CNO Financial Group, Inc. (CNO) Q3 2013 Earnings Report, Transcript and Summary

Good morning, my name is Gina [ph]. I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2013 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator instructions) Thank you. Mr. Erik Helding, you may begin your conference.

Good morning and thank you for joining us on CNO Financial Group’s third quarter 2013 earnings conference call. Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Fred Crawford, Chief Financial Officer. Following the presentation, we will have several other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday’s press release. You can obtain the release by visiting the media section of our website at www.cnoinc.com. This morning’s presentation is also available in the Investors Section of our website and was filed on a Form 8-K earlier today. We expect to file our third quarter 2013 Form 10-Q and post it on our website by November 1st. Let me remind you that on the forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today’s presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures. You’ll find reconciliation of the non-GAAP measures to the corresponding GAAP measures in the Appendix. Throughout this presentation, we will be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between third quarter 2012 and third quarter 2013. And with that, I’ll turn the call over to Ed.

Thanks, Erik, and good morning everyone. We are pleased with the results for the quarter as the positive momentum and trajectory of our business continues. Consolidated sales and collected premiums continue to grow driving solid operating earnings. We will continue to build on this momentum as we begin to accelerate the investment in our business moving in to the fourth quarter. We will maintain our focus on growing distribution, improving productivity, expanding our geographic reach and launching new products. At the same time, we’ve investing in our back office, improving the platform and gaining efficiency. Our solid performance and strong fundamentals continue to drive shareholder value while at the same time propelling us further along the path towards investment grade. So far this year, we have deployed over $220 million for securities repurchases; paid $18 million in common stock dividends and our stock price has increased over 50%. Simultaneously, our capital measures remain strong and improved further during the quarter. On slide six, you can see operating earnings on a normalized basis increased 12%. The increase is driven by 20% reduction in diluted shares as a result of capital action. Don’t lose sight of the fact that 3Q ‘12 on a normalized basis was a very strong quarter. During 3Q ‘13, we again saw strong growth in our quarter segments and normalized earnings drivers performed as expected, leading to sequential normalized earnings growth of 10%. The quarterly results keep us on track for a 9% run rate ROE by the end of 2015. Turning to slide seven, it is clear that the investments in our business are paying up, with consolidated sales up 8% and collected premiums from our core segments up 4%. This growth is especially impressive when you consider the shift within our target market toward lower premium-per-policy…

Thanks, Ed. At Bankers Life, sales and distribution results were again positive as compared to prior year. Total sales were up 9% reflecting the impact of investments we’ve been making in growth initiatives. Life insurance sales was the primary driver in the quarter up 24%. Annuity sales also improved by 11% over this time last year. While health sales were down 3%, mainly due to a decline in long-term care but also a modest decline in Med Supp partially offset by growth in critical illness. Medicare Advantage sales which are not reported as NAP, but do provide us with recurring fee income, experienced considerable growth during the period as an increase number of agents obtained certifications in preparation for the annual enrolment period which kicked off two weeks ago. As a consequence, our fee income from these plans achieved a higher level this past quarter than what we have seen in recent periods. This continued momentum in sales growth has pushed up total collected premium at Bankers by 3% propelled by growth in nearly every product line but mostly driven by greater annuity purchases. This is especially impressive given the decrease in long-term care premiums and the rapid decrease of our Coventry PDP quota-share premium as the program winds down and converts to a fee-only arrangement. Adjusted for these two decreases, Bankers premium growth is up almost 9%. We are also pleased to have continued to successfully execute on our office expansion initiative which we began in earnest a couple of years ago as we added another 10 sales locations this past quarter, bringing our total locations to 295. As a result of this expansion and other efforts, our average agent force is now up 4% year-to-date. Before I move on to Washington National’s result, I’d like to take a…

