CNO Financial Group, Inc. 5.125

Thank you, operator. Good morning and thank you for joining us on CNO Financial Group’s first quarter 2012 earnings conference call.

Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Operating Officer and President of Bankers Life; Fred Crawford, our Chief Financial Officer; and Eric Johnson, our Chief Investment Officer. Following the presentation, we will also have several other business leaders available for the question-and-answer period.

During this conference call, we’ll 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 on the investor section of our website and was filed in a Form 8-K this morning. We do expect to file our first quarter 2012 Form 10-K and post it on our website on or before May, 04.

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 does contain a number of non-GAAP measures, which should not be considered as a substitute for the most directly comparable GAAP measures. You will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix to the presentation.

Effective January 1, 2012, we adopted accounting standard ASU 2010-26 which modified the definition of the types of acquisition costs that can be deferred by insurance companies.

We elected to adopt the new guidance on a retrospective basis and accordingly all prior periods presented have been retrospectively adjusted. The new guidance impacts the timing of recognition of our profits on our business that has no impact on cash flow, statutory financial results or the ultimate profitability of the business.

Throughout the presentation, we’ll be making performance comparisons and unless otherwise specified any comparisons made will be referring to changes between the first quarter of 2011 as restated for the pronouncement and first quarter of 2012.

And with that I’d like to turn the call over to our Chief Executive Officer, Ed Bonach. Ed?

Thanks, Scott and good morning. CNO’s core businesses continued to perform well during the first quarter and our investments and distribution in business growth are yielding solid sales and earnings.

We reported first quarter net income of $59.1 million or $0.21 per diluted share. Sales were up 12% from the prior year primarily due to increases in the number of agents and investments in lead generation.

We continue to generate significant amounts of excess capital and our key measures of financial strength and credit profile also continued to improve.

During the quarter we continued our share buybacks and also prepared the remaining balance on the Senior Health Note. This early prepayment in full removes the restriction on paying dividends on common stock.

In addition, we saw improvement in our key metrics as risk risk-based capital increased and our debt to capital ratio decreased further during the quarter. Fred will touch on these in more detail later in the presentation.

I’m also pleased to report that as we continue to emphasize and focus on profitable organic growth, our sales in all 3 operating segments where we actively market business for our core segments increased in the first quarter. Scott Perry will touch on the related drivers during the business review of the core segments.

Net operating EPS in the quarter was $0.15 per share which is flat with the prior year. To enhance the understanding of our operating results, slide 7 shows our operating EPS adjusted for several significant items that occurred during this quarter and a year ago.

When excluding these items from reported results, you can more clearly see the underlying strength in earnings drivers of our business.

Slide 8 shows our trailing 4 quarter consolidated operating return on equity which decreased to 5.8%. As Fred will speak to later, the new DAC pronouncement has a negative impact on our earnings and therefore our absolute ROE with each segment impacted differently.

The absolute values that you see on the chart matched the true value of the business that we are putting on the books.

Reporting on both imports and new business profits and providing more granularity on the dynamics of divestment and growing our businesses should lead to a better understanding of the long-term value drivers at CNO. Furthermore, our statutory results free cash flow and excess capital generation provide meaningful insights CNO's enterprise values.

As we have discussed before, our leverage to improve ROE continue to be improving OCB margins layering on profitable new business at a minimum 12% unlevered after tax returns effectively deploying our access capital and continuing to improve efficiencies across the enterprise.

While we have made great progress in growing earnings and as important earnings stability, we have made even more progress in shoring up the balance sheet and delevering. Having now achieved capital ratios consistent with upgrades, we expect continued earnings growth in capital management to contribute more to increasing ROE going forward.

Slide 9 is one that we have shown in the past few quarters. This slide not only illustrates the growth of our franchise based on growth and liabilities of our 3 core segments, but also clearly shows that for OCB, which is primarily closed blocks of business, the liabilities continue to run up.

Turning to slide 10, as I mentioned earlier, our key measures of financial strength continued to improve driven by robust statutory earnings, cash flow generation and effective capital deployment. Again, our consolidated statutory risk-based capital increased by 19 percentage points to 360% from a year ago.

Our unrestricted cash and investments held at the holding company ended the quarter with $172 million and our debt to capital reduced further to 17.1% continuing at the level requiring only $0.50 of debt paydown for each dollar of share repurchase.

I think it’s important to note that all of these metrics continue to be strong, driven by earnings generating considerable excess capital that allows for our continued share repurchase, debt paydowns and investments in our business.

So to recap, our investments in distribution, growth and active management of business in force are yielding solid sales and earnings results. Our financial strength profitability and credit profile continue to improve, as well as our generation of considerable cash flow and excess capital.

We continue the sharp focus on generating free cash flow for reinvestment in our business and returning capital to our shareholders.

Let me pause for a moment and take a bit on continuing to get some of the legacy issues behind us. We recently announced the tentative settlement in the class action litigation, which involves changes implemented in late 2011 to some non-guaranteed elements in certain universal life policies sold by Conseco Life Insurance Company prior to its acquisition by CNO’s predecessor.

