May 8, 2008
Executives
Scott Galovic - IR Jim Prieur - CEO Ed Bonach - EVP and CFO Scott Perry - President of Bankers Life John Wells - SVP, Long-Term Care Eric Johnson - CIO
Analysts
Nigel Dally - Morgan Stanley Randy Binner - Friedman, Billings, Ramsey & Co. Tom Gallagher - Credit Suisse Andrew Kligerman - UBS Jamminder Bhullar - JPMorgan Jukka Lipponen - Keefe, Bruyette & Woods Omar Mallick John Nidel
Operator
Good Morning. At this time, I will like to welcome everyone to the first quarter 2008 Earnings Call.
(Operator Instructions). Mr.
Galovic, you may begin your conference.
Scott Galovic
Good morning. And thank you for joining us on Conseco's first quarter 2008 earnings conference call.
Today's presentation will include remarks from Jim Prieur, Conseco's CEO, Ed Bonach, Chief Financial Officer, Scott Perry, President of Bankers Life; John Wells, Senior VP of Long-Term Care and Eric Johnson, our Chief Investment Officer. Following the presentation, we will also have several business leaders available for the question and answer period.
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 on our Form 8-K yesterday afternoon.
Our 10-Quarter for first quarter 2008 will be filed on Friday, May 9th, and will also be 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 for additional information concerning the forward-looking statements and related factors. The presentation to which we will be referring to you today contains a number of non-GAAP measures.
These measures should not be considered as substitutes for the most directly comparable GAAP measures. The appendix to the presentation contains a reconciliation of the GAAP measures with the non-GAAP measures.
And now, I will turn the call over to Conseco's CEO, Jim Prieur. Jim.
C. Jim Prieur
Thanks, Scott. In the first quarter, very strong sales results for the company, with new business volumes up 10.7% over the first quarter from last year.
Sales of Bankers were up 11% and Colonial Penn had sales growth of 22% in its core products and it had more than 60% growth when you add in some of the new product introductions at Colonial Penn. CIG sales were down, but supplemental health sales at CIG were up 23%.
There were also very good results in LTC closed block, with the GAAP loss of less than $2 million in the quarter, in this segment. And that is after including more than $5 million of amortization of intangibles.
As you will see later in the presentation, this business is behaving in a much more stable way. In investments, we did have impairments, on which we will provide quite a bit of detail on shortly.
These losses were less than most insurers as a percentage of assets. But they certainly weren't insignificant.
We had some hedging losses on equity-indexed annuities, while the equity-indexed annuities are hedged effectively on an economic basis, they do produce some volatility on a GAAP accounting basis, and Ed will describe that later. At Bankers earnings were impacted by a couple of things.
There were higher than expected claims in long-term care and the equity-indexed annuity issues that I just mentioned. The results for the first quarter were much more stable than the quarterly results for the last year.
There were no significant and period accounting adjustments, no significant deck row overcharges and it was the third consecutive stable quarter for the LTC closed block, as it moves to profitability. The multi-state market conduct exam also reached a conclusion.
And we made a lot of progress, and I think we will make more as the year unfolds. The Chicago facilities consolidation is on track for completion in the second quarter, and there will be a pre-tax charge of $15 million with on-going annual savings of $6 million.
Conseco, as we announced at the March analysts meeting, is continuing to explore strategic alternatives. And we're targeting late summer, early fall, to get back to you on that.
On the multi-state examination, I am pleased to say that we are able to announce that the multi-state market conduct exam was completed. This exam focused on CSHI, Conseco Senior Health Insurance the company which holds most of the LTC run-off blocks and also on Bankers.
You may recall that we asked the state DOI's to do a multi-state exam. The essential finding was that there was no pattern in improper claims denials, but there were problems with prompt payment claims.
The basic find was, up to $2.3 million, which would be increased by $10 million, if we don't hit certain performance targets in the future, and these performance targets are on complaint turnaround times and prompt paying. We're also going back to review certain claims, which will cost us $4 million.
Now this $2.3 million find and the $4 million remediation costs were accrued in 2007. Finally, in our performance improvement plan for long-term care which had been developed some time ago.
We planned on spending $26 million on performance improvement measures. And we committed in the agreement to spend that sum.
This is an extra. This is all operational improvements planned before, part of the operating and the IT budget, much of which is related to the migration to the Long-Term Care Group of administration, and migration to the Long-Term Care Group's systems.
There are no extra costs in this. This is a gross cost associated with that migration, and operational improvements, and is offset by savings in variable costs going forward.
In fact more than a third of these costs have already been spent and just in the regular operating budget. With respect to the performance targets for service that are in the multi-state exam, we are currently at those targets and John Wells will add more to this in his presentation a little later this morning.
Next up is our CFO. Ed Bonach, he will take you through our financial data.
Ed?
Ed Bonach
Thanks Jim and good morning. Let me start by covering first quarter 2008 results.
Overall the company had solid underlying performance from all four of our operating segments. For the first quarter of 2008 the net loss applicable to common stock was $5.8 million, which includes $26.5 million of net realized investment losses.
This equates to a loss of $0.03 per diluted share. Our net operating income of $20.7 million, equated to $0.11 per diluted share for the first quarter of 2008, compared to a net operating income of $3.7 million in the first quarter of 2007 or $0.02 per share.