Thanks, Scott. CNO recorded another strong quarter on the earnings and capital front. Our earnings continued to benefit from core in-force growth, relative strength in investment income and spreads with normalize benefit ratios in aggregate performing as expected. If you adjust for the significant items in the quarter, we posted $0.29 per share, a 12% increase over the prior years’ normalized results. This quarter’s normalized items including an adjustment for prior period loss reserves in our Bankers Medicare Supplement business are result of continued positive trends. Our corporate segment recorded an adjustment to the discount rate applied principally to our agent deferred compensation liability. During the third quarter, we reviewed our assumptions underlying our FAS 97 interest-sensitive products and made no significant adjustments. We did not alter our interest rate assumption as actual results were largely consistent with a recovering rate assumption in 2014 and beyond. Core capital ratios and holding company liquidity strengthened in the quarter and we continue to return capital to our shareholders in a way of repurchases and our common stock dividend. There were several positive tax developments impacting net income which I’ll touch on later in my comments. Turning to slide 13 in our segment earnings, Bankers EBIT benefited from a continued strength in the Medicare supplement and annuity margins while long-term care benefit ratios remain elevated and consistent with our experience in the recent quarters. Washington National posted another solid quarter of collected premium growth in their supplemental health business. This positive trend was somewhat offset by modestly elevated benefit ratios. Colonial Penn reported a modest loss in the quarter. As mentioned in the past, the first and third quarters tend to be heavy ad spend quarters. OCB’s results benefited from favorable mortality in our life blocks and positive performance in our runoff long-term…

Thanks Fred. As you hopefully glean from Fred’s comments regarding our outlook, CNO is in good position to continue to positively grow and invest in our franchise while also efficiently deploying capital and furthering our positive ratings momentum. We have a classy [ph] problem with our strong capital levels coupled with steady cash flow and excess capital generation. Our capital deployment will continue to be balanced between returns to shareholders, investments back into our business, and appropriate capital retention. We are meaningfully growing earnings per share and are on track to achieve a 20% dividend payout ratio by 2015. Also our goal of a 9% run rate ROE by 2015 is within reach. Investments back into our business are driving growth that exceeds industry averages. Our business investments are expected to accelerate as we increase platform and infrastructure investments to broaden capabilities, drive efficiencies and further enhance risk management. As far as capital retention, this can drive shareholder value as much as capital deployment. Holding some additional capital is in-line with trends as the industry RBC levels and targets have noticeably risen over the last several years. Furthermore, in the case of CNO, further strengthening capital ratios can appreciably drive shareholder value including a reduction in our implied data. With regard to accelerating run and run-off businesses, you can be assured that potential acquisitions and divestitures of non-core blocks of business are actively on our radar screens. Needless to say, we’re bullish regarding our prospects. Our strategic focus on the middle market, reaching it with largely exclusive distribution offering a breadth of product provides us with sustainable competitive advantage. Lastly, we are well into our annual strategic and financial planning and will hold the 2014 outlook call the third week of December. We will then hold an investor conference in the spring of 2014 to spend quality time on strategy, investments we are making in our business and longer range expectations. And with that, we’ll now open it up for questions. Operator?

(Operator instructions) Your first audio question comes from the line of Mark Finkelstein with Evercore Partners. Mark Finkelstein – Evercore Partners: Good morning. I guess this is probably a question for Fred. Maybe just to start off on long-term care, the interest adjusted loss ratio, I guess, the normalized has been characterized as 79%, it’s a little higher sequentially; I think it’s a little higher than what you thought it would normalize for at the second quarter and you did talk about maybe some impact from lowering commissions on conversion premium. So, I guess, my question is I’m trying to understand how all these pieces fit together and specifically did you see any deterioration in the trends in the quarter, and if so, like, what did you see? And then, secondly, when do you see the benefit of kind of the lower kind of commission on the conversion premium kind of playing out?

Yeah, so, let’s make sure we categorize these moves just to serve everybody for clarification. So, specifically, on long-term care is what’s really driving the interest adjusted benefit ratio dynamics there in terms of the climb over the course of the last year has been increased persistency particularly on the blocks of more comprehensive long-term care that we have. And those tend to also be the very same blocks where we have targeted rate action in past years therefore generating a little bit first, certainly better premium related to the rate actions but also a level of lapsation both shock [ph] and more persistent lapsation if you will that come from the rate actions. As we’ve slowed that rate action activity down or as that activity has slowed down, those comprehensive long-term care policies are persisting more. Persistency has climbed up a bit. And even just a small tick up in persistency will impact the benefit ratios and the margins we generate off of the business. We haven’t really seen what I would call deterioration of any great degree but rather a settling in at this higher level of 79% over the last few quarters. And it is our expectation right now that we would remain at these types of levels absent an ability to come back in and look at rate actions over time or other actions we may take to look at efficiencies and running the block of business. Right now though, our suggestion for the remainder of the year is that we would stick around that normalized. Now, not to be confused with supplemental health and Washington National which is where the commission action I referenced in my comments that was made. Mark Finkelstein – Evercore Partners: Okay.

