CNO Financial Group, Inc. (CNO) Q4 2011 Earnings Report, Transcript and Summary

Good morning, my name is Shante I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year-End Results for 2011 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. Mr. Scott Galovic, you may begin your conference.

Thank you, operator. Good morning and thank you for joining us on CNO Financial Group’s fourth quarter and year-end 2011 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, Chief Financial Officer, and Eric Johnson, our Chief Investment Officer. Following the presentation, we will also have several other business leaders available for the question-and-answer period. During the conference call, we’ll be referring to information contained in yesterday’s press release. You can obtain a copy of the release by visiting the Company News section of our website at www.cnoinc.com. This morning’s presentation is also available on our website and was filed in a Form 8-K this morning. We do expect to file our 2011 Form 10-K and post it on our website on or before February 28. Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today’s presentation contains a number of non-GAAP measures, which should not be considered as substitute 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. Throughout the presentation, we’ll be making performance comparisons and unless otherwise specified any comparisons made will be referring to changes between 4Q, 2010 and 4Q, 2011. With that, I’d like to turn the call over to our CEO, Ed Bonach. Ed?

Thanks, Scott, and good morning. We again delivered strong earnings growth for both the fourth quarter and full-year of 2011 as our businesses continued to perform well. Our sales momentum is growing with core new annualized premium up 6% in the fourth quarter and increasing 2% for the year. In addition, our full-year net income increased to over $382 million or $1.31 per share, compared to $285 million or $0.99 per share in 2010. We continue to generate significant amounts of excess capital, and our key measures of financial strength also continue to improve. As we have talked about in prior quarters, we continue to emphasize and focus on profitable organic growth. Our sales in all 3 operating segments actively marketing business or our core segments increased in 2011. During the year, we added 15 Bankers locations and continued to invest further in agent recruiting, footprint expansion, test marketing and field management development. Scott Perry will share more detail on these initiatives later in the presentation. 2011 net operating EPS was $0.76 per share versus $0.65 a year earlier, driven by business growth, ongoing pricing and repricing, favorable persistency in claims, along with effective capital deployment. Slide 7 shows our trailing 4 quarters consolidated operating return on equity. ROE increased to 6.4%, primarily reflecting a 19% increase in operating earnings, which more than offset the 11% increase in average equity. Our book value per common share increased to $18.26. As we have discussed before, our levers for continuing to improve ROE are improving the OCB segments through non-guaranteed element changes, layering on profitable new business at a minimum of 12% un-levered after-tax returns, effectively deploying our excess capital and continuing to improve efficiencies across the enterprise. Slide 8 illustrates the growth of our franchise based on growth in liabilities for our 3 core segments. The slide also clearly shows that for OCB, which is primarily closed blocks of business, the liabilities continue to run out. Turning to Slide 9, as I mentioned at the outset, our financial strength continues to improve, driven by robust statutory earnings, cash flow generation and effective capital deployment. Consolidated statutory risk-based capital increased 26 points during the year to 358%. Unrestricted cash and investments at our holding company also increased by almost $42 million to $203 million at 12/31/11. Debt to total capital reduced further to 17.1% with leverage now at the level requiring only $0.50 of debt pay down for each dollar of share repurchase. We accomplished a lot in 2011. Our financial strength and credit profile improved further and we continued to generate considerable cash flow in excess capital. Effective utilization of excess capital is a primary focus for us. As part of that effort, we took a measured approach as we began buying back stock and reducing debt. In addition, we also established a holding company investment portfolio to generate additional non-life income. Our business continues to perform well, and we have seen growth in all 3 of our core segments. In late 2011, we completed another step in our rebranding process by changing the name of the home of the Indiana Pacers to Bankers Life Fieldhouse, representing our most significant consumer-facing brand. We’ve started to see our progress being recognized, albeit slowly, in our ratings, as we did receive some upgrades at the end of 2010 and during 2011. We also began 2012 on a strong note with Fred Crawford joining our executive team. Fred not only brings tremendous experience and credibility as CFO, but is joining as a confirmation of the strength, position, and opportunity we have at CNO. Let me now turn it over to Scott Perry, our Chief Operating Officer, to cover the results for the 3 segments he oversees. Scott?

