Apr 7, 2008
Executives
Scott Galovic - Investor Relations C. James Prieur - Chief Executive Officer Edward J.
Bonach - Executive Vice President and Chief Financial Officer Eric R. Johnson - Chief Investment Officer; President, 40/86 Advisors, Inc.
Analysts
Nigel Dally - Morgan Stanley Jukka Lipponen - Keefe, Bruyette & Woods Randy Binner - Friedman, Billings and Ramsey Jimmy Bhullar – JP Morgan Tom Gallagher - Credit Suisse Mark Finkelstein - FPK Ken Goldberg
Operator
Welcome everyone to the fourth quarter 2007 earnings conference call. (Operator Instructions)
Scott Galovic
Thank you for joining us on Conseco’s fourth quarter 2007 earnings conference call. Today’s presentation will include remarks from Jim Prieur, Conseco’s CEO and Ed Bonach, Chief Financial Officer.
Also joining us for a question-and-answer session will be several key Conseco executives: Scott Perry, President of Bankers Life; John Wells, Senior VP of Long-Term Care; Eric Johnson, Chief Investment Officer; Greg Barstead, President of Colonial Penn Life; Dan Bardin, President of Conseco Insurance Group; Mark Alberts, Chief Actuary; and John Kline, our Chief Accounting Officer. During this call, we will be referring to information contained in yesterday’s press release.
You can obtain the release by visiting the company news section of our website at www.Conseco.com. During the conference call, we will be referring to a presentation that can also be obtained and viewed from the company’s website.
This presentation was filed in our Form 8-K this morning. The 10-K, which was filed last Friday, is also available through the Investor section of our website.
Let me remind you that the forward-looking statements being made today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Please refer to yesterday’s press release and our 10-K for additional information concerning the forward-looking statements and related factors.
The presentation to which we will be referring today contains a number of non-GAAP measures. These measures should not be considered as substitute for the most directly comparable GAAP measures.
The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures. In addition for your reference, we have added a section is front of the appendix, which will include slides that were carried over from our preliminary fourth quarter results call on March 17.
And now, I will turn the call over to Conseco’s CEO, Jim Prieur.
C. James Prieur
As we indicated on our March 17 call, the fourth quarter was an interesting quarter with lot going on. We won’t be repeating a lot of the detailed information that we shared on our call of March 17, but I did want to take a few minutes to address some of the issues that have been on the minds of investors and analysts since that call.
Ed Bonach, our CFO, will cover additional detail and overall results and on the segment results in a few minutes. The net loss before realized losses and taxes for the fourth quarter and for the full year of 2007 were improved from the preliminary results and were in line with what we had indicated for the expected range.
The reported net loss applicable to common stock for 2007 was $194 million compared to the $210.1 million estimated by the company in its preliminary results. The reported net loss applicable to common stock for the fourth quarter was $71.5 million compared to the earlier estimate of $72.2 million.
The reported loss before realized losses and taxes was $53.3 million for 2007 compared to $78.6 million estimated by the company in its preliminary results. The reported income before realized losses and taxes for the fourth quarter of 2007 was $33.8 million compared to the earlier estimate of $32.5 million.
The impact of the accounting for LTC premium rate increases and future loss reserves, FLR, versus the pivoted LTC reserves will be discussed a little later in the presentation by Ed Bonach. We continue to evaluate the deployment of capital.
Although there are those in the Street who say we need to be more aggressive with stock buybacks, there is also a contingent that says there is concern with liquidity and capital levels. We’ll continue to be opportunistic about stock buybacks, but we also realize that maintaining the appropriate liquidity and capital levels is extremely important to our business, particularly in this market, as is considering the other uses of capital.
As we said before, we’ll continue to manage both of these issues with respect to our goal of increasing the intrinsic value of the company and of the stock. We will provide some more detail on this later in the presentation.
I would like to reiterate that overall we do continue to make progress on our plans for future growth and profits at Conseco. New business and underlying results at both Bankers Life and at Colonial Penn continue to be strong, and the expected future margins related to new business at Conseco Insurance Group increased despite declining sales.
