My name is Marcy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2011 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Mr. Galovic. You may begin your conference.
Thank you, operator. Good morning, and thank you for joining us on CNO Financial Group's third quarter 2011 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Operating Officer and President of Bankers Life; and Eric Johnson, our Chief Investment Officer. Following the presentation, we will also have several other business leaders available for the Q&A period. During the conference call, we'll 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.cnoinc.com. This morning's presentation is also available on our website and was filed in a Form 8-K this morning. We do expect to file our third quarter 10-Q and post it to our website on or before November 1st.
Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by those forward-looking statements. Today's presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the GAAP measures with the non-GAAP measures in the appendix to the presentation. Throughout the presentation, we'll be making performance comparisons, unless otherwise specified, any comparisons made will be referring to changes between Q3 2011 and Q3 2010. Now I'd like to turn the call over to our CEO, Ed Bonach. Ed?
Thanks, Scott. We are pleased to report that CNO continued to generate earnings growth, with business segment operating earnings increasing 16% in the third quarter. Net income was $196 million, almost a four-fold increase from last year. Our net income was driven in part by the release of $143 million of tax valuation allowance, enabled by our improved financial performance as our franchise continues to grow through sales, good persistency, and earnings. Net operating income of $46.5 million was down 1% from a year ago, while operating EPS of $0.17 per share was up from the prior year, primarily due to our share repurchase program. The consolidated statutory risk-based capital ratio of our insurance subsidiaries increased eight percentage points to 359% during the quarter, driven by statutory operating earnings of $65.5 million, partially offset by $27.4 million of dividend payments to our holding company.
Unrestricted cash and investments held by our non-insurance subsidiaries decreased by $65.1 million to $168.9 million in the quarter, primarily reflecting $39.5 million for share repurchases and an equal amount of prepayment of debt, as well as a $25 million early payment on the senior health note. These outflows were partially offset by the aforementioned dividend payments, surplus debenture interest, management, and investment fees. Our debt-to-total capital ratio was 18%, down from 20% at December 31, 2010, reflecting our strong earnings and debt payments. Finally, our total new annualized premium on core products was $94 million, which is up 8%, with growth in sales for all three segments that are actively marketing business. Turning to slide six, net operating income for the quarter was $46.5 million, or $0.17 per share, compared to $47.1 million or $0.16 per share a year ago.
Net income applicable to common stock was $196 million, which included $16.6 million of net realized investment gains, a charge of $9.4 million related to fair value changes in embedded derivative liabilities, a $700,000 loss on extinguishment of debt, and the aforementioned release of $143 million of the tax valuation allowance. This compares to net income of $49.4 million a year ago, which included $2.3 million of net realized investment gains. Net income per share for the third quarter was $0.66, including $0.05 per share of net realized investment gains, a negative $0.03 per share related to the fair value changes in embedded derivative liabilities, and $0.47 related to the release of a portion of the tax valuation allowance. This compares to net income per share of $0.17 a year ago, which included $0.01 per share of net realized investment gains.
Moving on to slide seven, income before net realized investment gains, corporate interest, and taxes, or EBIT, of $96.1 million was up 2% compared to $93.8 million a year ago. Our business segment operating earnings increased 16%. We will cover the insurance segment results in more detail in a few minutes. For our corporate operations, which include our investment advisory subsidiary and corporate expenses, our net expenses in the quarter were up $15.2 million and included a loss of $10.4 million related to the impact of market value fluctuations on assets backing company-owned life insurance policies purchased as an investment vehicle for agent deferred compensation benefits and a loss of $8.9 million related to the impact of lower interest rates on the value of liabilities for agent deferred compensation and former executive retirement benefits.
With respect to non-operating items, net realized investment gains were $16.6 million, including total other than temporary impairment losses of $2.9 million, all of which were recorded in earnings. Net realized investment gains in Q3 2010 were $2.3 million, including total others in temporary impairment losses of $22.8 million, of which $24.5 million was recorded in earnings and a negative $1.7 million in AOCI. During Q3 2011, we recognized a $9.4 million decrease to earnings resulting from an increase in the estimated fair value of embedded derivative liabilities related to our fixed indexed annuity. Such charge reflects the reduction in market interest rates used to determine the derivative's estimated fair value. Our overall results also include a $700,000 loss on extinguishment of debt, net of income taxes related to the prepayment of $39.5 million under our senior secured credit agreement.
