CNO Financial Group, Inc. (CNO) Q4 2007 Earnings Report, Transcript and Summary

Good morning, my name is Sheila, and I will be your conference operator today. At this time, I would like to welcome everyone to Conseco Fourth Quarter Preliminary Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I'd now like to turn the call over to Mr. Scott Galovic, Director of Investor Relations. Sir, you may begin your conference.

Good afternoon and thank you for joining us on Conseco's fourth quarter preliminary results conference call. Several key Conseco executives are on the call with presentations today, including Jim Prieur, Conseco's CEO; Ed Bonach, Chief Financial Officer; Scott Perry, President of Bankers Life; John Wells, Senior Vice President, Long-Term Care; and Eric Johnson, Chief Investment Officer. Also joining us for our question-and-answer session will be Greg Barinstead, President of Colonial Penn Life; Dan Bardin, President of Conseco Insurance Group; Mark Alberts, Chief Actuary; and John Kline, our Chief Accounting Officer. During this call, we will be referring to information contained in this morning's press releases. You can obtain the releases by visiting the company news section at our website at conseco.com. During the conference call, we will be referring to a presentation that can also be obtained and viewed from the company's website. This presentation was also filed in the Form 8-K earlier today. The 10-K will also be available through the Investors section of our website, once filed with the SEC. With regard to forward-looking statements, let me remind you that the statements that are being made today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Please refer to this morning's press releases for additional information concerning the forward-looking statements and related factors. As we stated in our release this morning, the results we would be discussing today are preliminary. Today's presentation contains a number of non-GAAP measures. These measures should not be considered as substitutes with the most directly comparable GAAP measures. The appendix for the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures. And now, I will turn the call over to Conseco's CEO, Jim Prieur. Jim?

Thanks, Scott. The fourth quarter 2007 was another interesting quarter with a lot going on. Overall, we continue to make progress in our plans to position Conseco for future growth. I'll provide some highlights of our preliminary results and related progress. Ed Bonach, our CFO, will cover the overall results and the segment results in more detail in a few minutes. Because of the complications arising from the change in the accounting around the Pivot of LTC reserves, which came up very late in the process on February 28, we were not able to release earnings until later. But we are going to explain what is going on in quite some detail. The GAAP accounting treatment is controversial, but in the long run, it doesn't change the economics to the LTC blocks. It's only the timing of our earnings release blocks which is affected. We wanted to spend some time on this during this presentation because it is clear that some people and the press particularly, got this 100% wrong. New business continues to be strong at Bankers and at Colonial Penn, despite some slowdown in Q4 at Bankers, which is driven in part by the cessation of PFFS sales in the market. There is some new seasonality being introduced in the Bankers sales, that can be shown this year and last, as PFFS sales, mean that a lot of activity that takes in the fourth quarter will end up getting recognized as revenue in the first quarter. Furthermore, you may recall that in Q3, Bankers picked up a large reinsurance relationship with the PFFS product, that will add a significant amount of premium and profit to our results with no new annualized premium. Bankers continue to add to its field force in the fourth quarter. Colonial Penn experienced a temporary negative impact to their earnings, due to expenses incurred in the fourth quarter related to extending their brand into the PFFS market. Basically, we expensed quite a bit of the advertising related to their 2008 PFFS sales. Although CIG sales were down 21% compared to last year, the value of the business actually increased, both for the quarter and year-over-year. So while the accrued sales mixture of NAP didn’t show growth, we have been adding value. The most significant item of note for CIG earnings related to an unlocking adjustment on the interest-sensitive Life Block, and this was related primarily to mortality. The LTC closed-block experienced another stable quarter approaching breakeven, primarily as a result of the second quarter 2007 reserve strengthening. In our press release of March 4th, 2008, we indicated that the company was completing several open items, including its analysis to determine the possible need to increase the deferred income tax asset valuation allowance. The valuation allowance was increased by $68 million in the fourth quarter, primarily as a result of a 2007 operating and capital (inaudible). However, it's very important to point out that there is no change in our earnings outlook at this time which would alter our view on the overall annual recoverability going forward. During the quarter, the company also bought back 127 million shares of its common stock. To reiterate from last quarter, the company has set a long-term goal with improving its ROE to 11% for 2009, which we believe is achievable. Next up is our CFO, Ed Bonach, who will take us through our status update and various preliminary financial data, Ed?

