CNO Financial Group Inc (CNO) 2012 Q1 法說會逐字稿

Good morning. My name is Benita, and I will be your conference operator today.

At this time I would like to welcome everyone to the first quarter 2012 earnings results call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. Mr. Galovic, you may begin.

Thank you, Operator. Good morning and thank you for joining us on CNO Financial Group's first-quarter 2012 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Operating Officer and President of Bankers Life; Fred Crawford, our Chief Financial Officer; and Eric Johnson, Chief Investment Officer. During 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 media section of our website at www.CNOInc.com. This morning's presentation is also available in the Investors Section of our website, and was filed in a Form 8-K this morning. We expect to file our first-quarter 2012 Form 10-Q and post it on our website on or before May 4.

Let me remind you that any for 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 does contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix to the presentation.

Effective January 1, 2012, we adopted accounting standard ASU 2010-26, which modified the definition of the types of acquisition costs that can be deferred by insurance companies. We elected to adopt the new guidance on a retrospective basis, and accordingly all prior periods presented have been retrospectively adjusted. The new guidance impacts the timing of recognition of our profits on our business, but has no impact on cash flow, statutory financial results, or the ultimate profitability of the business. Throughout the presentation we'll be making performance comparisons, and unless otherwise specified, any comparison made will be referring to changes between the first quarter of 2011 as restated for the pronouncement and the first quarter of 2012.

With that I'd like to turn the call over to our Chief Executive Officer, Ed Bonach.

Thanks, Scott and good morning.

CNO's core businesses continued to perform well during the first quarter, and our investments and distribution in business growth are yielding solid sales and earnings. We reported first-quarter net income of $59.1 million, or $0.21 per diluted share. Sales were up 12% from the prior year, primarily due to increases in the number of agents and investments in lead generation. We continue to generate significant amounts of excess capital and our key measures of financial strength and credit profile also continued to improve. During the quarter we continued our share buybacks and also prepaid the remaining balance on the senior health note. This early prepayment in full removes the restriction on paying dividends on common stock. In addition, we saw improvements in our key metrics as risk-based capital increased and our debt to capital ratio decreased further during the quarter. Fred will touch on these in more detail later in the presentation.

I'm also pleased to report that, as we continue to emphasize and focus on profitable organic growth, our sales in all three operating segments where we actively market business, or our core segments, increased in the first quarter. Scott Perry will touch on the related drivers during the business review of the core segments. Net operating EPS in the quarter was $0.15 per share, which is flat with the prior year. To enhance the understanding of our operating results, Slide 7 shows our operating EPS adjusted for several significant items that occurred during this quarter and a year ago. When excluding these items from reported results, you can more clearly see the underlying strength in the earnings drivers of our business.

Slide 8 shows our trailing four quarters consolidated operating return on equity, which decreased to 5.8%. As Fred will speak to later, the new DAC pronouncement has a negative impact on our earnings, and, therefore, our absolute ROE with each segment impacted differently. The absolute values that you see on the chart matched the true value of the business that we are putting on the books. Reporting on both imports and new business profits, and providing more granularity on the dynamics of investing in and growing our businesses, should lead to a better understanding of the long-term value drivers at CNO. Furthermore, our statutory results, free cash flow, and excess capital generation, provide meaningful insights on CNO's enterprise values.

As we have discussed before, our leverage to improve ROE continued to be improving OCB margins, layering on profitable new business at a minimum 12% unlevered after-tax return, effectively deploying our excess capital, and continuing to improve efficiencies across the enterprise. While we have made great progress in growing earnings and, as important, earnings stability, we have made even more progress in shoring up the balance sheet and delevering. Having now achieved capital ratios consistent with upgrades, we expect continued earnings growth in capital management to contribute more to increasing ROE going forward.

Slide 9 is one that we have shown in the past few quarters. The slide not only illustrates the growth of our franchise based on growth and liabilities of our three core segments, but also clearly shows that for OCB, which is primarily closed blocks of business, the liability continued to run up.

Turning to Slide 10, as I mentioned earlier, our key measures of financial strength continued to improve, driven by robust statutory earnings, cash flow generation, and effective capital deployment. Again, our consolidated statutory risk-based capital increased by 19 percentage points to 360% from a year ago. Our unrestricted cash and investments held at the holding company ended the quarter at $172 million, and our debt to capital reduced further to 17.1%, continuing at the level requiring only $0.50 of debt paydown for each $1 of share repurchase. I think it's important to note that all of these metrics continue to be strong, driven by earnings generating considerable excess capital that allows for our continued share repurchase, debt paydowns, and investments in our business.

To recap, our investments in distribution, growth, and active management of business in force are yielding solid sales and earnings results. Our financial strength, profitability, and credit profile continue to improve, as well as our generation of considerable cash flow and excess capital. We continue the sharp focus on generating free cash flow for reinvestment in our business and returning capital to our shareholders.

Let me pause for a moment and take a bit on continuing to get some of the legacy issues behind us. We recently announced a tentative settlement in the class action litigation, which involves changes implemented in late 2011 to some non-guaranteed elements in certain universal life policies sold by Conseco Life Insurance Company prior to its acquisition by CNO's predecessor. Management of changes to non-guaranteed elements in accordance with the terms our insurance policies and our insurance regulatory agreements are key components of our ongoing efforts to improve the performance of our other CNO business segments. Resolving this litigation will remove one of the obstacles to those efforts, while providing impacted Conseco Life policyholders with additional benefits and options.