Thank you, Ed. In 2011, we made progress in all 3 of our core business segments. We continued to build out distribution platforms, enhanced agent for size and productivity, and identified important operating synergies across segments that will be leveraged beginning in 2012. Additionally, in each segment, we made significant progress on important organic growth initiatives. At Bankers, we built out the manager training program and our first class of 12 to 15 trainees is currently being hired and on-boarded with an expected 80 to 90 for the full year. As a reminder, each successful trainee will be ready to take over leadership of a Bankers location after, on average, spending 3 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 development process. Also as a reminder, we expect each new location will ultimately give us the ability to recruit, train and develop an average of 15 producing agents. At Washington National, we have successfully expanded our individual and worksite businesses through both sales channels. We increased product availability, expanded independent wholesaling capacity, and strengthened the PMA recruiting and development structure, all of which contributed to 4 consecutive quarters of increased sales in supplemental health and life products. At Colonial Penn, we are on schedule to test market 2 new simplified issued life products which will allow us to meet the demand that exists for modestly higher face amounts up to $50,000. We are on schedule to pilot these products beginning in August and into the fourth quarter. We expect to have early indications of the viability for national rollout by the end of this year. Slide 12 shows our fourth-quarter core segment results. Bankers Life pre-tax operating earnings of $87.2 million were up 22% compared to 4Q ‘10. Washington National’s pre-tax operating earnings in 4Q ‘11 of $29.2 million increased 2%. Colonial Penn’s pre-tax operating earnings were up 7%, primarily reflecting growth in the block. I am pleased that we are able to demonstrate consistent earnings growth while making investments in the business which are reflected in segment expenses during 2011. At Bankers, sales results for the quarter, excluding MA and PDP, were up slightly. Overall sales were up 2% versus 4Q ‘10 driven by increases of 7% in life sales and 6% in long-term care. Annuity sales were also up 1% year-over-year despite the fact we temporarily suspended sales of select fixed index products due to the low interest rate environment. Offsetting these increases was Metsa which was down 1%. Recruiting results were strong for the quarter. New agent contracts increased by 25% versus 4Q ‘10 and along with improved retention, helped fuel an overall increase in our agent for size by 11%, finishing the year at nearly 5000. During the year, we also expanded our partnership programs where we distribute non-manufacture products that meet important needs in our marketplace. Today, we are actively marketing MA, PDP, dental and vision coverage. These products help in customer acquisition as well as in generating fee income, and in the case of PDP, quota share income. During the year, this program garnered approximately 24,000 new households from the production of 32,000 sales. The entire book of partnership business generated $17 million in income through fees in quota share activity during the year. Lastly, our branch expansion initiative for 2011 finished on target as we have opened the 15 planned net new locations. I would also like to comment on the overall management of our long-term Care business, and the differences in the risk profile of the 3 products that make up this line. As we have discussed over the past several quarters, our long-term Care financial results remain consistently profitable as we diligently manage the business. We continue to benefit from claims management improvements and the successes we have had in gaining approval for rate increases where actuarially justified and necessary. As a result, over the last several quarters, the long-term care interest adjusted benefit ratio, a key measure of financial performance, has been in the 66% to 75% range. As part of the ongoing rate management, we are currently pursuing a round of increases. Once complete, we expect to obtain approval for approximately $35 million of increases. 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 [audio gap] 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 with shorter benefit periods and smaller daily benefits. Even more significant, over the last 6 years, we’ve seen a dramatic shift in sales away from the comprehensive long-term care product to lower-risk short-term care and home health care only coverage. The risk profile for short-term care is considerably lower than a comprehensive product in that the maximum benefit period is 1 year. And as a result, 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’s important to note that, as a result of this mix shift, comprehensive long-term care and standalone home health care combined represent only 6% of Bankers 2011 NAP. As I mentioned, this product line fills an important need in our target market and we are committed to offering it in a responsible manner. In addition to proactive product management, we also benefit from an overall lower risk profile of our block of business as a result of our preferred distribution channel, lower price points and corresponding lower benefits, and shorter duration due to an average issue age for new sales of approximately 67. This average age, coupled with our active asset liability hedging strategy, helped to mitigate a low interest rate environment in addition to providing advantages in the underwriting selection process. We believe the combination of these factors is unique and provides us an advantage in managing our long-term care portfolio. Switching gears to Washington National sales, during the quarter, supplemental health and life increased by 14% versus 4Q ‘10. Life sales continue to build momentum as we benefit from an increased focus on worksite sales, selling Universal Life and our new term product that was introduced in June of last year. Sales growth was driven in part by an increase of new agents, both at PMA and WNIC Independent. Expansion of product availability was also a contributing factor. Sales at Colonial Penn were up 29% for the quarter, driven by robust lead generation which was up 44% over Q4 ‘10. We are optimistic looking forward to 2012. 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 health care 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 worksite, or direct. In all 3 businesses, the initiatives we identified for capital deployment to accelerate organic growth are on schedule. At Bankers, our focus is branch expansion and the growth and size and productivity of our agent force. At Washington National, we will increase our geographic footprint and expand our PMA agency model. At Colonial Penn, we will test new product offerings that extend the direct response model beyond our traditional line. Although these initiatives are a major focus of the businesses, we are also carrying a great deal of momentum into 2012. At Bankers and Washington National, this is in the form of a larger agency force and more producing new agents, and new IMOs respectively. At Colonial Penn, we see a continuation of the strong lead activity we saw in the second half of 2011. These factors are helping drive a strong start to 2012. Through mid February, all 3 segments are posting increases over last year’s performance. Let me now turn it over to Fred Crawford, our new Chief Financial Officer, to cover the financial and capital results. Fred?