Finally, the results from the quarter also reflect a $143 million reduction to the deferred tax valuation allowance, primarily resulting from no longer being in the three-year cumulative loss position, our recent higher operating income, and now being able to model growth in future taxable income. I will share more detail on this topic later in the presentation. Slide eight shows our trailing four quarters consolidated operating return on equity. ROE on a trailing four quarters basis increased to 6.3%, primarily reflecting higher earnings, which more than offset the 12% increase in average equity. Third quarter 2011 net operating EPS was $0.17 per share versus $0.16 per share a year earlier, primarily due to a decrease in shares outstanding as a result of our share repurchase program.
Turning to slide 10, book value per common share, excluding AOCI, increased to $17.89 from $16.28 at year-end 2010 and $15.60 a year ago, primarily reflecting earnings as well as a reduction of almost eight million shares as a result of the share repurchase program. The ongoing improvement in our profitability is evident in slide 11, which is a summary of the pre- and after-tax GAAP operating income for years 2009 and 2010, along with the last 12 months. As we have reminded you in past calls, it's important to note that under GAAP, our earnings are reported as if we're paying taxes at approximately a 36% rate, yet we pay minimal tax due to our NOL. This valuable tax asset should be considered when evaluating the company based on a PE multiple or price-to-book ratio.
Slide 12 shows the statutory earnings power of the insurance companies, with growth in statutory earnings largely paralleling GAAP. We think this is important as statutory mirrors cash flow, and there are some investors that seem to be moving towards valuing companies on statutory metrics. The statutory dividend capacity of the insurance subsidiaries is in the range of $75 million-$200 million annually, with the residual remaining at the insurance subsidiaries to maintain appropriate capital levels and fund growth. In addition to dividends from the insurance companies, the holding company also generates cash from interest payments on surplus notes and fees for investment and advisory services provided to the insurance companies that annually total approximately $140 million. Annual holding company interest and operating expense is currently about $115 million. Turning to slide 13, you can see that our financial strength continues to improve.
Consolidated statutory risk-based capital increased another eight points in the quarter to 359%, primarily as a result of a 14-point increase from statutory operating income, partially offset by a six-point decrease due to dividends paid up to the holding company. With respect to liquidity, unrestricted cash and investments held at our holding company decreased by $65.1 million to $168.9 million in the quarter, primarily reflecting $39.5 million for share repurchases, $39.5 million of commensurate prepayment of debt, as well as the $25 million early payment on the senior health note. These outflows were partially offset by the aforementioned dividend payments, surplus to venture interest, management, and investment fees. Slide 14 illustrates the growth of our CNO franchises evidenced by growth in the liabilities for our three segments that are actively marketing business.
The slide also clearly shows that for OCB, which is primarily closed blocks of business, the liabilities continue to run up. Important to point out is that the Washington National segment decreases since 2009 are primarily a result of a 2010 reinsurance transaction as well as higher return of premium payments for policies 20 years and older, the sales of which peaked in the early 1990s. Let me now turn it over to Scott Perry, our Chief Operating Officer and President of Bankers Life, to cover the results of our three segments where we actively market and sell new business. Scott?
Thanks, Ed. In our Bankers Life segment, pre-tax operating earnings were $91.4 million, down 4% compared to the prior year. The decrease in pre-tax operating earnings compared to Q3 2010 reflects a $3 million reduction in earnings from PDP products, as well as the positive impact in Q3 2010 of $6.5 million of favorable reserve development from private fee for service business assumed through our reinsurance agreements with Coventry, the last of which expired on January 1, 2010. Partially offsetting this decline was favorable reserve development relative to last year of approximately $4 million in our long-term care and Medicare supplement blocks. Q3 2011 operating earnings included approximately $14 million of favorable reserve developments in the long-term care and Medicare supplement blocks.
Q3 2010 operating earnings of $95.5 million, including the aforementioned favorable developments from the private fee for service business and approximately $10 million of favorable reserve developments in the long-term care and Medicare supplement blocks as well. Sales results as measured by new annualized premiums or NAP for the quarter, excluding Medicare Advantage and PDP, were strong. Overall sales were up 10% versus Q3 2010, led by increases of 21% in Medicare supplement and 12% in life insurance. Recruiting results continue to be strong. New agent contracts increased by 9% versus Q2 2011, and our overall agent force increased by 6% versus Q2 2011 and 11% since year-end 2010. Lastly, our branch expansion initiative for 2011 is on schedule. Through September, we have opened 14 of the 15 planned locations. In the past couple of quarters, we've provided an update on the Medicare supplement market.