Let me now turn it over to Scott Perry, our Chief Operating Officer, to cover the results for the three segments he oversees.

Thanks, Ed.

During the quarter, we continued to make progress in all three of our business segments where we are actively selling new business. At Bankers, sales are up, our agent force is growing, our long-term care business continues to show predictable and stable performance, and our management trainee program is fully operational, as we continue to recruit and hire the 2012 class of trainees. As of March 31, we have hired 15 trainees and expect to hire an additional 65 this year.

As a reminder, each successful trainee will be ready to take over leadership of a Bankers location after, on average, spending three years learning the Bankers model by successfully executing key agent and management competencies. This program will enable us to accelerate our location expansion by more than doubling the rate of locations we are able to establish through our normal organic developmental process. We expect each location will ultimately allow us to recruit, train, and develop an average of 15 producing agents.

At Washington National, we have successfully expanded our individual and work site businesses through both sales channels. We increased product availability, expanded Washington National independent wholesaling capacity, and strengthened the PMA recruiting and development structure, all of which contributed to an increase in supplemental health and life sales of 20% over the prior year. At Colonial Penn, we have increased our investment in marketing and advertising and the results have been very positive. Sales were up 28% over the prior year.

Moving on to Slide 13 -- at Bankers, sales results for the quarter were up 6% overall compared to 1Q '11, driven by increases of 7% in mid sub, 22% in life and 27% in short-term care. Annuity sales were down 17%, and reflect actions taken by management to ensure that products sold meet our targeted return threshold in the slow interest rate environment. During the quarter, sales benefited from the new four-tier med sub-product, which rolled out in the fourth quarter of 2011 for January 2012 effective date. As well as two new life products, one universal life and one single premium life, that were introduced last year and have been received enthusiastically by the field and the marketplace.

Recruiting results were also strong for the quarter. Our overall agent force grew by 11%, fueled by strong recruiting during Q4 '11 and this quarter. Aging contracts were 2% up in Q1 '12, and veteran agent retention was up 4% versus the prior year.

I'd like to briefly reiterate some comments I made last quarter about the performance of our long-term care business, and the differences in the risk profile of the three products that make up this line. It is important to understand that, because of the very nature of the Bankers business model, which focuses on the 65-plus middle market, our long-term care sales produce a lower risk profile than that of the rest of the industry. For instance, because we sell to a lower price point, we tend to sell reduced benefit plans to a shorter benefit periods and smaller daily benefits. We also have no group business.

And since 2006, we have implemented four rounds of rate increases covering over 50% of all of our in-force comprehensive and home healthcare policies. It is important to note that since we were one of the first companies to actively seek rate increases, we are one of the few companies in the market that has been able to reprice in-force business to levels in line with current new business rates.

Even more significant, over the last six years, we've seen a dramatic shift in sales away from the comprehensive long-term care product to a lower-risk short-term care and home healthcare only coverage. The risk profile for short-term care is considerably lower than a comprehensive product, in that the maximum benefit period is one year. Less than 5% of our total in-force policies have unlimited lifetime benefits. This product meets an important need in the market, offering a lower price point and basic level of benefits, and now accounts for 50% of our new long-term care sales. It is important to note that as a result of this mix shift over time, today comprehensive care long-term care and standalone home health care combined represent only 6% of Bankers' total math.

Turning to Washington National, sales of our core supplemental health and life products increased by 20% versus 1Q of '11. In the Independent channel, sales continue to build momentum as we benefit from an increased focus on work site sales, which has been aided by the deployment of four additional wholesalers in the channel. Recruiting in the Independent channel was also positively impacted by the additional resources, as new producing IMOs increased by 26, or 44% during the quarter. At PMA, sales were up 21%, driven by strong recruiting results; new producing agents increased by 11%; and improved cross-selling of life insurance by both the consumer and work site divisions.

As a reminder, at Washington National, both channels -- PMA and Washington National Independent -- sell supplemental health and life products direct to the consumer and through the work site as voluntary benefits. We've seen a continued improvement in the work site sales environment for these products through both channels. For the quarter, year-over-year voluntary work site sales in total were up 24%.

Sales at Colonial Penn were up 28% for the quarter, driven by robust lead generation; was up 11% over 1Q of '11. As I mentioned earlier, over the past several quarters we have increased our investment in marketing and advertising in order to generate sales growth that will benefit the Company over the long term. Because of the new accounting principles now in place, the investments we make in this segment will no longer be deferrable, and as a result, financial results in this segment will fluctuate.

We are off to a strong start in 2012 and are optimistic looking forward. Our strategy is focused on the rapidly growing pre- and post-retiree middle markets that are being fueled by the aging of the Boomer generation. This market needs the simple, straightforward products that we offer to address the things they are most concerned with -- healthcare expenses, outliving their retirement, and providing a legacy for their families. Our segments are well-positioned to meet these basic needs, whether through career agents, independent agents, at the work site, or direct. In all three businesses, the capital deployment initiatives we identified to accelerate organic growth are progressing and ongoing.