Thanks, Scott. Turning to Slide 18, operating income for the quarter was 60.1 million, or $0.22 per share, compared to 51.7 million, or $0.18 per share, a year ago. Overall income in the period benefited from a combination of favorable benefit ratios across our Health and long-term care products and favorable margins in our annuity line. ROE increased to 6.4% on the year, up 40 basis points, and benefiting from both earnings performance and capital management. Our debt-to-total cap ratio was 17.1%, down from 20% a year ago, reflecting our strong earnings and $145 million of debt reduction. The consolidated statutory RBC ratio of our insurance subsidiaries increased 26 percentage points to 358%, driven by statutory operating earnings of 363 million, partially offset by 209 million of net dividend payments to our holding company. Unrestricted cash and investments held by our non-insurance subsidiaries ended the year at approximately 203 million. Eric will go into greater detail, but the quality of our investment portfolio remains strong with only modest realized losses and impairments in the quarter, more than offset by gains in the period. Finally, our sharp focus on capital generation and deployment continued in the quarter. For the year, we purchased 11 million shares for $70 million. This represents 4.4% of the outstanding shares as of yearend 2010. Turning to segment results, there were a couple of notable items in the period. Bankers’ earnings included 11 million of favorable claims development in long-term care and Medicare supplemental. In the corporate line, we had offsetting items that netted to an unfavorable 2.6 million impact in the quarter, an interest rate related charge on our employee and agent benefit obligations offset by a positive true-up to assumptions related to our stock compensation expense. Focusing on normalized earnings growth rates, Bankers benefited from favorable claims trends overall and annuity margins where better persistency and crediting rate action helped to preserve spreads. In addition, reduced lapse rates in our Medicare supplement blocks resulted in favorable DAC amortization. Both Washington National and Colonial Penn results mirrored that a year ago. Our OCB segment recorded a modest loss in the quarter. As commented on in the past, we expect results in this segment to fluctuate between modest gains and losses from period-to-period. Slide 20 show statutory earnings power of our insurance companies with growth in statutory earnings largely parallel in GAAP. Our mix of business, efforts to actively manage in-force blocks, and our tax position produces a powerful statutory earnings and cash flow engine. In light of the new DAC accounting, we expect investors to focus even more attention on statutory and cash flow dynamics to derive valuation. And believe this is a relative strength of CNO. Recognizing 2011, dividends came in at the high end of our stated range of 75 million to 200 million; we will continue to balance dividend strategy with supporting profitable new business growth and holding our core financial strength ratios at levels consistent with investment grade. It’s very important to understand that in addition to dividends from the insurance companies, the holding company also generates cash from interest payments on surplus notes and fees for investment and administrative services provided to the insurance companies that annually total approximately $140 million. Slide 21 takes this analysis a step further, looking at the last 2 years of recurring sources and uses of liquidity at the holding company. I think it’s significant to point out that the recurring sources of cash flow to the holding company that is surplus note interest and management fees alone are sufficient to cover holding company expenses and service our debt obligations. This leaves dividend capacity to drive redeployment strategies. Free cash flow to the holding company increased by 100 million over 2010 with interest coverage of roughly 5 times. After holding company expenses and fixed charges, we deployed approximately $160 million of capital to share repurchase and unscheduled debt prepayments during the year. One of our goals is to be an investment grade credit. I have firsthand knowledge of the financial standards