CNO Financial Group, Inc. (CNO) Q4 2013 Earnings Report, Transcript and Summary

Good morning, my name is Teresa and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year End Results for 2013. 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.

Thank you. Good morning and thank you for joining us on CNO Financial Group’s fourth 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 also have several other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday’s press release. You can obtain the release by visiting the media section of our website at www.cnoinc.com. This morning’s presentation is also available in the Investors Section of our website and was filed on a Form 8-K earlier today. We expect to file our 2013 Form 10-K and post it on our website by February 24th. Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today’s presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures. You’ll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the Appendix. Throughout this presentation, we will be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2012 and fourth quarter 2013.And with that, I’ll turn the call over to Ed.

Thanks, Erik. Good morning everyone. CNO posted another strong quarter and our businesses continue to perform well as we delivered growth in sales, collected premiums and earnings. As we have discussed in the past, we have been making significant investments in our various business platforms over the past several quarters and those investments are yielding results. Consolidated sales were up 8% in the quarter and 6% for the whole year. We continue to return capital to shareholders and repurchased $31 million of stock in the quarter. During the quarter we also paid $6.6 million in common stock dividends. Our solid performance and ongoing financial strength continued to be recognized by the rating agencies. In last week, we were placed on review for upgrade by Moody’s. We look forward to continuing our dialogue with the rating agencies and are optimistic that our positive momentum will continue. Lastly as detailed in yesterday’s press release, I am pleased to report that we have entered into a reinsurance transaction which will seed our closed block long-term care business to Beechwood Re. We will provide more details on this later in the presentation. Turning to slide 6, as I previously mentioned, we have been investing in our business platform to enhance growth and we are pleased with the results that we have seen across a number of different measures. Sales increased by 5% in 2012 and 6% in 2013. Collected premiums in our core business segments excluding annuities increased by 3% in both 2012 and 2013. Lastly, despite a prolonged period of low interest rate, we have been able to grow our annuity business. Annuity assets under management increased by 4% in 2012 and 1% last year with increases in indexed annuities partially offset by declines in fixed annuities driven by low market interest rates.…

Thank you; Ed. Bankers Life results were again positive in the quarter. Total sales were up 7% driven by continued strength in health sales, which were up 6% overall. This increase was driven by Medicare Supplement, which was up 10% and was partially offset by lower long term care sales, which were down 5%. Medicare Advantage sales which are not reported as now but provide us with recurring fee income experienced considerable growth during the period as well. On a policies issued basis, Medicare Advantage was up 53% over the prior year. Life sales were up 5% and we continue to see growth in annuities which were up 11% in the quarter. Our overall sales continue to benefit from an increase in our agent force and our branch expansion initiatives. This continued positive momentum in sales resulted in collected premium growth of 6% propelled by growth in nearly every product line. And as I mentioned last quarter is especially impressive given the continued decline in long term care and the decline in Coventry PDP quota-share premium as that program has converted to a fee only arrangement. Adjusted for these two decreases, Bankers premium growth was 9%. Washington National had an exceptional fourth quarter sales were up 15% and both of our sales channels recorded double growth. PMA sales were up 13% and our independent partners channel was up 24%. Voluntary worksite sales were up 29% in the quarter and benefited from increased group enrolments. Sales growth in continued strength and persistency contributed to collected premium growth of 8% over the prior year. Growth in our PMA agent force was also strong with producing agents up 10%. Moving on to Colonial Penn, sales were up 3%, this was the lower expectations as we experienced a challenging television advertising environment during the…

Thanks Scott. CNO recorded another strong quarter on the earnings and capital front. If you adjust for the significant items in the quarter, we recorded operating earnings of $0.31 per share. This quarter’s significant items included favorable development of prior period loss reserves in our Bankers, Medicare Supplement business offset somewhat by reserves established for certain remediation efforts also impacting the Bankers segment. OCB recorded a one-time reinsurance settlement related to legacy life insurance policies. Overall, margins performed as expected in the quarter and consistent with what we highlighted during our December outlook call. We completed our loss recognition testing as well as preliminary cash flow testing with no significant adjustments. I will cover this in more detail in a few minutes. Core capital ratios and holding company liquidity strengthened. We repurchased $31 million of common stock in the fourth quarter, coming in a bit lower than our normal quarterly pace but consistent with our tactical approach and our annual guidance. As indicated during our outlook call, there were several positive tax developments impacting net income which I will touch on in a moment. Finally, we took an important initial step in addressing our run-off businesses, executing on one of our more complex blocks. Let’s then turn to slide 15 to go into greater detail on the OCB long-term care transaction. To be clear, the transaction involves only our close block LTC reserves reported as part of our OCB segment and does not involve our Bankers long term care business. The 100% coinsurance agreements moved roughly $550 million of statutory long-term care reserves off the balance sheets of two CNO legal entities. About two-thirds of the reserves came out of our Washington National legal entity domiciled in Indiana and the remaining from our smaller New York legal entity. The reinsurance…