Bankers will continue to increase the number of locations and operationalize the manager trainee program, both of which will increase our ability to grow our agent force. This quarter we also introduced a new critical illness product, which has shown promise early on. While we expect sales of annuities to continue to be a challenge in this low interest rate environment, we are encouraged by sales results of our life products, and expect this positive momentum to carry forward.

At Washington National, we expect the increased focus and positive momentum in the voluntary work site market to continue as the additional resources we've deployed fully ramp up. We expect the strong recruiting of new IMOs to continue for the remainder of the year, with anticipation that we will see recurring gains in the 20% range. We're also investing in expanding product availability at Washington National. So far this year, we have added products in 14 states and expect to roll out new products in 20 states by year end.

At Colonial Penn, we will continue to invest in new lead generation activity, but recognizing that this is a presidential election year, and that television ad time will be limited and costly, we expect that lead-based spending will taper off for the rest of the year and especially during the fourth quarter. As I mentioned last quarter, we are currently filing two new products in this segment that will enable us to expand the appeal of our offering by allowing for slightly higher face amounts than our traditional product set. We are still on track for new product launches in the second half of this year, but don't expect them to have a material sales impact until 2013.

Now let me turn it over to Fred Crawford, our Chief Financial Officer, to cover the financial and capital results.

Thanks, Scott.

Operating earnings for the quarter came in at $40.6 million, or $0.15 per diluted share. As with the rest of the industry, we adopted the new accounting for the treatment of policy acquisition costs. The adoption had a more pronounced impact on Colonial Penn's results, which I'll touch on in a moment. Our book value, excluding AOCI, increased by 11% to $16.20. Our debt-to-capital ratio excluding AOCI came in at 17.1%, down 120 basis points from a year ago, reflecting our strong earnings and accelerated debt reduction during the quarter.

The consolidated statutory RBC ratio ended the period up 360%, driven by statutory operating earnings of $87 million, and after paying $45 million in dividends during the quarter. Unrestricted cash and investments held by our non-insurance subsidiaries ended the quarter at a healthy $172 million. Capital deployment activities included repurchasing 2.4 million shares of our common stock at a cost of $19 million, representing 1% of the outstanding shares as of year-end 2011. As noted earlier, we paid in full the remaining $50 million balance of our senior health notes.

Turning to our segments, there were a number of significant items that impacted the quarter's results. Reserve redundancies in Bankers' Medicare supplement and long-term care lines contributed to positive results. The $21 million positive EBIT impact in the quarter was divided evenly between the two product lines. We also had net favorable items impacting life and annuity margins in our OCB segment of approximately $5 million.

Our Corporate segment benefited from favorable investment results, mainly trading gains in our more actively managed portfolio held at the holding company, and a gain in our COLI investments, which together contributed $12 million in EBIT. These items were largely offset by the regulatory settlement running through Bankers, and reserves established for litigation settlement impacting our other CNO business segments. As mentioned during our fourth quarter call, we also recognized approximately $7 million in costs associated with our new Chicago location, which ran through the Corporate segment.

We provided in our press release and in the appendix of today's slide deck a reconciliation of significant items by segment for the comparable quarters, in order to better see the underlying earnings trends in our business. If you made these adjustments, year-over-year EBIT grew by 15%, driven primarily by net favorable benefit ratios across our Health and LTC business lines, and better persistency and spreads in our Annuity line, these results having the greatest impact on Bankers. In addition, we are experiencing the benefits of in-force activities, such as LTC rate actions and addressing non-guaranteed elements in our runoff Life business.

Last week we conducted a call on the new DAC accounting. Slide 20 shows the impact of the adoption, together with the bifurcation in in-force and new business results during the period. This summary clearly illustrates how the DAC change impacts each of our four business segments differently. Bankers' EBIT was reduced by about $4 million, a result of growth rates and the additional non-deferrable costs incurred for its career agency force. There are many positive economic attributes associated with Bankers' career force but unlike a third party platform, where field support is embedded in deferrable commission structures, these costs are fully recognized in Bankers' earnings as incurred.

Contrast this with Washington National EBIT having little impact. While PMA is exclusive to Washington National, this platform, together with the WNIC independent distribution model, has more of a third-party compensation structure. Colonial Penn recorded a loss, given the investment we're making in new business, and the fact that nearly all of their marketing and advertising costs are not deferrable. The impact on the other CNO business segment reflects the reduction to its DAC balance, and obvious absence of investment in new business. Reporting on both in-force and new business profits should lead to a better understanding of the long-term value drivers at CNO over time, namely in-force dynamics and the return on our investment in new business.

It's worth taking a hard look at Colonial Penn, as this is the largest swing factor in our reported GAAP results. Slide 21 pulls from our quarterly supplement information and illustrates both the impact and the seasonality of results that will now be more apparent in this business line. Colonial Penn's in-force block is very profitable, with EBIT of nearly $40 million in 2011 and $7 million in the first quarter. You can see that our investment in advertising and lead generation tends to be more pronounced in the first and third quarters, a tactical buying decision as we look to maximize the efficiency in our spend. For 2012, there's an added wrinkle given that we're in a presidential election year, and have accelerated our investment earlier in the year to avoid the natural increase in rates as the campaign spend moves into full swing. As we move forward, it's clear to me that investors will need to look through the accounting and develop some of the parts analysis when it comes to Colonial Penn, a valuable franchise of CNO.