to qualify as investment grade. And there is no question we have the pure financial ratios to support higher ratings. Our current capital position remains strong with excess capital over our recently increased management targets totaling $140 million. We seek to hold the majority of our excess capital at the holding company for flexibility and tax efficiency. Excess capital at the holding company can be contributed down to the insurance subsidiaries at any time if needed. Had the holding company excess capital at year end been contributed down to the insurance subsidiaries, our consolidated RBC ratio at year end would have increased by another 21 points to nearly 380%. I want to spend a few minutes on a familiar topic and address the impact of sustained low interest rates on CNO. As we have indicated last quarter, current rates have been factored into our loss recognition testing on GAAP intangibles and reserves, where we have comfortable margins overall. In the third quarter of both this year and last year, we took charges of approximately $13 million in the OCB segment, reflecting the continuation of current interest rates through the end of the following year. Asset adequacy analysis has been completed for all of our insurance companies. This allowed our actuaries to certify that our statutory reserves are adequate under a wide range of moderately adverse conditions. This includes the base case that projects the current interest environment indefinitely, as well as the standard 6 variations from that scenario. To be clear, all of our companies passed all of these scenarios. In addition to actively managing our investment portfolio and adhering to tight ALM standards, there are several management actions that are being and could be taken to help mitigate the impact of a persistent low interest rate environment. These actions include pulling back on certain annuity products and/or adjusting crediting rates and product charges on interest sensitive life and annuities, increasing new business premiums, and exploring reinsurance solutions on certain blocks. In summary, I do not see the current rate environment impacting our capital generation and redeployment activities over the planning horizon. And while spread compression provides a headwind to earnings, we see this as more of an impact to growth rates for which we have levers to pull in response. I’d like to close with a few updates and outlook comments as we look towards 2012. First, the implementation of the new DAC standard and the expected pro forma impacts have been updated to reflect actual 2011 activity. We now estimate the EPS impact to be in the $0.15 range with a book value impact of $580 million, or $1.96 per share. The primary driver of this adjustment is sales momentum in the second half of the year, a good kind of problem and not unlike the impact of statutory surplus strain. This is still an estimate and we continue to explore ways to moderate this impact in the future. Second, we have reminded the market in prior years but want to reiterate again that there will be -- will likely be some seasonality in the first quarter in our benefit ratios. This is the result of a history of high mortality in Q1 and the dynamics of Medicare supplement business, and to a lesser extent our PDP business. In addition, we successfully relocated our Chicago operations and expect to recognize a charge of approximately $6 million pre-tax in the first quarter. We expect in excess of $1 million in annual savings for the 11-year life of the lease, delivering a solid return. And finally, we do expect our excess capital to continue to build with no material change in redeployment priorities. Before I had off to Eric, let me say how pleased I am to join CNO. As you can imagine, I’m still climbing the learning curve but I continue to be impressed with CNO’s disciplined execution, and steady track record of accomplishments over the last several years. Overall, capital quality is strong, we have a disciplined approach to capital deployment, and our risk management fundamentals are comprehensive. I look forward to working with this leadership team and helping CNO continue the momentum in the coming years. Now I’ll hand off to Eric Johnson who will discuss CNO’s investment portfolio. Eric?