Thanks Fred. Some might say we have a gold medal year in 2013. We finished the year strong and see significant opportunity ahead in 2014. The closed-block long-term care reinsurance transaction paves the way for us to further accelerate the run-off of our OCB closed-block business. As I’ve said in the past, the combination and alignment of exclusive distribution, a suite of products that served the needs of our target underserved middle markets and the back-office that is aligned with serving the needs of our customers and agents provides us with sustainable competitive advantage. We will continue to invest in initiatives that will increase the reach and productivity of our agency force and in initiatives that will drive increased back-office efficiency while improving the customer experience. We feel these investments will enable us to continue to achieve sales growth that is above the industry average. Our balanced approach to deploying excess capital over the past couple of years has been successful. Since 2011 we have repurchased $845 million of common stocks and equivalent. We have initiated a common stock dividend in 2012, and increased it in 2013. At the same time you paid down a significant amount of debt and leverage now stands slightly below 17%. We have built capital in our insurance companies to support growth and drive RBC to over 400%. And we have increased liquidity at the holding company to more than $300 million. We believe that our business model, risk profile and financial metrics are consistent with investment-grade ratings. We continue to believe that there is substantial shareholder value to be unlocked by building book value and return on equity while further lowering the beta in our business. We took another important step yesterday when we announced our long-term care reinsurance transaction but we believe that there are additional levers that we can execute on to unlock additional value. We are optimistic that we can execute an additional transaction to further accelerate OCB run-off, continue profitable growth, leveraging our valuable tax assets, optimize our capital structure and deploy excess capital. And now will open it up for questions; operator?

[Operator Instructions]. Your first question comes from the line of Erik Bass.

It's for the long-term care transaction, can you talk a little bit about the tradeoff between the reduction in GAAP equity and the increase in ROE and potential risk reduction benefits. As you explore potential future transactions within OCB, how do you weigh those different factors? Citi: It's for the long-term care transaction, can you talk a little bit about the tradeoff between the reduction in GAAP equity and the increase in ROE and potential risk reduction benefits. As you explore potential future transactions within OCB, how do you weigh those different factors?

Yes Erik, thanks for the question, this is Ed, I’ll start off, on the OCB-LTC we really looked at it from the standpoint of our risk profile and here we’d done a lot of work to stabilize and reduce volatility in this block, but it was more the fact that we are reducing our exposure to closed blocks and LTC, without sacrificing on financial terms.

I mean the -- Erik as you know from following us and we’ve said this before we are at the core economic driven and so we pay very careful attention to the GAAP outcomes of the transactions we look at but at the end of the day we’re trying to drive IRR, particularly if there’s going to be a use of capital involved in the transaction which was the case here. So what’s important to focus on is that, this is a business that from a long-term care perspective while it’s stable and a bit more predictable because of its age and then I think that lent a lot to being able to do a transaction, it’s also a business that runs an interest adjusted benefit ratio in the 120% to 140% range from quarter-to-quarter. It’s a business that’s in a negative statutory earnings position and therefore you naturally will upraise it out to contributing some level of capital as part of transferring the business. And so we looked at it from, a sort of a traditional capital deployed payback period IRR to make sure that it was at least falling in line with what our expectations are for use of capital and it does, but very importantly and arguably more importantly as Ed’s comments, that overall it has to do with us making moves that make sense to lower our exposures, in this case long-term care exposure, but also with it interest rate risk exposure as well as just pure asset leverage. We have an asset leverage on run-off non-strategic blocks of business. We have to invest those assets in a way that generates returns to support the liability so by definition you need to go somewhat out on the credit curve to support the business like any other insurance business. But the fact that this is in run-off and non-strategic means that when credit cycles return and which they will, it’s particularly painful when it’s on something you’re running off that’s less strategic and top of that carries long-term care volatility potentially. So for us it’s been priced appropriately for both sides, for our side it’s been priced appropriately to be attractive for Beechwood as well, but for us it’s a lot around risk management.

Great, thank you, that’s very helpful color, and can you quantify maybe the difference between the stat and GAAP reserves for the remaining blocks within OCB? Citi: Great, thank you, that’s very helpful color, and can you quantify maybe the difference between the stat and GAAP reserves for the remaining blocks within OCB?