It's worth repeating that the adoption had no impact on the economics of our business. In light of the new DAC accounting we expect investors to focus even more attention on the statutory and cash flow dynamics to derive valuation, and believe this is a relative strength of CNO. Slide 22 shows the quarterly statutory operating earnings power of our insurance companies. We had operating earnings of $87 million in the first quarter, with roughly a 50-50 split in terms of earnings retained in support of business growth and dividends paid to the holding company. Importantly, our statutory earnings reflect the majority of significant items in the quarter, namely favorable reserve development and annuity margins, as well as the regulatory settlement and litigation reserves. We expect 2012 to follow the quarterly capital generating pattern of 2011, absent any unexpected volatility in returns.

Our consolidated RBC ratio ended the quarter at 360%, a level we expect to maintain throughout the year. As compared to the year-ago period, our RBC improved nearly 20 points, with total adjusted capital up $128 million and required capital up only $10 million. Our current capital position remains strong, with excess capital over our management targets totaling $122 million. As a holding company, excess capital at quarter end then contributed down to the insurance subsidiaries, our consolidated RBC ratio would stand at nearly 375%.

Free cash flow in the period was about $45 million, essentially $64 million of dividends, surplus note interest and administrative contract payments, less holding company expenses and debt services. We were again very tactical in our approach to redeployment, repurchasing 2.4 million shares of stock for $19 million. We reduced outstanding debt by $59 million, to required $0.50 on the $1 reduction in our senior debt facility, and early retirement of the senior health note.

With that, I'll hand it over to Eric Johnson, who will discuss CNO's investment portfolio.

Thank you, Fred and good morning.

I'm going to start with Slide 24. In the first quarter we earned investment income of $345 million, compared to $344 million in the fourth quarter of 2011. Our portfolio earned yield was 5.64%, compared to 5.70% in the prior quarter. Yields and income were positively impacted by low cash balances and a shift into credit. However, book yield was negatively affected by the impact of market rate on funding yield.

Our new money rate in the quarter was 5.32%. We allocated the bulk of our new money to corporates RMBS on a slightly elevated allocation for corporate high yield. We sustained our practice of actively matching our assets and our liabilities at our line of business level. And we continue to be well within our duration matching targets in all lines of business, including long-term care.

Slide 25 lays out realized gains and losses. In the first quarter we recognized $22.9 million in net realized gains. This included approximately $33 million in gross realized gains, partially offset by $2.5 million realized losses and $7.9 million in other than temporary impairments recognized in earnings.

As Slide 26 indicates, impairments remained comparatively low. I would attribute this to strong corporate fundamentals in the US and abundant liquidity in most credit markets. Further reducing our exposure to leverage less stabilized properties, we agreed to sell 10 performing loans totaling $21 million during the quarter. This involved a charge of $3.2 million taken to revalue the loans to market value. In addition, we reduced to a [decimated] recoverable amount a face value $20 million note, which our predecessor received in 2002 as part of the sale of Conseco variable annuity company. This note is being cashed out as part of the subsequent sale of the acquirer.

On Slide 27 our unrealized gain increased slightly to $1.8 million at quarter end, the spread tightening in most credit markets more than offsetting changes in treasuries during the quarter.

Slide 28 illustrates our overall asset allocation, which was substantially unchanged in the quarter. The main point here is, our asset quality remains good. Our invested assets were 90% investment grade at quarter end, essentially unchanged. In industrial, the relationship of upgrades and downgrades has stayed relatively stable. The financial sector has experienced downgrades due primarily to changes in rating practices affecting international banks, and prospectively, global [cabble] market intermediaries. Certain non-agency RMBS continued to be susceptible to NRSRO downgrades as collateral seasons, but its support inherently diminishes in many structures. However, because these securities are rated for statutory capital purposes using [a price and estimated] recovery matrix from BlackRock, downgrades have not materially impacted our RBC ratio. Taken as a whole, raising actions have not materially impacted our regulatory capital requirements in recent periods.

Slide 29 is about investments at our holding company. They are our first priority to maintain liquidity to support capital management. Funds are invested primarily and principally in money market and core-plus strategies [with] limited leverage. We additionally maintain a small allocation to unleveraged equities alternatives.

Have some data points -- the amount of unrestricted cash and investments held at March 31 was $172 million. Net interest income for the first quarter was approximately $800,000. Gained loss at the quarter was slightly more than $6 million. Core return for the quarter was 4.83%. Our fixed income allocation returned 1.62%, our equity allocation 12.61%, and alternatives returned a loss of 40 basis points.

Going on to my last comments, and really slide 30 -- news on the US economy, the labor market, and European sovereigns has been mixed and market reaction on balance slightly negative. While the debt is expected to keep rates low for an extended period, the market reflects a diminishing probability of QE3. Recent equity market performance has demonstrated the possibility of volatility in risky assets. The yield curve, asset curves, are each very steep.