Turning to slide eight, in our Bankers Life segment, pre-tax operating earnings were $29.1 million in Q1 of '08, compared to $45.5 million in Q1 of '07. Results for the first quarter 2008 were affected by several items; our LTC products experienced a reduction in earnings of approximately $10 million, resulting from higher claimed volumes and costs.
Earnings were also negatively impacted by approximately $7 million related to equity-indexed annuity product. This variance primarily resulted from the change in the value of the embedded derivative related to future index benefits, which are reported at estimated fair value in accordance with the accounting requirements.
This amount includes a $2 million charge in the first quarter of 2008 related to the adoption of Statement of Financial Accounting Standards, number 157, Fair Value Measurements, also known as FAS 157. Finally, a reduction in earnings of approximately $6 million, as compared to the first quarter of 2007, was related to company owned life insurance policies, which were purchased in 2006 and 2007 to fund the segments agent-deferred compensation plan.
This resulted from a decrease in the estimated fair value of investments underlying such policies in the first quarter of 2008 and a $2.7 million debt benefit recognized in the first quarter of 2007. For Colonial Penn, the pre-tax operating earnings were $3.7 million in the first quarter of '08, compared to $4.6 million in the first quarter of '07.
Results for the first quarter of 2008 were affected primarily by higher marketing expenses related to our product line expansion initiative. In our Conseco Insurance Group segment or CIG pretax operating earnings were $23.3 million in Q1 '08 compared to $33.5 million in Q1 '07.
Results for the first quarter of 2008 were affected primarily by a reduction in earnings of approximately $4 million driven by lower terminations and specified disease policy. First quarter 2007 earnings also included $5.4 million from the annuity block, which was subsequently reinsured.
In addition, we also experienced a reduction in earnings of approximately $2 million related to equity-indexed annuity products. Again this variance primarily resulted from the change in the value of the embedded derivative, related to future index benefits reported at estimated fair value in accordance with the accounting requirements.
This amount includes $0.8 million charge in the first quarter of 2008 related to the adoption of FAS 157. We are very pleased to report that the LTC Run-off block is continuing to approach break-even as predicted and we continue to also improve its stability.
In our other business, in the Run-off segment we recognized pretax operating loss of $1.3 million in the first quarter of 2008 compared to a loss of $26.1 million in the first quarter of 2007. Results for the first quarter of 2008 shows a progress we continue to make towards restoring profitability through premium re-rates, claims and expense management.
Consistent with what we have, seen throughout the industry and the markets. The company recognized net realized investment losses of $26.5 million, which is net of related amortization and taxes in the first quarter of 2008.
Gross realized losses before related amortization and taxes included $41.3 million of write-downs for securities we determined were subject to other than temporary impairment. Eric Johnson, our Chief Investment Officer will address this in more detail later in the presentation.
Given the impact on our earnings from equity-indexed products in both our Bankers and CIG segments, let me touch on how the accounting impacts our reported earnings. So let's now turn to slide 9, we fully hedge our exposure to the equity markets related to these products.
The options purchased are one year options that match the one year equity index benefit of the product. As policies terminate in the course of the year, we don't immediately sell the related options, but rather, we periodically rebalance our option positions to appropriately hedge the remaining liability exposure.
This results in a modestly over hedged position in between rebalancing, to the extent markets move down in the quarter as they did in the first quarter of 2008, we report loss on these excess options. Conversely market increases would result in a reported gain.
The accounting for these products creates fluctuations as the liability portion of the benefit is valued on a very different basis than the supporting option. This noise is a vagary of Financial Accounting Standard 133.
The differences however are temporary and due balance all over the life of the contract. Our trailing fourth quarters operating return on equity excluding litigation charges loss on co-insurance transaction and deferred tax asset valuation allowance was 1.7% for the four quarters ended March 31, 2008, which is consistent with that which we reported as of December 31, 2007.
As a reminder, these segment GAAP ROE calculations are based on the method described in the notes to this slide. We start by describing statutory capital to lines of business based on statutory risk based capital.
As we have stated our long term goal is to improve ROE to 11% in 2009, which we believe is achievable. Net operating income for the first quarter of 2008 was $20.7 million or $0.11 per diluted share.
This compares with net operating income for the first quarter of 2007 of $3.7 million. The Q1 '08 operating income is excluding the $26.5 million of net realized investment losses or $0.14 per diluted share, which resulted in a net loss applicable to common stock per diluted share of $0.03 as compared to $0.07 loss per share in the first quarter of 2007.
Slide 12, consolidates several of our more important indicators. Book value per diluted share of $24.40 at March 31, 2008 is virtually unchanged from year-end 2007's value of $24.41.
Our debt and preferred stock to total capital ratio calculated excluding accumulated other comprehensive income was just over 21% at March 31, 2008 consistent with year-end 2007. Risk based capital at our insurance company remains strong ending the first quarter at 281%.
And I will touch on this further in a moment. Our investment portfolio continues to perform within expectations.
Net investment income on general account assets for the first quarter reflected an earned yield of 5.83%. Investment quality remains high, and we continue to have very limited financial exposure to subprime asset backed securities.
Eric Johnson will provide more detail on this in a few minutes. As indicated earlier, our consolidated RBC or risk based capital ratio has declined somewhat since year end 2007.
Absolute capital however increased but not as much as required capital. The first quarter RBC decline is primarily a result of business growth from our record sales increases in reserves due to the long-term care reserve dividend, and the interest rate environment that increased the dynamic testing components of required capital.