Thanks, Jim. As we indicated in our press release, our financial statements are not complete and therefore the 10-K will not be filed today as anticipated. The financial statements will be completed upon resolution of the LTC future loss reserve and K will be filed as soon as practical, but no later than March 28. With regard to the LTC reserve issue, as you will recall from our prior press release, it was on February 28, that the SEC staff informed Conseco of their view, that the use of a method which prospectively changes reserve assumptions for long-term care policies, what we have commonly referred to as the Pivot method, is not consistent with the guidance, even if the Financial Accounting Standards No. 60, Accounting And Reporting By Insurance Enterprise, also known as FAS or FAS-60. The company is continuing to evaluate the SEC staff's view, including its effects on the preliminary earnings reported herein and the possible effects in prior periods. Let me make it perfectly clear. Our reserves overall are adequate. We have a positive margin from our traditional loss recognition test, which considers future results in the aggregate. Furthermore, as the Pivot method has been confirmed by the SEC staff, we would have expected future earning to emerge as a fairly level present of future premium revenue. However, removal of the reserve Pivot has a perverse effect of increasing earnings in the near-term, resulting in lower or no earnings in later year. We continue to work on the requirements under FAS-60, paragraph 37, that a future loss reserve be established if we expect losses in later years, even if our reserves are adequate in total. We currently estimate that adjustments to reflect the SEC staff's view, may have the effect of reducing the preliminary loss reported for the fourth quarter of 2007, by up to $5 million after-tax or $0.03 per share. It is important to understand that the development of future loss reserves under FAS-60, paragraph 37, has no impact on the product lines' underlying economics. The issue revolves around how profits are recognized over the life of the block. Let me take you through a couple of charts that will hopefully help you to understand the issue. The amounts in this example are illustrative and are not meant to represent the company's expectations. Assuming the product line has expected profits and losses is detected in our bar chart on slide 6. Clearly, the present value of profits exceeds the present value of losses, or in other words, the gross premium valuation or loss recognition testing produces a positive margin. With pivoting, or prospect of unlocking, a portion of the margin and profit years, is added to the reserve that is ultimately released in years of anticipated losses to produce profits over all years of the blocks life. Slide 7 illustrates our pivoting work. The yellow portion in the profit years is the amount that goes into the accrual of the pivot reserve. These accruals reduce reported profits in years one through five in this example, to the levels indicated by the green portion of the bar. The pivot reserve is then released in years six through eight to produce profits, as also indicated by the arrows in the green portion of the bar. Paragraph 37 of FAS-60 however, calls for the establishment of a future loss reserve that will ultimately be released in the years of expected losses, so as to report years of breakeven results. The future loss reserve is developed in the years of profit. The bar chart on slide 8 illustrates this concept. Again, the yellow portion in the profit years is the amount that goes into the accrual of the future loss reserve. These accruals reduce reported profit in years one to six to the levels indicated by the green portion of the bar. Correspondingly, the future loss reserve is then released over the expected loss years, so as to bring those years to a breakeven position. As I said, these are simple examples that are further simplified by not incorporating interest on the reserve. But the yellow amounts in the profit years equal the reserves released in the former loss year. In other words, the reserve accrual equals the subsequent reserve releases. So, knowing the risks, I am trying to provide simple examples, if the complex topic has confused some of you. Let's look at slide 9, with the earnings pattern, under the Pivot and Future Loss Reserve methods are depicted. Pivoted earnings are shown by the black lines, future loss reserve earnings by the blue line. Here is what I want you to walk away from this portion of the call with. Pivoting would have resulted in higher reserves and lower earnings than the future loss reserve or FLR method in the early years. It would have produced a more level stream of profits over the life of the blocks. As you will recall, our material weakness in internal controls was first disclosed in the 2006 Form 10-K. The 2007 remediation plan was completed and also included scope expansion from the original plan based upon our findings. We examined over 2400 policy forms, which included the specified disease, LTC and life blocks of business. Based upon the cumulative impact of areas identified during that 2007 remediation process, Conseco will restate its financial statements for the years ended December 31, 2006 and 2005, along with affected selected consolidated financial data for 2004 and 2003, and quarterly financial information for 2006 and the first three quarters of 2007. Therefore, the previously issued financial statements of the company for those periods should no longer be relied upon. The most significant control issues we've identified through our remediation process were in specified disease products, consistent with our expectations. The remediation process is continuing and further developments will be described in future filings with the SEC. Our 2007 10-K will continue to reflect the material control weakness. The focus of the remediation program in 2008 will be on improving the processes, systems and controls related to the actuarial reporting process to address the new findings. As previously disclosed, the material weakness will not be fully remediated until the improved internal control processes resulting from our procedure are operating effectively for a sufficient period of time, to provide reasonable assurance as to their effectiveness. Now, turning to our preliminary summary results. Overall, the company has very strong underlying results from Bankers and Colonial Penn. Bankers’ preliminary pre tax profits of $58.3 million is consistent with expectation. Noted in our first footnote on slide 11, the ultimate resolution of the future loss reserves may increase these results. Colonial Penn’s underlying business results for the fourth quarter were affected negatively as a result of the $8.4 million charge for expenses related to expanding the product line into the private Fee-For-Service market. CIG results were negatively affected by a few items also during the quarter. Segments experienced a negative adjustment of $17 million related to an unlocking adjustment and the interest sensitive Life portion of the business, and also experienced a negative adjustment of $4.2 million, related to losses on the termination of some interest rate [flux]. In addition, excess expenses of $3.3 million were incurred during the quarter related to consolidation of operation. This effort will reduce expenses going forward of a two-year payback. The LTC runoff block is continuing to approach breakeven as predicted. You will see the improved stability as we go through other related information during this call. The preliminary net loss applicable to the common stock for the fourth quarter was $72.2 million or $0.39 per diluted share. This includes $23 million of net realized investment losses or $0.12 per diluted share, and $68 million or $0.37 per diluted share for the valuation allowance for deferred tax assets. As you can see, the preliminary pre tax loss for the quarter was $2.9 million, or essentially a breakeven quarter, which is consistent with what we disclosed in our March 4 press release. Earnings before net realized investment losses and valuation allowance for deferred tax assets were $18.8 million or $0.10 per diluted share. The current quarter included adjustments that need to be understood when comparing these results, the expectations and earnings trends. We will provide more detail on this later in the presentation. Now for the full year 2007, the net loss applicable to common stock was $210.1 million, which includes $77.8 million, a net realized investment losses and $68 million in valuation allowance for deferred tax assets. This equates to a loss of $1.21 per diluted share. Our net operating income before refinement to the R-factor litigation settlement, our third quarter 2007 charge related to the annuity co-insurance transaction and the fourth quarter 2007 valuation allowance for deferred tax assets was $27.3 million or $0.16 per diluted share. Bankers' full year preliminary pre tax earnings were $233 million, which may increase marginally upon resolution of the future loss reserves royalty fees. Colonial Penn's full year earnings includes the expensing of the $8.4 million for the expansion of their brands into the private Fee-For-Service market, and also mentioned Conseco Insurance Group's results were impacted by various items during the quarter. The LTC closed blocks preliminary pre tax loss of $202.4 million includes our $110 million reserve strengthening in the second quarter of 2007. Slide 13 consolidates several of our more important indicators. Risk based capital with our insurance companies remained very strong, ending the year at 296%. The decline for the year can primarily be attributed to our long-term care reserve strengthening, costs related to the R-factor litigation settlement, and net capital losses. Net investment income on general account assets for the fourth quarter, reflects earned yield of almost 6%. Investment quality remains high. We had very little financial exposure to subprime asset-backed securities, and we've reduced it further during the quarter, now comprising about one half of 1% of our portfolio. Eric Johnson, our Chief Investment Officer, will cover this in more detail later. And our liquidity remains strong with over $90 million at the holding company. Collected premium is another indicator of growth, cash flow and earnings power. Slide 14, shows our growth in collected premium over the last four years led by Bankers, which is a perfect time to turn it over now to Scott Perry, President of Bankers Life. Scott?