So, yeah. So in that block of business, okay, there is something very different taking place. So this is the supplemental health block in Washington National and we have seen a modest climb in their interest adjusted benefit ratio, and upon investigating the driving of that, we determined that that has to do with some adjustments we’ve made in part to the commission structure on conversion activity that is lowering commissions and therefore reducing the amount of conversion activity particularly on policies with return of premium features that are late or heading towards their maturity, relatively age policies. The reason that’s important is that when converting those policies that are reaching their maturity dates and have return of premium features, those policies will naturally build more aggressively reserves. When those policies are converted, you essentially freeze those reserves and start a new reserving pattern because it’s a younger policy, that reserving dynamic moves up more slowly. Said differently and to simplify more conversions of those types of policies will lead to better interest adjusted benefit ratios like the ratios we’ve experienced in the past. We believe that conversion activity was helping past interest adjusted benefit ratios. Now having calm down, we’re seeing the benefit ratio return to a more normalized level in the 54% range. So we would expect that to continue as we play out. Now, those benefit ratios will migrate slowly up and down on this dynamic by virtue of just simply the pattern of sales of these policies and the amount of these policies that are moving towards maturity and their lapse rates. So there will be movement in the benefit ratio, but the elevation of it is expected to continue for a period of time. Mark Finkelstein – Evercore Partners: Okay.

Mark, Ed here. Let me just add. The business driver for the reduced commission on conversions of these supplemental health products was to have the agents focus more on acquiring new customers, new households as opposed to converting existing customers into another product. And that is having the effect that we expected here. Mark Finkelstein – Evercore Partners: Okay. Thank you for the clarification on that. Just, can you give an update on the life trends and are we still expecting that to be finalized by year end?

Yeah, I think the life trend lawsuit that you’re referring to are [ph] class action that’s involving business in OCB, as we have disclosed and we continue to freshen [ph] our disclosure each quarter, so obviously pay attention to those disclosures in our queue [ph]. But where we stand right now is that agreement in principle has been reached between the parties and the reserving and GAAP and stat [ph] implications of a settlement have been installed into our financial statements. A fairness hearing has been scheduled for the early part of November, currently November 8th. After which, there is typically a time for appeals and other closure items that takes place; very difficult to front run the court in terms of what and how they want to schedule that. Our past experience in this case is it’s been something in the neighborhood of 30 to 45 days, but that’s yet to be determined. So we continue on path with simply working through the necessary legal actions. Mark Finkelstein – Evercore Partners: Okay. All right. Thank you.

Your next audio question comes from the line of Sean Dargan with Macquarie. Sean Dargan – Macquarie: Thank you and good morning. Just to refresh my memory. The goal of 9% ROE in 2015 is not dependent upon a solution in OCB?

That’s right. What we have said in the past is that our goal of a run rate ROE of 9% by 2015 or the end of 2015 is really driven from organic growth in our business model and capital management. It’s not driven by broad OCB solutions or broad-based recapitalization efforts. Sean Dargan – Macquarie: Okay, thanks, Fred. And we’ve seen some stabilization in OCB results in recent quarters which I think was a prerequisite to coming up with a solution of some sort for the books of business there or at least those that eat up the most capital. What are we waiting for at this point? Is it final resolution around the cost action [ph] litigation?

Well, again, stepping back, our goal has always been pretty straightforward and that is, first, maximize the cash flows in those business; and secondly, minimize volatility of those cash flows very simply to drive better value for us if we were to retain the blocks of business and better valuation if you will on those blocks of business. So if we were to choose to reinsure or sell any of the blocks, the litigation activities involve actually both matters. They involve matters that generate cash flows on policies and they involve matters that could give rise to volatility if not put behind us. And so, that’s been the focus. So certainly progressing on the legal front opens up if you will or creates additional options for us to explore on these blocks of business. But we have always been – I mean, the day you announce that a block of business is in a runoff, you immediately have decisions to make and options to entertain over time and that is do you grab those cash flows over a long period of time and bring them into shareholder value or do you choose to accelerate those cash flows, the reinsurance of a sale transaction. That’s always been the case. We remain very attentive and close the marketplace and looking at those options. Clearly though, getting some of that potential volatility or contingency risk associated with class actions behind us is an important step in opening up options. Sean Dargan – Macquarie: Thank you.