Asset quality remains a high priority, and our portfolio continues to perform within expectations. We are also moving forward with our strategy to further stabilize our long-term care closed block of business.
I will again provide some brief highlights of our results and related progress at the end of this call. Next up is our CFO, Ed Bonach, who will take us through our financial data.
Edward J. Bonach
Let me start with Slide six by covering fourth quarter 2007 results. Pre-tax results were in line with preliminary figures presented in our call on March 17 with the long-term care run-off block loss improving by $1.3 million.
Overall, the company had very strong underlying results from Bankers and Colonial Penn. Bankers’ pre-tax profit of $58.3 million is consistent with expectation.
The fourth quarter was negatively impacted by $11 million of hedging inefficiencies related to our equity-indexed annuity business. Colonial Penn’s underlying business results for the fourth quarter were affected negatively as a result of the $8.4 million charge for expenses related to efforts to expand the brand into the private fee-for-service or PFFS market.
Earnings, excluding the brand extension, are up 52% over the fourth quarter of 2006 reflecting overall growth in the business, including the recapture of the previously reinsured book of business from Swiss Re. CIG or Conseco Insurance Group’s results were negatively affected by a few items as well during the quarter.
The segment experienced negative adjustments of $14.8 million related to an unlocking adjustment on the interest-sensitive life portion of the business, and $8 million from increased benefit ratios for Medicare supplement and specified disease, which do fluctuate from quarter to quarter. We also experienced the negative adjustment of $4.2 million related to losses on the termination of some interest rate swaps.
Additionally, excess expenses of $3 million were incurred during the quarter related to consolidation of operations. This effort will reduce expenses going forward with about a two-year payback.
The LTC run-off block is continuing to approach breakeven as predicted, and we continue to improve its stability. In addition to the two rounds of re-rates that we talked about in our earlier calls, we will also be seeking additional re-rates on the long-term care run-off block.
The net loss applicable to common stock for the fourth quarter was $71.5 million, or $0.38 per diluted share. This includes $23 million of net realized investment losses, or $0.12 per diluted share and $68 million, or $0.37 per diluted share, for the increase to the valuation allowance for deferred tax assets.
As you can see, the pre-tax loss for the quarter was $1.6 million or essentially a breakeven quarter as we had previously disclosed. Earnings before net realized investment losses and valuation allowance for deferred tax assets were $19.5 million, or $0.11 per diluted share.
Again, I want to point out that the current quarter included adjustments that need to be understood in comparing these results to expectations and earnings trends. Detail on these adjustments is provided later in this presentation.
Turning now to Slide seven, for the full year 2007, the net loss applicable to common stocks was $194 million, which includes $77.8 million of net realized investment losses and $68 million for the increase to the valuation allowance for deferred tax asset. This equates to a loss of $1.12 per diluted share.
Our net operating income before refinements to the R-factor litigation settlement, a third quarter 2007 charge related to the annuity coinsurance transaction and the fourth quarter 2007 increase to the valuation allowance for deferred tax asset was $43.4 million, or $0.25 per diluted share. Bankers Life’s full year pre-tax operating earnings were $241.8 million or $8.8 million higher than our preliminary results, reflecting the impact of reversing the pivoted long-term care reserve and replacing them with future loss reserve.
The return on equity or ROE for Bankers Life before realized investment gains or losses was 10.2% for the year. Again, Colonial Penn’s full year earnings included expensing $8.4 million for the expansion of their brand into the private fee-for-service markets.
This also depressed their ROE to 8.9% for the year. And, as I mentioned, Conseco Insurance Group’s results were impacted by various items during the year.
CIG’s ROE for 2007 was 2.2%. The LTC closed blocks pre-tax operating loss of $185.9 million includes our $110 million reserve strengthening in the second quarter of 2007 plus $22 million of reserve strengthening in the first quarter of 2007.
This segment’s results improved by $16.5 million from the preliminary results due to the LTC reserving changes mentioned also for Bankers. Slide eight shows the impact that the restatement had on income and earnings per share amounts for the four quarters of 2006, the full year of 2006 and the first three quarters of 2007.