Management of changes to non-guaranteed element in accordance with the terms our insurance policies and our insurance regulatory agreements are key components of our ongoing efforts to improve the performance of our Others CNO business segment. Resulting this litigation will remove one of the obstacles to those efforts, while providing impacted in legalized policyholders with additional benefits and options.

Let me now turn it over to Scott Perry, our Chief Operating Officer to cover the results for the 3 segments he oversees. Scott?

Thanks, ED. During the quarter, we continued to make progress in all 3 of our business segments where we are actively selling new business.

At bankers sales are up, our agent force is growing, our long-term care business continues to show predictable and stable performance and our management trainee program is fully operational as we continue to recruit and hire the 2012 class of trainees.

As of March 31st, we have hired 15 trainees and expect to hire an additional 65 this year. As a reminder, each successful trainee will be ready to take over leadership of a banker’s location after on average, spending 3 years learning the banker’s 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 expansion by more than doubling the rate of locations we are able to establish through our normal organic developmental process.

We expect each location will ultimately allow us to recruit, train and develop an average of 15 producing agents. At Washington National, we have successfully expanded our individual and worksite businesses through both sales channels.

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

Sales were up 28% over the prior year.

Moving on to slide 13, at bankers, sales results for the quarter were up 6% overall, compared to 1Q ‘11 driven by increases of 7% in Med Supp, 22% in Life and 27% in short-term care. Annuity sales were down 17% and reflect actions taken by management to ensure that products sold meet our targeted return threshold in the slowed interest rate environment.

During the quarter, sales benefited from the new 4 tiered Med supp product which rolled out in the fourth quarter of 2011 for January 2012, effective date, as well as 2 new Life products, one universal life and one single premium life that were introduced last year and have been received enthusiastically by the field and the marketplace.

Recruiting results were also strong for the quarter. Our overall agent force grew by 11%, fueled by strong recruiting during Q4 ‘11 and this quarter.

Aging contracts were 2% up in Q1 ‘12, and veteran agent retention was up 4% versus the prior year.

I’d like to briefly reiterate some comments I made last quarter about the performance of our long-term care business and the differences in the risk profile of the 3 products that make up this line. It is important to understand that because of the very nature of the Bankers business model, which focuses on the 65 plus middle market, our long-term care sales produce a lower risk profile than that of the rest of the industry.

For instance because we sell to a lower price point, we tend to sell reduced benefit plans to a shorter benefit periods and smaller daily benefits.

We also have no group business. And since 2006, we have implemented 4 rounds of rate increases covering over 50% of all of our in force comprehensive and home healthcare policies.

It is important to note that since we were one of the first companies to actively seek rate increases, we are one of the few companies in the market that has been able to reprice in-force business to levels in line with current new business rates.

Even more significant, over the last 6 years, we’ve seen a dramatic shift in sales away from the comprehensive long-term care products to a lower risk short-term care and home healthcare only coverage. The risk profile for short-term care is considerably lower than a comprehensive product in that the maximum benefit period is 1 year, less than 5% of our total enforce policies have unlimited lifetime benefits.

This product meets an important need in the market offering a lower price point and basic level of benefits and now accounts for 50% of our new long-term care sales. It is important to note that as a result of this mix shift over time today conference long terms care and standalone home healthcare combined represent only 6% of Bankers total net.

Turning to Washington National, sales of our core supplemental health and life product increased by 20% versus 1Q of ‘11.

In independent channel, sales continue to build momentum as we benefit from an increased focus on worksite sales, which has been aided by the deployment of 4 additional wholesalers in the channel. Recruiting in the independent channel was also positively impacted by the additional resources as new producing IMOs increased by 26, or 44% during the quarter.

At PMA, sales were up 21% driven by strong recruiting results, new producing agents increased by 11% and improve cross-selling of life insurance by both the consumer and worksite divisions. As a reminder, at Washington National, both channels, PMA and Washington National independent sell supplemental health and life products direct to the consumer and through the worksite as voluntary benefits.

We’ve seen a continued improvement in the worksite sales environment for these products through both channels.

For the quarter, year-over-year voluntary worksite sales in total were up 24%. Sales at Colonial Penn were up 28% for the quarter driven by robust lead generation was up 11% over 1Q of ‘11.

As I mentioned earlier, over the past several quarters, we have increased our investment in marketing and advertising in order to generate sales growth that will benefit the company over the long-term. Because of the new accounting principles now in place, the investments we make in this segment will no longer be deferrable and as a result, financial results in this segment will fluctuate.

We are off to a strong start in 2012 and are optimistic looking forward. Our strategy is focused on the rapidly growing pre-and post-retiree middle markets that are being fueled by the aging of the Boomer generation.

This market needs the simple, straightforward products that we offer to address the things they are most concerned with, healthcare expenses, outliving their retirement, and providing a legacy for their families.