Thanks, Ed. Full year 2007 sales at Bankers have been driven by strong growth in Life Insurance and Medicare Advantage Private-Fee-For-Service. Business growth at Bankers is evident in quarterly new annualized premium or NAP of $58 million, up 4% over the fourth quarter 2006 and full year sales of $294 million, up 10% over 2006. As a reminder, although Medicare Advantage sales activity occurred during the fourth quarter, sales made during this period are not reflected in the fourth quarter results and will be reported in Q1 2008. However, for comparison purposes, as of December 31st, 2007, Med Advantage open enrollment exceeded 16,000 new members, a 15% increase over December 2006 open enrollment results. Additionally, effective July 2007, Bankers entered into a quota-share reinsurance agreement related to certain group PFFS business, sold by Coventry Healthcare. This has added approximately $2 million of additional pre-tax quarterly earnings. Premium re-rate results on Bankers in force long-term care business, sold between 2003 and 2005, which began in the first quarter of 2007, affecting $157 million in premium, are in line with expectations, to date achieving a financial impact of $16.5 million. On the distribution front, 2007 proved to be another strong year for Bankers, with another year of double-digit sales growth. For full year 2007, we reached $294 million or 10% growth to 2006. From a product standpoint, Medicare Advantage sales grew to $66 million. This demonstrated the career force's ability to quickly react to changes in the marketplace and provide a broad selection of Medicare offerings. Even with this strong growth of Med Advantage, Bankers nonetheless, demonstrated strong Medicare supplement sales of $68 million, down only 6% from 2006 pre-Medicare Advantage results. Combined Medicare sales reached $133 million versus $71 million in 2006. This strong growth was complimented by 17% growth in life insurance sales, from $46 million in 2006 to $54 million in 2007 driven by increases in Senior Whole Life and Universal Life products. Life insurance sales continue to be an important future growth opportunity in the Bankers channel. Long-Term Care sales stabilized and remain flat at $47 million. Consistent with the market place, we did experience a drop in fixed annuity sales. Annuity sales were down at 11% from $60 million in '06 to $53 million in '07. As the interest rate environment favored competing product types, Bankers continues to maintain and enhance its ability to attract new agents into our business. During 2007, new agent recruiting was up 13%. More importantly, this, along with modest improvement in retention in 2007 helped grow our agent force 10% finishing the year with 4,480 agents compared to 4,090 agents in December of 2006. In addition to increase in agent force size during 2007, agent productivity grew by 4%, and reached 67,000 NAPP per agent based on an average agent field force of 4,400. Over the last five years, Bankers has increased its NAPP by a 10% compound annual growth rate. Doing so, we have added more than $90 million in new sales growth, from $203 million in 2003 to $294 million in 2007. It's important to note that the NAPP measure does not include all new revenue, nor does it equate one-to-one to revenue. NAPP normalizes all premiums to equivalent health premium margins and does not include group Med Advantage revenue received as part of our quarter-share arrangement with Coventry Health Care. In fact, first year premium during this period has grown by over $200 million, and total collected premium has increased by over $400 million, thus providing a strong platform for future earnings power. During this period, we have been able to increase the size of our agent force by recruiting more new agents, improving agent productivity and by providing our field force with strong support in new products that allow them to better serve the needs of our market. Demonstrating the unique competitive advantage, Bankers career agency channel provides, this growth has been achieved in spite of internal and external environmental challenges, including rating changes, radical new market developments in the Medicare market and the ups and downs of the economy. The unique ability to successfully execute the career model combined with the broad product portfolio, has allowed Bankers to continually adjust and rapidly take advantage of market opportunities as they present themselves. While the industry has seen the career distribution model struggle or abandoned altogether, the Bankers model has flourished. Tight execution and a market-centric customer focus enables the economic viability of the Bankers career model that is capable of achieving sustained profitable growth. Moving to Colonial Penn, I will turn it back over to Ed Bonach. Ed?