Going to Slide 25, in the fourth quarter, we earned investment income of $344 million compared to $338 million in the third quarter. Our portfolio earned yield was 5.7% compared to 5.67% in the prior quarter. Yields and income each benefited from lower cash balances despite somewhat lower new money rates consistent with market conditions. Our fourth-quarter new money rate was 5.29% compared to 5.55% in the third quarter. We allocated the bulk of our new money to high-grade corporates, RMBS, CLOs and a slightly elevated allocation to corporate high yield. Also during the quarter, we sustained our practice of actively matching our assets and our liabilities at a line-of-business level. We continue to be well within our duration matching targets in all lines of business, including Long-Term Care. Hence, we do not presently need to use derivative transactions to mitigate rate risk. Going on to Slide 26, in the fourth quarter, we recognized $23.2 million in net realized gains. This included approximately $42 million in gross realized gains, partially offset by approximately $10 million in realized losses and $8 million in other than temporary impairments recognized in earnings. The next slide drills a little bit lower on impairments. At $8.3 million, the level remained comparatively low. I would attribute this to stabilizing economic fundamentals in the U.S. and strong valuations in most credit markets. In terms of a little more detail, we revalued 2 mortgage loans with an aggregate par of slightly less than $2 million to estimated market values, and we wrote down $3 million in financial high grades which are trading at material discounts and which we consider unlikely to be called or to return to par market value in the near-term. Going on to Slide 28, which displays our unrealized gain position at this time, that increased slightly to $1.7 billion at quarter end, basically attributable to credit spread tightening in various credit sectors. Slide 29, with regard to investments at our holding company, our first priority remains liquidity for capital management. This means investing principally in money markets and core plus strategies with limited leverage and a smaller allocation to unleveraged equities and alternatives. For the fourth quarter, at 12.31, the amount of unrestricted cash and investment sales was $203 million. Net investment income for the quarter on these funds was approximately $0.8 million. Gain/loss for the quarter was approximately $1 million. And total return for the fourth quarter was 2.58%. Our fixed income allocation returned 3.04% and our equity allocation returned 11.5%. Slide 29 breaks down the related allocation. Slide 30 illustrates our overall asset allocation, which was really not much changed in the quarter. It also segments our invested assets by rating. As you can see, our low investment grade ratio was approximately 9% at quarter end, which has been very stable throughout the last year. In corporates, the relationship of upgrades to downgrades was relatively good for the quarter, higher levels of M&A offset by favorable fundamentals. We’ve also seen some downgrades in the financial sector as rating agencies have migrated rating standards. Certain non-agency RMBS continue to be susceptible to NRSRO downgrades as the collateral fees and credit support inherently diminishes in many structures. However, because these securities are rated for statutory capital purposes using a price and estimated recovery matrix from PIMCO and BlackRock, we don’t expect RMBS downgrades to materially impact our RBC ratio, and they have not. Going on to Slide 31, in many ways recent news has been better rather than worse. Given the pace of economic development and slow pace in labor market fundamentals improvement, the Fed is expected to keep rates low for an extended period. The possibility of further asset purchases continues to provide a backstop for mortgages. Corporate fundamentals are positive. Negative net supply is expected to tighten spreads in various securitized sectors. While the only thing certain is surprise, tail risk seems lower and that’s reflected in the lower level of volatility. Financing markets are open and fairly liquid. Most of this point’s toward satisfactory credit performance, but tightening money rates and that is what we are experiencing today. Recognizing that spreads could tighten somewhat, we remain a net buyer of credit, although aware that there is tail risk in the market. We still also think mortgages are cheap and some parts of the commercial mortgage market. While it’s relatively early days in 2012, we expect to continue to fund at levels consistent with the company’s needs and objectives. And with that, I will turn it back to Ed.

