being acted on with our recent $50 million debt pre-payment, the opening of 10 new Bankers field offices in the first half of this year and with our common stock repurchases and commensurate debt prepayment in the second quarter totalling just over $32 million.

Deploying excess capital to further increase organic growth as Scott said, is one of our top priorities. As indicated earlier during the second quarter of 2011 we repurchased 2.2 million shares of common stock for an aggregate purchase cost of $16.2 million under the share repurchase program announced on May 16th of this year. The shares were repurchased at an average cost of $7.35 per share and represented 0.9% of the total outstanding shares as of March 31 of 2011.

As required under the terms of our senior secured credit agreement we also made a commensurate principal pre-payment of the same amount. This $16.2 million pre-payment will reduce the scheduled principal amount that is due on September 30, 2016. After this pre-payment, the outstanding principal balance of the facility is $308.8 million and the next scheduled principal payment under the facility is $10 million and is not due until September 30, 2012.

Slide 31 is a graphic breakdown of our NOL on a gross and net basis. As we have noted in prior quarters, accounting should not be confused with economic value and GAAP valuation allowances do not limit our ability to recognize economic benefits from the carry-forwards. As we have noted in the past, our tax valuation allowance and therefore our net NOL are valued conservatively as required under GAAP since we have been in and are in a cumulative loss position over the last three years due to the separation of the former LTC business which was spun off into an independent trust in the second half of 2008. We do not anticipate being in a three year cumulative loss position as of the end of the third quarter this year which is likely to lead us to reevaluate our tax valuation allowance on a less conservative basis next quarter. Now, I will hand it over to Eric Johnson who will discuss the CNO investment portfolio. Eric?

Thank you, Ed. Good morning, everybody. Beginning with slide 32. In the second quarter we earned investment income of $342 million compared to $336 million in the first quarter. Average invested assets increased 4% quarter-over-quarter. Our portfolio generated an earned yield of 5.87% compared to 5.79% in the previous quarter. Both investment income and earned yieldswere positively affected by non-recurring pre-payment income.

During the second quarter we invested in a range of sectors including high-grade corporates, current pay non-agency RMBS and selected CMBS. Our new money rate was 5.24% declined from previous quarters due to market conditions. Slide 33 summarizes quarterly realized gains and losses. In the second quarter we recognized $2.9 million in net realized gains. $29.7 million in gross realized gains were offset by $16.7 million in realized losses and $10.1 million in other than temporary impairments recognized in earnings.

As you will recall, in the fourth quarter of 2010 we decided to pursue the early commutation of $305 million segregated account GIC in exchange for interest in the underlying invested assets held by the insurer of the GIC. In that the GIC earned a very low yield, about 1.33% and had a very long maturity date of 2029, the commutation should mean higher investment income in future periods. During the second quarter we completed another part of the commutation as we exchanged approximately 9% of the GIC for $17 million in agencies and $3 million in ordinary shares and two of the insurers' corporate investments. Current information related to those corporate investments and certain other investment assets still held by the issuer of the remaining portion of the GIC resulted in realized losses and impairment charges of approximately $9 million in the quarter.

Going to slide 34. During the second quarter the unrealized gain in our portfolio increased to $733 million at quarter end. This can be attributed to declines in treasury yields offset by credit spread widening in certain markets.

Slide 35breaks down second quarter impairments totaling approximately $10 million. We reduced the carrying value of three commercial mortgage loans pending sale by $5 million representing estimated market value. This reflects our ongoing work to enhance mortgage portfolio quality. We expect future losses to continue to be manageable and primarily proactive.

By way of reference slide 36 provides a high level summary of our commercial mortgage portfolio. Its quantitative characteristics and qualitative characteristics are essentially unchanged. The present rate of delinquency is approximately 60 basis points represented by two loans totaling approximately $11 million.

Slide 37 illustrates our overall asset allocation which didn't change very much in the second quarter.