Our segments are well-positioned to meet these basic needs, whether through career agents, independent agents, at the worksite or direct. And all 3 businesses, the capital deployment initiatives we identified to accelerate organic growth are progressing and ongoing.

Bankers will continue to increase the number of locations and operationalize the manager training program. Both of which will increase our ability to grow our agent force.

This quarter, we also introduced a new critical illness product which has shown promise early on. While we expect sales of annuities to continue to be a challenge in this low interest rate environment, we are encouraged by sales results of our life product and expect this positive momentum to carry forward.

At Washington National, we expect the increased focus and positive momentum in the voluntary worksite market to continue as the additional resources we’ve deployed fully ramp up. We expect the strong recruiting of new IMOs to continue for the remainder of the year with anticipation that we will see recruiting gains in the 20% range.

We are also investing in expanding product availability at Washington National. So far this year, we have added products in 14 states and expect to rollout new product in 20 states by year end.

At Colonial Penn we will continue to invest in new lead generation activity, but recognizing that this is a presidential election year, and that television ad time will be limited and costly we expect that lead base spending will taper off for the rest of the year and especially during the fourth quarter.

As I mentioned last quarter, we are currently filing two 2 products in this segment that will enable us to expand the appeal of our offering by allowing for slightly higher face amounts than our traditional product set. We are still on track for new product launches in the second half of this year, but don’t expect them to have a material sales impact until 2013.

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

Thanks, Scott. Operating earnings for the quarter came in at $40.6 million or $0.15 per diluted share.

As with the rest of the industry, we adopted the new accounting for the treatment of policy acquisition costs, the adoption had a more pronounced impact on Colonial Penn’s results, which I’ll touch on any moment.

Our book value excluding AOCI increased by 11% to $16.20. Our debt-to-capital ratio excluding AOCI came in 17.1% down 120 basis points from a year ago, reflecting our strong earnings and accelerated debt reduction during the quarter.

The consolidated statutory RBC ratio ended the period of 360% driven by statutory operating earnings of $87 million and after paying out $45 million in dividends during the quarter.

Unrestricted cash and investments held by our non-insurance subsidiaries ended the quarter at a healthy $172 million. Capital deployment activities included repurchasing 2.4 million shares of our common stock at a cost of $19 million representing 1% of the outstanding shares as of year-end 2011.

As noted earlier we paid in full the remaining $50 million balance of our senior health notes.

Turning to our segments, there were a number of significant items that impacted the quarter’s results. Reserve redundancies in Bankers Medicare supplement and long-term care lines contributed to positive results.

The $21 million positive EBIT impact in the quarter was divided evenly between the 2 product lines. We also had net favorable items impacting life and annuity margins in our OCB segment of approximately $5 million.

Our corporate segment benefited from favorable investment results mainly trading gains in our more actively managed portfolio held at the holding company and a gain in our Coley investments which together contributed $12 million in EBIT. These items were largely offset by the regulatory settlement running through Bankers and reserves established for litigation settlement impacting our other CNO business segments.

As mentioned during our fourth quarter call, we also recognized approximately $7 million in costs associated with our new Chicago location which ran through the corporate segment. We provided in our press release and in the appendix of today’s slide deck, a reconciliation of significant items by segment for the comparable quarters in order to better see the underlying earnings trends in our business.

If you make these adjustments, year-over-year EBIT grew by 15%, driven primarily by net favorable benefit ratios across our health and LTC business lines and better persistency and spreads in our annuity line, these results having the greatest impact on the Bankers. In addition, we are experiencing the benefits of in-force activities, such as LTC rate actions and addressing non-guaranteed elements in our run-off life business.

Last week we conducted a call on the new DAC accounting. Slide 20 shows the impact of the adoption together with the bifurcation in in-force and new business results during the period.

This summary clearly illustrates how the DAC changed impact in each of our 4 business segments differently.

Bankers EBIT was reduced by about $4 million, a result of growth rates and the additional non deferrable cost incurred for its career agency force. There are many positive economic attributes associated with Bankers career force but unlike a third party platform, where field support is embedded in deferred will commission structures, these costs are fully recognized in banker’s earnings as incurred.

Contrast this with Washington National's EBIT having little impact. While PMA is exclusive to Washington National, this platform together with the Winnick independent estimation model has a more of a third party compensation structure.

Colonial Penn recorded a loss given the investment we’re making in new business and the fact that nearly all of their marketing and advertising costs are not deferral. The impact on the Other CNO business segment reflects the reduction to its DAC balance and obvious absence of investment in new business.

Reporting on both in force and new business profits should lead to a better understanding of the long-term value drivers at CNO over time. Namely in force dynamics and return on our investment in new business.

It’s worth taking a hard look at Colonial Penn as this is the largest swing factor in our reported GAAP results.

Slide 21 polls from our quarterly supplement information and illustrates both the impacts and the seasonality of results that will now be more apparent in this business line. Colonial Penn’s in force block is very profitable, with EBIT of nearly $40 million in 2011 and $7 million in the first quarter.