Turning to slide 14, collected premiums on a trailing fourth quarters basis are up over the third quarter and fourth quarters of 2007. Strong increases at Bankers and Colonial Penn were offset by a decrease in CIG, primarily due to the sale of the annuity block in 2007, and a focus at CIG in more profitable business.
Maintaining the appropriate liquidity and capital levels is extremely important to our business, especially in today's market as is optimally deploying our capital. Our liquidity remains strong, increasing in the quarter to over $100 million at the holding company plus an untapped $80 million revolver.
Slide 15, details the major 2007 and first quarter 2008 sources and uses of cash for the holding company. It is important to note that this summary excludes any dividends that were paid up from subsidiaries and also excludes share repurchases.
We did not repurchase any shares in the first quarter of 2008. Liquidity at the holding company is impacted by the strength of our insurance subsidiaries.
Our insurance companies generate approximately $150 million of statutory profits annually, excluding extraordinary items. This in excess of their capital needs to support our ongoing growth.
In addition, the dividends from insurance companies, the holding company generates cash from interest payments and surplus notes, tax sharing payments, fees for investment services and fees for administrative services provided to the insurance company. Let me now turn it over to the Scott Perry, President of Bankers Life to cover that segment's results.
Scott?
Scott Perry
Thanks Ed and good morning. During Q1 of '08, Bankers achieved record setting sales levels with $115 million in new annualized premium, which represents 11% growth to Q1 '07, our prior biggest quarter.
Results were driven by growth in Med Sup and Med Advantage as well as annuities, partially offset by lower LTC and life sales. During Q1 of '08, we recorded all open enrollment Medicare Advantage private-fee-for-service sales activity, which covers the period from November 15th to March 31st.
As we commented, during our last earnings call, we are very pleased with this year's results. Our net new members in 2008 exceeded 28,000.
A 26% increase to 2007 open enrollment results .With this year's results, our total Med Advantage in-force membership is over 170,000 with PFFS accounting for over 41,000 and PDP at nearly 130,000 members. As Ed stated, earnings during the quarter were affected by three important factors.
One, unfavorable launch on care results, which I will address in more detail in the next slide. Two, lower EIA income, due to accounting fluctuations that Ed previously discussed.
And finally three, a decrease in the estimated fair market value of investments, underlying company-owned life insurance policies. Premium re-rates on Bankers in-force long-term care business, affecting $157 million in premium, continue to be in line with expectations, achieving an annual financial impact of $17.2 million as of 4/30/08.
Turning to slide 17, the impact of long-term care results on Banker's first quarter earnings is driven by unfavorable claims experience. While the up tick in claims experience is not entirely unexpected as the book continues to age.
In the quarter we did see an increase in the number of initial claims and higher than expected payments on continuing claims. We will continue to manage long-term care profitability through a variety of levers.
These levers include, actively managing premium rates, new business risk selection tools, continuing to enhance our claims management, and making efficient use of our operating expense dollars. Related to new business risk selection, in 2007, we implemented the EMS key test, a memory skills test.
This significantly improves our ability to detect cognitive impairment which is one of the most costly categories of claim. Additionally, regarding claims management, we are in the process of reviewing our procedures at a more granular level, including utilizing outside expert resources.
We expect this review to provide insight into opportunities that can positively impact profitability. On slide 18, we see the impact of the earnings items previously discussed producing an ROE on the trailing four quarters basis of 9.5%.
On the distribution front, Q1 '08 proved to be another strong quarter for Bankers, with double digit sales growth. These results were driven by strong Med Advantage sales, Med Sup and annuities, partially offset by lower long term care and life sales.
From a product line standpoint, Medicare Advantage sales reached $59 million, which represents a 26% increase to Q1 '07, as a result of broader market coverage and a more intense focus by our field force to take advantage of the open enrollment period. Bankers also delivered strong first quarter '08 Medicare Supplement sales of $16.2 million, a 12% growth to the prior year.
Combined Medicare sales grew 20%, reaching $79 million versus $65 million in 2007. This strong growth was complemented by an 8% growth in annuity sales.
Partially offsetting these positive results were lower long-term care and life sales. Long term care sales were down 19% from $11.7 million in Q1 of '07 to $9.4 million in Q1 of '08, and life sales were down 8% from $12.6 million in Q1 of '07 to $11.7 million in Q1 of '08.
Both of these product lines were affected by two factors. First, we experienced a processing backlog resulting from the implementation of a new front-end application processing system during the quarter.
We expect the backlog to be fully worked down and processing times back to normal by the end of the second quarter. Secondly, the field's heavy focus on Medicare Advantage during open enrollment did detract from the normal attention these two lines received.
Also affecting long term Care NAP is a slight shift to sales of lower premium short term care in home healthcare products. These products expand the price point of our middle income market and have strong margins, but do produce less premium per policy than comprehensive plans.
Bankers, continues to continue to enhance its ability to attracting new agents in to our business. During Q1 of '08, new agent recruiting was up 7%.
At the end of the quarter, our agent force grew 6% to 4,750, representing 250 more agents than at the end of Q1 of '07. In addition, we continue making improvements on our agent productivity, which during Q1 of '08 grew 4%.
These strong sales results and agent force metrics underscore the lack of significant impact that current economic conditions have on the Bankers field force. Overall, as slide 20 illustrates, Q1 of '08 represents a record sales quarter, but more importantly, Bankers continues to build on strong momentum of past quarters, growing 10% compound annually since 2003.