Not off the top of my head, I would say this, that generally we have -- there’s not a tremendous amount of difference but there is a difference the primary difference would be the best estimate based reserving on a GAAP basis which would generally lead to a lower level of reserves if you will as compared to a more standardized and required typical reserving standards on statutory, so that’s one difference, so in the long-term care block that’s a good example as to why you see lower GAAP reserves than you would see the transferred reserves in the transaction, difference between best estimate reserves and standard approaches to statutory reserving. The other component would typically be things like DAC and PVP but in this particular case most of these run off blocks have less in the way of those types of assets, have either been written down previously or taken care of. So we’ve tended to talk about this as having generally around $5 billion of total reserves in OCB of which this was around $550 million of it. So that gives you some idea of the reserve levels.

Perfect, and if I could just sneak in one last question, I mean if the capacity were available would you consider reinsuring a portion of the older bankers’ LTC block? Citi: Perfect, and if I could just sneak in one last question, I mean if the capacity were available would you consider reinsuring a portion of the older bankers’ LTC block?

You know, our general rule of thumb is, if there is an economic benefit to the Company to look at that kind of a solution on a risk adjusted basis, we would, like I think any company entertain it. What I would say about this deal, I think there’s the notion that this may be perhaps a watershed transaction right that could lead to further long-term care closed block reinsurance transactions. And I think that would be a bit of a jump from my view and the reason I say that is because this is an older block in run-off with relative stability around the variables that tend to push long-term care performance up and down, and so the age of the block, the stability of it, the age of the actual policyholders themselves, a number of things that causes a more narrow spray of outcomes if you will on core assumptions that bake into the valuation. The other thing I would say about this block is, in order to do a reinsurance transaction it starts with are you properly reserved on a conservative basis otherwise the bit ask is going to be dramatically different between a prospective buyer and a prospective seller. And so to me this speaks very well for our Company’s reserving practices and the attention we pay to managing these blocks of business, that you could actually even reach agreement with another party who has been listed third-party actuaries to look over the shoulder of the transaction. So this block had unique characteristics that made it doable it’s also small, so for us that made a difference because we could structure a deal without outsized counterparty risk to manage. For the reinsurer in this case, they could move into a line of business and work it and explore it without taking undue risk by taking on a big block. So I think there is some unique natures with this block but we’ll see should it be successful it may open a door for looking at other opportunities as an industry.

Great, very helpful. Thank you. Citi: Great, very helpful. Thank you.

And your next question comes from the line Randy Binner.

Great, Thank you. Good morning. I wanted to ask couple of questions related to kind of the capital and how the ratings outlook is looking and so first, just on the RBC ratio the one -- first question is on the meef or how commercial mortgage factors in, could you quantify how much that supported the RBC ratio this quarter? And then the next question is when Moody’s put out their CreditWatch positive they identified it for 320% for an upgrade in RBC which seems low relative to the number that you reported and so can you help us kind of maybe compare how their RBC maybe different than then one that you report? And then I have a follow-up. Friedman, Billings, Ramsey: Great, Thank you. Good morning. I wanted to ask couple of questions related to kind of the capital and how the ratings outlook is looking and so first, just on the RBC ratio the one -- first question is on the meef or how commercial mortgage factors in, could you quantify how much that supported the RBC ratio this quarter? And then the next question is when Moody’s put out their CreditWatch positive they identified it for 320% for an upgrade in RBC which seems low relative to the number that you reported and so can you help us kind of maybe compare how their RBC maybe different than then one that you report? And then I have a follow-up.

Yes, so a couple of things. One, the actual decrease in our required capital associated with the new mortgage methodology was just shy of 7 million of RBC decline. That equates to about 6 points of benefit in the RBC ratio this quarter. So that’s sequential. It’s been a more sizable benefit over the course of the year. I would say it’s probably over the course of the year approached nearly high-teens or so of reduction in required capital all told. So it’s been a clear contributor but of course hasn’t been the only contributor. In terms of your question about how to interpret a Moody’s definition of risk-based capital, first of all Moody’s pays very close attention to our consolidated risk-based capital and they like any rating agency factor that in and like to see the progress in it. They don’t believe it to be a non-calculation. But what Moody’s does do as do I believe the other rating agencies is they try to bust it down into looking at what the ratio might look like without consolidation benefits, meaning as you may know or many of you may know, if you consolidate various legal entities, you will pick natural covariance benefits in the calculation of RBC. Those covariance benefits contribute to us generating 410 RBC. It moves around a bit but it’s generally the case that we generate upwards of 50 points of RBC related to covariance benefits. So if you are a Moody’s or another rating agency that wants the back out that benefit, you’d back off those 50 percentage points. Now, we don’t think this is some sort of artful engineering that we’re doing on covariance benefits, we haven’t made this formula up, we follow very strict practices as to how in fact covariance benefit works if you were to jam together the assets and liabilities of these various legal entities. And so from our perspective, we’re reporting apples-to-apples with the industry when looking at other companies that have more large singular legal entities and are afford of these covariance benefits. The one other caveat I would say is the agencies also look at individual company RBCs as well and not surprisingly they pay a little bit of careful attention to bankers. The bankers RBC ratio came in this quarter at 382% but they watch that because as you all know bankers, the legal entity, generates a good portion of the cash flow capital generation of the company.