You can see that our investment in advertising and lead generation tends to be more pronounced in the first and third quarters, a tactical buying decision as we look to maximize the efficiency in our spend.

For 2012, there’s an added wrinkle given that we’re in a presidential election year, and have accelerated our investment earlier in the year to avoid the natural increase in rates as the campaign spend moves into full swing.

As we move forward, it’s clear to me that investors will need to look through the accounting and develop some of the parts analysis when it comes to Colonial Penn, a valuable franchise of CNO.

It’s worth repeating that the adoption had no impact on the economics of our business. In light of the new DAC accounting we expect investors to focus even more attention on the statutory and cash flow dynamics to derive valuation and believe this is a relative strength of CNO.

Slide 22 shows the quarterly statutory operating earnings power of our insurance companies. We had operating earnings of $87 million in the first quarter with roughly a 50-50 split in terms of earnings retained in support of business growth and dividends paid to the holding company.

Importantly, our statutory earnings reflect the majority of significant items in the quarter. Namely favorable reserve development and annuity margins as well as the regulatory settlement and litigation reserves.

We expect 2012 to follow the quarterly capital generation pattern of 2011, absent any of unexpected volatility in returns.

Our consolidated RBC ratio ended the quarter at 360%, a level we expect to maintain throughout the year. As compared to the year-ago period our RBC improved nearly 20 points with total adjusted capital up $128 million and required capital up only $10 million.

Our current capital position remains strong with excess capital over our management targets totaling $122 million. As a holding company excess capital at quarter end that contributed down to the insurance subsidiaries, our consolidated RBC ratio would stand at nearly 375%.

Free cash flow in the period was about $45 million, essentially $64 million of dividends, surplus note interest and administrative contract payments less holding company expenses and debt services.

We were again very tactical in our approach to redeployment, repurchasing 2.4 million shares of stock for $19 million. We reduced outstanding debt by $59 million, the required $0.50 on a dollar reduction in our senior debt facility and early retirement of the Senior Health Note.

And with that, I’ll hand it over to Eric Johnson, who will discuss CNOs investment portfolio. Eric?

Thank you, Fred and good morning. I’m going to start with slide 24.

In the first quarter we earned investment income of $345 million compared to $344 million in the fourth quarter of 2011. Our portfolio earned yield was 5.64% compared to 5.70% in the prior quarter.

Yields and income were positively impacted by low cash balances and a shift into credit. However, book yield was negatively impacted by the impact of market rates on earned yield.

Our new money rate in the quarter was 5.32%. We allocated the bulk of our new money to corporates, RMBS on a slightly elevated allocation TO corporate high yield.

We sustained our practice of actively matching our assets and our liabilities at a line-of-business level. And we continue to be well within our duration matching targets in all lines of business, including long-term care.

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

As slide 26 indicates impairments remained comparatively low. I would attribute this to strong corporate fundamentals in the U.S.

and the abundance of liquidity in most credit markets, further reducing our exposure to leverage less stabilize properties we’ve redeveloped nonperforming loans totaling $21 million during the quarter. This involved a charge of $3.2 million taken to revalue the loans to market value.

In addition, we reduced to investment recoverable amounts a face value $20 million note which our predecessor received in 2002 as part of the sales Conseco variable annuity company. This note is being cashed as part of the subsequent sale of the acquirer.

Onto slide 27, our unrealized gain increased slightly to $1.8 million at quarter end. The spread tightening in those credit markets more than offsetting changes -- during the quarter.

Slide 28 illustrates our overall asset allocation which was substantially unchanged in the quarter. The Main point here is our asset quality remains good, our invested assets were 90% investment grade at quarter end essentially unchanged.

In industrial the relationship of upgrades and downgrades has been -- stayed relatively stable. The financial sector has experienced downgrades due primarily to changes in rating practices affecting international banks and prospectively global travel market intermediaries.

Certain non agency RMBS continue to be step hold to NRSRO downgrades as collateral seasons but it support inherently diminishes in many structures. However, because these securities are rated for statutory capital purchases using a -- the recovery matrix from BlackRock downgrades have not materially impacted our RBC ratio.

Taken as a whole, rate raising actions have not materially impacted our regulatory capital requirements in recent periods. Slide 29 is about investments at our holding company.

There our first priority remains liquidity to support capital management. Funds are invested primarily in principally money market and core plus strategies limited leverage.

We additionally maintain a small allocation to unleveraged equities alternatives.

Add some data points, the amount of unrestricted cash and investments held at March 31 was $172 million. Net interest income for the first quarter was approximately $800,000.

Gain/loss for the quarter was slightly more than $6 million. Total return for the quarter was 4.83%.

Our fixed income allocation returned 1.62% our equity allocation 12.61% and alternatives returned a loss of 40 basis points.

Going on to my last comment and really slide 30. News on the U.S.

economy, labor market and European sovereigns has been mixed and market reaction on balance slightly negative. While the Fed is expected to keep rates low for an extended period the market reflects the diminishing probability of Q3.