Both of this, to me, points towards satisfactory credit performance up and down liquidity in low money rates, and that's what we are expecting. Dramatic moves and credit [hours] from us are unlikely, but spreads could tighten somewhat assuming rates stay range bound. We remain a net buyer of credit, although we are avoiding high beta mains. We feel also consider mortgages cheap, including parts of the commercial mortgage loan market. We expect to continue to fund at levels consistent with the Company's needs and objectives.

With that I will turn it back to Ed.

Thanks, Eric.

CNO has a compelling value proposition. We have been growing and have above-average growth potential as we are differentiated by our market focus on the senior and middle-income markets. This market is both underserved and rapidly expanding, with the baby boomers turning 6;, and we have a substantial competitive advantage because of the way we approach that market with face-to-face sales through Bankers and Washington National, and direct to consumer sales through Colonial Penn.

As you've heard today, our value proposition is driven by earnings, business and distribution growth, in-force management, a strong capital position, and the consistent generation of a considerable amount of cash flow and excess capital. At the same time, our risk profile benefits from active management, the diversification of our products, plus the markets we serve mostly needing protection products. In summary, we're well-positioned to continue to capitalize on our unique market focus and business strengths.

And now I'll open it up to your questions. Operator?

(Operator Instructions)

Randy Binner, FBR.

I wanted to ask about the Nicholas settlement, the Nicholas case. In particular, to drill down a little bit to understand what the impact is, Ed, in your comments I think you said that the settlement removed a hurdle to NG changes; but I guess when I read some of the other disclosures, it seemed like CNO may be reducing some of the price actions taken in 2011 and not increasing pricing going forward on this group of value life and value term policies.

In as a non-legal way as possible, if you could explain, to help us understand what, if anything, the Company gives up on its ability to change pricing around this policy block?

Thanks, Randy, and I'll try to do that and also have Fred add to it as necessary.

We do believe that this settlement, if approved, does confirm our right to change non-guaranteed elements of these types of products. We think the glass is more than half full, in that, yes, on one hand, 15% of the contemplated increases in cost of insurance would be rolled back; but the glass being more than half full, that means 85% of those cost of insurance charges would be implemented should this settlement be approved.

These changes -- were these the changes that gave the Company the right to increase pricing in the twenty-first year of the policy? Was that what happened in 2011?

Not specifically. That's one element of these products. These products -- they are in various durations since they were first issued. These increases are not focused on any one duration of the policies in that block.

As far as what you're getting with the $20 million -- what all does that encompass? Does that encompass just -- is that the 15% that you are giving back? Is it other costs and fees? Does that potentially include the inclusion of the UKs -- I think you're trying to get these two jurisdictions merged. Would the $20 million be a wrapper on both pieces of litigation?

To answer your question, I'll go in order of how you asked it.

But in terms of the $20 million GAAP reserve that we put up -- and again it's important to understand that as we disclose, the judge has taken the settlement talks under consideration and will be ruling on that going forward, so we need to watch that progress -- the $20 million reserve that we put up is essentially could be bucketed into thirds. A third of that associated with the specific 15% rollback to the increase. A third of that is related to a series of policyholder benefit-related activities -- both existing policyholders and policyholders that have since lapsed. And then, a third of it is related to attorney fees and I would say other category associated with potential future costs.

In terms of the UKs, what we do from a reserving perspective -- and it really is not narrowly identified in these particular cases, it's what we do with all litigation -- is that we establish the reserves and then we watch how these cases trend. When we see material changes in the development of the case, we'll then adjust our reserves accordingly. You can assume from that, that as we watch the UKs move forward, we have been, when appropriate, establishing reserves in support of that case and how we see it trending.

To add to that clarification, Randy -- this litigation settlement reserve does encompass both U and Nicholas.

The bottom line there -- and I will drop back in the queue for the more operating stuff -- is, this action does not impact -- I think the answer to this is yes, but I just want to make sure -- this does not impact your longer-term goals and turning OCB into a profitable business line?

Correct.

Paul Sarran, Evercore Partners.

I wanted to follow up on Randy's question on the court case, or the settlement. If you are rolling back that 15% of the COI increases, has that been recognized as premium? Is that part of this quarter's revenue?

When addressing the reserve for the possible settlement, we take into account both the current quarterly's impact as well as adjusting our reserves accordingly for what the rollback would be; so past periods as well.

My question is trying to get at -- if I'm trying to look at a run rate premium income for that segment, was there a portion of this premium increase in this quarter that is not going to be there anymore?

There's a couple ways to answer that. One is, yes, you can assume that embedded in the reserve we established was any impact in this particular quarter. Also, importantly, we have been successfully putting in place NGE increases for a while now. You can see that pattern through our policyholder revenue line. I'd focus on that as to what has been the cumulative effect of the actions we've taken.

Paul, I would say, there will be some geography, but in essence, assuming the settlement is approved as we have it reserved for, there would be a reduction going forward, relatively speaking, of the cost of insurance charges for the policy income line, but then the reserve would over time be released. In essence, this reserve -- or the portion of it for this COI changes -- already accounts for that rollback, so there won't be future hits if everything develops as we've anticipated in the reserves.