As a follow-up, I'd like to share some additional thoughts based on some developments over the past several months. We continue to see our competitors taking significant rate increase actions in most markets. As our products continue to perform to profit expectations, we do not expect to take any rate increase actions this year. During the quarter, we received approval in 32 states for a new 4-tier product that will offer gender-specific and preferred rates. We anticipate that these new plans will be available in the remaining applicable states by year-end. Although sales through the first nine months of 2011 were flat compared to 2010, issued policies increased 6%, reflecting continued consumer preference for our lower priced Plan N.
As I mentioned earlier, NAP increased for Medicare supplement by 21% compared to Q3 2010, and we continue to see a reduction in policies return during the free look period, which is further validation of our improving competitive position. I'd also like to provide an update on our long-term care business. As we have discussed over the past several quarters, our long-term care financial results remain consistently profitable as we continue to diligently manage the business. We continue to benefit from claims management improvements and the success we have in gaining approval for rate increases where actuarially justified and necessary. As a result, over the last several quarters, long-term care's interest-adjusted benefit ratio, a key measure of financial health, has been in the 66%-75% range. Rate increase activity continued during the quarter.
We have filed for the third increase on inflationary plans sold between 1992 and 2003, which is approximately half of this block, and also filed for the second increase on most plans sold between 2002 and 2005. In total, we expect rate increases of approximately $37 million when fully implemented. As of the end of the third quarter, we have received approximately $22 million of approvals. Although the rate increase approval process has slowed over time, we still expect to receive most approvals within 24 months. This is reflective of the relatively small number of product types within our block and our experience in navigating the rate increase approval process. Slide 19 shows the impact of the earnings items previously discussed, producing a return on allocated capital on a trailing four quarter basis of 12.2% for Bankers.
Pre-tax operating earnings for Washington National in Q3 2011 were down $5.1 million or 19%. Pre-tax operating earnings in Q3 2011 of $22.1 million included a $6 million audit period adjustment for a catch-up and return of premium payments, which reduced earnings, partially offset by $1 million of additional spread earnings in Q3 2011 on investments purchased with the proceeds of increased borrowings from expanding the Federal Home Loan Bank program to Washington National. NAP for our core supplemental health and life products increased by 3%, and we experienced solid recruiting results in both the PMA and Washington National Independent channels. As mentioned during the quarter, supplemental health and life sales each increased by 3% versus Q3 2010. Slide 22 summarizes Washington National's operating earnings by period. Its consistent earnings produced a trailing four-quarter operating return on allocated capital of 8.5%.
Moving to Colonial Penn's results on slide 23, our pre-tax operating earnings in Q3 2011 were up 4% compared to a year ago, reflecting growth in the block. Sales increased by 10% over Q3 2010, and our lead generation activity continues to be strong. Slide 24 summarizes Colonial Penn's operating earnings by period, producing a trailing four quarters operating return on allocated capital of 7.2%. Last quarter, I mentioned that as part of my new role as Chief Operating Officer, I would be evaluating initiatives in each segment that will generate profitable growth. I would now like to comment on some of these initiatives we have decided to pursue. In our Bankers career distribution channel, we will be focusing on two growth levers, geographic expansion and agent and manager productivity. The first initiative I want to briefly touch on is our field management trainee program.
This program will enable us to accelerate location expansion, which is key to achieving maximum market penetration. The primary obstacle we face in establishing new locations is having the sales leadership talent to staff them. This program will leverage one of Bankers' greatest sources of competitive advantage, insurance sales leadership development. It targets high-potential external candidates and offers an integrated development program with salary benefits and commission potential. This will enhance and augment our traditional management development process by recruiting targeted individuals to immediately enter a fast-track career development program as management trainees, where they will perform all the career steps in the developmental process, but at an accelerated pace and with intense support and supervision along the way. We expect this program to produce or enable 30 to 35 candidates per year, beginning in three years, who are prepared to lead a branch or satellite location at Bankers.
This will be in addition to the 15 to 20 managerial candidates that develop naturally through our process. Secondly, at Bankers, we are launching two initiatives that will improve agent productivity through both skill development and the deployment of sales technology tools. In January 2012, we will be introducing a new sales training and development program, Top Gun, that focuses on improving second and third-year agent productivity by addressing selling skills, professional development, and relationship management. This program extends our current training curriculum with dedicated in-person training sessions, online support, field coaching, and clear expectations. The objective is to enable more agents to make a successful transition from first-year success to second year and from second year to third year. Improved performance will lead to improved retention of developing agents, which results in growth in agent force size and productivity.