Thanks, Eric. We have a compelling value proposition. We’ve been growing and have above average growth potential because we are focused on a market that is both underserved and rapidly expanding with the Baby Boomers turning 65. We not only have a competitive advantage, but we believe it is a sustainable 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. Our value proposition is driven by earnings growth and generating 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 and distribution, plus the markets we serve mostly needing protection products. Also, as we have shown, we’re well-capitalized. If you look over the last 3 years, we’ve increased our risk-based capital by over 100 points, reduced our leverage by over 10 points, and have extended the maturity structure of our debt, all of this while also improving profitability, the absolute amount of capital, and liquidity. So, in summary, we are differentiated by our market focus with natural growth catalysts as the Baby Boomers age. We are well positioned to continue to capitalize on our unique market focus in business strength. Needless to say, we are bullish on CNO. And now we’ll open it up for your questions. Operator? Open it up for questions.

[Operator Instructions] Your first question is from the line of Randy Binner.

Just want to ask a few questions about the DAC guidance for O9G. It did increase a little bit. In your comments, I think you attributed that to higher sales in the back half of ‘11. So I just want to kind of first of all clarify that the delta in the guidance was kind of purely related to those sales and if we would expect any more adjustments based on the sales activity you’ve seen so far in 2012?

Sure. Randy, it’s Fred. The way I would put it is the majority of the delta was related to sales growth that was the dominant piece of the driver of the revised estimate. There were some natural adjustments that were made in the calculations as we got better information and further refined some of our approaches to certain elements of volume related expenses. So there were some adjustments there, but they were minor in comparison to the sales growth rates, as you mentioned. So that was a dominant amount. In terms of revisions, I would just say that obviously we are now operating under the new guidance and we’ll report our first quarter accordingly. You should expect that we will give a fair amount of detail in understanding the ins and outs of the application and how best to assess the value of the Company, given the installation. So I would expect there to be some movement simply because you are adjusting for sales mix; you’re adjusting for the ratio of applications that are successful versus unsuccessful; you’ve got sales mix dynamics. So there are implications to just the normal operations and what it means to the final number. However, we wouldn’t, at this point in time, expect material changes from the range bound $0.15 we gave.

Okay. This is Ed. I’ll also add, as we did in our Primer call on the expected impact on the Company, we do expect to report earnings going forward bifurcated between the impact of business sold in the period and the contribution to profits from the in-force business so that you can more clearly see the impact of sales on reported results.

No, understood. And then I think that investors understand that it’s not economic. But I’m just trying to understand it from a modeling perspective. There’s a couple of other follow-ups. One is as this new accounting system I guess for DAC comes in, one, can we expect it to be evenly spread across the quarters in 2012, or will it phase in? And the other question is, to the extent you’re able to pursue commission, comp, and other efforts to mitigate the impact, could we expect to see improvement in 2012, or would that take until 2013?

You are not phasing the impact in, but realize the impact is going to move around with just the operations of the Company.

So that -- and listening to Scott of course today, we are making a lot of progress on building out the franchise and the sales engine is starting to deliver here, particularly in the second half, and we’re off to a decent start. So there will be those dynamics. Then the second part of your question, I’m sorry?

To the extent you pursue mitigation efforts like commission, comp changes -- I guess reinsurance, whatever, is that -- could we expect that to have an impact in ‘12 or would we really think about that being more of a ‘13 thing?

Well, I can tell you that the management team has been and is going to be working actively throughout 2012 to look for areas where we can do better on this without hurting the economic engine that we are driving, which is the most important element from our perspective. There are some areas that we can explore as it relates to volume related expenses that we think are more commission-like, but are currently being treated negatively under the DAC guidance. So, there are some areas we can explore. I would not want to put any sort of estimates around it because it’s really too premature. But we will continue to work on that throughout 2012, and will alert you to those actions when we take them.

The next question is from the line of Paul Sarran.

A couple of questions, first on DAC. I don’t want to necessarily belabor the discussion, but the $0.15 you gave as a pro forma 2011 impact I think if I’m correct, do you have an estimate for what the impact would be in 2012? I know there is a lot of moving parts that will impact that, but there’s some reasons why it should be different, right?