This consistent growth has been driven by increases in both the size and productivity of our agent force, plus the timely identification and addition of new product offerings to satisfy the needs of our target customers. This steady growth of new premium provides Bankers with a strong base on which to grow future earnings.
I will now turn it back over to Ed to cover Colonial Penn and CIG results. Ed?
Ed Bonach
Thanks Scott, turning to slide 21, sales as measured by new annual premium or NAP, increased 67% from Q1 '07 with both core and test products contributing to the NAP growth. Excluding the product tests, NAP increased 22% over the first quarter of 2007.
The variance in earnings is primarily attributable, to the investments to extend our brands into the private-fee-for-service market, for which there is no first quarter of 2007 equivalent. These investments, which also impacted the fourth quarter of 2007, totaled over $9 million, which have reduced the trailing four quarter ROE to 8.4%.
Colonial Penn continues to demonstrate the capacity for increased lead development, which is a key indicator of future sales for a direct marketing organization. Turning to slide 23, CIG's overall NAP sales were down in 21% from the first quarter of 2007, again with strong sales gains in specified disease, offset by decreases in Medicare supplements and annuities.
While CIG sales are down, there continues to be greater focus on more profitable business. With the contribution in the profit from the new business, higher than it was a year ago.
The decrease in Q1 '08 earnings from Q1 '07 is primarily attributable to the increase in specified disease benefit ratios, which is driven by higher persistency. Also negatively affecting results was the accounting for equity-indexed products, as discussed earlier in the presentation.
In addition, Q1 '07 results included profits from certain annuity blocks, which were subsequently reinsured during the later part of 2007. Slide 25 illustrates the significant changes in CIG sales mix compared to the first quarter of 2007.
Continuing a trend, sales rose by 23% for the quarter in specified disease, which is CIG's highest margin product. The largest NAP sales decline was in the annuities, which is CIG's lowest margin product line that was further influenced by an unfavorable interest rate environment.
CIG Medicare supplements sales were negatively impacted by competing Med Advantage products. Next, I will turn it over to John Wells, Senior Vice President Long-Term Care, for a discussion of our LTC runoff results and turnaround progress.
John?
John Wells
Thanks Ed. First quarter financial results for the long-term care closed block are close to breakeven and this outcome is significant, and that we now have experienced three straight quarters of improving results.
There are two primary reasons for this continued progress. First, the significant reserve strengthening implemented in second quarter 2007, has led to stabilize results.
Second, we are near profitability because of the success of the long-term care program for improvement, starting in early 2007. Through active rate management, significantly improved claims processes, and increased operating efficiency, the turnaround program launched early last year, has improved the business fundamentals of this block.
These improvements have also resulted in better service for our policyholders, and advances and compliance. The work related to the closed block system and operational solution from the long-term care group is progressing well.
Through this initiative, we expect continued improvements in client management, customer service and compliance. While we are encouraged by the possible momentum on this block, the results for this product line can be volatile.
On slide 27, you can see the graphic depiction of the improving results over the past three quarters. Also of, note is that collected premiums have reversed their decline in preceding quarters, indicative of the positive results of the rate increase program.
Turning to slide 28, results for the quarter net to $1.3 million loss versus the $26.1 million loss in the prior year. Turning to incurred claims on slide 29, this demonstrates our claims improvements.
Prior period development was $13 million favorable, our third straight quarter of favorable development. In addition this quarter's verified claims of $101.9 are the lowest of the last four quarters.
Our operating metrics on slide 30, reflect a more stable claims operation, another one of the positive outcomes of the turnaround program. Claims paid for the first quarter of 2008 were at a lower level than the prior quarter driven by an inventory reduction in the fourth quarter of 2007.
Our claim accounts were slightly less than the previous three quarters and in line with the first quarters of the prior two years. Termination rates for the first quarter are also essentially even with the average of the prior two years history.
Moving on to rate increases on slide 31. We have exceeded the goal for each element of the 2006 round of rate increases and are on track for where we had planned to be for the 2007 round of re-rates, also known as round two.
Preparations for a third round of actuarially justified increases are underway with a goal of having the analysis completed by the end of the second quarter. We expect that we will file for additional rate increases for most policy co-owners beginning this summer.
We're encouraged with the steady progress on this block of business, but need to continue to build on the past three quarters. As part of this we need to continue on with the foundation laid in the turnaround program.
Namely we need to continue to secure actuarially justified rate increases, keep improving claim management and improve operating efficiency. As Jim mentioned earlier we view the conclusion of the Multi-state Exam settlement as a positive step for Conseco.
As part of the settlement agreement there are a couple of performance metrics that we will be reporting to the regulators. These metrics include prompt payment of claims and family complaint handling.
The early results indicate that we're meeting the requirements for both of these metrics. Work is also beginning on the review of certain claims from 2005 to early 2007.
Another very important piece of work we have in front of us relates to how LTC fits into the overall portfolio of the company. The company is working actively to pursue options to reduce its LTC exposure.
In summary, the significant efforts and results from the turnaround program coupled with the second quarter 2007 reserve strengthening have brought us close to break even. And now, I will hand it over to Eric Johnson, our Chief Investment Officer who will discuss CNO investment portfolio.
Eric?