Next month, Bankers will be launching new mobile technology tools that will enable our sales force to present product information, conduct interactive sales presentations, and access prospect information using iPads and other mobile devices. This is the first phase of a multi-phased initiative that will leverage technology tools at the point of sale to improve effectiveness and efficiency of our sales organization. In our Washington National segment, we continue to invest in recruiting and other initiatives that will expand the geographic footprint of both PMA and Washington National Independent sales channels. We are adding wholesaling capacity in Washington National Independent recruiting. To enable expansion of both PMA and Washington National Independent, we are aggressively seeking product approvals in new markets for our supplemental health products.
Lastly, in our direct marketing segment, Colonial Penn, we are developing new products for testing in 2012, which will increase the portfolio of products we bring to the market. Clearly, this is not an all-inclusive list of the many opportunities we have to drive growth across the enterprise. Hopefully, it does provide some color of the type of programs we will be pursuing. In addition, we will continue to look for ways to achieve operational and distribution efficiencies across the business units, establish common technology platforms, and leverage best practices in sales and marketing across segments. I will now turn it back over to Ed to cover OCB's results. Ed?
Thanks, Scott. Turning to slide 26, in our other CNO business segment, pre-tax operating earnings of $2 million increased $26 million over 3Q10. The increase reflects approximately $13 million of improvement in interest-sensitive life margins, $4 million of reduced legal costs, and a $6 million write-off last year of the present value of future profits related to this segment's long-term care block. Results in both 3Q11 and 3Q10 reflect a reduction in earnings of approximately $13 million, primarily due to the impact of decreased projected future investment yields for our interest-sensitive insurance products. Slide 27 illustrates the improved stability that this legacy closed block has produced over the past four quarters as we have implemented various non-guaranteed element changes. As we have previously stated, we continue to review the OCB business for justified changes to non-guaranteed elements.
In order to appropriately manage risk in this area, we are taking a measured, deliberate approach. Progress continues to be steady and in line with our expectations. One of our goals is to be an investment-grade credit. Managing excess capital at the holding company while maintaining appropriate capital at the insurance subsidiaries are priorities for us. As such, we have raised our current management target for RBC to 350% in support of higher ratings while maintaining the target for liquidity at the holding company at $100 million, which is approximately equal to a year of holding company expenditures. Our current capital position remains strong, with excess capital over the increased management targets totaling more than $110 million. It's important to note that the excess capital at the holding company can be contributed down to the insurance subsidiaries at any time if needed.
Had the holding company excess capital at September 30th, 2011, been contributed down to the insurance subsidiaries instead of held at the holding company, our consolidated RBC at September 30th would have increased by another 14 points to 373%. Our earnings power and cash generation, coupled with our valuable NOL tax assets, provide us with several opportunities to effectively deploy excess capital. Some of these options are already being acted on with our $50 million debt prepayment in the first quarter and with our common stock repurchases and commensurate debt prepayments in the second and third quarters totaling just over $111 million. Deploying excess capital to further increase organic growth is our top priority, Scott provided you with updates on some of those organic growth initiatives. As indicated earlier, during the third quarter, we repurchased 6.6 million shares of common stock for an aggregate purchase price of $39.5 million.
The shares were repurchased at an average cost of $6.01 per share and represented 2.6% of the total outstanding shares as of June 30, 2011. As required under the terms of our senior secured credit agreement, we also made a principal prepayment of the same amount. During the third quarter, we also made an early payment of $25 million on the senior health note in satisfaction of the scheduled amortization payment due November 12, 2011. We further reduced leverage with our debt-to-total capital ratio improving by 0.8 percentage points. Our next scheduled principal payment under the credit facility of $10 million is not due until September 30, 2012. Year-to-date, we have repurchased 8.8 million shares for $55.7 million at an average cost per share of $6.35. This represents 3.5% of outstanding shares at December 31, 2010. Year-to-date principal payments on debt totaled approximately $131 million.
As a result of our aforementioned year-to-date capital transactions, our debt-to-total capital ratio improved by 1.8 percentage points. Slide 31 is a graphic breakdown of our NOL on a gross and net basis. As we have noted in prior quarters, accounting should not be confused with economic value. GAAP valuation allowances do not limit our ability to recognize economic benefits from the carryforwards. As of the third quarter of 2011, due to 12 consecutive quarters of normalized earnings, we are no longer in a three-year cumulative loss position, which has allowed us to reevaluate our tax valuation allowance, including modeling taxable income growth, resulting in a $143 million reduction in the allowance in the quarter.