Slide 38 segments our invested assets by rating. As you can see our below investment grade ratio was approximately 8% at quarter end down from approximately 10% at 3/31. In corporates the relationship of upgrades to downgrades has improved. The absolute number of downgrades has decreased. This ratio has also benefited from the liquidation of certain high yield corporates and below investment-grade CLO securities which we felt had achieved their full market value. Offsetting these trends we believe higher levels of M&A and other corporate actions may negatively impact this ratio in coming quarters.

Also as we described last quarter certain non-agency RMBS will continue to be susceptible to downgrades through the life of the securities as underlying collateral fees and credit support inherently diminishes in certain structures. We don't expect these downgrades to materially impact our RBC requirements.

Slide 39 is about the holding company. With regard to investments at our holding company and other non-life entities our long-term objective is to earn returns in line with the relevant benchmarks without taking inappropriate risk and while preserving satisfactory liquidity for anticipated and even unexpected strategic needs. We are investing these funds in a variety of sectors including money markets, fixed income, indexed equities and various alternative classes such as private equity and hedge funds. We would expect to gradually deploy these funds over the remainder of the year, hence results at this point are not fully indicative of long-term results. For the second quarter at June 30 the amount of cash investments held was $234 million. Net investment income was $0.8 million. Net investment gains were $2.2 million. Total return was 13 basis points positive. Slide 39 breaks down the related 6/30 allocation. It also presents an indication of our longer term strategy.

Going to slide 40. Recently the sovereign debt crisis in several European countries has created concern in the financial markets. Slide 40 summarizes our sovereign debt investments in Portugal, Italy, Greece and Spain. As you can see we have no direct sovereign exposure and our overall exposure in these countries is low. We own two corporate names and two U.S. domicile banks owned by a Spanish parent. We will continue to monitor this position quite actively.

Speaking generally, current investable yield reflects strong real money liquidity but on-off uncertainty about the direction of the economy and the rate markets. Demand for risk is increasingly volatile creating an uncertain environment for investing money. As our insurance operating companies will continue to generate yields on new investments which support the Company's earnings objectives, while at the same time we are carefully monitoring and not stretching the Company's capacity and appetite for risk. Our holding company activities are in their early days and will flower as the year goes forward. In the holding company we are gradually building a portfolio which will meet the strategic objectives that have been described here and will add positively to the Company's value. Now with that, I will turn it back to Jim Prieur.

Thank you, Eric. On July 6th I announced that I would be retiring as CEO of CNO Financial as of September 30th of this year. After five successful years rebuilding and recapitalizing CNO, and with the company well positioned to pursue the underserved but very fast growing senior middle income market it is the right time for the Company to continue its success under new leadership. The board has selected our CFO, Edward Bonach, to become CEO upon my retirement. And Ed will also fill my position on the board at that time. At the same time the board promoted Scott Perry to the newly created position of Chief Operating Officer. Ed will continue his responsibilities as CFO until a successor CFO is identified, while Scott will retain his position as President of Bankers Life and Casualty Company.

Our strong financial results and our new corporate brand reflect our tremendous progress both operationally and financially. We have now substantially reduced CNO's debt, lowered costs by reallocating human resources and creating an efficient shared services platform. We have also increased our focus on businesses where we have competitive advantages. We spun off our closed long-term care business to reduce risk and earnings volatility. With this nation on the cusp of an explosion of growth in our market as the first of the baby boom generation enters retirement age I look forward to watching CNO grow in an attractive middle-income market with a very bright future. And with that, I would like to turn it back to Ed for some closing comments. Thank you.

Thanks, Jim. Even though Jim will be at the helm of CNO for a couple more months this is his last quarterly earnings call as CNO's CEO, so recognizing and thanking him for his invaluable contributions to CNO are more than appropriate. I and we owe a debt of gratitude to Jim for his leadership over the last five years to get us more focused and positioned on profitability, strength and stability with plenty of opportunity ahead of us. I look forward to Jim's ongoing friendship and council. Jim, many thanks on behalf of CNO's associates, its management team, board, shareholders and other stakeholders. We all wish you the best.