The restatement impact was in line with our expectations in previous communications increasing 2006 operating income per diluted share by $0.07 to $0.61 and net income per diluted share also increased by $0.07 to $0.45 per share. Slide nine shows the major restatement items which reconciled from the EPS amount as originally reported and now also as restated.
As you can see, the full year 2006 impact was to increase income before income taxes by $14.9 million and increase 2006 net income by $9.5 million. The combined impact from restatements due to our remediation procedures, accounting for long-term care premium rate increases also known as future loss reserves instead of pivoted LTC reserves, and previously identified errors had the impact on shareholders’ equity at December 31, 2006 and September 30, 2007 that were within our expected ranges.
Year-end 2006 shareholders’ equity was reduced by $13 million or less than three-tenths of 1% or 0.28% to be precise. Shareholders’ equity at September 30, 2007 was reduced by $18.2 million or 0.42%.
Turning now to Slide 11, our year-to-date annualized operating return on equity excluding the litigation charge in loss and coinsurance transaction from our earning was a negative 3.1% for the last four quarters ended December 31, 2007, and has been declining on a trailing four quarter basis, principally due to losses in our run-off segment which includes the before mentioned $132 million of reserve strengthening in the year. As a reminder, these segment GAAP ROE calculations are based on the method described in the notes to this slide, which start by ascribing statutory capital to lines of business based on statutory risk-based capital.
Our long-term goal is to improve our ROE on an operating basis to 11% in 2009. The net loss applicable to common stock for the fourth quarter was $71.5 million.
This included $23 million of net realized investment losses or $0.12 per diluted share resulting in an operating loss per diluted share of $0.26 as compared to $0.10 profit per share in the fourth quarter of 2006. Again, the current quarter included adjustments that need to be understood when comparing these results to expectations and earnings trend.
Turning now to Slide 13, adjusted operating expenses for the trailing four quarters are down by $2.1 million comparing the fourth quarter of 2007 with the fourth quarter of 2006. The improvement would have been $10.5 million excluding the brand extension of Colonial Penn into PFFS.
We are on-track to achieve our targeted cost reduction of $25 million annually resulting from our back-office consolidation project. Additionally, we will save $6 million annually from the rightsizing of sales and marketing, which occurred in the third quarter of 2007.
Slide 14 consolidates several of our more important indicators. Book value per diluted share reflecting the conversion of the preferred stock in May of 2007 decreased from year-end 2006 to $24.41, reflecting principally the loss during the year.
Our debt and preferred stock to total capital ratio calculated excluding the accumulated other comprehensive income was just over 21% at the end of 2007 as compared to about 29% restated at year-end 2006. Risk-based capital with our insurance companies remained very strong ending the year at 296%.
The declines for the year can primarily be attributed to our long-term care reserve strengthening, cost related to the R-factor litigation settlement and net capital losses. Net investment income on general account assets for the fourth quarter reflects current yield of 5.95%.
Investment quality remains high. We had very limited financial exposure to sub-prime asset-backed securities and we reduced our exposure further during the quarter now comprising about one-half of 1% of our portfolio.
Turning now to Slide 15, as Jim indicated earlier, we realized that maintaining the appropriate liquidity and capital level is extremely important to our business as is considering other uses of capital. Our liquidity remains strong with over $90 million at the holding company at year-end 2007 plus an untapped $80 million revolver.
Here on Slide 15, you’ll see the major sources and uses of cash at the holding company. This excludes any dividend from insurance subsidiaries.
The main non-dividend sources of liquidity at the holding company are fees in excess of our costs for investment and management services provided to the subsidiaries and interest received on surplus notes from some of our insurance companies. The primary uses of cash at the holding company are holding company operating expenses and interest payments on debt.
The interest payments on debt are 200 basis points above LIBOR, which has been declining reducing the payments by approximately $4 million in the first quarter of 2008. Also, liquidity at the holding company is impacted by the strength of our insurance subsidiary.
Our insurance companies generate approximately $150 million of statutory profits annually excluding extraordinary item. This is in excess of their capital needs to support their ongoing growth.
And with that, I will turn it back to Jim.
C. James Prieur
Slide 16 again highlights the impact of several large factors on the fourth quarter earnings in each segment. The table suggests earnings power of more than $0.25 per share for the quarter.