Randy, I would just add that, that consolidation covariance benefit and the way we calculate it is also recognized in the capital markets and as part of our credit and debt structure.

Well, great. So that’s good kind of segue to the second part of my question because obviously where the covariance is real and so if they chose not to look at it that’s fine, but it’s a situation here from a capital perspective where your debt-to-capital is going to keep low going down throughout the year to almost an inefficient level and it’s three notches from Moody’s and two for S&P to get to investment-grade, and so I guess I’d be interested in any thoughts you have on the ability of the Company to recap as a high below investment-grade issuer with almost investment-grade issuer terms, or if it really is a technicality that you at least have to be split rated investment-grade, below investment-grade to be able to do a recap? Friedman, Billings, Ramsey: Well, great. So that’s good kind of segue to the second part of my question because obviously where the covariance is real and so if they chose not to look at it that’s fine, but it’s a situation here from a capital perspective where your debt-to-capital is going to keep low going down throughout the year to almost an inefficient level and it’s three notches from Moody’s and two for S&P to get to investment-grade, and so I guess I’d be interested in any thoughts you have on the ability of the Company to recap as a high below investment-grade issuer with almost investment-grade issuer terms, or if it really is a technicality that you at least have to be split rated investment-grade, below investment-grade to be able to do a recap?

Yes I mean it’s a good question. I’ll give you my perspective on it, Randy. And that is that, the bond markets have a nice ability to within reason pierce through the actual ratings of the company to assess the credit strength of the underlying property. We actually saw that in the last recapitalization and even refinancing we did where clearly I think the pricing we received and even to some degree the flexibility in terms were arguably a good notch above what we’re actually reported that because you see of the bond market and the lending market react to our favorable progress. As a result, it’s not just a matter of when we receive investment grade because we will eventually that we’re going to ring some big bell and go-to-market. We’re going to watch things very carefully along the way I am after some very simple things and I mentioned then in my comment. One, I want to see that I have a material benefit to my cost of capital because I know there is a cost associated with recapping the Company and want that cost recovered quickly and want it to lower my permanent cost of capital. So I want to watch that. The second thing is we really would benefit as a Company from greater flexibility in the structure. Things like sweeps and baskets, which actually do come into play when we’re looking at opportunistically deploying capital, are things that we need to adhere to that we’re not really found of. We also have awful lot of just structure. We’re in no risk of breaching covenants. We have substantial roman cushion as you can imagine between covenant structures. But just having a lengthy set of covenants is not a good position to be in, it’s even an optically bad decision to be in because it actually causes in a circular way the rating agencies to look at your financial flexibility as being somehow less flexible. And so with that I’d also like to string out maturities at some degree. It’s not just the matter of the fact that we have to amortize our debt. We also have some limits as to how far out we can go with our debt, so I am constantly having to stare a few years out to a fairly large maturity and I need to be very careful about that. So those are the things I am after. If I can get those types of structural things before I reach the promise land of investment grade then we’ll do what you would expect us to do, we’ll go out the market and make it happen. But right now that’s not quite the case. We still have a bit more work to do. But we’ll keep watching the markets carefully.

I appreciate the commentary. Thanks. Friedman, Billings, Ramsey: I appreciate the commentary. Thanks.

And your next question comes from the line of Christopher Giovanni.

Good morning, thanks so much. I guess question for Ed I know in the past you’ve talked about looking to potentially try and bundle some OCB blocks to accelerate the run off. I’m wondering if that’s still the strategy or if we should think that based on dialogs maybe that approach has changed recognizing LTC certainly was a bit unique, but I guess on a go forward basis? Goldman Sachs: Good morning, thanks so much. I guess question for Ed I know in the past you’ve talked about looking to potentially try and bundle some OCB blocks to accelerate the run off. I’m wondering if that’s still the strategy or if we should think that based on dialogs maybe that approach has changed recognizing LTC certainly was a bit unique, but I guess on a go forward basis?

Yes Chris, I would say similar to Fred’s comments about the next recap, it will be opportunistic and try to optimize value. So if bundling traditional life and interest sensitive life insurance together for example gives us a better economic outcome we’ll entertain that if also including the fixed annuities in the equation helps the economic metrics and outcomes we’ll do that. But the converse is also true if we feel that we can optimize value by more than a bundled transaction. So one or more individual transactions, that’s what we constantly assess as Fred said we’re driven by the IRRs and the shareholder value that’s created out of a transaction or transactions.