Thanks, Scott. Sales, as measured by new annualized premium or NAP were up 25% for the fourth quarter of 2006, and up 27% for the full year at Colonial Penn. As I indicated earlier, Colonial Penn's earnings were down from prior quarters primarily due to the $8.4 million charge for expenses related to extending the Colonial Penn brand into the PFSS market. Virtually all of these expenses were incurred in testing the effectiveness of various direct channels of customers outreach, market segmentation, and messaging associated with sales that will be recognized in 2008. Our sales in 2008 through the end of February based on NAPP are $4.5 million. We are satisfied with the overall results from the program to-date. For the quarter, Colonial Penn also completed the recapture of a block of life insurance business that had previously been reinsured. The transaction was disclosed during our third quarter 2007 earnings release. The recapture fee recorded on the transaction was $63 million, and this repurchase was immediately accretive to our earnings and ROE for the segment adding approximately $2 million to pretax operating earning. Colonial Penn continues to demonstrate a capacity for increased lead development, a key indicator of future sales for a direct marketing organization, and now on to Conseco Insurance Group. CIG's overall NAPP sales were 18% from the fourth quarter of 2006 with strong sales gains in specified disease offset by decreases in Medicare supplement and annuity. While CIG's sales are down, there is greater focus on more profitable business with the value of new business higher than it was a year ago. As previously mentioned, CIG's preliminary earnings were negatively impacted in the fourth quarter due to the $17 million unlocking adjustment on the interest-sensitive life blocks along with the $4.2 million of losses upon terminating some interest rate swaps and $3.3 million of expense charges in consolidating operations. Slide 20 illustrates the significant changes in the CIG sales mix over the last year. Continuing the trend, sales rose by 30% for the quarter in specified disease, which is CIG's highest margin product. The largest NAP sales declined for the year was in annuity, which is CIG's lowest margin product line that was further influenced by an unfavorable interest rate environment. CIG's Medicare supplement sales were negatively impacted by Med Advantage product, which CIG did not have in its portfolio to offer in 2007. Next, we're going to focus on our run-off long-term care block and I'll ask John Wells, Senior Vice President of Long-Term Care for a discussion of our results and turnaround progress. John?

Thanks, Ed. LTC closed block results for Q4 reflect another quarter of improvement, as the significant reserves strengthening implemented in Q2 [reflect the] stabilized results. We are approaching breakeven on this block of business, as fundamentals are improving driven by our program for improvement. The turnaround program launched early last years is driving positive results in a number of areas. We are actively managing our premium rates, and improve the claims operations and are more effectively managing expenses. Collectively these actions have led to reduce losses for LTC. As we mentioned in the Q3 investor call, we were setting a proposal for a system and operational solution for our run-off block for Long-Term Care Group, also known as LTCG. On November 28, we reported an agreement to implement this solution for our LTC closed block. As far the operational solution, 110 Conseco employees transferred to LTCG in January. Currently, the initial phases of work related to the system conversion efforts are underway. We are confident that these efforts with this recognized industry leader will lead to continued improvements in claims management, customer service and compliance. Slide 22 clearly demonstrates the improvement in stability of claims results this quarter. The prior period development is $1.8 million compared with the deficiencies that arose in Q2 and prior periods. Comparing June 30, September 30 and December 31 2007 verified claims arose, we see the stability in the incurred claim estimates reaching [curl] period column. Prior to Q3 2007, the estimates of prior period claims were consistently increasing. Moving to slide 23, the increase in claims paid in Q4 2007, was driven primarily by inventory reduction, and as such does not reflect the trend. Open claim count in policy cap trends, continue to run in line with expectations. On the topic of claim management, stabilized claim inventory levels toward customers service improvements in the fourth quarter in the form of shorter claim turnaround times and shorter call wait times. What this means is that the turnaround program has improved and stabilized customer service levels as we exited 2007. At the same time these claims management changes are not driving the levels of financial impacts we had originally expected. There are few reasons for this dynamic. First, we believe, some of the positive changes made in claims management are being increasingly offset by the worsening experience of the industry continues to see. Secondly the need to address the high level of regulatory activity in 2007 did affect implementation timing of some of the claims management improvements. Lastly, we continue to refine our methods of estimating the impact of the process improvements and other drivers of our claims management trends. We expect claims management improvements to continue into 2008 with periodic recertification of previously approved claims driving positive result. In addition, we continue see better accuracy of the initial claims decisions to policy language, resulting from improvements implemented earlier in the year. We feel that the increasingly stabilized operation should help contribute to more predictable financial results. This is evident in the last two quarter results. Next, I would like to provide some information on positive results from rerate program. Slide 24 shows that we have achieved a milestone, and that we have exceed our goal for an estimated $35 million in financial impact from a first round of rate increases initiated in 2006. These rate increases take into effects at the next premium billing date of the related policies following implementation of the each increase. As you can see, we have exceeded the goal for each element of the 2006 round of rate increases. Moving to round of rate increases initiated in 2007 also known as round two, we have good progress to report. As of March 13th, we have submitted approximately $43 million in round two rate increase filings to the state, for their approval representing 98% of our $43 million goal. We have received approval from the states totaling almost $17 million. This represents 65% of our $26 million goal. We have also completed system implementations of approved rate increases representing over $13.5 million or 53% of the total goal of $26 million. Consistent with the message in previous calls, the expected net financial impact will differ slightly from the system implementations amounted due to [lapses] and other factors. The expected financial impact of these system implementations spans at almost $11 million or 52% of our $21 million goal. The metrics for approvals, implementations and financial impact are all ahead of our targets for this day. While much has been accomplished in the LTC closed block in 2007, important work remains to return the business to profitability and address the risks inherent in this line. First, we will continue to work with our regulators to seek affordable and actuarial justified rate increases. We will also continue to focus on improving the claims operation and expense management. Another piece of important work we have to do, related to how LTC fits into the overall portfolio of the company. The company is working actively to pursue options to renew its LTC exposure. To summarize, we feel good about the turnaround programs progress in 2007. Our approaching breakeven earnings, and expected improvements to continue into 2008. And now I will hand it over Eric Johnson, our Chief Investment Officer, who will discuss the CNO investment portfolio. Eric?