Consistent increases in taxable income over the last several years have resulted in a $95 million reduction in the tax valuation allowance in the fourth quarter of last year and a $143 million reduction this quarter. As we are no longer in a three-year cumulative loss position by achieving normalized taxable income in each of the last 12 quarters, we now have the ability to model some future increases in taxable income, which supports the release of the valuation allowance that we mentioned. Our modeled future taxable earnings are based on a historic three-year average normalized taxable income, which is assumed to grow by 5% per year in each of the next five years and then remain flat for the remaining years. Future benefits of NOLs recognized on the balance sheet continue to be determined by accounting rules that require us to maintain a valuation allowance based on verifiable evidence.
Slide 33 shows the various components of our analysis with regard to the tax valuation allowance, including our modeled future taxable income and excess life income that can be used against the non-life NOL. One of the more significant items that we have been addressing is the new DAC accounting standard, EITF 09-G. The new standard provides a new definition and significant changes for deferred acquisition costs. Under the new definition, only costs that are directly related to the successful acquisition of new insurance contracts will be able to be deferred, and advertising costs can only be deferred if qualified pursuant to the direct response advertising criteria. The accounting standard is effective January 1, 2012, and CNO will be adopting the change retrospectively. It's important to keep in mind that this is an accounting change only, and there is no change in the economics of our business.
I'd like to spend a few minutes on where and why CNO is expected to be impacted disproportionately. Colonial Penn will be impacted the most as a percentage of their segment earnings due to the significantly reduced deferral of direct advertising costs. Bankers has career distribution and will also be impacted as certain field management expenses will no longer be deferrable. We would anticipate little impact on the Washington National and OCB segments. Under the new pronouncement, new business will strain earnings in year of issue, so growth will suppress reported earnings. As CNO's sales growth has been greater than market, we would expect a disproportionate negative impact on our earnings than the industry. Our present value of future profits, or PVFP, also known as VOBA, which resulted from fresh start accounting upon emergence from bankruptcy, is not impacted by 09-G.
Although this will be positive with respect to our book value decrease compared to the industry, it will continue to have a negative impact on future earnings and returns. Slide 35 shows the estimated impact of the adoption of the accounting on Colonial Penn's 2010 EBIT. By bifurcating the results between new and in-force business, you can clearly see the impact that the new accounting will have on earnings as a result of the majority of direct marketing costs not being able to be capitalized and deferred under O9G. It's important to note that earnings before acquisition expenses and amortization remains unchanged. Slide 36 illustrates the estimated impact of the adoption of the accounting on Colonial Penn's EBIT for the years 2008 to 2010. A couple of items I'd like to note on this slide.
O9G GAAP earnings for a direct marketing operation like Colonial Penn will be similar to statutory earnings. Also, you see the increase in earnings in 2009, when we reduced advertising spending to conserve cash and capital. Finally, we believe the growth in the top in-force line is the most indicative of the economic value of this business. Slide 37 is a summary of the expected impact of the implementation of the new DAC accounting rules on CNO. At this time, we would expect that we will be able to defer most commission payments, plus some other costs directly related to the production of new business. Our current estimate shows an expected $29 million-$34 million negative impact to our annual net income, equating to $0.09-$0.12 per diluted share.
In addition, we would estimate the initial retrospective adoption to result in a $465 million-$570 million, or a 10%-12% reduction in book value, excluding AOCI, which equates to $1.50-$1.70 reduction in diluted book value per share. We will continue to refine our estimates of the impact of the new accounting rules. Slide 38 shows some potential management actions that are being considered with respect to mitigating the impacts of the DAC accounting change. We will be reviewing our business models for potential changes, which could entail such things as modifying sales and marketing compensation, as well as doing reinsurance and other transactions. We are also planning to develop non-GAAP measures to disclose the impacts of the accounting change in order to provide more comparability with peers.
The bifurcation of GAAP earnings between new and in-force business, as we just covered for Colonial Penn, is an example. Finally, we will be announcing an upcoming call in December, which will provide more detail and granularity on the estimated impacts to CNO of O9G. Turning to slide 39, I want to spend a few minutes to address the low interest rate environment and the impact on CNO. First, current rates have been factored into our loss recognition testing. In the third quarter of both this year and last, we took charges of approximately $13 million in the OCB segment to write down intangibles to reflect the continuation of current interest rates through the end of the following year. With respect to statutory reserves and capital, the low interest rate environment is considered in determining reserve adequacy.