Eric Johnson
Thank you John and good Morning everybody. As I've described earlier for the first quarter that the income increased to $352 million representing a earned yield of 5.83%.
This was consistent with our expectations. It's attributable to a higher level of invested assets and slight increase in book yield due to portfolio lengthening and they have also wider credit spreads, offset to some degree by prepayment losses.
Asset quality remains a high priority; our low investment grade allocation remains satisfactory at approximately 5% of general account assets. This is a highly diversified allocation, it receives very careful attention.
Slide 34 breaks out first quarter impairments. We recognized $41.3 million in impairment losses in the first quarter.
These losses substantially resulted from mortgage market liquidity and rise in delinquency and loss trends, which particularly impacted our prime jumbo portfolio. We believe many of these impairments which were recognized in the first quarter, may ultimately reverse, may not represent [from an] economic losses at the individual securities themselves do exhibit satisfactory performance.
We also wrote down a small number of fallen angels, which were negatively affected by adding substantial amounts of debt and leverage transactions. In the long-term, we believe these impairments may also prove to be temporary in nature.
Moving on to slide 35, you will see there our structured securities portfolio, which is very highly rated over 89% AAA. Moving on to slide 36, we will discuss subprime.
During the first quarter, our subprime exposure continued to decline, principally as a function of collateral seasoning. We continue very careful deal level surveillance of that portfolio.
We are looking at some very conservative economic assumptions and our objective is to manage to a sufficient coverage of projected collateral losses including the margin for adverse development endeavor. Going on to slide 37, you will see there that subprime is down to 44 basis points on our total portfolio at market value, approximately $103 million.
While in general delinquency and loss severities have been unfavorable in the subprime stage. We remain satisfied with the great support impairments on collateral.
We do recognize for over this, we will remember a very volatile asset class and we will continue to work on it very hard. Going on to slide 39 now, 39 talks about our CMBS portfolio, which is approximately $1 billion slightly over 4% of invested assets.
This also is a highly rated portfolio over 70% in the AAA and AA categories. We remained satisfied with the performance of our collateral here, reflected in very low delinquencies and significant loss cushions.
However, the wide degree of spread widening in this sector is generated material in realized loss. Especially in lower ratings categories BBB.
As a general comment I do believe we will continue to meet our objectives for income yields and quality this year. However, I think it's reasonable to assume that market volatility will persist and could lead to continued elevated impairment levels in the near term and with that I will turn it back to Jim Prieur.
Jim Prieur
Thanks Eric one of the most important takeaways I think in the quarter that was just completed is that Conseco has got the ability to grow at a very attractive rate. Bankers is continuing to grow at more than 10% per year, while Colonial Penn's core business is growing at more than 20% with the possibility of the extending this brand into other markets.
Essentially mid-face term and PFFS. We have improving earnings stability with CIG returning to profitability and the LTC Run-off block basically a break even now with stable claims reserves.
We said for some time, that fixing the LTC close block would take quarters not weeks or months. It has now been a number of quarters and the results are now visible.
The claims reserve volatility has been reduced re-rates are continuing to come true and there have been improvements in claims management and you can now see that quite clearly. Management is very focused on improving shareholder value.
The reason for looking at strategic alternatives is to improve the value of the company and to reduce the GAAP between what the intrinsic value of the company is and what the current share price is. The analysis behind this is targeted for completion by the end of this summer or beginning of the fall and we will be back to with that.
Moving on briefly from the strategic issue to a practical issue, I would like to comment just quickly on expectations for the earnings power of the company. First and maybe we haven't made this quite clear enough there is a quite bit of seasonality in Conseco's earnings.
Some of this has not been that visible when earnings were swamped by reserve strengthening and remediation charges. And of course the product shift to Medicare related products has made this seasonality a bit stronger than it was in the past.
Our Med Supp, Med Advantage and PDP have quite a bit of seasonality to them and in addition there tends to be much worse mortality on life products in Q1 every year particularly in our target market segment. So overall you should expect that less than 20% of the annual operating earnings will occur in the first quarter and while that's true for the whole company it is particularly true for Bankers given their business mix and that you might expect something around 17% of earnings to be generated in the first quarter.
At the last quarters earnings conference call I said that the run rate of earnings was above $1 a share per year and that we would expect it to rise to somewhere around $1.25 per share by year-end. And frankly the numbers that we presented today are consistent with that.
If you take the earnings actually recorded by Bankers and take back into it the special factors in Q1, it suggests that earnings will be in the high $60 million range per quarter. Somebody would say it suggests earnings in the mid $30 million, between $30 million and $40 million per quarter, and at Colonial Penn something over $6 million per quarter.
And with that we'd like to turn it over to questions and operator.
Operator
(Operator Instructions) Your next question comes from the line of Nigel Dally.
Nigel Dally - Morgan Stanley
John, just in terms of the strategic review, you have been looking at it for some time. Can you provide us any color on what appears to be the most likely alternatives at this point?
And then second question just on capital. The risk-based capital ratio continues to decline, and I assume that some of the strategic alternatives you're examining may also require some incremental capital.
So, against that backdrop, how much deterioration are you prepared to see before you're forced to concede or potentially raise incremental equity capital? Thanks.
Jim Prieur
Thanks, Nigel. With respect to the strategic alternatives, we're looking at the complete range of strategic alternatives, and we really can't share anything more than that at the current time.