Well thank you, John, and hello everyone. Starting with slide 26, for the fourth quarter, investment income increased to $362 million, representing an earn yield of 5.95%, up from 5.88% in the third quarter. This increase in the portfolio yield can be attributed to wider credit spreads, and a moderate degree of portfolio lengthening. Asset quality has remained a high priority. Our below investment grade ratio remains satisfactory at approximately 6% of general account assets. This allocation is highly diversified and receives careful attention. Referring now to slide 27. Our structure securities portfolio is very highly rated over 88% AAA rated. That includes about 50% agencies, with basic risks related to volatility, convexity in prepayments, subprime securities are included in the ABS segment. On slide 28, you will see that during the fourth quarter, we continue to reduce our subprime exposure with greatest emphasis on this 2007 vintage. We continue a very methodological surveillance of deal level performance based on a range of economic conditions, some quite conservative. Our objective is to manage the sufficient coverage of projected losses, including a margin for error and adverse development. Moving to the next slide, you will see that subprime represents only approximately 0.5% to 1% of our total portfolio with market value around $123 million. The total book value of the securities at the end of the year was $150 million, compared to more than $300 million at the beginning of 2007. We've done a lot of work to write size this portfolio. Moving to slide 30, subprime will certainly remain a voluble market and we will continue to be very rigorous about it. We don’t own any leveraged ABS, ABS-CDO or hedge fund investments. Let's move on to slide 31. There've been a lot of questions recently regarding the CMBS market, and with good reason. Our CMBS portfolio comprised approximately $1 billion or 4% roughly of invested assets. This portfolio was also highly rated over 70% in the AAA and AA category. We are very satisfied with its performance characteristic at the deal level in terms of delinquencies and loss quotients. But we do recognize, there has been high risk spread widening in this sector, which has generated unrealized loss position, especially in BBBs. Stepping back from the details here overall I believe we will meet our objectives this year for income, yield and quality. And with that general comment, I'll turn it back to Jim.

Thanks, Eric. To summarize, Bankers Life and Colonial Penn have continued to have great results, they are focused on growth. CIG is now much more focused on its distinctive capabilities. It's focused on its PMA distribution system, health products distribution, and worksite. While sales have declined at CIG the economic value of these sales has actually improved over the last year, and some of the expenses incurred during the quarter, will produce ongoing operating savings going forward. We've been saying for some time that fixing the LTC close block would take quarters, not weeks or months. It's now been a few quarters, and the results are becoming more visible. The claims reserve volatility has been reduced. The rerates have continued to come through, and there have been improvements in claims management. We expect that this block will be breakeven this next year. We're changing the portfolios of the business. In our third quarter, we closed the sale of the annuity block to Swiss Re and in the fourth quarter, we recaptured the Colonial Penn block that the company had reinsured about five years ago. In doing that we have shed an old lower turn annuity block and bought back a block that is part of our core business. Also from a portfolio capital management perspective, we bought back about 1.7 million shares of stock during the fourth quarter. On the operations side, most of our organizational changes have been completed. We still have the real estate changes to make. We actually have to complete the physical move in Chicago, before we can recognize the loss, and that is anticipated to happen in the second quarter of 2008. We continue to expect that the one-time charge related to this Chicago move will be about $15 million another move will reduce annual expense by about $5 million. Slide 34 highlights the impact of several large factors on the fourth quarter earnings for each segment. The table suggests that the earnings power is more than $0.23 per share per quarter after-tax. That is, of course, before the impact of real estate savings, some additional operational consolidation methods, further claims improvements and the positive impact from Q2 re-rates. As Scott and Ed reminded you earlier in the call, the results for the fourth quarter and for the full year are preliminary at this point. We are working diligently to complete our financial statements and file our 10-K as soon as possible, but no later than March 28th. Once that work is completed, we will hold our full earnings call and publish a complete investor deck along with a restated quarterly financial supplement. This delay in producing final earning is as frustrating for management as it is for shareholders. There is no difference in the economics of a long-term care business rising from these GAAP accounting changes. There are no changes at all in the cash flows or the capital requirements. It is all about the timing of the recognition of earnings for long-term business. And before we open up the call for questions, I would like to make a brief comment on the recent 13D filing by Steel Partners and our response. And as with other shareholders, we have had conversations with Steel Partners about the ongoing progress of the company. We've decided to decline the request from Steel to nominate two of their officers to the Board of Conseco. Steel Partners in their letter stated that their intention was to help the company by engaging an investment banker to look at strategic alternatives, we are already doing that. And as we have announced this morning, we have been working with Morgan Stanley for a few months, looking at the widest possible range of strategic alternatives. We are focused on improving value for shareholders and all the possible options are being looked at which is, what you would expect. And now we will open it up for questions. Operator?