Again, that is before the impact of real estate savings, some additional operations, consolidation benefits, further claims improvements and the ongoing positive impact from the re-rates. To summarize, Bankers Life and Colonial Penn continued to have great results.
They are focused on growth. CIG is now much more focused on its distinctive capabilities.
It’s focused on its PMA distribution system, health products distribution and work site. While sales at CIG have declined, the economic value of those sales has actually improved over the last year and some of the expenses incurred during the quarter will produce ongoing operating savings going forward.
We’ve been saying for some time that fixing the LTC closed block would take quarters, not weeks or months, it has now been a few quarters and the results are becoming more visible. The claims reserve volatility has been reduced, re-rates have continued to come through.
And there have been improvements in claims management. We expect the block will be breakeven this year.
We are changing the portfolios of the business. In the third quarter, we closed the sale of the annuity block to Swiss Re and in the fourth quarter, we recaptured the Colonial Penn block that the company had reinsured about five years ago.
In doing that, we have shed an old low-return annuity block and bought back a block that is a part of our core business. From a portfolio capital management perspective, we also bought back about 1.7 million shares of stock during the fourth quarter.
On the operations side, most of the organizational changes have been completed. We still have the Chicago real estate consolidation changes to make.
We actually have to complete the physical move in Chicago before we can recognize the loss, and that’s anticipated to happen in the second quarter of 2008. We continue to expect that the one-time charge related to the Chicago move will be about $15 million and that the move will reduce annual expenses going forward by about $5 million per year.
And now, we will open it up for your questions.
Operator
(Operator Instructions) Your first question comes from the line of Nigel Dally - Morgan Stanley.
Nigel Dally - Morgan Stanley
The $90 million of holding company liquidity at year-end, is it fair to say that liquidity declined significantly in February after you paid the additional $56 million in Conseco Senior Health?
Edward J. Bonach
It declined to some extent because of that, but we also did have dividends in the year from the insurance companies as well that isn’t depicted in that slide.
Nigel Dally - Morgan Stanley
Looking at the free cash flow, which excludes those subsidiary dividends, what’s the reasonable range of dividends that we should expect for 2008?
Edward J. Bonach
I would say somewhere between $50 and $100 million of statutory dividends is what should be expected.
Nigel Dally - Morgan Stanley
Of the total cash flows coming in, is there a risk that a sizable portion of those cash flows will be absorbed by further contributions to Conseco Senior Health? It seemed liked from your discussions in the 10-K, it looked like the risk-based capital ratio was right on the edge of triggering regulatory action?
Edward J. Bonach
First of all, with Conseco Senior Health, we have been operating that entity about at the same capital levels for some time. To the extent that the results continue to stabilize as the last two quarters have, that would significantly reduce the need to have to contribute additional capital to Conseco Senior Health.
That said, on a statutory basis, because there we are actually pivoting our statutory reserves to higher levels, there is approximately a $25 million difference between the GAAP results and the statutory results, which could require some additional funding.
Nigel Dally - Morgan Stanley
On the hedging costs that you had in Bankers Life. What went wrong to trigger those expenses, and given the equity market volatility in the first quarter, could this continue to be an issue for this year?
Edward J. Bonach
It shouldn’t be a major ongoing issue, and what this loss is from is that we at times are over-hedged. And in that case, we were in the fourth quarter, and with that over-hedged position, the hedges had a cost to us of $11 million, and we do rebalance how many hedges we have, but we certainly guard against being under-hedged and would rather if we had to be over-hedged.
Operator
Your next question comes from the line of Jukka Lipponen - Keefe, Bruyette & Woods.
Jukka Lipponen - Keefe, Bruyette & Woods
Jim, based on your comments, is it reasonable to expect that starting with the first quarter ‘08 that we should expect you to report sort of cleaner results without so many items, excluding obviously the real estate charge that will be expected in the second quarter.
C. James Prieur
That’s certainly our expectation.