Ed Bonach
Yeah, Nigel, on the risk-based capital, we believe that the Q1 '08 281% is at or near the bottom for the year. We would expect that to increase during the year through statutory income generation.
And also, we would expect that we will not have as onerous of our long-term charge on the risk-based capital from the dynamic elements of those components.
Nigel Dally - Morgan Stanley
So, the fact that obviously ratio is going down though, it seems to limit some of your strategic alternatives which you're potentially looking at?
Jim Prieur
We don't believe so.
Nigel Dally - Morgan Stanley
Okay, very good. Thanks
Operator
Your next question comes from the line of Randy Binner.
Randy Binner
Good morning. A quick question for Eric Johnson.
The investment yield came in at 5.8%. Two things.
Do you see opportunities out there in the market to potentially improve that yield? And can you give a little more color on the prepayment losses you saw in the quarter and to what degree those may be recurring?
Eric Johnson
Sure, I know really two questions there. Year-to-date business experienced a subtle, but noticeable increase in book yield probably in the context of 4 or 5 basis points.
Between book yield and effective yield, there can be various quarter-to-quarter fluctuations that might be the positive or negative prepayments, which can be positive or negative and other factors. While they intend to be in fairly small dollars amounts, because they are annualized in terms of producing effective yield calculation, however, a fairly material impact on the difference in book yield, which is what we really manage, and effective yield, which is kind of a residual.
During the first quarter, that variance was negative, because there were various negative effects on affective yield that were relatively small dollar amounts, I mean a couple of million dollars, and in many quarters, will trend favorably, trend negatively in the first quarter. And over a substantial period of time, tend to kind of balance out.
Second quarter-to-date, I frankly couldn't tell you how that's trending, although I can tell you it's in either direction, probably not that significant. To your second question, which is, are there opportunities to continue to increase book yield, yes, we've had that experience year-to-date.
And I would expect to continue through the rest of the year. We think that's achievable while also protecting portfolio quality and stability.
And so, while I don't want to get too much into specific invariable forecast for the year, I do think the trends of increasing book yield and protecting portfolio quality are consistent with each other and probably happen through the rest of the year.
Jim Prieur
Randy, let me add too that the lengthening portion of increasing the yield is consistent with our liability portfolio, so we are not taking a mismatched risk there with product lines like life insurance and long-term care. We have a significant amount of long-term liabilities.
Randy Binner
Okay and great. That's helpful.
And then one another quick question. You seem to be laying out a case that the derivative adjustments for EIAs both at bankers and CIG do not have economic value.
And is this something that we might look to in the future being reported in a different way? Not all life insurers include those adjustments in operating results?
Ed Bonach
Yes, and we are more and more aware of the different ways that companies report earnings on these products. We certainly are reviewing our presentation of results there and will most likely make modifications in the future.
Randy Binner
Okay, great. Thank you.
Operator
Your next question comes from the line of Tom Gallagher.
Tom Gallagher - Credit Suisse
Good morning. I guess first question for Eric Johnson.
I noticed that most of the impairments or at least to get a percentage of them were in prime jumbos. Just curious what's driving this and if you can comment on how big that focus in terms of prime jumbo residential loans?
Thanks.
Eric Johnson
You're welcome and good morning. Again, two questions.
I'll do the first one. Interestingly enough, the underlying collateral in respect to that portfolio continues to perform pretty much as we expected when we put the securities on in terms of the trend, the roll rate of delinquencies, losses and severities.
As you know, that's an area where the historical loss rates are. Our delinquency rates are very low, in the double digits of basis points over the life of a security.
So, you're dealing with relatively fine ingredients here and the deltas are pretty precise. Having said that, that's a market which during the first quarter particularly experienced a tremendous amount of volatility and loss of liquidity, looking at the whole pipeline, the securitization market dried up, the underlying lending markets at the bank level dried up and the whole market really kind of came to a halt.
Existing securities depreciated in value pretty significantly, and it's not withstanding the underlying performance. And right now it is difficult for us to represent that depreciation and value will be recovered in a reasonable time horizon now.
We did not experience any ratings transitions in this area or particularly any changes in underlying trends. But in testing impairments, you look at a variety of factors, some of which are fundamental, some of which are more market technical.
Putting all of those factors together, we deiced to bring down the value of our portfolio in that area. I can tell you that because the portfolio is relatively small, it's very unlikely that future quarters would have this kind of experience, and in terms of giving an overall size it's well less than $100 million in aggregate.
Tom Gallagher - Credit Suisse
Okay so really, prospectively this shouldn't be a focal area especially if the underlying cash flows and the mortgages aren't showing severe signs --
Unidentified Company Representative
Of course that is the, prospectively I think it would be very difficult in absolute terms for us to experience this again in this space.
Tom Gallagher - Credit Suisse
Okay, that's helpful. The next question I had was on your comment on cognitive screening that had been put in place for the Bankers long term care.
Can you just give us a sense for what has your screening technique been to date. Are you using them as this is brand new, maybe a little bit of color there and also, is this really what drove or what's been moving the increase in claims in Bankers.
Is it really on the cognitive side and if so, is that something that you see as reversible or continue into pressure results?
John Wells
Sure, Tom, this is John, Wells, I'll take that one. Relative to the EMST cognitive test, that's pretty much the industry has gone there, Bankers started rolling that out to the field last year and continues to do so, it's a pretty standard test.