(Operator Instructions). Your question comes from the line of Andrew Kligerman of UBS.

Hey, good afternoon. Couple of quick questions, first, could you give us a sense of what technically might be your excess capital at this point, and what you might be able to do with that capital in terms of buybacks, in other words, what is your capacity to do share repurchases for the balance of the year? Second question, could you give a little more color around the Morgan Stanley reviews, what might be a logical move from a strategic standpoint or most logical move? And then thirdly and lastly, with regard to the interest-sensitive life block that's been problematic for a while, looks like another $17 million negative in the quarter, could you give us a sense of when that might mitigate in any material way? Thank you.

Yeah, Andrew, this is Ed Banoch. Thanks for your questions, I'll address most of them and then turn it over to Jim on Morgan Stanley. As far as excess capital with risk base capital near 300%, arguably we've got capital at levels of several higher rating notches than we currently are. So, there is room there without giving a specific number, because on one hand, we do need to continue to manage the company to capital levels that are consistent with higher ratings, because eventually that's where we believe we belong. As far as share buyback, there we'll continue to be opportunistic as we have been in the past and trying to balance other capital opportunities, maintaining appropriate liquidity which we all know of course is even more important it seems with every passing day there. On the interest sensitive life book of CIG, we think that the majority of that is behind us, certainly we can't guarantee that. I can say though that mortality so far in the first quarter of the year has reverted back to being favorable compared to expectations which you would assume over a longer period of time that mortality would be more inline with long-term trends.

Ed, were you surprised by the $17 million in increased amortization in benefits, because I know that you seem to have had that, or at least I had thought it was behind you in earlier quarter, after the last quarter. Were you surprised by that?

I'll say, not totally and what we had recorded in prior quarters were amortization of intangibles, primarily bowled by the value of business acquired, so we were experiencing higher mortality on the book in primarily the older years, but we are always conscious as to with that also continue into more recently issued business. So the $17 million charge is related to business issued post-emergence or post fresh starts. So it is largely GAC related.

Okay. And again, just back to that buyback lastly, you did $23 million this quarter. You got $90 million in liquidity. Will it be safe to assume that at this price, you could at least do what you did in the fourth quarter in terms of buyback? Does that seem feasible or prudent going forward?

Again, we will look at it, compare to other alternatives with capital, and so we don't provide any specific expectations as to what we would buy in any period of time?

Okay. And maybe I missed it, but I didn't hear anything really specific on Morgan Stanley.

Yeah, I am going to turn it to Jim to respond to that.

Thanks for the question, Andrew. As I said, we are looking at the widest possible range of options. I mean to some extent turning Conseco around is taking us longer than we had thought. And we believe the company is trading at a discount to its intrinsic value and is trading perhaps to a greater discount, well, certainly today, it's trading in a greater discount than it was in the past. The discount has been getting bigger. This is not a good thing and so we are therefore looking at wide array of options and I think I will just leave it there?

Okay.

Your next question comes from line of Tom Gallagher of Credit Suisse.

Hi, first question, Jim, just a quick follow-up, just on the strategic alternatives question. So, I believe over the past year or so, your thought was first priority, and probably still the priority is just turning the businesses around and seeing operational improvement before you consider unlocking any potential product market value disconnect. Is the thought now that it's taking longer? So you want to see in the interim period, if you can unlock value. Can you just talk a little bit about that? Has there been a change in the turnaround story at all, or is that do you feel like that's still very much intact? Thanks.

Sure. I feel the fundamentals in the company are getting stronger, and we've done an awful lot of cleanup, and in 2007 included an awful lot of recognition of losses that were out of the current period. And I think that the management team is stronger, and I think we're quite a bit further along. And that being said I think that if you look at some of the parts, the company is trading at a significant discount. And it boohoos us to do something about that. I mean some of things obviously that we have talked about on almost every call is that we don't want to have as much exposure to long-term care, and at some point, there would be perhaps an opportunity to reduce the exposure to long-term care, and that's been an objective that we've stated publicly a number of times. And as the business starts to get better and better, there may be an opportunity to do something like that. That would be a very simple transaction clearly.