Jukka Lipponen - Keefe, Bruyette & Woods
And going back to the Conseco Senior Health, Ed on the previous call, you had said that you expected on a statutory basis annual additional reserve increases of $50 to $55 million per year is I think what you had said. And so, when I look at the numbers, is that a number that I should compare to the reserve increase that you had in Conseco Senior Health in 2007 of about $185 million?
Edward J. Bonach
That is correct that the pivoting is approximately an additional $50 to $55 million for Conseco Senior on a statutory basis. And that’s a fair number to compare to the $185 million, Jukka.
Jukka Lipponen - Keefe, Bruyette & Woods
On a statutory basis, the general expenses in Conseco Senior Health came down by about $10 million in 2007, should we expect further declines on a statutory basis or not?
Edward J. Bonach
Yes, and we continue to benefit in all of our segments from the consolidation of the back-office, and we continue to seek other ways to bring down expenses.
Jukka Lipponen - Keefe, Bruyette & Woods
And, in terms of the surplus note interest payments out of the subsidiaries and the service fee payments, do you need regulatory approval for those or can you pay them without prior approval?
Edward J. Bonach
They are paid without prior approval. The whole note once it was established was subject to regulatory approval, but then the payments in subsequent periods just carry on without additional approval.
Jukka Lipponen - Keefe, Bruyette & Woods
Jim, you have indicated all along that at some point you want to reduce Conseco’s exposure to long-term care, how should we think about the timing of a potential transaction at this point.
C. James Prieur
I think the business is in much better shape than it was before, but I wouldn’t want to create any expectations about timing.
Operator
Your next question comes from the line of Randy Binner - Friedman, Billings and Ramsey.
Randy Binner - Friedman, Billings and Ramsey
Ed, I was wondering if we can go into the EIA, the equity-indexed annuity hedging issue a little bit more so we can try and understand that. When you say you were over-hedged, can you explain how you were over-hedged?
How market volatility is measured by the VIX might be an input to that as well as the performance of the S&P overall.
Eric R. Johnson
I’ll take a step back and explain how the transactions originate and then penetrate it through, and I think that will help put it in context for you. When the company sells equity-indexed annuities, which obviously have a pay-off to the policy holder based on changes in the value of an index, in order to hedge that exposure, we purchased similar options be they on the S&P or it could be on Russell or any number of indexes that would narrow that pay-off characteristics.
So the extent that in the intervening time, these will tend to be one-year options. To the extent that during the intervening time, after the asset and the liability has been established, there may be changes to the liability values that will come from lapses or other reductions in the options sold.
We may from time-to-time find ourselves with what we call an over-hedge, meaning a remaining long position that’s not offset by a short position. I would tell you that in 2006, we benefited from an excess long position by about $8 to $10 million and the rising market being obviously long to make money.
In the fourth quarter to the extent that we basically had declining option values that residual net long position basically gave back that money that had been earned in earlier periods. Now, obviously, volatility is one factor in evaluation of that, but it’s not the only one.
Overall index levels remain in term interest rates and there are varieties of factors that play into that net value. Obviously to the extent we are long in the absence of any other factors, increasing volatility will increase that value.
Having said that, during the first quarter of this year, you have lower index levels overall, and that would go the other direction. The goal here is not to speculate on, but to basically match our liability sold with an asset held, and make the insurance spread between the two.
Over a long period of time, that will tend to be the case. From quarter-to-quarter, there is noise.
The $11 million is more noise than one typically sees in one quarter but it was a more volatile quarter.
Edward J. Bonach
Yes and the reason that we would be over-hedged is that the terminations or lapse rates are different from what was assumed or experienced in the prior periods. And the other thing I would add is, the reason we buy the one year options is that’s exactly the way the liability side works, is that the equity index credits are granted on an annual year by year basis.
Randy Binner - Friedman, Billings and Ramsey
Is it fair to say it’s more of a timing issue than necessarily a higher cost issue, because we’ve seen some issues with other people who offered the same product?
Eric R. Johnson
I wouldn’t characterize it as a timing issue because I mean these are real monies. Having said that, over a period of time the gains and losses will very much tend to balance out.
Randy Binner - Friedman, Billings and Ramsey
You mentioned in the press release that benefit ratios had increased in CIG, in spec disease and Med Supp. Can you elaborate on that?