We are pleased that our core businesses continue to perform well, with solid earnings and that our key measures of financial strength including our risk-based capital and debt-to-total-capital ratio also continue to improve. Let me briefly outline my current and longer-term priorities as we transition the CEO position. As I said to our officer group upon the announcement of Jim's retirement and my appointment to succeed him it is the same book new chapter. My appointment is a confirmation by the board that the direction, strategy, management and progress are appropriate and expected to be continued. Our main focus is on continuing to execute.

As you know Jim and I have worked side-by-side for more than four years here, so I am quite vested in the strategy and direction along with knowing and having confidence in the management team. Not surprisingly the CEO transition is going smoothly. As part of the CEO transition I am focused on appointing our next CFO. A key element in the process is determining the desired CFO competencies, especially if my successor is to have an actuarial background or not. This influences the candidate pools both internally and externally.

Effective capital deployment is both a near and longer term priority as we have excess capital currently and expect to continue to generate more going forward. As you heard, Scott's appointment to the new role of COO underscores the board's and my commitment to increasing profitable organic growth as a priority in effectively deploying our capital, building increasing earnings and long-term sustained value for shareholders and other stakeholders. Scott will leverage synergies across the distribution functions and further align customer-facing functions as he now oversees our three segments that are actively selling new business along with our operations division. We remain committed to profitably growing CNO and increasing the enterprise ROE by 200 to 300 basis points by the end of 2013 to the 8% to 9% range. It is a great time to be turning the page to the next chapter in the CNO story.

And with that, I now turn it over for questions. Operator.

(Operator Instructions). Your first question comes from the line of Eric Bass from JPMorgan.

Hi, good morning. I just had a couple of questions. First if you could talk a little more about the expected pace of share repurchases, and how much of a consideration is the restricted payments covenant when thinking about whether to buy back stock now, vs.. waiting for the debt-to-capital ratio to come down further?Then related to that if you could talk a little more about the opportunities you see to invest capital in the business and how you think about returns on these growth investments vs.. share buybacks or further deleveraging.

Thanks, Eric. This is Ed. I'll start out. As far as the pace of share buy backs as we did in the second quarter it will be determined by market conditions, where the stock price is as well as what are the other potential alternatives we have to deploy that capital. As far as the pace relative to the credit agreement and once we get below 17.5% we then are only required to prepay $0.50 for every dollar of share buy back.

That certainly is a consideration but I would expect that as we continue to delever that that should be increasing value to the shareholders and if the share price is rising we may be in a position where we have a benefit of the lower pre-payment requirement on the debt but then we are buying back shares at a higher price. It will not wait is a good way to succinctly answer it to we're not going to wait until 17.5% or lower debt-to-cap is reached. As far as opportunities for capital deployment, we believe that all of our new business is being priced to return at least 12% on allocated capital. That certainly is one hurdle that all of the growth initiatives are compared against and then the buy back of stock is certainly-- you can calculate the return on that as well as any debt repayment and so we do those calculations along the way and we will continue to do so.

Okay. Thank you.

Your next question comes from the line of Randy Binner with FBR Capital Markets

Hi and thanks. I wanted to amplify on the prior question. It seemed like Scott Perry was a little more focused on organic growth opportunities as a way to deploy capital. Should we read it that way, that that's more of a focus than it was before or is it still a situation where across buy backs investing at the whole go for the NOL, organic growth opportunities, debt repayment, those are all equally in the mix at any point in time?

Hey Randy, this is Scott. I think the focus in my comments on organic growth has been more so because we find ourselves in a unique position that we can consider all three

Right. I add to that, Randy, that Scott's position is new and yes that does, in and of itself, put more of the focus on organic growth. But I would say we have always been focused on organic growth. But to Scott's point having excess capital we want to step that up even more to see if we can continue a higher trajectory there on the organic growth.