We will complete all of our reserve adequacy testing before year-end, but no material impact is expected at this time. There are also management actions that are being, and could be taken to help mitigate the impact of a persistent low interest rate environment. We continue to actively manage our investment portfolio with the new money rate in the third quarter of 2011, increasing to 5.55% from 5.24% in the previous quarter. We have removed some annuity products from the market and adjusted crediting rates and product charges on interest-sensitive life and annuities. Increasing new business premiums to offset reduced long-term investment yields can also contribute to lessen the negative impact of low rates. Lastly, as we have done before for capital management and to enhance financial stability, we could choose to reinsure certain blocks.
Now I will turn it over to Eric Johnson, who will discuss the CNO investment portfolio. Eric?
Thank you, Ed. Good morning, everybody. In the third quarter, we earned investment income of $338.2 million compared to approximately $342 million in the second quarter. While average invested assets increased 2.2% quarter-over-quarter, our portfolio earned yields declined to 5.67% compared to 5.87% in the prior quarter. In the second quarter, investment results were positively affected by non-recurring items such as prepayment income. In addition, third quarter yield and income were negatively affected by higher cash balances at points during the quarter. Adjusting for non-recurring items, earned yields would have been 5.73% in the second quarter and 5.60% in the third quarter. During the third quarter, we invested the bulk of our new money in high-grade corporates and current pay non-agencies. New money rate, as Ed mentioned, was 5.55% compared to 5.24% in the second quarter. Going on to the next slide.
In the third quarter, we recognized $30.6 million in net realized gains. $74.5 million in gross realized gains were partially offset by $41 million in realized losses and $2.9 million in other than temporary impairments recognized in earned income. As you will recall, in the fourth quarter of last year, we decided to pursue the early commutation of a $305 million segregated account, GIC, in exchange for interest in the underlying invested assets held by the insurer. During the most recent quarter, we fully completed the commutation. We exchanged our remaining GIC investment of approximately $138 million for $127 million in agencies and $24 million in varied interests in private companies. In total, over the past three quarters, we committed 100% of our GIC investment for $210 million in agencies and $64 million in varied interests in private companies.
Also during the third quarter, we sold a $70 million portfolio of current commercial mortgage loans in order to mitigate future loss rates. This transaction eliminated a segment of our portfolio that had higher risk characteristics, resulting in a realized loss of $20 million. It should enhance the longer-term quality of our portfolio. On to the next page. The unrealized gain in our portfolio increased to approximately $1.6 billion at quarter end. This can be attributed to a point-to-point decline in Treasury yields of approximately 125 basis points using the 10-year as a reference, partially offset by credit spread widening in certain sectors. The next page describes impairments for the quarter, which trended lower to approximately $2.9 million. We reduced the carrying value of one commercial mortgage loan that is current but not displaying the characteristics that we'd like to see. On to the next page.
The next slide provides a pretty high-level summary of our commercial mortgage loan portfolio. Present rate of delinquency is approximately 66 basis points. We are continuing our active management of this portfolio to further reduce less stable exposures, while at the same time, we're adding in higher quality exposures in what's a pretty favorable marketplace. The next page depicts our overall asset allocation, which is substantially unchanged in the quarter, trending a little higher on corporates and treading water in a bunch of other sectors. On to the next page. The next page slide segments our invested assets by rating. As you can see, our below investment grade ratio was approximately 8% at quarter end, essentially unchanged quarter-over-quarter. A little lower. In corporate, the relationship of upgrades to downgrades has certainly improved compared to last year, fairly stable throughout this year.
Kind of going against that, certain non-agency RMBS continue to be susceptible to downgrades as collateral seasons and credit support inherently diminishes in some structures. We don't expect RMBS, the downgrades, to materially impact our RBC ratio. It had no impact year-to-date. With regard to investments at our holding company, which is on the next page, our first priority there is liquidity for corporate and strategic needs as I described. What we're doing with the money is as follows. We're investing a larger portion of the available funds in fixed income, core plus, and money markets, and the smaller portion in indexed equity and alternatives. For the third quarter, here's some summary results. At 9/30, the amount of cash and investments held was approximately $169 million. Income for the quarter was approximately $1 million. Net realized and unrealized losses were approximately $6.5 million.
Total return for the quarter was approximately -4.9%. The fixed income results were positive and on target. That was offset by unrealized declines in equities and alternatives. The next slide breaks down the allocation of the funds with a little more detail at the end of the quarter and gives an indication of the target allocation, which we're moving towards appropriately. Changing the page and topic. Recently, the sovereign debt crisis in several European countries has continued to create some concern in the financial markets. This page summarizes our sovereign debt investments in certain European countries. Portugal is the increase in Spain. As you can see, we have no direct sovereign exposure, and our overall exposure to these countries is low. We own two corporate names and two U.S. domicile banks owned by Spanish parents. We'll continue to monitor this position in European credit, which is not significant.