I think in the opening statement you said there is volatility there. But, was there any thing that drove the volatility in the current quarter?
Edward J. Bonach
No. Nothing in particular, they will fluctuate from quarter-to-quarter and so we don’t have any cause for great concern with that volatility.
Operator
Your next question comes from the line of Jimmy Bhullar – JP Morgan.
Jimmy Bhullar – JP Morgan
On your capital flexibly, and your ratings aspirations, your RBC has declined a decent amount over the past year. You have got some holding company liquidity; you have got a revolver.
What do you believe your capital flexibility is, and what your ratings aspirations are long-term? Could you talk about your ROE target of 11%, what do you think are the main levers are that are going to get you there, because even if you normalize the earnings from the last several quarters, and add a few pennies for expense savings and higher margins because of the rebates.
It doesn’t seem like you are going to be anywhere close, at least based on where your recent earnings have been. So, what are some of the levers that you believe will get you to an 11% ROE and your confidence around that?
Edward J. Bonach
As far as capital flexibility, risk-based capital levels, arguably at just under 300% risk-based capital at the end of ‘07, that capital level is more than sufficient, not only at our current ratings, but at least at one to even two notches higher in ratings by most of the agencies. An important factor in looking at capital levels is what is the operating performance, and what are your sources and uses of capital, and that is why we included the slide in the presentation to show that even excluding dividends from the insurance subsidiaries, we generate about an additional $50 million of cash or capital at the holding company level on a year.
The insurance companies with $150 million of statutory income, here is where you see the extra earnings power we have from our non-tax paying position, where statutory pre-tax income is after-tax income. And then $150 million of statutory net income, that generates the ability to pay dividends of $50 to $100 million, while capital levels are at least maintained around 300%, but arguably they could even increase and still have dividends of at least $50 million.
C. James Prieur
With respect to the 11% ROE goal, to remind everybody, the 11% ROE goal is based on the equity being the book value of the company less that portion of the book value that is the NOL. So, effectively what that means is that the equity is about $17 per share, so to get to 11% means we have to get to $1.90 per share or so.
And while showing the earning power of the company in the fourth quarter being about $0.25 per quarter, obviously that suggests sort of a base of a little bit more than $1. And we would expect to be able to move that number up quite considerably and getting it to somewhere around $1.25 by the end of this year and maybe the same sort of increase in the following year.
Getting from $1.50 on up to $1.90 would require some capital changes. And I think we’ve always sort of mentioned that as being something that we’ll have to do to get the ROE at that that last step to 11%.
Jimmy Bhullar – JP Morgan
On the capital question, you have bought back some stock. Is it reasonable to assume that you would be using or buying back a lot of stock over the next year given the decline in the stock price, or is that not likely given that you want to preserve your ratings and also just have some flexibility for some of the other initiatives you have?
Edward J. Bonach
I guess, we’ll continue to be opportunistic on that Jimmy, and look at the relative stock value, look at what are other potential uses for our capital. Certainly in our strategic alternative, we want to be mindful of having the capital at the right levels and in the right places as well as liquidity.
And then, on top of that, to preserve our debt to the greatest extent possible because at 100 basis points over LIBOR for almost $900 million in our credit facility, that’s 200 to 300 basis points lower than what it would be comparably priced at now, if a company like ours could even get any additional credit in this marketplace. So that has a tremendous value to us as well and will be considered.
Operator
Your next question comes from the line of Tom Gallagher - Credit Suisse.
Tom Gallagher - Credit Suisse
Jim, you had just commented that, I guess the feeling is core earnings power ex unusuals is about $0.25 for the quarter. Can you, at least as it relates to CIG, comment on what you view as sort of the sustainable level there?
And should we be thinking about the higher amortization rate that was produced this quarter or some level of that recurring?
C. James Prieur
Well, without getting into too much detail on CIG, the CIG business obviously has got some of the greatest potential for increased earnings, simply because it is so relatively low. And we would expect that the earnings there will be able to increase by more in percentage terms than the earnings at Bankers or Colonial Penn.