Yes. I think the way you described it is correct. With 2011 behind us, we were able to take what otherwise was a pro forma estimate and actually apply looking back on 2011 results and mix. No. We have not given or really aren’t in a position to give clarifying guidance on how best to consider 2012 for the simple fact that really there are those moving parts associated with what I mentioned earlier in terms of mix of business and so forth. So, we hope that, when applying it to 2011, it allows some level of reasonable gates, if you will, around what the impact will be, but to give precise guidance on it in 2012 would be very difficult.

All else equal, assuming the same level of sales and no unusual DAC unlockings or anything like that, is it safe to say it should be a little bit lower just due to the roll-off of PVFP?

Well, I’ll tell you. I mean, the way I would answer it this way. We’re dedicated on trying to successfully build out the franchise. Scott and others are investing in their platform, particularly at Bankers and Washington. As you know, we are also making investments at Colonial. So in a way, the more successful we are in creating that sales engine and booking business, the more there would be a relative drag on this number. So, that’s really the best I can give you at this time.

Okay. I got it. On capital generation, I understand 2011 was a very good year in terms of the dividends you took out of the stat companies. Are you maintaining your range, your expected range, of 75 to 200? And if you are, are there specific scenarios you have in mind that would get you towards the low end of the range?

As I mentioned in my comments, we are pretty confident in the capital generating trends we’ve seen throughout 2011. The reason why in part we have a wider range is because we always want to make sure that we maintain the ratios necessary to continue on a proper track towards investment grade which is very important to the company over the long run, and honestly to make sure that we are doing what we need to do in terms of retaining capital support growth in the business. That’s why we put a wider range out there to allow, if nothing else, management discretion to put the money where it’s most economic to build out the long-term value of the company period. Having said that, we have obviously a recent track record of being at the higher end of this, I think Ed has said that we have traveled more in the high end of that midpoint, if you will, or higher end of that range. And as I mentioned, we expect the capital generation to continue in a similar pattern.

Okay. And then one last question if I could. You talked about the levers to ROE improvement. Can you talk about where you actually expect ROE to go, whether that’s -- what kind of rate of improvement over the next few years, or what potential ROE you see the company getting to over a few years?

Yes. Paul, we continue to believe that we can get the ROE to the 8% to 9% range between ‘13 and ‘14, so in the 8% range by the end of ‘13, and getting near 9% by the end of ‘14.

Your next question is form the line of Ryan Krueger.

I have a couple of questions about the short-term care policies you’re selling at Bankers. Could you give a little more detail on how these policies are structured, such as the type of benefits and the maximum benefits? And then also I assume that the utilization rates there are pretty high, if you could just shed a little bit of light on what type of utilization rates you get on these type of policies?

Sure. This is Scott. The way the policies are structured, a consumer can purchase up to 12-months of benefits and daily benefit choices from $80 a day to $175 a day or $200 a day. But the key is that the maximum is that 12-month period. There is a restoration benefit element, so if a consumer uses 6 months and then they’re in a facility for a different condition, and there’s a 6 month period in between, they are eligible for an additional 6 months. So I guess, all-in, the maximum you could get would be a 2 year benefit period off of a one-year policy. That’s not very typical. Typically, we sell benefit periods of 9 months and we see that utilized one time. I’m not really -- we haven’t disclosed those utilization levels. So I’m not prepared to do that right now.

Are they -- I guess one thing, is there a waiting period on them?

There is an elimination period that will factor into the pricing, right and it could be up to 90 days. Typically with the short-term care policy, because the price point is lower, you don’t see as long of elimination period chosen. So you usually see a 30 to 45 day elimination period on those, unlike the comprehensive where you might see 60 to 90day.

Okay. That’s helpful. Then on the statutory cash flow testing, if interest rates were to remain where they are today for 2 or 3 more years, would you expect any impact, or is that scenario already fully contemplated in this year’s analysis?

Yes, we would not expect further impact. That’s actually what you’re describing is actually what’s oftentimes referred to as the base scenario that takes the current interest rate environment and holds it constant and then runs the cash flow testing accordingly. And we maintain a comfortable margin and actually haven’t seen any material deterioration in that margin year-over-year. But even beyond that, there is a more severe scenario that’s important to understand, which effectively drops rates by another 100 basis points and runs a so-called interest rate stress scenario. It’s part of the 6 additional scenarios that companies run. And even in that particular case, while there is some level of deterioration in the margin, it still remains very comfortable.