Before that there was a cognitive screen, it wasn't as sensitive as this one is and this one's is very sensitive so rejecting more applicants that have cognitive, perhaps would have a cognitive claim in the future. As to claims, cognitive and cognitive related claims are largest claims cost.
So, by doing this on the front end, having the cognitive test on the front end, we feel it will address future claims cost. Although it is just tighter, it's not that we didn't have it before it's just a tighter screen.
Tom Gallagher - Credit Suisse
Okay thanks, and then John just a follow-up. Is it fair to say though that, since you had a less regular screen in place that we might still feel some of the after affects of cognitive claims on your back book for some time, quarter --
John Wells
Right, Tom that's exactly right. Since we have been doing it recently, it's just going to improve.
We don't have really any early results yet, but that's basically what the industry is seeing and what we plan to see going forward. As I said most, 30% or more of our claims are cognitive related, we believe we will see that decrease over time.
Ed Bonach
Yeah, I also think it's important to put our $10 million variants in the quarter in context still with $7million of that $10 million being related to increased number of initial claims. We have 400,000 policies in force, about $2.5 billion of active Life reserve and over $0.5 billion of premium.
So, related to the size of our in force, $7 million is relatively small percentage. Now is the percentage of earnings obviously much higher, which under scores why our strategy is to reduce our exposure were over weighted in long-term care with that volatility quarter-to-quarter that way and then the $3 million remaining of the $10 million was on adverse loss development.
Well we have over $700 million of claim reserves on this block. So $3 million on $700 million again a very small percentage of what's in force.
Tom Gallagher - Credit Suisse
So Ed, following up on that, so your point really on this is it's well within the normal deviations that you would expect and not necessarily representative of the trend. Is that a fair statement?
Ed Bonach Well said Tom. Yes.
Tom Gallagher - Credit Suisse
Okay thanks very much.
Operator
Your next question comes from the line of Andrew Kligerman.
Andrew Kligerman - UBS
Sorry my line was breaking up a bit, but I do want to follow-up on the earlier comments on cognitive. Not cognitive testing is required to the bankers long-term care ratio.
So we are looking at a trend where it picked up in the first quarter to 111.6% the bankers lost long-term care ratio that was 103.3 in the fourth quarter. It just seems to be rising up, so what I want to understand is maybe you could isolate out what you think you can improve it by with better cognitive testing technique.
And then generally do you think this large spike sequentially was anomaly, as it seems to be both the frequency and a severity issue. So is this an anomaly and should it revert back to what I think we believe was a somewhat elevated number in the fourth quarter.
John Wells
Andrew this is John Wells. I will take a piece of that relative to the claims piece.
No we have been talking about cognitive, but also on the back end we are also as Scott referenced in his presentation we are doing some analysis, we are going to be doing some more analysis on the claims management which in the near term would address looking at, things like eligibility, decisions, plans of care, recertification, some of the same kind of things that we're doing with the closed blocks. So we expect to do that, have an outside expert come in and help us take a look at that, make sure that we're continuing to use the industry best practice for claims adjudication, in addition to the cognitive screening upfront, which you'll see over time.
Scott Perry
Yeah, just to emphasize that point John, this is Scott. The cognitive testing isn't, we started this back in 2007.
It's kind of a normal transition from the test that we were doing, upgrading the test it's not in any way kind of a reaction to the quarter's results. And although certainly cognitive is affecting just claims cost in general in the industry, the testing that we're doing is really proactive in getting in front of cognitive disorders in the new business that we're issuing.
I know Ed wanted to make a comment.
Ed Bonach
Yeah and I think the other thing Andrew with the loss ratio or benefit ratio that you quoted that's the non-interest adjusted.
Andrew Kligerman - UBS
Understood, yeah
Ed Bonach
We do expect to add to the book of business ages that that percentage would go up somewhat from period-to-period. Yes the interest adjusted also went up somewhat, but that is really what shows with over $3 billion of reserves it includes the investment income on that, which is a significant portion of revenues to make sure that we are having total revenues of premium and investment income to cover benefits and expenses.
And then lastly, sort of to the question that Tom Gallagher also raised, we see this fluctuation in the quarter to be within the normal range of fluctuation that you can get on this business from quarter-to-quarter.
Andrew Kligerman - UBS
Okay, so maybe let me just attack it a little differently, and so if it's within the normal range, maybe just give me a sense of the range of what you think the interest adjusted loss ratio should be, maybe that will help me understand that and then just back to our original question. Maybe you could incrementally give a range of impact around what these initiatives and I understand that they are not new, but what kind of impact would these initiatives have, maybe give us a little range there.
Just to get a sense of how normal this is for my model, what should I be plugging in?
Ed Bonach
I would say, for the interest adjusted benefit ratio, something in the mid 70's would be normal.
Andrew Kligerman - UBS
And it is what this quarter?
Ed Bonach
It was 79%, I think, you know it can very much vary by 3 to 5 percentage points quarter-to-quarter.
Andrew Kligerman - UBS
Okay and then these improvements, do you think that could improve it by how much?
Ed Bonach
Well, if you consider we have about $600 million of premium about $1 billion or so of revenues there. I think between re-rates that still have to come through with the claims management, increasing our yields on the investment income that can easily have a couple percentage points impact over the course of the next 12 months.
Andrew Kligerman - UBS
That's very helpful. And then just back to that RBC ratio, what was the biggest driver going from 296 at year end to 281 in this quarter?