Tom Gallagher - Credit Suisse
But as you get to a $0.25 run rate, in that definition what level are we viewing as normalized before any improvements this quarter for CIG, that’s the only thing that wasn’t that clear to me?
C. James Prieur
We show it on Page 16, we are showing a normalized earnings of $31.7 million per quarter and that’s lower than it can be.
Edward J. Bonach
Tom with that, this is the fourth quarter of ‘07 obviously normalized, that does not include the full impact yet of that $6 million expense savings from the right-sizing of the sales and marketing and additional focus there, also to the extent that a fair number of the charges in ‘07 for CIG were of intangibles. So value of business acquired and/or deferred acquisition costs, and when those are written-off, they’re written-off never to reoccur and so amortization going forward should be somewhat less.
So from that standpoint, that’s why we say the $31.7 should have more upside than the other segments.
Tom Gallagher - Credit Suisse
The corporate of negative 22, Ed, I know you mentioned your interest costs are going to be going down because at least there is a portion of them tied to LIBOR, can you just give us sort of a rough range for where we should expect that to come out, because there are some moving pieces there in terms of lowering of expenses as well. What’s the level, on a quarterly basis, we should expect there for the next several quarters, is negative 22 less the interest or is there any other consideration there?
Edward J. Bonach
Certainly there will be some benefit there, Tom, from lower expenses and assuming that the LIBOR continues to be at its low level, but as far as on an annual run rate basis, I would not see this number changing too significantly either way.
Tom Gallagher - Credit Suisse
So, that’s a decent run rate to assume for kind of on an annualized basis.
Edward J. Bonach
Yes. Again, if the interest rates stay as low as they are for the whole year, then I could see that coming down to the $4 million a quarter.
Tom Gallagher - Credit Suisse
I just want to make sure I have all of the liquidity pieces right here. So at year-end we had $90 million of Hold-Co liquidity, $80 million of the revolver and RBC of 296% and it sounds like you are managing to, is 250% a reasonable RBC level to take up what you are sort of managing to right now?
Edward J. Bonach
No, it would be higher than that. Certainly, we are mindful that the rating agencies have been looking for more capital from all insurance companies with today’s market and the liquidity issues.
So it’s definitely north of 275% that we would be managing to.
Tom Gallagher - Credit Suisse
After you made the capital contribution in February, presumably your RBC went up north of 296%. So, I just want to see if we are still in the same place as we were at year-end after the capital contribution was made, recognizing there is a trapped capital element to that which was downstream.
If you follow my logic, let’s just say we are managing to a 280% RBC and if your RBC went up above 296%, you take whatever that spread is to give you the cushion there and then you add the revolver $80 million plus whatever the holding company liquidity was reduced by. My question is are we still at the same place or is there a slightly less capital capacity than there was at year-end?
Edward J. Bonach
Actually there is more capacity. We would expect that we will have statutory earnings in the first quarter.
Liquidity at the holding company as of yesterday is over $100 million, so things have improved.
Tom Gallagher - Credit Suisse
Then your RBC I presume would be north of 300% then?
Edward J. Bonach
Yes, assuming no further dividends, it should not have deteriorated, let’s put it that way.
Tom Gallagher - Credit Suisse
Jim, you had talked earlier about sort of the balance of capital management looking at buyback versus alternative uses. Is it fair to say that if you are looking for a solution that what makes sense right now is to try and retain as much capital, if in fact an LTC reinsurance and/or risk transfer solution is going to cost some money, that maybe the best use of any excess capital.
Is that sort of what you are thinking or am I not thinking about that the right way?
C. James Prieur
We are not going to talk about timing on any of these, but we are just saying it’s logical.
Operator
Your next question comes from the line of Mark Finkelstein - FPK.
Mark Finkelstein - FPK
Speaking about CIG a little bit, obviously the life and the annuity business has been impacted by the rating, Med Supp impacted by private-fee-for-service of which you are selling through Coventry. Even with the cost savings that you have announced, are there further cost savings opportunities to right size this business or essentially are you where you think you are going to get to for the foreseeable future on that?
C. James Prieur
With CIG, a couple of things have happened. Because of the change in the emphasis to CIG, the supplemental health business, the specified disease business is becoming an increasing proportion in new sales and of course that’s one of our highest margin products in the company overall.