Recent equity market performance has demonstrated the possibility of volatility in risky assets. The yield curve and asset curves are each very steep.

Both of this to me point towards satisfactory credit performance up and down liquidity of low new money rates and that’s what we are expecting.

Losing credit for most are unlikely but spreads could tighten somewhat assuming rates stay range bound. We remain in that buyer or credit although we are avoiding high beta.

We still also think mortgages is cheap including parts of the commercial mortgage loan market. We expect to continue to fund at levels consistent with the company’s needs and objectives.

And with that I will turn it back to Ed.

Thanks, Eric. CNO has a compelling value proposition.

We have been growing and have above average growth potential as we are differentiated by our market focus on the senior and middle income markets. This market is both underserved and rapidly expanding with the Baby Boomers turning 65, and we have a substantial competitive advantage because of the way we approach that market with face-to-face sales through Bankers in Washington National and direct-to-consumer sales through Colonial Penn.

As you’ve heard today, our value proposition is driven by earnings, business and distribution growth, import management, a strong capital position, and the consistent generation of a considerable amount of cash flow and excess capital. At the same time, our risk profile benefits from active management, the diversification of our products, plus the markets we serve mostly needing protection products.

So in summary, we are well-positioned to continue to capitalize on our unique market focus and business strengths.

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

I wanted to ask about the Nicholas settlement, the Nicholas case. I guess, in particular to kind of drill down a little bit to understand what the impact is, Ed, in your comments I think you said that the settlement removed a hurdle to NG changes.

But I guess when I read some of the other disclosures, it seemed like CNO may be reducing some of the price actions taken in 2011 and not increasing pricing going forward on this group of value life and value term policies. So I guess is in non-legal way is possible, if you could explain to help us understand kind of what if anything the company gives up on its ability to change pricing around this policy block?

Yes. No.

Randy and I’ll try to do that and also have Fred add to it if necessary. We do believe that this settlement, if approved does confirm our right to change non-guaranteed element of these types of products.

And we think the glass is more than half full in that yes, on one hand, 15% of the contemplated increases in cost of insurance would be rolled back, but the glass being more than half full, that means 85% of those cost of insurance charges would be implemented should this settlement be approved.

And was that -- these changes, were these the changes that gave the company the right to increase pricing in the 21st year of the policy? Was that what happened in 2011?

Or...

Not specifically. That’s one element of these products.

These products have -- there are various durations since they were first issued. And these increases are not focused on any one duration of the policies in that block.

Okay. Fair enough.

And then I guess as far as what you are getting with the $20 million, what all does that encompass? Does that encompass just -- is that the 15% that you are giving back?

Is it kind of other costs and fees? And does that potentially include the inclusion of the U.K.

-- I think you’re trying to get these 2 jurisdictions merged. With the $20 million be kind of a wrap around on both pieces of litigation?

Yes. So, Randy, this is Fred.

Just to answer your question I’ll go kind of in the order of how you asked it, but in terms of the $20 million GAAP reserve that we put up and again it’s important to understand that as we disclose, the judge has taken the settlement talks under consideration, and will be ruling on that going forward, so we need to watch that progress. But the $20 million reserve that we put up is essentially could be bucketed into thirds.

1/3 of that associated with the specific 15% rollback to the increase. 1/3 of that is related to a series of policyholder benefit related activities, both existing policyholders and policyholders that have since elapsed.

And then 1/3 of it is related to attorney fees. And then I would just say other category associated with potential future costs.

In terms of the UKs, what we do from a reserving perspective, and it really is not narrowly identified in these particular cases, it’s what we do in all litigation, is that we establish the reserves and then we watch how these cases trend. And when we see material changes in the development of the case, we’ll then adjust our reserves accordingly.

And so you can assume from that that as we watch the UK’s go forward, we have been, when appropriate, establishing reserves in support of that case and how we see it trending.

Okay.

And maybe just to add to that clarification, Randy, as -- this litigation settlement reserve does encompass both you and Nicholas.

Okay. Great.

And then I guess the bottom line there and I’ll drop back in the queue for the more operating stuff. I mean, this action does not impact -- I think the answer to this is yes, but I just want to make sure, this does not impact your kind of longer-term goals in turning OCB into a profitable business line?

Correct.

I guess, today I wanted to follow up on Randy’s question on the court case or the settlement. The -- if you are rolling back that 15% of the COI increases, has that been recognized as premium?

I mean, is that part of this quarter’s revenue?

When addressing the reserve for the possible settlement, we take into account both the current quarterly’s impact, as well as adjusting -- setting up our reserves -- adjusting our reserves accordingly for when the rollback would be, so past periods as well.

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

What I would -- I think probably the -- there’s a couple ways to answer that. One is, yes, you can assume that embedded in the reserve we established was any impact in this particular quarter.

But also importantly, we have been successfully putting in place NGE increases for a while now. You can see that pattern through our policyholder revenue line.