Okay. And you noted I mean you have gotten the regulatory approvals. The regulators for a number of other transactions in the space have been very involved as you would expect but in some instances maybe putting additional covenants or restrictions around transactions be it whether it’s a private equity player or even traditional players. Anything you guys are learning as you went through kind of this process with LTC that you need to be mindful of when you think about other pieces of OCB? Goldman Sachs: Okay. And you noted I mean you have gotten the regulatory approvals. The regulators for a number of other transactions in the space have been very involved as you would expect but in some instances maybe putting additional covenants or restrictions around transactions be it whether it’s a private equity player or even traditional players. Anything you guys are learning as you went through kind of this process with LTC that you need to be mindful of when you think about other pieces of OCB?

We actually had a very good experience I would say in total going through the regulatory process on this long-term care transaction. And by that I mean not that there was complete agreement in every line item of the document and not that there was an extensive exchange of information questions and detail required, but rather that it typically benefits you when you are aligned. Meaning CNO has every interest to protect the financial integrity of our New York and our Indiana domiciled legal entities. And so therefore, structured at the get go a transaction that we fully expected to be acceptable through the regulatory process. I also want to also make that same comment about Beechwood Re and the folks on their side they enlisted several different specialists surrounding their team and were quite helpful in working with us together and make it through the regulatory process and answer the call and all the questions. As you can imagine the regulators had as many questions and requests for information around Beechwood Re and their entity as they did on the pro forma’s of this transaction. So A, be prepared and B, make sure you understand the perspective the regulators are coming at when it comes to protecting both policyholders and the legal entity. We did that quite successfully. We, for example, did not come out of this transaction with any sort of mandated requirement or threshold or sort of outside the normal regulatory dynamic request of this transaction. More so, it was really clarifying, fine tuning, getting language and compliance, expanding upon certain elements of the transaction to be more clear as to how it was going to work and so it was a good experience.

Great. And then just two quick ones on LTC, Fred I think you made a statement, you’re still comfortable with kind of that 79% interest adjusted benefit ratio. Just wanted to confirm that, just based on kind of the consistent comments you guys have made around rate actions really starting to slow. And then when you did the margin testing for LTC, you noted certainly higher persistency. Wondering if you can quantify kind of what’s embedded within your assumptions for persistency or lapses? Goldman Sachs: Great. And then just two quick ones on LTC, Fred I think you made a statement, you’re still comfortable with kind of that 79% interest adjusted benefit ratio. Just wanted to confirm that, just based on kind of the consistent comments you guys have made around rate actions really starting to slow. And then when you did the margin testing for LTC, you noted certainly higher persistency. Wondering if you can quantify kind of what’s embedded within your assumptions for persistency or lapses?

Sure, yes we are sticking with our guidance. I think our guidance specifically a 79% range and what we recorded in the fourth quarter is consistent with that. To the degree it was pressured up in terms of being 80%, it is the same sort of pressure that we have been experiencing actually goes to your question somewhat, Chris it’s a same pressure and that as we have seen a slight or gradual tick up in persistency on certain pieces of our business, most notably nursing home inflation and nursing home non-inflation that have pressured our benefit ratios. That’s really been the primary driver of the slow escalation in benefit ratios since last year this time. And we believe it to be certainly in part due to the slowing if you will of rate increases. In terms of our assumptions, the best way to talk to it is the notion of an ultimate lapse rate assumption and we tend to assume just a little north of 1% ultimate lapse rate assumption. You have noted here in the document that we have done a stress test on that. The idea of plus or minus 10% lapse rate adjustment will tend to hover in and around 20 basis points give or take of movement in that lapse rate expectation and that generated the plus or minus $55 million of margin. Now something I would say, I think something that you are typically going to want to do and we perfectly understand that is compare assumptions across the industry right and to try to assess what maybe aggressive and not so aggressive. I think there is a be careful in doing that, whether you are talking about CNO or any other competitor in the marketplace and that is, it may have a lot…

Okay. And the older age of your block, does that influence it as well? Goldman Sachs: Okay. And the older age of your block, does that influence it as well?

If could, it certainly does have different dynamics related to that. So yes it could absolutely. I think -- one of the things I think about with the older age of the policyholders as well as the older age of the blocks themselves is that you just sort of gradually gain a little bit more confidence in what you believe the spray of potential outcomes can be overtime. I think one of the things that can be dangerous or more dangerous certainly by having a younger age population of selling product to, is there is an awful lot of years to play out to your favor and there is an awful lot of years to play out to your detriment, so.

Great. Thanks so much for the comments. Goldman Sachs: Great. Thanks so much for the comments.

And your next question comes from the line of Mark Finkelstein.

