CNO Financial Group Inc (CNO) 2014 Q4 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and year end results for 2014 conference call.

(Operator Instructions)

After the speaker's remark, there will be a question and answer session.

(Operator Instructions)

Thank you, and Mr. Erik Helding, you may begin your conference.

Thanks, operator. Good morning, and thank you for joining us on CNO Financial Group's fourth quarter 2014 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Fred Crawford, Chief Financial Officer. Following the presentation we will also have Chris Nickele, Chief Actuary, and Bruce Baude, Chief Technology Officer and Chief Operations Officer, available for the question and answer period.

During this conference call, we will be referring to information contained in yesterday's press release. You can obtain that release by visiting the media section of our website at www.cnoinc.com. This morning's presentation is also available on the Investor's section of our website and was filed in a Form 8K earlier today. We expect to file our Form 10K and post it on our website by February 23rd.

Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements.

Today's presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation at the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we'll be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2013 and fourth quarter 2014. And with that, I'll turn the call over to Ed.

Thanks, Eric, and good morning, everyone.

CNO posted another strong quarter and our business has performed well as we continue to grow sales, collected premiums, annuity account values and earnings. Consolidated sales were up 1% in the quarter, lead by 6% sales growth at Colonial Penn. Sales at Bankers Life and Washington National were flat for the quarter.

We completed our detailed year end assumption review, and I am pleased to report that overall testing margins remain strong while long-term care margins continue to be thin. LTC margins incorporate a comprehensive claims cost study covering 12 years of our acclaimed data. Fred will discuss this in more detail later in the presentation.

Our financial position remains strong and our key capital ratios are at investment grade levels. Consolidated RBC increased further to 434%, leverage decreased to 17.1%, and holding company liquidity was $345 million. We continue to return capital to shareholders through dividends and repurchasing $75 million of common stock in the quarter bringing us essentially to the midpoint of our guidance at just over $376 million for the year.

Turning to slide 6-- For the quarter, operating earnings, excluding significant items, were up 8% while operating earnings per share increased by 21%. We continue to effectively deploy capital via our securities repurchase program. This has resulted in a 9% year-over-year decrease in average shares outstanding.

Let me now briefly discuss the strategic partnership we announced last night. CNO and Cognizant have entered into a comprehensive, multi-year agreement in which Cognizant will deliver technology services to CNO. After a brief transition period, Cognizant will assume CNO's application development, maintenance, testing, select IT infrastructure and all India-based operations.

This partnership provides CNO with access to scalable resources and capabilities and should allow us to accelerate information technology process improvement and invasion. In addition, this partnership delivers immediate run rate expense savings and reduces the cost of future IT delivery services.

As a result of this agreement, we expect to incur a modest charge to earnings of approximately $6 million in the first half of 2015. We expect to realize $10 million in annualized expense savings beginning in the second quarter.

Turning now to slide 8-- For the full year 2014 was another year of progress for CNO. We continued to grow the business even with overall sales results below our expectations. The sales results were due to specific acute issues that we are actively addressing to regain momentum.

We significantly reduced the go-forward risk profile of the Company to reinsurance and the sale of closed-blocks the business that were part of the former other CNO business segment. We have met and exceeded the earnings growth, return on equity and financial strength targets that we set back in 2012.

We continue to return capital to shareholders. Since the beginning of 2011, we have returned nearly $1.3 billion via securities repurchase and common stock dividends. We also achieved a 20% dividend pay-out ratio one year earlier than we had guided to.

We have been able to simultaneously invest in our business, build capital to withstand stress conditions and return capital to shareholders. We have a strong business model and investment grade financial strength. We received an additional 4 upgrades from the rating agencies during the year, bringing the total number of upgrades over the past three years to 10.

And with that, I'll now turn it over to Scott.

Thanks, Ed.

Beginning with Bankers Life, sales in the quarter were flat putting us up 1% for the year. Life sales continued to be strong with an increase of 11% and annuities were up 4% for a combined increase of 8% in the quarter. This was offset by an 8% decrease in health sales, mostly made up of a decline in Med Supp.

Primary driver of the sales shortfall relates to challenges in recruiting we faced during the early part of 2014 which lead to a contraction in our overall agent force despite continued improvements in agent productivity. This has had a particular impact on Med Supp sales. We have responded to our recruiting challenges by implementing tactical adjustments, and we are seeing positive results from those actions with a 9% increase in new recruits in the quarter. This is an improvement over the 11% decline we saw at the end of the third quarter.

The average producing agent count, which is impacted by recruiting, was down 4% from the prior year but is up 1% verses the third quarter. Recognize that due to the onboarding process, it will take time to regrow our agent count to prior year levels, but we expect a positive impact throughout 2015. Agent productivity continues to be strong with a 5% increase in NAP-per-agent for the quarter.

Collected premiums at Bankers Life grew by 3%, primarily due to an increase in life premiums resulting from higher sales as we continue to gain traction with intrasensitive life, as well as larger premium per policy overall and growth in the size of the block, partially attributable to the recapture of a block of business previously reinsured. This increase is partially offset by a continued decline in long-term care as new sales, which are primarily short-term care and the run-off of more comprehensive nursing home policies, gradually changes the mix of our in-force.