Right. And Jim, just in terms of the long-term care alternatives, is there any reinsurance capacity whatsoever out there yet where there could a risk transfer solution on that part? It would appear that the securitization markets are totally shut, but just curious about the insurance market side.

Yeah, you are right about securitization markets. If there ever were one for something like long-term care, it's gone. But reinsurers come and go and there is interest in them in the marketplace for LTC and it does go up and down. And there has been more interest I think in long-term care in the last six months, nine months than there was in the previous six months, nine months.

Okay, got it. Question for Ed. The RBC ended the year at 296. Can you remind us what the target is? Yeah, with the ratings where they are, does it make sense to consider just permanently operating at a lower level, for the time being especially given where the stock is getting back to the balance between levels of capital needed versus share buyback?

Our target has been to have the consolidated RBC around that 300% level. Certainly, as we've explored strategic alternative, that will be included in the mix, as to how do we best operate the group going forward, what capital levels, what we do with capital as part of that.

Okay. I just have a few for Eric Johnson. Can you give a little perspective on your view on CMBS? You have little bit than $1 billion portfolio, can you comment how your vintages stack up, is it predominately '06, '07, or is it prior? And then just looking at some third party indexes, certainly one of the areas within fixed income that has been hit the hardest. Can we assume that there would some impairments being taken, particularly on your BBB and low rated exposures? Thanks.

Sure. You had a series of questions there and I'm not sure I'll hit them all, but I will try to give you a flavor anyway of the main point which I was thinking. On vintages, while we have exposure to basically everything from '03 through '07, the curve would be most heavily weighted toward '04, '05, with favorably small commitment in the '06-'07 space, almost none in fact in '06, and a very small amount in '07. So I think that’s a favorable allocation. On the other hand, certainly and particularly in the BBB area, we've seen spreads that are four digit numbers, that speaking generically I feel very comfortable with how our underlying collateral is performing, and so I think relative to the indexes, will have a little better valuation. Though that certainly underestimated some pressure. I don’t want to address the issue of what the income statement might [require] going forward. Although, I can say fundamentally, I feel very comfortable that we will receive all of the payments we believe we will receive on a timely basis. How we will account for that, is a subject of future consideration, I think.

Okay. That’s great. And then, if I can just sneak in one last question. Your high yield exposure, that’s north of $1 billion just curious what the outlook there is for you and whether there is any particular problems or do you think that’s holding up well in lieu of the current environment.

Interestingly enough because that’s a such a diversified portfolio, there aren’t really any particular areas or collection of areas that are individually problematic, and in fact, I think that’s held in rather well compared to some other asset classes in the last couple of weeks. So, when I think about the immediate challenges of the markets today, and as they affect us, that isn’t in particular our first priority.

Yeah. Thanks a lot.

You are welcome.

Your next question comes from the line of Jukka Lipponen of KBW.

First question, can you give us some color on the benefit ratio for the Bankers Life PDP and Private-Free-For-Service business, seems like, that was quite a bit higher, at least compared to the fourth quarter of '06?

Jukka, this is Ed. I'll say that there is nothing fundamental that we saw in the fourth quarter of '07. I think with that ratio, it does fluctuate from period-to-period. But nothing that causes us concern.

And in terms of your statutory earnings side, it looked like Bankers Life had pretty strong earnings. Most of the CIG subsidiary seemed to be in the negative column. And then you did infuse, I guess, a little over 200 million into Conseco Senior Health. So, two questions there. First of all, the CIG status if you could give us some color on that, and then the Conseco Senior Health? What are your expectations going forward in terms of capital infusions that might be needed?

On the CIG company, there of course we had the annuity reinsurance transaction, which would impact that. So, there is, I'll say, more noise going on there in 2007 as a result. You are right, Bankers is producing very consistent strong statutory income and capital, and of course, we benefit from our tax position whenever we generate income that way. As far as Conseco Senior Health, hopefully not to confuse everyone, but there on a statutory basis, we actually are increasing reserves on a accelerated pivoting method that is acceptable under statutory. So, that does require us to fund about $50 million to $55 million annual additional reserve for that in Conseco Senior Health.

And to Eric, on your CMBS portfolio. You said, it looks like you have, you're going to have much of the later vintages and also looks like from a debt service coverage standpoint, you don't have much exposure to, like issues that have 1.25 or lower, but you do have some of the higher exposures than some of the other companies that we've seen to lower rates stuff and also things that have a higher LTV so can give us some color there?

Sure. I am not sure that I would buy the characterization that we have a lot of higher LTV collateral, having said that about 15% of our allocation or maybe 13% to 15% is in BBB securities. What I can tell you there is that the performance of the underlying collateral in terms of delinquencies, in terms of DSCR trends are strong, and you're looking at that sort of coverage it's not 1.2, 1.3 and usually north of 1.5. So we monitor that performance very carefully and it has not well deteriorated nominally in the last three or so months it is not deteriorated compared to the overall marketplace as you know which is more in the delinquency area of 40, 50 basis points, so we're very comfortable with it and I think it will continue to perform well.