Speaking generally, current investment yield reflects real and strong money liquidity, but on-off uncertainty about the direction of the economy. Fall in demand for risk means a somewhat uncertain environment for investing. At the insurance operating companies, we're continuing to generate new money yields, which while pressured, support the company's earnings objectives and meet the company's needs. At the same time, we're not stretching the company's capacity for risk, and we're working very hard to mitigate the lower yield environment. First, we have a very strong asset liability management process, and we're tightly matched in every line of business. Second, our ongoing de-risking actions have provided a good opportunity to prudently add exposure in relatively higher yielding sectors, and that balanced approach will continue. Third, we've added manageable increments of investment leverage at attractive net spreads on a floating rate basis.
Our holding company activity was structured appropriately with our fixed income allocation meeting our expectations, while returns from alternatives will continue to fluctuate with the overall market. With that, I will turn it back to Ed.
Thanks, Eric. We remain committed to profitably growing CNO and increasing the enterprise ROE by the end of 2013 to the 8%-9% range. We continue to expect to increase ROE by improving underperforming legacy blocks through management of non-guaranteed elements, layering on new, more profitable business, effectively deploying excess capital, and by further improving our operational efficiency. Slide 49 is a very simplified illustration to show one of the levers to accomplish this. The power of improving OCB results. You can see that CNO's operating return on allocated capital for the non-OCB segments is 7.5%. As OCB continues to improve its earnings through non-guaranteed element changes, and its allocated capital reduces with the business running up, you can hopefully see how this will improve CNO's consolidated return. Before I summarize the quarter, let me give you a quick CFO search update.
We continue to make good progress with some internal and external candidates moving through the selection process. Our progress makes me optimistic that the decision can be announced by the end of the year. Our core business continues to perform well. Solid earnings continued in the third quarter, and sales grew by over 8%. Our financial strength and credit profile continue to improve, and we are generating significant amounts of excess capital while also increasing our statutory capital and RBC. In addition, our debt to capital ratio now stands at 18% and is decreasing. We'll continue emphasizing profitable organic growth, and it's notable that all three of our actively marketing insurance segments grew their sales in the quarter. We have added, as Scott said, 14 new Bankers locations year to date and will continue to invest in further agent recruiting, footprint expansion, and field management development.
We'll open it up for your questions. Operator?
At this time, if you would like to ask a question, please press star, then one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Randy Binner with FBR Capital Markets.
Thank you very much for the in-depth call. I wanted to follow up on the interest rate commentary. It seems from a statutory perspective, there's not going to be a material impact this year, but just be curious on more color on if rates stayed this low for an extended period of time, how long you would hold together fairly well as you have on DAC and stat before there might be more pressure.
Randy, continued low interest rates is a part of our scenario testing. Those are in scenarios that are considered now in determining the adequacy of our reserves. We don't see any imminent need for reserve increases, also would want to point out that these scenarios are also based on more than just interest rate assumptions. It's not just the treasury, it's what are spreads, what's the shape of the yield curve, what's persistency, morbidity, mortality, and expenses. That isolating one scenario or one of the assumptions we don't think is illustrative or helpful in understanding the reserve adequacy. We have to really consider all the assumptions and all the scenarios.
All right. That's great. Just one more if I can real quick. The 350 RBC goal is new. The holdco cash has been moving around a little bit, but I guess the question is on the 350 RBC, is that a hard deck or could you go below that when we're trying to plan for excess capital? Should we assume that holdco cash stays in the neighborhood of $150 million?
Two things. It's a management target, so no, it's not an absolute cap yet. That is our expectation to keep it at or above 350, but that said, if it went down to 348 in a quarter, we're not going to lose sleep over it. With our continued expectation to generate strong statutory earnings and excess capital, we still maintain our range of $75 million-$200 million annually of dividendable statutory earnings that will continue to be moved up to the holding company. Over time, we will expect the holding company investments and portfolio to grow other than when it's deployed for opportunistic reasons, be that share repurchases, debt pay down, or other strategic deployment.
The bottom line is whatever that excess is, it would be used in one of those three or four areas.
Yes.
Yeah. Okay. Very good. Thank you.
Your next question comes from the line of Ryan Krueger with Dowling & Partners.
Thanks. Good morning.
Good morning.
On the DAC accounting change, I understand why Colonial Penn wouldn't qualify under the new DAC rules, but I'm curious, what is it about the business that doesn't allow it to qualify for the SOP 93-7 direct response rule? Is it because it uses TV ads and telemarketers where you can't directly attribute a sale to an ad, or what is it exactly?