One more try on this topic. Just taking a bigger picture view -- so total insurance policy income in OCB increased 10% year-over-year; so taking into consideration this settlement, all the actions you've already taken and actions in the pipeline on other NGEs -- where do you see premium trending going forward?

That's a little bit hard to predict. As we've said for quite a while, we do expect there to be some level of volatility. But in that particular line item, it will depend on the pace of actions we take, the degree of action we take, the amount of -- in terms of blocks of business we address. It's very hard to extrapolate, if you will, specifically the NGE actions to try to create a trend line on it.

My suggestion is simply to recognize the last several quarters' trends in that policyholder revenue, realize that we're running the books off at about 4% to 5%. The go-forward prediction of revenues -- that's really going to be dependent on actions we take, elect to take or not take.

As well as, Paul, the choice is of the policyholder's. I think to Fred's point, we'd encourage you to look more at the all-in -- what's the EBIT from OCB, because as NGE changes are implemented, policyholders generally have other options than just accepting the COI change that they could reduce the amount of coverage, for example. That won't change the policy income line, but it would change the reserves or benefit line as a result. It's best to look at the totality of all the actions, both by the Company as well as by the policyholders, and look to the bottom line operating income.

Chris Giovanni, Goldman Sachs.

First question is tied to the favorable reserve releases you've been seeing at Bankers. You have been seeing this for several quarters now. I wanted to see if you could talk a bit more about what's driving this trend and how sustainable it could be going forward?

A couple things just to frame the discussion -- first, on Bankers med sub, we reported benefit ratio of about 64%, a little north of 64%. If you normalize for the redundancy in the period, that would come out at just shy of 71%. Last year's average benefit ratio in this line of business was about 69%. The effect of the redundancy is normalizing you back, if you will, to a slightly elevated loss ratio relative to last year's favorable experience, on average.

When it comes to the redundancy itself -- really, that's driven by a couple things. When we established the reserves on the business involved in the blocks that we took the claims reserve down in, we established the loss ratio targets with an understanding that the rate increases we were putting in across these blocks were less than what have been historically put in place. We thought that would naturally lead to a tick up in loss ratios.

The second thing is, we've had a practice for quite a while now of, while these rate increases are coming through and when selling med sub through Bankers, we will offer typically the more preferred risk, the opportunity to move into a Colonial Penn-designed product. This is requiring a fully underwritten process in order to qualify for that product. In doing so, we naturally suspected that, that would tick up the Bankers loss ratios due to adverse selection; that our higher-quality risk, if you will, would take us up on that offer and look to that product.

Reflecting on both of those expectations, we simply have not seen that come through in our results. Because of that, and because of analysis on it, we've been taking down the reserves periodically and here, once again, in the first quarter. That's really the driver on the med sub side.

Next question, just on capital management -- if we think about the potential capital management catalyst in 2012, I think looking back last year you announced the initial $100 million authorization for buybacks on May 16. So should we be thinking about a similar time frame again when we think about potential dividend implementation?

I would say no, not necessarily, given that, that was our original $100 million. The Board did authorize an additional $100 million, so we had $200 million gross outstanding, of which we've got approximately 0.5 of that still available to us. Given that we're just at the beginning of May, I don't see where necessarily there would be another share buyback authorization in May or in the next few months, given, again, the amount of outstanding authorization we still have.

I think our capital deployment priorities and strategies have not really changed from what we experienced in 2011. As I mentioned in my comments, we see the free cash flow patterns remaining fairly consistent, and our priorities on the use of excess capital to be fairly consistent.

I had mentioned a shareholder dividend in May. Is that something that we should be thinking about? I understand, unlikely to see an upsize buyback here in the next few weeks, but how are you thinking about the dividend?

Well, ultimately, Chris, we don't want to preempt any discussion or analysis or consideration of our Board. That's really a Board decision to make. I think our important comments are that with the payoff of the senior health note, we're now in a position -- our Board's in a position -- to give consideration to a dividend going forward; but that's really their call to contemplate.

Erik Bass, JPMorgan.

One follow-up on the Nicholas case. You mentioned you still expect to be able to get the targeted re-rates in the OCB block over time, but are there any implications for how you will go about repricing the other blocks? Are there any implications in terms of the timing? Would it slow down the process at all?

The short answer is no. I refer you back to the regulatory agreement that we had, we struck in 2010, which started in 2008 as we began the process of pursuing non-guaranteed element changes. In this, we reached agreement with most of the regulators that sign onto this on our process, which, in essence codified our contractual right to pursue these changes. That's what we've been operating on since 2010, and see that continuing.

You don't see any risk of additional legal hurdles that weren't anticipated at that point?

I'll say again -- short answer, no. As we have discussed in prior calls, all along we believed and expected with this process that there would be some legal challenges. That's why we've put a very deliberate approach to reviewing our experience, the contractual language and related materials, working under this process, that again was codified by the regulators to pursue these changes. In that though, I can say that of the non-guaranteed element changes that we've implemented to date, that the majority have not had any litigation associated with them, to this point at least.

One question for Bankers -- you went through what was driving the med sub reserve releases. But can you talk a little about what's been driving them on the long-term care line?