Yes.

So I’d sort of focus on that as to what has been the cumulative effect of the actions we’ve taken.

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

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

That’s a little bit hard to predict, as we’ve said for quite a while there we do expect there to be some level of volatility but in that particular line item, it will depend on the pace of actions we take, the degree of action we take, the amount of -- in terms of blocks of business we addressed, so it’s very hard to extrapolate, if you will, just specifically the NGE actions to try to create a trend line on it. My suggestion is simply to recognize the last several quarters’ trends in that policyholder revenue, realize that we’re running the books off at about 4% to 5%.

And -- but the go forward prediction of revenues, that is really going to be dependent on actions we take, elect to take or not take.

Yes. As well as, Paul, the choice is that the policyholders, so I think to Fred’s point, we’d encourage you to look more at all in, what’s the EBIT from OCB, because as NGE changes are implemented policyholders generally have other options than just accepting the COI change that they could reduce the amount of coverage, for example.

And so that won’t change the policy income line but it would change the reserves or benefits line as a result. So it’s best to look at the totality of all actions, both by the company as well as by the policyholders and look to the bottom line operating income.

First question is tied to the favorable reserve releases you been seeing at Bankers. I mean, you have been seeing this for several quarters now.

So I wanted to see if you could talk a bit more about sort of what’s driving this trend and how sustainable it could be going forward?

Sure, Chris. It’s Fred.

A couple things just to sort of frame the discussion. First, on Bankers med sup, we reported benefit ratio of about 64%, a little north of 64%.

If you normalize for the redundancy in the period that would come out at just shy of 71%. Last year’s average benefit ratio in this line of business was about 69%.

So the effect of the redundancy is normalizing you back, if you will, to a slightly elevated loss ratio relative to last year’s favorable experience on average. But when it comes to the redundancy itself, really, that’s driven by a couple of things.

When we establish the reserves on the business involved in the blocks that we took the claims reserved down in, we established the loss ratio targets with an understanding that the rate increases we were putting in across these blocks were less than what have been historically put in place. We thought that would naturally lead to a tick up in loss ratios.

The second thing is we’ve had a practice for quite a while now of while these rate increases are coming through and when selling med sup through Bankers, we will offer typically the more preferred risk, the opportunity to move into Colonial Penn designed products. This is requiring a fully underwritten process in order to qualify for that product.

But in doing so, we naturally suspected that that would take up the Bankers loss ratios due to adverse selection that are higher quality risk if you will would take us up on that offer and look to that product. Reflecting on both of those expectations, we simply have not seen that come through in our results.

And so because of that because of analysis on it, we’ve been taking down the reserves periodically and here we are once again in the first quarter. So that’s really the driver on the Med Supp side.

Okay. That’s helpful.

And then next question just on capital, management if we think about the potential capital management catalyst in 2012, I think looking back last year you announced the initial $100 million authorization for buybacks on May 16, so should we be thinking about a similar timeframe again when we think about potential dividend implementation?

Chris, this is Ed. I would say no, not necessarily given that, that was our original $100 million.

The board did authorize an additional $100 million, so we had $200 million gross outstanding, of which we’ve got approximately 1/2 of that still available to us. So given that we’re just at the beginning of May, I don’t see we’re necessarily there would be another share buyback authorization in May or in the next few months, given again the amount of outstanding authorization we still have.

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

Sorry. Ed, I had mentioned a shareholder dividend in May.

Is that -- is that something that we should be thinking about? I understand unlikely to see an upsized buyback here in the next few weeks but how are you thinking about the dividend?

Well, ultimately, Chris, we don’t want to preempt any discussion or analysis or consideration of our board. And so that’s really a board decision to make.

I think our important comments are that with the payoff of senior health note we’re now in a position, our board is in a position to give consideration to dividend going forward, but that’s really their call to contemplate.

Just one follow-up on the Nicholas case. You mentioned you still expect to be able to get the targeted rates in the OCB block over time but I guess, are there any implications for how you will go about repricing the other blocks?

And are there any implications in terms of the timing? Would it slowdown the process at all?

Eric, this is Ed. The short answer is no.

And I refer you back to the regulatory agreement that we had, we struck in 2010 which started in 2008, as we began the process of pursuing non-guaranteed element changes, and in this, we reached agreement with most of the regulators that sign onto this on our process, which in essence codified our contractual right to pursue these changes. So that’s what we’ve been operating on since 2010, and see that continuing.

Okay. So you don’t see any risk sort of additional, sort of legal hurdles that weren’t anticipated at that point?

I’ll say again, short answer, no. But as we have discussed in prior calls, all along we believe an expected with this process that there would be some legal challenges.

That’s why we’ve put a very deliberate approach to reviewing our experience, the contractual language and related materials, working under this process, that again was codified by the regulators to pursue these changes. And so in that, all I can say that of the non-guaranteed element changes that we’ve implemented today, that the majority have not had any litigation associated with them to this point at least.

That’s helpful. And then just one question for Bankers.