No, you hit on it, and sort of related to that is at least our understanding of the requirements is that there has to be sufficient information in the ad for the end consumer to make a buying decision. We, nor to our knowledge, any other direct marketer of life insurance put the whole rate table out there. A person of either sex and any age can go and see exactly what their rate would be for the insurance product.
Okay. Under your interpretation, really, just the direct response model overall, just for life insurance, just wouldn't ever qualify at this point for that SOP rule.
That's our current understanding, yes. That's why, as we illustrated, we believe that the vast majority of the direct marketing costs will be expensed under the new accounting.
Okay. Can you elaborate a little bit more on some of the business model changes you mentioned that you could make to try to get around this new accounting rule? You mentioned some potential change to compensation and also some potential reinsurance transactions.
Let me start with the reinsurance transaction. Reinsurance is based on economic value. If we want to monetize the economic value, a reinsurance transaction would do that. That's why we list that. As far as business model changes, in the way that agents and even call center employees are compensated could be modified to a certain degree to pay for successful efforts in part of their compensation that would be variable.
Okay. Just a quick follow-up on the reinsurance. Would it be more like a co-insurance transaction where you're actually just trying to sell the block and get an economic value for it? Is that the idea?
Co-insurance is effectively selling it. The economics of an outright sale of a block or using co-insurance would be virtually identical.
Okay, great. Thanks a lot.
Once again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Erik Bass with J.P. Morgan.
Hi, good morning. I just had a couple of questions for Scott. I was hoping you could provide a little bit more detail on agent productivity metrics at Bankers, and I guess in particular, the contributions of the new agents that you've hired. Also, maybe if you could give us a little help on how we should evaluate the contribution of your new business initiatives, such as the new branch openings to Bankers sales going forward.
Sure, Erik. We evaluate at Bankers the agent productivity using a couple of metrics. For new agents, it's primarily a metric we refer to as SNA, Successful New Agent, and that's a measurement of their activity in the first 90 days that they're with the company and their ability to place policies during that period. We generally shoot for a target of somewhere between 25%-30% of the new recruits that achieve a Successful New Agent status. That's currently the range that we're in the high 20s right now, close to 30. Obviously, we continually try to raise that bar and move that up. There's a clear correlation between successful new agent achievement and first-year agent retention. That's our primary new agent metric.
The metric for veteran agents or developing agents is a metric we refer to as Productive Agent Status, and that applies to agents that place four pieces of business per month. We'll measure that in just pure counts of how many agents that in any given month achieve that four applications per month metric or threshold. We generally run somewhere between 1,500-2,000 agents achieving that metric in any given month. As far as the expansion, how we look for the expansion to pay off, first and foremost, it's the ability to recruit agents. It's important for us to have a location in a marketplace as a base of operations for a management person to be able to recruit agents, bring them to that location for training and development purposes. The first result we would expect to see would be a growth in agent count.
Obviously, the residual impact would be the productivity of those new agents in the form of just more total SNAs or Successful New Agents that matriculate to successful first-year agents and ultimately into successful veteran agents by achieving the productive agent metric that I referred to over time.
Okay. Is it reasonable to assume then that when you open a new location, it takes time for those agents to start to contribute so the impact on sales is more seen a year out or longer?
Yeah. That's a fair way of looking at it. It's about a two-and-a-half-year kind of startup to where they reach full productivity. That's why it's important for us to accelerate the growth for us to open more offices than our system would naturally allow. Right? Our system naturally allows us to produce 15-20 management candidates. At that pace, though, and the timing and the lag that you referred to, it's hard to impact more than the normal growth rates of 6%-8%. To achieve something north of 8%, closer to 10% or 12%, we want to accelerate that process and begin layering on more office than the system would naturally allow. There will be some lag time before we see the immediate effects of the management trainee program taking place.
We expect, as I mentioned, the first tranche of management candidates to be able to hit the field in somewhere between two and a half to three years from now, and then there is about a one-year lag. It's four years before we'll start to see that accelerated growth from those new offices. In the meantime, we'll continue to open locations through our natural process, and that's why we've also layered on some of the agent productivity initiatives, so we can get closer to that 10% growth that we'd like to achieve.
Okay, great. That's very helpful. Thanks.
There are no further questions at this time, and we'll turn the call back over to the speakers for any closing remarks.
Thank you, operator, and thanks to everyone on the call for your interest in CNO Financial Group.
This concludes today's conference call. You may now disconnect.