As Jim has said in the past, we have a classic problem of what do we do with the excess capital? I have always added to that remember we are an insurance company. We are not going to most likely put all of our eggs in one basket. We are and can and have already done things on at least all three of those fronts. Those debt pre-payments, stock buy backs, and growth.

That is helpful. On the statutory earnings, there was a big result on the stat earnings front in the first half of 2011. I want to get a feel for how much that would drop off in the second half if you add visibility into that. You can't run-rate this level of earnings out over time. I assume you will come in after tax around $300 million am trying to get clarity on that for the capital role forward.

You are right. We would not expect to run rate or annualize the first half of 2011's statutory results and the answer is quite dependent on how quickly we grow. As Jim has also mentioned in the past, the outcome of not growing as fast as we have in the past is that you know the good news is we generate more statutory income and free cash flow and excess capital. We would expect the earnings in the second half to be less than the first half. We would expect to have more sales growth in the second half of the year than the first but it is hard to give a specific number because it will depend not just on the rate of growth but which product line is growing the most

That is helpful. Thanks.

Your next question comes from Sean Dargan from Wells Fargo Securities

Thank you. Jim, best of luck in retirement and congratulations Ed and Scott on your retirement-- I'm sorry, on your promotions.

(Multiple Speakers) Thank you

In regards to the valuation allowance can you describe in terms of magnitude of what could happen after the third quarter? I am wondering if there is an interplay there between that and how you will treat DAC, what kind of write off we should see?

Yes, first of all, I will try to answer both parts of that but I do see them as separate. What the DAC implications might be are going to be dictated by the accounting pronouncement and it is likely to be where our expectation is to adopt it retroactively. We expect that all of the commissions should continue to be part of DAC and capitalizable and that is about two-thirds of our DAC balance. We expect some of that remaining one-third to also continue to be capitalized as it has in the past. With that it will certainly reduce the DAC balance upon implementation. It will grow more slowly going forward. Less is able to be capitalized.

As far as the NOL I would say here is the way at least one way we think of it, is thatbecause we are in the cumulative three year loss position we basically are required by GAAP to be conservative and not project increases in taxable income going forward. As we have out-earned a flat line projection you saw some of that impact at the end of last year when about half of our $90 million release of tax valuation allowance was from out earning in 2010 a flat line 2009 projection. That gives you one order of magnitude. When we are out of the cumulative loss we can then project some growth in taxable earnings which we would expect taxable earnings to grow over time.

But that said, GAAP here does still have a margin for adverse deviation. What might be typical is to project half of the growth rate we might expect as part of valuing the tax NOL. If we are expecting 8% growth we would project something more in 4% range. Then generally companies would project that growth in taxable income for maybe a handful of years and then flat line it again. Even at my example of 4% you do that for three to five years and then keep it at that level, that can amount to tens of millions of dollars of additional taxable income over the 10 to 15 year remaining life of our NOLs

Thank you. That is helpful. When you talk about the 200 to 300 basis point expansion in ROE by the end of 2013, in addition to organic earnings growth, what else do you see as having to happen for you to get there?

Number one, certainly is to improve the earnings in OCB. The non-guaranteed element aspect of improving that business is powerful and we expect it to continue to help us to grow earnings. Secondly, besides the organic growth and layering on the new business at least 12% return, continued operational efficiency and I think we had mentioned in a call previously that we continued to work on that.

An example is in Chicago because of fortuitous events, meaning Groupon is in the same building we occupy we will sublease our space there and move to other space that is arguably just as good or better and save at least $1 million a year so we are going to continue to look at ways to reduce expenses or keep them level as we grow. And then it's the effective deployment of capital in that as we use capital to pay down debt, buy back stock, that will also help the ROE and as we noted in one of our slides that our earnings growth has helped to increase ROE on a trailing four quarters basis and is at the same time while the average equity increased by 15%. Using some of the equity to buy back stock and pay down debt will help ROE as well

Thank you.