Your next audio question comes from the line of Randy Binner with FBR Capital Markets. Randy Binner – FBR Capital Markets: Hi, good morning and thank you. I’d like to ask a question about the valuation allowance pull down and this might be a little granular but I’m going to take a shot at it. So, on the $128 million that got pulled down this quarter, I guess, the first question is, have you disclosed how much of that was non-life versus capital loss?

Yeah, so here is the way to think about it. It’s really driven predominantly from life and non-life dynamics and taxable income. And so, Randy, the way in which this $128 million is calculated, first of all, is to recognize that we have installed a methodology that is really there to document and support the notion of what management’s more likely than not ability to utilize these assets going forward. And that methodology has been to look back over the past three years taxable income, average that income, apply a growth rate to it both life and non-life and then assess from that our ability or renewed ability to utilize those assets and thus taking down the valuation allowance. What gave rise to the large dollar amount or the large number of $128 million is very simply replacing a lower taxable income year with a much higher taxable income year as we continue to improve the earnings story over the last three and four years. That swing factor established in the formula, in the methodology a much higher base from which we then grew that taxable income and sort of then generates accumulative life and non-life earnings to then bounce off against your assets. The majority of that taxable income increase is on the life side, but there is a fair amount on non-life. And the distinction there is any sort of benefit on the non-life side drops down dollar-for-dollar because we have an ability to utilize $0.100 [ph] on the dollar of any benefit or earnings benefit we drive in that business. On the life side however, we can only, once having exhausted all of our NOLs there, we can only carry over 35% of any benefit to non-life. So it does have a major impact but less so compared to non-life. And so, that’s the basis of the large dollar amount. It was generally a large life increase, to a smaller proportion non-life but together benefiting our overall taxable earnings outlook in the formula we use. Randy Binner – FBR Capital Markets: Okay, that’s helpful. But just so, whatever this amount was though, it was basically, the tax shield is like 35% of 35%, right? Because there is no more valuation allowance for the life, right? So, if it was predominantly non-life –

Right. Randy Binner – FBR Capital Markets: – valuation allowance being pulled down –

Yeah, that’s right. Randy Binner – FBR Capital Markets: – which I think you said, then the shield was the 35% for 35%.

It’s really – Randy Binner – FBR Capital Markets: Because on my end, our estimate is like way lower than this. I’m just trying to make sure I understood the math correctly that it was 35% for 35%.

Yeah, exactly. Well, it’s, I think, I’m not sure what your math is but, one, realize non-life income continues to grow too. Randy Binner – FBR Capital Markets: Yeah.

Right. So we have distribution relationships driving non-life income. As our overall life business grows, we’re throwing up contractual income up to the holding company. So we have a non-life growth rate that is very powerful even though smaller because we utilize 100% of that. And then to your point, you’re right, because we’ve used up effectively the assets on the life side, it’s really more pulling 35% of 35% if you will as a value over when you reduce your valuation allowance. Randy Binner – FBR Capital Markets: Okay, and then more follow up on this one. You said, the footnote in the presentation here says it’s a 3% go-forward increase for earnings growth going forward; did that used to be 5% or has that always been 3%?

No, it did used to be 5%. Realize that this is taxable income and realize it’s a methodology where you’re applying a growth rate to a base of earnings. And so, think about it this way, when faced with a much lower average base of taxable income, you can certainly justify or support a particular growth rate on taxable income differently than when you’ve re-established that average at a much higher level. So, you shouldn’t necessarily infer from this dynamic as a change in the way we view our earnings trajectory going forward. This is really a more mechanical exercise as supporting management decision on the valuation allowance. Randy Binner – FBR Capital Markets: Yeah, that’s what I was getting at. That’s great. And just one more if I can. You said on the kind of like the interest rate review for DAC that there was no DAC unlocked [ph] this quarter for interest rates, which makes sense because the 10-year [ph] is like a 100 basis points higher than it was last year. But, I mean, I guess, I just want to make sure, I kind of want to amplify that I heard that correctly and should I take from that basically if we kind of think about like that J curve illustration that you gave at the Analyst Day –

Yeah, yeah. Randy Binner – FBR Capital Markets: – last December, I mean, basically, the J curve didn’t change; is that kind of the takeaway that we should have?