Hi good morning. I guess back to the LTC transaction, obviously you went through a pretty thoughtful process in vetting the reinsurer and putting in place your own protections. Obviously the risk there is also -- if things go bad the reserves come back to you. But in thinking through that and I know you in answering Chris’s question talked about 7% over collateralization is being kind of in line with market. But my question is how did you get comfortable at 7% generally was the right number of collateralization? And then secondly, what other forms of due diligence got you comfortable in looking at the balance sheet or the mix of business that’s in Beechwood, I know it’s a new entity on that overall? Evercore Partners: Hi good morning. I guess back to the LTC transaction, obviously you went through a pretty thoughtful process in vetting the reinsurer and putting in place your own protections. Obviously the risk there is also -- if things go bad the reserves come back to you. But in thinking through that and I know you in answering Chris’s question talked about 7% over collateralization is being kind of in line with market. But my question is how did you get comfortable at 7% generally was the right number of collateralization? And then secondly, what other forms of due diligence got you comfortable in looking at the balance sheet or the mix of business that’s in Beechwood, I know it’s a new entity on that overall?

Yes, so a few things out, I’ll paint a picture for you. One is, we of course wanted certain levels of assurance around the type of initial capitalization that would be placed in the vehicle to support our business and any other business that’s written. That’s somewhat of a private matter from our perspective. But I can assure you that those types of questions and exchange of information not only happened with us but also with regulators who are trying to assess the type of capitalization that is expected to be maintained overtime in a way that they can understand best, right? So information there -- so initial level of capitalization; realize that we in this particular case are sending some level of capital over with the actual transaction itself so that ends up being an additional capital infusion naturally as part of the transaction. Third, the over collateralization of 7%; there’s a bit of a mechanical approach to that. Mark, not entirely unlike the kind of mechanics you would see in say CDO technology. And that is what’s the expected level of over collateralization that brings the counterparty risk up to let’s call it conventional A-rated standards. And these deals have been done in the marketplace as you can imagine with unregulated offshore and often times newly formed entities, more so these days than ever before. And so somewhat of a convention has been built up around the level of 102% is not enough, a 115% is too much, what is that right amount of over collateralization to dial in that kind of counterparty risk. Now importantly as you mentioned there’s a few other things to take note of. One, these are market value trusts, and so there is a natural true-up process that takes place every quarter, should there be fallen angels, should asset classes fall out of favor, obviously there is potential for interest rate risk. These market value trusts and the true-up provision helps to assure you a certain level of credit, credit integrity if you will as you go. Obviously 114 trusts in New York and similar styled trusts in Indiana which represents the vast majority of assets involved here already have strict limitations as to what can be put into the trust and what it needs to look like. Then on top of that we have aggregate investment guidelines. And those are simply meant to mere general account, trademarks of great traditional general account asset allocation, it’s just simply to say that we would not be comfortable if this was a transaction that would say levering off of an asset strategy that we thought was aggressive or unique or even potentially less liquid. This is not -- that’s not the goal of Beechwood, that certainly wouldn’t be flying through a regulatory dynamics and so we have all those protections.

I’d add to that Mark that Fred alluded in his comments earlier about the partners that they have brought in advisors and so certainly knowing those advisors and what they have worked on and their credentials played apart as well as, as is typical with reinsurance arrangements. There’s the right that we have to certain information and rights to review and audit. So those typical protections are there as well that helps the overall credit evaluation.

Okay that’s very helpful. On long-term care testing results, the asset adequacy, testing that you did at your end, I understand how it works and that you were able to kind of look at it with Med supp et cetera on an entity basis. Do you have any sense of if you had to look at long-term care standalone, what if any impact there would have been, and if so how much you would have had to add? Evercore Partners: Okay that’s very helpful. On long-term care testing results, the asset adequacy, testing that you did at your end, I understand how it works and that you were able to kind of look at it with Med supp et cetera on an entity basis. Do you have any sense of if you had to look at long-term care standalone, what if any impact there would have been, and if so how much you would have had to add?

On a standalone basis the long-term care business passes the level of scenario for example which arguably as a form of stress scenario, i.e., holding current rates level indefinitely. And so that gives you just on the surface, a level of comfort with the asset adequacy on a standalone basis. However, it is absolutely true that under additional stress tests of the so-called seven interest rate tests that are commonly done for example, that there are in fact some of those tests which would challenge certainly the asset adequacy on a standalone basis; and really then requires if you will, borrowing if you will, or aggregating with the Med supp excess margin to pass all those standard scenarios. So Mark, that’s the way I would characterize it. Now remember when it comes to asset adequacy testing it’s not as simple as pass or fail, add or don’t add. What can happen and commonly happen is that you pass these tests but upon stressing the block you as the appointed actuary would simply feel more comfortable with adding to the reserve levels. As I mentioned in my commentary we certainly have not done that to any great degree, really just marginal movement in our asset adequacy reserves this year. But we wanted to make a point here on this call that, yes, margins improved year-over-year including on long-term care. Yes, we have passed the appropriate scenarios that protect us from both a GAAP hit and statutory adding to capital, but we also want to make the point that under our current assumptions these remains thin margins and this remains a business that we have to watch very carefully, which really is in part the driver of making sure that we have got adequate risk-based capital as a Company.