Ed Bonach
It was marginally growth related and the --
Andrew Kligerman - UBS
I see
Ed Bonach
Yes, the at acquisition cost of course for statutory are not capitalized and with our product line expansion in Colonial Penn and record sales had Colonial Penn and Banker.
Andrew Kligerman - UBS
But for your comment earlier Ed, you think that's going to stabilize despite the fact that you will continue growing?
Ed Bonach
Yes, I guess on one end we would love that record sales every quarter. But I think it's unreasonable to expect that every quarter will have record sale.
Andrew Kligerman - UBS
You bet, thanks a lot.
Operator
Your next question comes from the line of Jimmy Bhullar.
Jamminder Bhullar - JPMorgan
Jim Prieur
Operator
Mr. Bhullar your line is open.
Jim Prieur
Maybe he is off. I wish you go on.
Operator
Your next question comes from the Jukka Lipponen.
Jukka Lipponen - Keefe, Bruyette & Woods
Good morning, two questions. First from the strategic perspective, would you potentially consider simply outsourcing the long-term care product instead of manufacturing it yourselves, even at Bankers?
Jim Prieur
With respect to Bankers, that's not an impossible thing to do. I mean certainly Conseco and Bankers in particular is very focused on senior middle market and the senior middle market has got a need for long-term care.
We don't necessarily have to manufacture 100% of the product that we are offering, but it would be an important product to have in the bag of products that the salesmen are taking out to the field.
Jukka Lipponen - Keefe, Bruyette & Woods
Right, so then that potentially is one of the options you might be considering?
Jim Prieur
There is a wide range of options and that would certainly be amongst them.
Jukka Lipponen - Keefe, Bruyette & Woods
And second question with respect to Conseco senior health. What were the statutory operating results in the first quarter and was there any kind of a capital contribution to that company in the first quarter?
Ed Bonach
Jukka there was not any additional capital contribution. It was the statutory loss pre-tax was about $14 million and so the difference between our GAAP results is of course you don't have the intangibles to amortize but then we do have the funding of the long-term care result pivot.
Jukka Lipponen - Keefe, Bruyette & Woods
Thank you.
Operator
Your next question comes from the line of Omar Mallick.
Omar Mallick
Hi I would like to ask a question about the convertible debentures. My understanding for the documents is that investors can acquire the company, pre-purchase of debentures for cash on specific dates, the first being 9/30/2010.
So my first question is, for most investors who were to the put them to the company, have you thought about how you would finance it and then secondly is there anything in your credit agreement or elsewhere which should restrict you from buying back?
Jim Prieur
There is nothing restricting us from buying them back and --
Omar Mallick
Okay.
Jim Prieur
There is a both a put and call at par in September 30th, 2010 and so when you look at our debt financing we've got that plus we've got the bank line, which is a larger piece of debt, which matures in 2013. So those are the two major pieces of debt obligations that the company has got.
Omar Mallick
Is there a certain scenario with regard to the put or call that you foresee as most likely?
Jim Prieur
Well, I would think that it's very likely the thing will mature effectively on September 30th, 2010. And that is the scenario we are planning for.
Omar Mallick
Okay. And so most likely, would that be financed with an incremental term loan or--
Jim Prieur
No, there is a wide variety of how we can finance that which, we are evaluating our alternatives and the preferred path, which of course is dependent on several factors, including what the financial markets are somewhere more towards the end of this year beginning of next year.
Omar Mallick
Perfect. Thank you.
Operator
(Operator instructions). Your next question comes from the line of [John Nidel].
John Nidel
Good morning, just a quick data question and I apologize for my voice. It's just what the statutory capital was at the end of the first quarter on a consolidated basis?
Jim Prieur
Yeah, consolidated was just short of $1.5 billion.
John Nidel
Thank you very much.
Scott Galovic
Operator, I think we have time for one more question.
Operator
Your next question comes from the line of Jimmy Bhullar
Jamminder Bhullar - JPMorgan
Got a quick about your earnings power and then the NOL in general. Could you discuss at what point, if your earnings don't improve, the NOL recoverability becomes an issue and just if you could give us some metrics on how much earnings you would have to make over the next few years to be able to use up most of that and what point would you have to incur a write-down in your NOL if profitability remains weak.
That's all I have?
Jim Prieur
The recoverability of the NOL isn't at risk, either in the first quarter or going forward, at this point. So our current earnings expectations will easily take care of the NOL going forward.
And I guess, you know that's it.
Ed Bonach
Well, it's Ed. The other thing I'd add is to remember that, there really are as we look at it three components to earnings than the NOL.
There are the capital losses, which we have an allowance up against the NOL there, so additional capital losses going to impair our net recoverable NOL. On the operating income side, there is the life and non-life income that's important and generating operating income in the first quarter.
And to Jim's point, what we would expect for the full year, certainly is in line with recovering and using the net NOL and lastly I'll say is that these NOL do go out for many years, so it is much more than what we earned this year and it's over a ten plus year period that really comes into account to assess the value of the NOL.
Jamminder Bhullar - JPMorgan
Thank you.
Jim Prieur
Well thank you very much, everyone for attending this conference call. Conseco is focused on the senior middle market.
In America it's the fastest growing major segment in the insurance business. We have a unique sales machine dedicated to the market; whether it's through agents, direct or through brokers and we are committed grow in this business successfully in the future.
Thank you very much.
Operator
This concludes today conference call. You may now disconnect.