Yeah, the notion of a J curve is developed because your new money rates are traveling below your current portfolio yields, and so naturally there is sort of a drop before there’s a recovery, if you have a rising new money rate assumption which we do. And so, all I’m saying in my comments is that based on our observations of how we’ve performed this year and based on our observations of likely interest rate dynamics going forward, we think we’re remaining largely consistent with our current assumption. So even though there’s been maybe a level of outperformance this year, slowing turnover rates down and investing at new money rates that are a bit higher than our assumption, we think that as we go forward and because we have a rising new money rate assumption, that that just sort of supports if you will or perhaps lowers the risk profile of achieving that outcome. But it doesn’t cost us to change our outright outlook for new money rates. Randy Binner – FBR Capital Markets: All right. Understood. Thank you.

(Operator instructions) Your next audio question comes from the line of Christopher Giovanni with Goldman Sachs. Christopher Giovanni – Goldman Sachs: Good morning. I guess, for Ed, obviously, you had a nice growth in the quarter in both [ph] from the tax items that we discussed. And I wanted to think about this relative to kind of the 9% ROE target. And in the past and again today, you kind of noted that the 9% isn’t dependent on OCB, but wondering if the target contemplates these tax benefits which could potentially continue to accrue based on the favorable operating results.

Thanks for the question, Chris. No, it does not. We exclude AOCI and the NOL from this calculation and we fully tax the R [ph] at a 35% rate as part of that, so it is not dependent on releasing or realizing more tax benefits. But in that, obviously, there is real economic value in increasing our book values through utilizing more of the tax asset. Christopher Giovanni – Goldman Sachs: Okay. And then, Fred, I feel like we just kind of had this leverage discussion yesterday but we’re back sitting here kind of mid-teens leverage ratio. So I wanted to see how you’re thinking about kind of recap 2.0 given the continued volatility around interest rates and then certainly the aspirations of investment grade.

Yeah, I think a couple of things. One is, at the moment, we’re very pleased with the direction leverage has gone for sure and it’s nice to be in a delevered or a relatively modestly levered position right now as a company. We’re reluctant to kind of open up our debt structure if you will because we’ve locked in such favorable debt cost. As you may recall, we just happen to hit the market at a very, very strong time for both rates and spreads. And so, very much like both the debt structure and the debt cost. What would cost us over time to change has more to do with ratings increases and being able to therefore achieve, yes, continued improvement in debt cost but also debt structuring that could be much more favorable to the company over time particularly if you could investment grade. For example, today, we amortize our debt as opposed to rolling debt which is more customary for investment-grade companies. The other thing I would tell you is that we have a relatively short duration on our debt, and so we constantly have to be watching as we creep towards maturities with large dollar amounts and realizing the reality that we’re below investment grade and need to be awfully careful about that. So those dynamics tend to kind of keep us into somewhat lower leverage category until such time we can start improving our ratings and really issue new types of securities. So that’s really the goal. The thought process here for right now is it’s a good position to be in to settling to strong leverage. It certainly supports our desire for further ratings upgrades. We’ve got a very good cost of debt capital that we wouldn’t want to reopen at the moment without better ratings. But it offers up the opportunity as we go forward to certainly look at that kind of dynamic but I’d rather do it on better ratings. Christopher Giovanni – Goldman Sachs: Okay. And then one maybe for Scott. You touched a bit on healthcare reform and exchanges, so I wanted to see if you can expand some in terms of how you’re attacking this potential opportunity.