Thank you.

Jukka, sorry to interrupt this yet again, going back to the benefit ratio in health, I don't if this was part of the intention of your question, but we're certainly aware of that some entities are reporting a more negative outlook or a cautious outlook on private fee for service, Med Advantage-related products, we have not seen that, nor have Coventry. So that is not something that is causing us any undue concern.

Thank you.

Your next question comes from the line of Randy Binner.

Hi, everyone. I am thinking about book value at CIG. I guess this is not a full slide deck and we'll get that with the full release, but as looking at the liabilities across the supplemental health and then life and annuity businesses, is that a good way to try and parse out the book value associated with the different business lines within CIG?

Well, probably the best thing is to wait for the supplement or to take the last supplement and just look at the change in earnings or a loss.

Maybe I wasn't clear. You all provided the book value allocation for CIG, but if were to divide CIG between the supplemental?

You are looking for profit by product line?

And I would say to that Randy, certainly when you look at the product lines in CIG, life insurance would typically be the most capital intensive, annuities and health would be at the lower end. So you have to recognize that there are different capital needs with products that have higher versus lower commissions, and are longer term versus shorter term in duration.

Understood, and based on the past supplements, if we look at the liabilities that are associated with each of those lines, it is fair to say that roughly 75% of CIG's book value is related to annuities and life?

I guess, if you combine them that way, annuities and life, that's an okay way to approximate.

Okay, great. And just to clarify when those new numbers come out with the financial sub, the new slide that will be expanded, would be similar to prior quarters?

Yeah. Once we have completed our financial statements, of course, we'll have prior periods that have been restated, that are then comparable to the fourth quarter of '07, as we've given on a preliminary basis to date. So, yes.

Great. Do you have any estimate of what statutory surplus is, at the end of the year?

Well, we've got our combined ratio of 300%. I will get it here in one minute.

Okay. There is just one other question. With this subsequent delay of the 10-K now to March 28, has that passed through any sort of procedural barrier and are there any impacts from that?

No. There is with the SEC, there is a provision to get the extension of filing for 15 business days, which is today. Even through there is no provision to extend the filing beyond that, there are no fines or repercussions. And so, with our expectation to file on or before March 28, there really are no repercussions. We also feel, as far as, back on statutory, it's just short of $1.5 billion

Okay. So it’s down just a little bit?

Yes.

--which is logical, okay. And then on the SEC there is nothing further. Just one other question, in Colonial Penn, any investment in Medicare Advantage there? There is always talk that Medicare Advantage might have political challenges. And within Bankers there has been the ability to switch to Med Supp, how do you think about that challenge in Colonial Penn, and is there the same switching opportunity?

This is Greg Barinstead. I think there are somewhat distinct in the direct marketplace. Bankers has a channel that could get it fairly cleanly into the market as it did, as it sees dynamic shift. I think, we would be a little more challenged perhaps to affect a similar transfer. We'd be more likely to tailor the campaigns to the product that seems to be a little successful in the marketplace at the time.

But again you're just going to have the one Med Advantage arrow in your quiver there?

At this point, I think it's highly unlikely that we would be in both places at the same time.

Yeah, at the end, I would just remind to you that, this is our first time into that marketplace or at least in recent history. So that we want to test this market, improve on what we have learned and are learning and we'll continue to adjust whether it's going to be solely on Med Advantage, solely on Med supplements or some combinations or nothing going forward. That's really why we were --most of our expenses related to launching this and we know we are learning along the way with obviously the intention to have it paying for itself and sell enough business, but it's too early to tell exactly where we're going to end up?

Okay. And maybe a little more broadly in Medicare Advantage and this will be the last question. I guess now in two segments, how do you view the political risk there on reimbursements, as it relates to Medicare Supp I guess, broadly just a quick take and that would be helpful? Thank you.

I think the exposure, the risk really as to Med Advantage and if we have a democratic administration, the likelihood that the net Supp will be emphasized then Med Advantage will be under pressure. I think it's much-much higher and so I think the exposure really is Med Advantage.

We actually have time for one more question.

Your final comes question comes from the line of [Mary Schaeffer of Morgan Stanley].

Hi, good afternoon. Just going back to the SEC versus Pivot accounting. Could you just remind me which line items on your income statement and balance sheet are going to be impacted by that, and in which direction those impacts will be?

Yeah, Mary, this is Ed. It impacts, first of all, two segments. The Other Business in Run-off long-term care and the Bankers long-term care. You would see it in the increase in reserves and so it would be on the balance sheet in the reserves for future obligation. And the Pivot was a more conservative lower income approach than the FLR. So with the FLR been ultimately implemented, we would expect reserves on balance sheet to go down relative to pivoting. And the reserve increase to go down and earnings to go up.

There are no further questions. Do you have any closing remarks?

Yes. Well, thank you, everyone. I'd like to thank everyone for attending the conference call and for their interest in Conseco. Conseco is focused on the senior middle market in America; it's the fastest growing market segment. In insurance, we have the unique sales machine dedicated to market whether it's through agents, directors through brokers and we're committed to growing this business successfully in the future. Thank you all very much.

This concludes today's Conseco fourth quarter preliminary results conference call. You may now disconnect.