Your next question comes from the line of Samuel Crawford.

I wanted to ask a couple of things. One you have the risk base capital ratio moved up to 351% now. The target is 300. It is the nature of the ratings agencies to be grudging and slow on the upside Do you see some practical utility in letting that number get higher and using it to force the issue with them to some degree?

The short answer is yes. I mentioned in my comments that our objective is to be an investment grade credit and we recognize that over time our management targets will need to move and will move above the 300% RBC

Second question is minor issue. On commercial mortgage portfolio if you could bring me up-to-date on where the loan-to-value is on average and maybe where the range, the top and low end of loan-to-value is on that portfolio

Sure. I don't know what is in the public disclosure but the loan-to-value is in the low 60s percentages, around 62% or 63%. That is an average across 300-odd loans. It has not that great of dispersion. There is a very small percentage of the portfolio that would be north of 70%, 75% I think that proportion is below 10% and maybe around 7% or 8%.

There is also, it's not a symmetrical curve, obviously there's very little of it that's going to be much below 50%. It is a curve that clusters around the middle-- low 60s with around 7% or 8% north of 75%. Very, very small proportion above 80% or 85% probably 1% or 2% of the portfolio. That is what that curve would look like. This is using current NOIs and market consistent cap rates by type of property and based on geography. While these are the percentages in numbers have a degree of estimation in them. The estimation is based on market consistent fact and known fact so we think it is reasonably representative

Let me add my best wishes to Jim's retirement and congratulations all around to the management team that will take this forward. Thanks.

Thank you.

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

Thanks. Just a couple small follow-ups In Bankers it looked like the amortization was low, quite a bit lower than we modeled and than where it has been recently. I just wanted to get some color on what happened. I assume it is not run rate. Clarification on what helped on the amortization on Bankers

It was improved persistency, Randy, on the annuity block.

How should we think about that going forward assuming that fixed annuities are a popular product with your target market, so assuming that persistency in the new generation sticks is that a better amortization block going forward?

I question that assumption given the low interest rate environment we are currently in. To the degree that low interest rate environment persists there may be some benefit in persistency, but as interest rates improve there is more alternatives for folks in that block to move. I think we see it back to our more normal levels

I think that is so important what Scott said is that back to more normal historic levels as we said in the past with our average annuity contract size of about $45,000, the relationship that the Bankers' agent has with the end consumer, our business through all kinds of economic scenarios has been quite sticky and just as Scott said with the relatively persistent low interest rates we have now had a few quarters in a row where our persistency has been somewhat more favorable than historic

Okay. Got it. But in a deflationary environment you could expect more of the same I guess. It depends on what interest rates do. Then just one other mop-up question. The NAIC 5 and 6 securities that you picked up, did you sell those or did they get upgraded?

This is Eric. Very few, there is very little positive rating for migration out of the 5 and 6 bucket for obvious reasons. Securities rated 5 and 6, it is a cow jumping over the moon before they go back to investment grade. We've had a CLO traction that we refinanced that reduced our amount of investment in the transactions since our investments are at the bottom of the capital structure. Reducing it reduced the amount of 5 and 6 dollars invested.

Second and these are more meaningful amounts. I think I mentioned in the script here we reduced our allocations into some corporate high yields and some non-investment grade RMBS just because we thought they had basically kind of hit the highs. We thought it was a good time to reallocate those dollars. Those transactions in the-- added to what I described in the CLO space. It added up to a reduction in NAIC fives and in sixes. I think I mentioned in the text here that our overall proportion of below investment grade investments to total invested assets went from roughly 10 to roughly 8. I think the same trend is also operated in the NAIC threes and fours as well. We just didn't call it out in the same way we did the fives and sixes.

That is perfect. Thank you.

You're welcome.

There are no further questions on the telephone line at this time.

Thank you everyone. Thank you, OperatorThank you for your interest in CNO and more importantly thank you, Jim, and all the best.

This does conclude today's conference call. You may now disconnect.