Sure, Chris. Well, as I’ve said in the past, our primary products aren’t in the center of healthcare reform. We’re on the outside and the peripherals. So, the first way that it’s kind of impacting us is the confusion that’s been created in the marketplace, both the underage markets, so under 65 as well as even those over 65 who aren’t directly impacted by the Affordable Care Act, but our kind of again being impacted by the noise around it. So it’s creating a lot of opportunities for both our agents at Bankers and Washington National to sit down and provide guidance in the marketplace, because people are looking for it. The other opportunity is around the supplemental health space. So what we are seeing in the underage markets tends to be high-deductible, high out-of-pocket type of plans that looked to be the norm. Those are creating large gaps and we see the health, the supplemental health product is creating a real opportunity to provide some peace of mind to fill in those gaps. And so, we see and are taking advantage of that. Finally, at Bankers, we are through our relationship with Humana exploring the opportunity to point a segment of our agents to offer major medical. Once everything gets worked out, we’re kind of holding off. It’s on the wayside – on hold right now given some of the confusion. But as that gets worked out, it’s likely that a segment of our agents at Bankers will be able to offer the major medical plan through one or two of our partners to satisfy that need of the underage market. And again, I think, given the confusion that has been created from the exchanges and the online purchasing and the difficulty that consumers are having, it just reinforces the value of our personal face-to-face service. Christopher Giovanni – Goldman Sachs: Okay. And I guess, just following up on the supplementals piece specific, I mean, is these opportunities around the public or the private exchanges and then how are you kind of attacking or entering those opportunities?

Sure. So around public exchanges, it’s really seizing the opportunity that are being created by the three levels of plans that are being offered through the Affordable Care Act, those kind of qualified plans, just creating gaps. As far as offering our products, I mean, within Washington National we are looking to build out our platform, private exchange platform to be able to offer the supplemental health products on a worksite basis to our employers and to our agents that are offering this to allow our customers to enroll seamlessly online into our supplemental health products as well as ancillary products that we partner with third parties to offer. Christopher Giovanni – Goldman Sachs: Okay. That’s helpful. Thanks so much.

Sure.

Your next audio question comes from the line of Humphrey Lee with UBS. Humphrey Lee – UBS: Guys, just looking at your RBC, the 392%, that’s the highest level in recent years and well above your 350% targets. Do [Indiscernible] just to kind of [indiscernible] immediately draw down this capital level in the near term or do you prefer to maintain at a high level for potentially a rating agency upgrade?

Humphrey, this is Fred. I would describe our excess capital position this way. The excess capital that we have down in the life insurance companies which would be roughly $200 million if you were to just say, do the math on the amount of capital north of 350% RBC. It’s there to drive overall ratings improvement. It’s there to recognize risk management dynamics; in other words, realize that we have been going through a period of very favorable credit markets here in recent years and we all know that those have a habit of turning over time and you need to be prepared for it. And then also importantly, to support growth in our business. So we continue to grow our business. We would like to see products that are heavy, more heavy capital usage comeback, for example, annuities would be the best example of that. So we want to be prepared to support the continued growth in our business model. Said differently, as we move that capital up to the holding company and we measure the amount of capital at the holding company, we have in excess of $150 million; that then defines our more deployable capital. So the answer to your question is right now what we’ve dialed in to RBC is a good spot to be in. We think it’s very nice and supporting, continued progress on the ratings front. It’s very smart from a risk management dynamic to have it in place, recognizing we’re going through good periods from a capital perspective. And then I would size [ph] the deployable capital at the $140 million at the holding company at this point. Humphrey Lee – UBS: Okay, that’s helpful. And then, in terms of the medical supplements benefit ratio that Bankers and Washington National, they’ve favorable for several quarter. My understanding is that, this favorable experience is more of an industry-wide observation. Can you talk about what you’re seeing in the market and do you expect this trend to continue?

This is on Bankers Med Supp? Humphrey Lee – UBS: Yes, both Bankers and Washington National.

Yeah, two different dynamics that play. So Bankers Med Supp, you’re exactly right, we are seeing very good benefit ratios in that business and really have now for three quarters or so. We’ve been regularly releasing a level of reserves or making adjustments to past established reserves because of that performance travelling more favorable to our expectation. And as I said in my comments, we would expect the normalized benefit ratio of around 70% to be a good example of what we would carry in certainly into the fourth quarter. So, the driver of that we believe is overall better really Medicare claims dynamics and that bleeding [ph] through to better results in our book of business, our industry’s book of business. We also think to some degree, although we would need to monitor this more carefully, but we think some of the plan designs that we sell have been performing favorably, namely, Plan N [ph] which is one of the major plans that we sell; but I think needs more time to play out. But the point is we’re very simply seeing better claims activity. The industry is seeing that and its claims activity that we price for and expect to get and that’s been favorable. Supplemental health, a little bit different dynamic, right? And I guess, I would just ask you to think through the comments that I made to the earlier question on what’s playing with supplemental health benefit ratios, again, that has to do with the level of conversion activity and we would also expect that to continue in the future here for a period of time. And as Ed mentioned has a lot to do with the way in which we’ve adjusted for example commission structures on conversions. And those conversions in past quarters were contributing to better than expected benefit ratios we believe. Humphrey Lee – UBS: Okay, got it.