You went through kind of what was driving the med sup reserve releases. But can you talk a little about what’s been driving them on the long-term care line?

Sure, it’s Fred. On the long-term care side, there was in fact reserve redundancy also, but the pure redundancy, that is, the claims experienced relative to what we had reserved for as a relatively minor piece of the benefits in the period, more in the $4 million-ish range.

The majority of the adjustment another $6 million to $7 million is really related to higher lapse experience on particularly some of the older inflation rated or inflation protected products. It’s not uncommon to find a level of shock lapse when you are putting forward rate increases.

We have put these increases across a broader array of products this particular round and in some cases we’re on the second round of rate increases for particularly a particular set of policies. We think that together with potentially some of the economic issues taking place in our target market is just resulting in higher than expected lapse rates.

So when those policies lapse, you have the related reserve release and that caused a pop, if you will, in the earnings. But we wouldn’t expect that to repeat at this magnitude, which is why we isolated it.

At Colonial Penn, you discussed front-end loaded advertising. Should we expect another strong sales quarter as we go into the second quarter?

And then taper off as the year progresses? Or how should we think about that?

I’ll start the answer on that, Ryan. This is Ed.

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

That’s all said, I don’t -- we don’t foresee any significant change in the pattern of that spending. If you look at the last 4 quarters, with the small caveat that we are, as was noted, in our remarks, the presidential election will impact, most likely, some of the ad buying as we get into the third and fourth quarters, because the effectiveness of advertising in that time is somewhat less.

Okay. Very helpful.

And then just back to the target NGE increases in the OCB, can you just give us some sense for how far along in the process you are overall, maybe some type of percentage, I am not sure if you are 10% of the rate through or 25% of the way through. Just trying to get some sense there?

Yes. It’s really honestly not the way to look at it.

We don’t think of this as something in terms of percentages or number of policies or what we have behind us, what we have in front of us. Really, this is a process of looking at asset accuracy and cash flow testing results and certain blocks, where action is needed and most importantly allowed for after a careful vetting of the nature of the policies and a defensible position to be able to address non guaranteed elements so it really has less to do with some sort of progression or percentage or amount on or not done and more to do with really what’s emerging out of the blocks of business, where we need to take action and most importantly where we can take action.

Okay. I mean, is it fair to say that to date, you’ve only had a fairly modest benefit from these actions?

Modest what, Ryan, sorry?

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

I guess that depends on how you want to define modest. I think as you compare our 2011 results in the OCB to 2010, there was over a $30 million EBIT improvement year-over-year.

Not to say that ‘12 will give the same dollar amount of improvement, but we believe we can continue to improve on 2011’s results as we go forward.

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

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

The first side of it is the aspect where I mentioned and where we’ve been over the last couple of years I think fairly actively pruning away at the -- that what was a higher data quotient of that portfolio. That work is not completely done, but is substantially done.

Although as time and experience rolls forward, that’s not to say that there might not be some additional actions that would we take but -- I think the greatest substance of it would be behind us. And in fact if you look at the trailing volume of actions, you would see that that amount of actions has decreased over the last couple quarters.

Now, the other side of that is that I think the portfolio we have today is a very good one, though not as big as I would like it to be. It’s about roughly 6.5% of assets, which I think is slightly on a low side, because for the most part, this is a segment that offers fairly good and stable cash flow and yields performance.

And a little less volatility than additional fixed income, public fixed income factors and also more duration in some respects. So there’s a certain amount of bifurcation in the market today where truly a quality properties and [audio gap] at yields that contribute and in part by Fannie and Freddie get to yields were they don’t really deal with them for us.

I mean when you get into the high threes and fours, you know getting enough to the [indiscernible] though we have to be not wholesale but selective in terms of wanting to aggressively compete for properties like that but knowing where to say no. Because we just don’t want to buy stuff at 3.5% or 3.25%, which is where you have to go for some multifamily properties out there.

So we’re not doing that, so we have to be -- although we love to wave and they lot of that we have to be smart about it and selective and maybe go for a longer duration or a little smaller property than some other people. And overtime, work toward a higher allocation.

But doing it in a way that supports the company. In a different dynamic, if maybe we had access to institutional or get money where you can do stuff on a pure spread basis you can do the 3.5, 3 and 3.25 type yield property and match up against spread loan and market and be done with it, we don’t have that opportunity so we’re funding it against general account reserves, and that requires a different field characteristic.

So that’s a long-winded way of saying we have to -- and we are working very hard to build the allocation up but it’s not going to happen overnight, and I think that net, net, you’ll see that number begin to increase off of what I hope is kind of the low point and get it back up a point or to a year or 2 at a time. I think that’s what’s real, and that shouldn’t do too much violence to our RBC requirement, and the yields we need.

And, then Ed, I think you made a comment in your prepared remarks around the bulk of the deleveraging to achieve higher ratings being done. So can you maybe just talk about conversations you’re having with the rating agencies?