Okay, great. And then one last one is there any update on the debt to cap covenants in the credit facility once you have the new DAC accounting rules push the debt to cap a little bit higher?

Well, as you know, we’ve drifted down now to a point to where we are on more a 50% basis, if you will in terms of debt reduction to share repurchase. That’s in fact what we would be able to operate under in the first quarter, which is important to note. In terms of actually making an adjustment to the covenant, all parties involved, the company as well as our group of creditors, realize that this is somewhat of a routine matter to go in and make adjustments based on an accounting change, particularly one that is not economic and doesn’t eat at the core of our capital ratios. That, coupled with the fact that we still are traveling at around a 19% debt to total cap after giving effect for the pro forma estimates that I mentioned, all makes us feel very comfortable that we can get this done. It’s something we’ll address in the coming weeks as we work with our creditors, but view it as somewhat of a housekeeping matter and routine.

[Operator Instructions] The next question is from the line of Erik Bass.

I just wanted to follow-up on Paul’s question about the ROE. I was hoping you could provide a little bit more of a roadmap in terms of how you get to the 8% to 9%. I guess you’ve highlighted the 4 key levers to improve returns, but I was hoping you might be able to give sort of an approximate magnitude of what you expect each to contribute?

Erik, this is Ed. I will say that the non-guaranteed element changes is the most significant lever of the 4. And then I would say the next 2 are basically tied in significance of layering on the profitable new business and effectively deploying capital. And the increased operating efficiencies would be the least of the 4.

Okay. That’s helpful. Then do you expect kind of -- obviously the ROE was up about 40 basis points this year. Do you think that’s sort of a near-term run rate, and then it should increase over time as you layer on more of the new business if sales continue to pick up?

I would say that’s accurate. And obviously, the run rate has to pick up to meet the 8% in a couple of years. But in that, I would remind you and everyone that the effective capital deployment really only began in the latter half of Q2 of 2011. So, we did not even see a full-year impact of that in 2011.

Got you. And then one unrelated question. The data on the LTC business in Bankers was helpful. Can you just remind us on how big the remaining LTC block is in the OCB segment, and then what percentage of that block is the kind of comprehensive coverage type policies?

The amount of liabilities in the remaining runoff LTC in the OCB segment is approximately $400 million. It’s less than half of the comprehensive benefits that would have any of the parameters like life-time benefits or inflation benefits with it.

[Operator Instructions] You have a follow-up from the line of Randy Binner.

So on the buy-back, the authorization I believe is approximately $30 million. And if you could provide any color on how you look at that plan versus other capital management options?

In terms of how we look at the relatively of it compared to other options, it’s what you would expect. We look for sort of the greatest economic benefit balancing shareholder value driving with maintaining our -- the strength in our balance sheet, and our direction towards moving towards investment grade. Obviously, as evidenced by our repurchase in the past year, we’ve seen a relative attractiveness of buying our stock back. We believe it’s discounted relative to the value of the company, and so that drives it. We have, as you rightfully say, about $30 million or so left on our authorization. This is, as you know, a board decision. And so, you would expect that we would entertain with our board looking at that authorization as we look forward to deploying capital.

Fair enough. And then as long as I’m on a follow-up here, for Scott, I had a question about his comment. I think you talked about this before, but you’re extending direct marketing outside of the Life product at Colonial Penn, I think I heard all of that right. Is that going into sub health at Colonial Penn? And is that something that is in a phase where we’d see anything material from that?

Randy, actually to clarify, the extension would be within the Life segment. So still Life products, but extending the product line to include a higher face amount that would be available on that direct platform.

Okay. So just higher face through the existing platform?

Higher face through the existing platform, correct.

But also, the simplified issue as opposed to guaranteed issue, which is the current core product of Colonial Penn.

All right. Understood. I misheard you.

At this time, we have no further questions.

So thank you, operator. And thank you everyone for your ongoing interest in CNO.

Ladies and gentlemen, this does conclude today’s conference. You may now disconnect.