Your last audio question comes from the line of Ryan Krueger with Dowling. Ryan Krueger – Dowling & Partners: Hey, good morning. First off, I was wondering if you could give an updated view of the economic present value of the NOLs.

Yeah, I would say this, Ryan, I’m not sure what you mean by updated view. Our basic, I would say only this, the only update I would suggest to you is that with the cancellation of indebtedness decision that was made or agreement that was settled to last quarter, we generated as you could see a $72-million release of the valuation allowance. We would estimate and I think we did this last quarter that from a discounting perspective, say discounting it at 10% it’s driving an additional $60 million of economic value. Each quarter and each year that goes by, we utilize some of that. We sort of drawdown some of that economic value. And beyond that, I don’t know that we have publicly put a number on it per se. It’s basically the $800 million plus of GAAP assets and then you apply the discount rate you believe to be appropriate on that asset in terms of converting it to economic value. I know a number of analyst tend to travel around a $0.5 billion but I don’t want to solve for your analysis. Ryan Krueger – Dowling & Partners: Okay, understood. And then, I wanted to follow up on [indiscernible] credit [ph], so you made a comment that you kind of were interested in participating in these fixed annuity market in terms of – and maybe [ph] in a little bit of a bigger way if that market comes back and it does seem like in the last couple of quarters we’re seeing a lot higher fixed in indexed annuity sales. I was just curious to what extent at the product that you’d like to materially grow in going forward.

In terms of annuities. Ryan Krueger – Dowling & Partners: Yes.

One of the things we don’t do is dial in a particular goal for a particular product, right. As Ed and Scott have both talked about, we have a portfolio of products and we let the buyer, the policyholder needs, the market needs dictate the ebb and flow of the products. And so, what we are experiencing right now is a little bit better energy around annuities because of a recovering rate environment but we’re not certain we would really attribute it all to rates. It’s a little too early to tell. Our view is if conditions are right to where the value proposition works for us and works for our market, we’ll see as much of it as demanded.

Yeah, Ryan, add to that. We did in the roughly year ago with the rates 100 basis points or so lower, we did reduce commissions on some annuity products as well as we pulled some annuity products. We’ve been able to reinstitute or restore some of those now so that is definitely contributing to the pickup in sales. But we’ve maintained our pricing discipline throughout and to what Fred mentioned, I mean, we’re market focused as opposed to product focused but with the 10-year in the 250 range does make it somewhat more attractive relatively speaking to a year ago which that’s our year-over-year comparison is what are we selling compared to a year ago, it is somewhat more attractive and easier to sell annuities to meet customer’s needs.

Yeah, and this is Scott, Ryan. Just one last comment on that. To Fred’s point of we do, as far as capital required, because sales were kind of very much depressed last year and the year prior, and as rates come back, we’re starting to see that soften a little bit and as Ed mentioned, we reinstituted some changes that we had previously made. It’s natural that that would require a little bit more capital.

Yeah, and this is a good example of why maintaining a level of excess capital is helpful because we have been in this position before as a company. I don’t want to call Scott up and add up in Scott’s direct reports and say, “A little bit less of this product; a little bit more of this product because we’re capital constrained,” particularly when we believe the all-in IRRs and VNB [ph] of the product are very attractive. So, we’re not in that position which is a position we want to maintain. One thing, Ryan, I’d mention to you the undiscounted NOLs travelling in north of $800 million, that’s of course before this most recent release of valuation allowance. It’s up more $970 million. But having said that, I think many of you as analyst have somewhat ignored if you will the more conservative or restrictive GAAP methodology and you’ve made your own assessment of what you think we could utilize and that where it becomes difficult for me to give you a number. Ryan Krueger – Dowling & Partners: Understood. Thanks a lot guys for all the responses.

Yeah.

And at this time, there are no audio questions.

All right. Thank you, operator, and thank you everyone for your interest and support in CNO.

This concludes today’s conference call. You may now disconnect.