Yes. We -- hopefully not surprisingly so, talk to them on a regular basis and at least quarterly, give them updates on our results including statutory and related cash flows.

They have their processes of review. We are coming up on annual reviews that are more extensive with the major rating agencies.

And we continue to believe that if we stay focused as we have been on running our business as well that the ratings will eventually catch up and follow.

This is a quick one and I don’t think this was covered, but on a core basis, the benefit ratio’s really across the board in Bankers Washington National Colonial Penn, was a little bit higher than we were forecasting. And I know that first quarter can be kind of seasonally higher for mortality.

So just wondering if there was any kind of unusual impact from mortality in the quarter and just kind of wanted to confirm the seasonality pattern on earnings for the 4 quarters of the year?

Yes. Randy, it’s Fred.

In terms of Washington National, focusing predominantly on supplemental health business, which is the majority of the driver there, we ended up with a benefit ratio of 55% what was adjusted. That’s above the average for last year for example around 51% but I’d note that we had at least a couple quarters last year where we were touching 54%.

So we did not normalize out anything in those benefit ratios. We review that as sort of the normal fluctuation within the range.

But that gives you maybe a little bit better perspective.

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

And just to confirm, the business mix isn’t changing that much but the heavier mortality quarters are the first and the fourth, right?

Generally, yes.

I wanted to see if we could get an update on your ROE expectations. I think last quarter you talked about a target of 8% by the end of ‘13 and 9% by the end of ‘14.

Is this still what you’re shooting for? Or is anything changed on these goals?

Nothing materially is changed, Paul. That said, those goals which we’ve been talking about for some time were based on the prior GAAP accounting.

We’ve definitely in our annual and strategic planning that we’ll be commencing here midyear will re-review those with the new accounting as well as our expected growth rates, which will obviously negatively impact current period earnings the faster we grow.

In general, what should hold is that Delta in terms of the build in ROE, and we’ll continue to work to provide more color on where we see those stair steps taking place in ROE, but they are largely what we’ve talked about, continued active management of in force. The repricing of our products and selling those products in the marketplace generating better returns.

Now you’re going to have a little bit of a different effect where the business sold in the current year is going to have a near-term effect on your financials, but as that transitions into in force, we see that builds steadily. And then capital management.

And as Ed mentioned, we’re right in and around where we would want to be from an optimal capital structure. There is some force delivering that takes place just scheduled principal payments and the $0.50 on the dollar requirement as we buy back stock.

But generally speaking, we’re where we want to be and in fact, arguably were on the lower end of the leverage range of loan currently the peer group and very much so in terms of our rating. So we’ll start to see that capital redeployment be more and more of a contributor as we go forward.

Okay. And then just on that point about capital deployment, is it mostly going to be deploying free cash flow and more of that going towards buybacks versus debt?

Or are you going to look at further drawing down hold co. excess capital as well?

Well, I mean, essentially our target, we target $100 million at the hold co. When we haven’t a build of liquidity as we did for example at year end you’ll see some spend down as part of redeploying capital.

So for example I believe we spent down around $30 million of holding company excess capital in the quarter as in addition to the normal free cash flow as part of their redeployment in the period. As we go forward, I think it’s important to note that we’re going to look at the highest and best use of that excess capital.

And at the moment reflecting on our strategy, it’s largely around paying down high coupon debt to create an environment where we have greater financial flexibility going forward and an ability to recast our capital structure at lower cost of capital and then buying back stock. Our board is now able to contemplate a dividend should they choose.

So then we will look for opportunities to continue to support and grow our business, build the business, which we see real good momentum there. So it’s still going to be assessing all the options for that capital.

And it would be a combination of -- if we built excess capital at the holding company over and above our targets we'll put that work. But I think the vast majority is really generating good core cash flows out of our insurance operations.

Okay. And then with respect to your comments on debt leverage, would the first step be refinancing the senior credit agreement in terms of doing anything on the debt side of the capital structure?

And have you started looking at that or considering that as an option?

Yes. I mean, you can assume that we are constantly putting our capital structure up against the marketplace to see whether or not it would make sense to do something.

But at the moment, our view would be -- the answer to your question is yes, yes and the fact that you’d be naturally focused in on that senior credit facility really just because there are practical restrictions in timing associated with doing something on the other debt that would be repayment related penalties and so forth that make it less economic at this point in time to address it. But the biggest issue is that we’ve got some real ratings momentum as a company.

And those of you who follow the high yield market would probably take note of the fact that there is very big difference in the marketplace between a double B senior debt player and single B. And as a result we want to be very tactical and opportunistic in terms of when the best time is to look for advantages and recasting our capital structure.

We also want to be in very good position when we contemplate going to market. By that I mean not only have an optimal ratings but also being on the debt level that provides us a great deal of flexibility.

So that’s essentially tactically what you see us doing. Continue to position for ratings upgrades, realizing there’s a real inflection point in the marketplace should we be upgraded, and then continuing to step down our debt such that we have lots of options when it comes to recasting.

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