So, as a result of that the value of new business associated with the new business is actually increasing even while sales have been decreasing. There may indeed be opportunities for cost cuts, there usually are within every business.
But, I think that from here, it’s more likely that CIG will start to grow. And now the supplemental health business is over 50% of the sales of CIG and that’s a pretty significant shift from a year ago.
Operator
Your next question comes from the line of Jukka Lipponen - Keefe, Bruyette & Woods.
Jukka Lipponen - Keefe, Bruyette & Woods
In terms of the covenants that are in your credit facility, you are not all that far away in terms of the statutory capital level, and I don’t know what’s your interest coverage ratio under that definition is currently. But can you just give us some color why I’m assuming that you are confident that you are not going to be violating any of those covenants?
Edward J. Bonach
The debt covenant is that the consolidated 250%, so being almost 50 points above that is considerable margin when you think of total adjusted capital of about $1.5 billion. So, that’s quite significant, plus there was the before mentioned earnings power of the insurance company of $150 million range.
So, we think we are quite a bit above the debt covenant there. And on the coverage ratio, we are also comfortably above that, roughly double where the minimum is.
Jukka Lipponen - Keefe, Bruyette & Woods
You also talked about in the K that to some extent you’ve lengthened the duration in your investment portfolio. So, maybe, Eric could give us some color why you are doing that at this point?
Eric R. Johnson
For a number of reasons that on a basic level, you find opportunities in a steeper curve environment, where you have new money, and you have choices where you want to lay it out where you have a fairly steep yield curve. There was a pretty good pickup comparing 2s to the long bond or 10s to the long bond.
Second, relative to our asset liability matching policy, as we on the enterprise all revisited the duration on the liabilities, while we were within our tolerances, we were a little bit short on our cash flows, particularly against the longer lines, and long term care, and also some of the life blocks. And good pickup, some benefit from lengthening the assets there.
I mean you mentioned RBC earlier for example to the extent that we do a little bit better job, tightening the cash flow, projected cash flow matches, you pick up the RBC benefits among other things as well as just being in a situation where you have less potential, value volatility in the company. So, those two underlying drivers really moved us toward lengthening, and you see that most as I mentioned in Cushy, which is mostly long-term care, Colonial Penn, which has a lot of life and a little bit Bankers.
And I think that, you’d see that continued through the first quarter as well.
Operator
Your next question comes from the line of Ken Goldberg.
Ken Goldberg
On the long-term care questions, can you just give us an idea of what type of transactions you could consider to wind up that business, what that would look like potentially?
C. James Prieur
The most likely transactions is some sort of reinsurance field selling the entire block or selling some of the companies that consist largely long-term care would be an another approach to doing that.
Ken Goldberg
And do you envision getting that to breakeven before you look to do that type of transaction?
C. James Prieur
Clearly the better performing the block is, the easier it is to do some sort of transaction. When we talked about decreasing our weight in long-term care that was a long-term objective, it was sort of a strategic objective because too great a proportion of the company’s earnings were coming from long-term care.
And it’s a very volatile business, and it doesn’t make sense for a company of our size to have as much as we have. So, we have continued to improve the performance of the business, anytime you do that of course, you are improving the ultimate terms of whatever you do with it at some point in the future.
Ken Goldberg
And when you said breakeven this year, can you be a little more specific about what you mean by that?
C. James Prieur
Well, no, we said breakeven this year. And the problem is that the business is volatile, and can easily bounce up and down by $10 million, which was actually the loss in the quarter, was $10 million.
So, you are then sort of one standard deviation of being at breakeven. So, as we continue to improve the business, we should hit breakeven.
But trying to get it down to a quarter makes you subject to the volatility that you are going to get just in the normal course of that kind of business.
Operator
At this time, there are no further questions.
C. James Prieur
Thanks to everyone on the call for your ongoing interest in Conseco. We continue to be focused on the middle market and retirees in America, the fastest growing major segment in the business.
We have got unique sales machine, whether we are selling through agents, directors or brokers. And we are committed to growing this business successfully into the future.
Thank you, very much.