And I guess just to maybe following-up on that and I understand the level of comfort you get if the rate stay flat, and it operates okay on a standalone basis, and it is a test that has to be looked at objectively from the chief actuary, but if it was looked at on a standalone and you did go through this New York seven, would the increase have been a large number, moderate number? Anyway of framing out like what it would have been. Evercore Partners: And I guess just to maybe following-up on that and I understand the level of comfort you get if the rate stay flat, and it operates okay on a standalone basis, and it is a test that has to be looked at objectively from the chief actuary, but if it was looked at on a standalone and you did go through this New York seven, would the increase have been a large number, moderate number? Anyway of framing out like what it would have been.

I don’t have a way of really describing that for you, I mean I think what you’re asking is if you were to pick up this business, plop it in New York and test it out would have it resulted in kicking up capital. I think that’s kind of a hard one for me to answer right now so I don’t have a good feel what that would look like, Mark and whether or not we would need to add materially to reserves under that scenario.

Okay, my final question is, sorry -- my final question is very quickly is when you look at the rest of OCB now that you’ve gotten rid of, or reinsured the long-term care block, are there any other discrete blocks that generate statutory losses or does everything else generate statutory income? Evercore Partners: Okay, my final question is, sorry -- my final question is very quickly is when you look at the rest of OCB now that you’ve gotten rid of, or reinsured the long-term care block, are there any other discrete blocks that generate statutory losses or does everything else generate statutory income?

It’s a good question, based on what I know of the lines of business now, let’s separate out one thing, there are some very small little health related businesses that can fluctuate and I would suspect move in and out of very minor loss or profit positions depending on the quarter, but those are very tiny sort of slivers. A major business’s traditional life is a business line, interest sensitive life and annuities. Annuities is a ongoing profitable business for us from a run rate perspective other than the natural run off of the business, traditional life is generally a contributor to a level of profitability. And by the way traditional life is something in the 700 million to 800 million worth of reserves, annuities, hovers in around a little north of a $1 billion worth of annuities in total. Interest sensitive life is the big animal, right? That’s about $2.3 billion of reserves. Now interest sensitive life’s a tricky one right, because that’s been a bit all over the map. So for example had it not been taking actions around non-guaranteed elements overtime that would be a business that would be more flat lined and potentially in a loss position but it’s in a marginal profit position. It is also a line of business though where mortality really can move around on that business and so we will move in and out of quarters that are favorable and less favorable, based on mortality. So that gives you some color, I would call interest sensitive life as volatile but intended to be marginally profitable, annuity is profitable, and from a traditional sense, traditional life I think also the same way.

Okay, that’s helpful, thank you. Evercore Partners: Okay, that’s helpful, thank you.

And your next question comes from the line of Humphrey Lee.

Good afternoon, guys, just a quick follow-up on the long-term care insurance transaction. Was Beechwood the only reinsurer in the mix or were there other reinsurers in the mix as well? UBS Securities: Good afternoon, guys, just a quick follow-up on the long-term care insurance transaction. Was Beechwood the only reinsurer in the mix or were there other reinsurers in the mix as well?

There were other parties looking at the transaction overtime, beyond just Beechwood, generally speaking what we found as an experience is that there is and you all maybe seeing this as well in the marketplace, there is in fact, interest in long-term care blocks of business. That interest in my view is basically playing off the annuity-based asset driven interest that has emerged in the marketplace where those same players, these would be, reinsurers that are toggled together with asset managers and have sort of an, a real asset driven strategy that they’re looking to exploit. Those same types of parties that have been doing transactions in the marketplace have found elements of long-term care blocks attractive, not the least of which is very long duration liabilities that could allow for asset strategies that would be beneficial to these parties. So there was a general attraction and actually has been in the marketplace to that kind of dynamic and then what typically happens is they then turn their attention to the liability side, hire up the actuarial firms and start to get very concerned, very quickly, as to how this will really work, not to mention that the administrative dynamics associated with it are quite unique, specialized and require partnering with a very specialized firm that does this for a living every day and in a large way which is the case with Beechwood. That’s exactly what they did as partner with those right firms to gain that level of comfort as Ed mentioned earlier. So we saw multiple parties come in and they spent some time on it and even priced out and offered up but Beechwood Re, they really impressed upon us, one, took a lot more time and energy to really dive deep, and listed in my view more in the way of expertise to dive into the dynamics of not just the asset side but the liability side and the administration side and that level of investigation and detail and partnership was what gave us more confidence and impressed us. So that’s really how this played out, but there were multiple parties that had an interest at least in the block.