On the long-term care side, there was in fact reserve redundancy also, but the pure redundancy -- that is, the claims experienced, relative to what we had reserved for -- is a relatively minor piece of the benefit in the period, more in the $4 million-ish range. The majority of the adjustment, another $6 million to $7 million, is really related to a higher lapse experience on, particularly some of the older inflation-rated or inflation-protected products. It's not uncommon to find a level of shock lapse when you are putting forward rate increases.

We have put these increases across a broader array of products this particular round, and in some cases, we're on the second round of rate increases for a particular set of policies. We think that, together with potentially some of the economic issues taking place in our target market, is resulting in higher than expected lapse rates. When those policies lapse, you have the related reserve release, and that caused a pop, if you will, in the earnings. We wouldn't expect that to repeat at this magnitude, which is why we isolated it.

(Operator Instructions)

Ryan Krueger, Dowling & Partners.

At Colonial Penn, you discussed some front-end loaded advertising. Should we expect another strong sales quarter as we go into the second quarter and then taper off as the year progresses? Or how should we think about that?

There definitely is somewhat of a lag between when the advertising starts and when it turns into leads and then ultimately sales. There is some seasonality as well in our business from the standpoint of, there are certain times of the year where buying advertising is more economical than others. As that one slide that Fred covered shows, our advertising spend is not linear or equal in every quarter, because we are quite thoughtful about when we're going to get the highest impact of the dollars spent on advertising.

That all said, we don't foresee any significant change in the pattern of that spending. If you look at the last four quarters, with the small caveat that we are, as was noted in our remarks, the presidential election will impact, most likely, some of the ad buying as we get into the third and fourth quarters, because the effectiveness of advertising in that time is somewhat less.

Back to the target NGE increases in OCB -- can you give us some sense for how far along in the process you are overall; maybe some type of percentage? I'm not sure if you are 10% of the way through, 25% of the way through -- trying to get some sense there.

Yes. It's really, honestly, not the way to look at it. We don't think of this as something in terms of percentages or number of policies or what we have behind us, what we have in front of us.

Really, this is a process of looking at asset accuracy and cash flow testing results in certain blocks where action is needed, and most importantly, allowed for after a careful vetting of the nature of the policies and a defensible position to be able to address non-guaranteed elements. It really has less to do with some sort of progression or percentage or amount done or not done, and more to do with, really, what's emerging out of the blocks of business, where we need to take action, and most importantly, where we can take action.

Is it fair to say that, to date, you've only had a fairly modest benefit from these actions?

Modest what, Ryan?

Is it a modest earnings benefit? Is that how we should think about the impact of what has been done so far?

I guess it depends on how you want to define modest. I think as you compare our 2011 results in OCB to 2010, there was over a $30 million EBIT improvement year-over-year. Not to say that '12 will give the same dollar amount of improvement, but we believe we can continue to improve on 2011's results as we go forward.

Chris Giovanni, Goldman Sachs.

Wanted to ask a question maybe for Eric on the portfolio -- when we look at the mortgage loan asset class, you talked about pruning back at that to some of the more highly leveraged properties, and this asset class has been decreasing over the course of the past year. How should we think about the stabilizing going forward as you look to put on more class A properties?

Good question, and it's kind of a two-sided question.

The first side of it is the aspect where I mentioned, and where we've been over the last couple of years, I think fairly actively pruning away at what was a higher beta quotient of that portfolio. That work is not completely done, but it is substantially done; although as time and experience rolls forward, that's not to say that there might not be some additional action that we would take, but I would think the greatest substance of it would be behind us. In fact, if you look at the trailing volume of actions, you would see that the amount of actions has decreased over the last couple quarters.

Now, the other side of that is that I think the portfolio we have today is a very good one, though not as big as I would like it to be. It's about roughly 6.5% of assets, which I think is slightly on the low side, because for the most part, this is a segment that offers fairly good and stable cash flow and yields performance; and a little less volatility than initial public fixed income sectors, and also more duration in some respects. There's a certain amount of bifurcation in the market today, where truly A-quality properties at yields that are driven in part by Fannie and Freddie get to yields where they don't really do enough for us.

When you get into the high threes and four, that isn't enough to feed the beast here. We have to be, not wholesale, but selective in terms of wanting to aggressively compete for properties like that, but knowing where to say no, because we don't want to buy stuff at 3.5% or 3.75%, which is where you have to go for some multi-family properties out there. We're not doing that, so we have to be -- although we'd love to wave in a lot of it, we have to be smart about it and somewhat selective and maybe go for the longer duration or a little smaller property than some other people. And over time, work toward a higher allocation, but do it in a way that supports the Company.

In a different dynamic, if maybe we had access to institutional, or (GIC) money, where you can do stuff on a pure spread basis, you can do the 3.5%, 3.75%-type yield property, and match it up against a spread node and lock it away and be done with it. We don't have that opportunity, so we're funding it against general account reserves, and that requires a different yield characteristic.

That's a long-winded way of saying we have to and we are working very hard to build the allocation up, but it's not going to happen overnight; and I think that, net-net, you'll see that number begin to increase off of what I hope is the low point and get it back up a point or two a year or two at a time. I think that's what's real, and that shouldn't do too much violence to our RBC requirements and the yields we need.

Ed, I think you made a comment in your prepared remarks around the bulk of the deleveraging to achieve higher ratings being won. Can you talk about conversations you're having with the rating agencies?