The color is helpful, another question, in the prepared remarks Ed talked about with the reissuance flows the long-term care company owing to the -- now management can focus more on the remaining blocks of business and talk about some of the options. Can you comment on some of the options that you’re seeing and also do you require a high interest rates for some of these options to materialize? UBS Securities: The color is helpful, another question, in the prepared remarks Ed talked about with the reissuance flows the long-term care company owing to the -- now management can focus more on the remaining blocks of business and talk about some of the options. Can you comment on some of the options that you’re seeing and also do you require a high interest rates for some of these options to materialize?

Humphrey, the second question, no it’s not necessarily dependent on interest rates and hopefully doing the LTC transaction in the current environment is an example of that. And I think my answer largely is what I said before about how we look at the remaining blocks which are the fixed annuities, traditional life insurance and interest sensitive life. I think that they can be looked at separately and/or bundled two or all three together. I wouldn’t say that the more traditional reinsurers definitely have experience and interest and do transactions with all three of those types of product lines, which is good for us as a potential seller. And the other thing is that Fred just mentioned it is certainly we know on the annuity side, there has been a lot of new entrance in that part of the marketplace and we don’t see that subsiding that’s also good for us in our position of being a potential seller.

Alright. Got it. Thank you. UBS Securities: Alright. Got it. Thank you.

And your next question comes from the line of Ryan Krueger.

Hey I will ask I guess another one on OCB. I don’t think you have said how much statutory capital is backing the remaining liabilities unless I missed it, can you disclose that? Dowling & Partners Securities: Hey I will ask I guess another one on OCB. I don’t think you have said how much statutory capital is backing the remaining liabilities unless I missed it, can you disclose that?

Here is a couple of ways to think about it. One, you have the actual -- here’s a way to think about it, there is a couple legal entities involved, right. So and the two dominant ones now in particular with the deal we have done would be Conseco Life Insurance Company, which is an Indiana domiciled company. That is the legal entity behind the majority of liabilities in OCB. I would suggest you something in the neighborhood 3.5 billion of the 5 billion is housed in some form in Conseco Life Insurance Company. And their total adjusted capital at Conseco Life Insurance Company travels right around $160 million right now. Now, the remaining money let’s take long-term care out of it since we just did a transaction, the remaining tends to be annuity business and it is housed in Washington National Insurance Company predominantly that’s a little bit more difficult for me to sort of bust that down and assess the amount of capital backing that business. I’m not sure I would know even where to guess other than I would suspect it not to be a tremendous amount of business maybe let’s $25 million or so of capital, I’m going to completely speculate. So that’s maybe one way to think about it, Ryan.

Great and that’s helpful. Thanks. And then if I could just ask one more on the cash flow testing results I thought that was really helpful, just on the -- how should I think about sensitivity to mortality versus morbidity and I’m just I guess I asked because I understand you it sounds like you haven’t had much morbidity improvement of late, but I guess it sounds like you are also not assuming any improved mortality and I was just trying to think about how those two differ from each other in sensitivities? Dowling & Partners Securities: Great and that’s helpful. Thanks. And then if I could just ask one more on the cash flow testing results I thought that was really helpful, just on the -- how should I think about sensitivity to mortality versus morbidity and I’m just I guess I asked because I understand you it sounds like you haven’t had much morbidity improvement of late, but I guess it sounds like you are also not assuming any improved mortality and I was just trying to think about how those two differ from each other in sensitivities?

Yes I think, well first the answer to your question is right. I mean we focused -- we have not included any improvement in mortality or morbidity in our assumptions. What we do, do with mortality though is we true mortality assumptions up for the most recent studies that are produced in other words we don’t go off of say scale studies as to what the mortality should look. We also look pretty heavily at our own mortality experience because as you get into say older age mortality that’s notorious for their being say less documented information around it and how best to understand it. So we watch very carefully our own experience. I don’t have a sensitivity for you on plus or minus mortality movements up or down overtime. What we did on morbidity as is sensitivity as to 1% shift. Now, I want to be very clear on what this is when we say shift, what that mortality sensitivity is, is it’s not 1% per year improvement where you go out to year 5 or year 10, it suits year 10 as an example. And our morbidity has improved by 10% come that year’s time. This is a 1% shift where as you go out 10 years we just assume what if it was just improved by 1% over our assumption and you run it all back and pivot it all back. So it’s a more -- it’s not compounded, if you will, assumption, it’s just a very straightforward shift and that’s why you get the lower sensitivity number. But we don’t -- we haven’t embedded any of that into our margins we don’t assume that because our studies don’t suggest support for that at this time.

Okay got it. Thanks for all the disclosure. Dowling & Partners Securities: Okay got it. Thanks for all the disclosure.

And there are no further questions.

Thanks operator and thanks everyone for your interest in CNO Financial Group.

Thank you. That does conclude today's conference call. You may now disconnect.