Yes. We, hopefully not surprisingly so, talk to them on a regular basis, and at least quarterly give them updates on our results, including statutory and related cash flows. They have their processes of review. We are coming up on annual reviews that are more extensive with the major rating agencies. We continue to believe that, if we stay focused as we have been on running our business as well, that the ratings will eventually catch up and follow.

Randy Binner, FBR.

This is a quick one and I don't think this was covered -- but on a core basis, the benefit ratio's really across the board -- in Bankers, Washington National, Colonial Penn -- was a little bit higher than we were forecasting. I know that the first quarter can be seasonably higher for mortality. Wondering if there was any unusual impact from mortality in the quarter, and wanted to confirm the seasonality pattern on earnings for the four quarters of the year.

In terms of Washington National, focusing predominantly on the supplemental health business, which is the majority of the driver there, we ended up with a benefit ratio of 55%, interest adjusted. That's above the average for last year, for example -- around 51% -- but I'd note that we had at least a couple quarters last year where we were touching 54%. We did not normalize out anything in those benefit ratios. We view that as the normal fluctuation within the range. That gives you maybe a little bit of perspective.

The only other thing I'd add, on life, Randy, is we did see slightly higher life claims in Colonial Penn, but again, within our normal range.

To confirm -- the business mix isn't changing that much, but the heavier mortality quarters are the first and the fourth, right?

Generally, yes.

Paul Sarran, Evercore Partners.

I wanted to see if we could get an update on your ROE expectations. I think last quarter you talked about a target of 8% by the end of '13 and 9% by the end of '14. Is this still what you're shooting for? Or has anything changed on these goals?

Nothing materially is changed, Paul. That said, those goals which we've been telling you about for some time were based on the prior GAAP accounting. We've definitely, in our annual and strategic planning that we'll be commencing here in mid-year, we'll re-review those with the new accounting as well as our expected growth rates, which obviously negatively impact current period earnings the faster we grow.

In general, what should hold is that delta in terms of the build in ROE, and we'll continue to work to provide more color on where we see those stair steps taking place in ROE. But they are largely what we've talked about -- the continued active management of in-force, the repricing of our products and selling those products in the marketplace generating better returns. Now, you're going to have a little bit of a different effect where the business sold in the current year is going to have a near-term effect on your financials, but as that transitions into in-force, we see that build steadily.

And then capital management. As Ed mentioned, we're right in and around where we would want to be from an optimal capital structure. There is some forced delevering that takes place, scheduled principal payments and the $0.50 on the $1 requirement as we buy back stock. Generally speaking, we're where we want to be; and in fact, arguably we are on the lower end of the leverage range among certainly the peer group, and very much so in terms of our ratings. We'll start to see that capital redeployment be more and more of a contributor as we go forward.

On that point about capital deployment -- is it mostly going to be deploying free cash flow, and more of that going to buybacks versus debt? Or are you going to look at further drawing down Holdco excess capital as well?

Essentially our target -- we target $100 million at the Holdco. When we have a build of liquidity, as we did, for example, at year end, you'll see some spend down as part of redeploying capital. For example, I believe we spent down around $30 million of holding company excess capital in the quarter in addition to the normal free cash flow as part of the redeployment in the period.

As we go forward, I think it's important to note that we're going to look for the highest and best use of that excess capital. At the moment reflecting on our strategy, it's largely around paying down high coupon debt to create an environment where we have greater financial flexibility going forward and ability to recast our capital structure at lower cost of capital, and then buying back stock. Our Board is now able to contemplate a dividend should they choose. Then we will look for opportunities to continue to support and grow our business, build the business, which we see real good momentum there.

It's still going to be assessing all the options for that capital. It would be a combination of, if we build excess capital at the holding company over and above our targets, we will put that work. I think the vast majority is really generating good core cash flows out of our insurance operations.

With respect to your comments on debt leverage, would the first step be refinancing the senior credit agreement in terms of doing anything on the debt side of the capital structure? And have you started looking at that or considering that as an option?

Yes. You can assume that we are constantly putting our capital structure up against the marketplace to see whether or not it would make sense to do something. At the moment, our view would be -- the answer to your question is, yes. Yes, in the fact that you'd be naturally focused in on that senior credit facility, really because there are practical restrictions in timing associated with doing something on the other debt, that would be repayment related penalties and so forth that make it less economic at this point in time to address it. The biggest issue is that we've got some real ratings momentum as a company. Those of you who follow the high yield market would probably take note of the fact that there is a very big difference in the marketplace between a DD senior debt player and D.

As a result, we want to be very tactical and opportunistic in terms of when the best time is to look for advantages and recasting our capital structure. We also want to be in very good position when we contemplate going to market. By that I mean not only having optimal ratings, but also being on a debt level that provides us a great deal of flexibility. That is essentially, tactically what you see us doing -- continue to position for ratings upgrades, realizing there's a real inflection point in the marketplace should we be upgraded. And then continuing to step down our debt such that we have lots of options when it comes to recasting.

There are no further questions at this time. Are there any closing remarks?

Yes, thank you, Operator and thanks to everyone on the call for your interest in CNO Financial Group.

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