Turning to Washington National, sales were flat in the quarter, but up 6% for the year. However, PMA, which makes up 80% of total sales, was up 6% in our average agent force at PMA was up 10%.

Our independent channel was down 17% with sales adversely impacted by an increased focus on the quality of submitted business and organizational restructuring of a large independent partner. Although the impact to fourth quarter sales results was larger than anticipated, the situation was isolated, and the changes position this partner well for steady, profitable growth, albeit with some residual impact on sales through the first half of 2015.

When excluding this particular partner, sales were up 5% in the quarter and overall sales were up 6%. For the year, Washington National sales were up 9% on this basis. Lastly, supplemental health collected premiums were up 5% due to continued growth in our in-force.

Moving on to slide 11, Colonial Penn posted 6% sales growth in the quarter and a 4% increase for the year. Results in the quarter were driven by strong sales in web and digital-generated activities, new simplified issue term and whole life products and double digit growth in GBL direct mail sales. Collected premiums were up 5% due to higher levels of sales and continued growth in the block.

EBIT for the year was just above break even and this represented a significant increase over 2013. This improvement was driven by growth in, in-force earnings, increased marketing effectiveness and a modest increase in the deferral of acquisition cost as we continue to shift to a higher percentage of direct mail based lead generation activities. For full year 2015, we expect EBIT in the zero to $3 million range, but because of the seasonality of advertising spend, we expect a loss in the $7 million range in Q1 of 2015.

Slide 12 provides our Outlook for 2015. From a consolidated standpoint, we expect sales to increase 3% to 6%. At Bankers Life, we expect sales to increase 3% to 5%.

We continue to face head winds in the sale of annuities as a result of low crediting rates, given the low interest rate environment. And as previously mentioned, it will take time to redraw our agency force to prior year levels.

We will continue to sharpen our focus on recruiting and increase the number of first year agents which is key to growing our overall agent force, and also to increasing sales of Med Supp. Additionally, we will continue to focus on increasing productivity of our veteran agents leading to improved retention levels which, combined with recruiting results returning to historical levels, will lead to a larger and more productive agent force.

At Washington National, we are expecting sales growth of 5% to 7%, along with continued growth in our PMA agency force of 8% to 10%, benefiting from greater availability of new products and programs targeted to increase productivity and retention. Work site sales will benefit from our new group supplemental health products and the one source benefit enrollment and servicing platform, both of which were introduced on a limited basis late in 2014.

For Colonial Penn, we expect full year 2015 year sales growth in the 6% to 8% range. The key drivers of this growth will be a continued diversification of sales generated through direct mail and digital marketing activities, growth in simplified issue term and whole life products and continued enhancements to our various marketing campaigns and lead generation and conversion activities.

I'll now turn it over to Fred to discuss CNO's financial results. Fred?

Thanks, Scott.

We recorded a solid quarter on the earnings and capital front. If you adjust for the significant items in our press release, we recorded operated earnings of $0.34 per share, up 21% over last year. The majority of our insurance earnings drivers performed in line with our expectations and core capital ratios strengthened in the quarter.

We spent down some of our holding company liquidity returning $87 million to our share holders in the form of stock repurchases and dividends. We completed our annual review of actuarial assumptions and loss recognition testing, which overall had little impact on the quarter's results, but did impact individual segments.

In Bankers, we have about 500 million of intrasensitive life reserves where model refinements, mortality and interest rate adjustments netted to a $6 million EBIT positive in the period. In Washington National, we have a small block of run-off pay-off annuities and loss recognition where we unlock interest rate and mortality assumptions driving the majority of their $10 million negative EBIT impact.

Separately, we adopted a new mortality table published by the Society of Actuaries with respect to our deferred compensation liabilities. We take a mark-to-market approach to accounting for this liability which resulted in a $15 million EBIT charge in the quarter. Going forward, we will be adjusting our definition of operating earnings to exclude these periodic adjustments as they are non-core and result in non-economic GAAP volatility.

Turning to slide 14 in our normalized segment earnings, Bankers' EBIT benefited from continued strength in annuity margins with life insurance benefiting from sales growth these last few years and the recapture of the Wilton reblock mid-year. Long term care margins were a bit stronger than expected and Med Supp a bit weaker. However, both within the normal range of quarterly movement.

Washington Nationals normalized EBIT was in line with our expectations. The elevated supplemental health claims experienced in the third quarter fell back in line at normal levels.

Colonial Penn reported solid earnings and sales growth driven by cost-effective marketing spent. As noted earlier, we anticipate GAAP profitability in 2015 with normal seasonality resulting in an estimated EBIT loss in the $7 million range for the first quarter.

Corporate segment results tend to move in accordance with our holding company investment performance. We actively invest approximately $200 million of our available liquidity and overall performance track the quarter's market volatility.

Turning to slide 15, we profile our health margins. Bankers' Medicare Supplement results were weaker than what we have experienced in recent quarters but still solid and in line with our expectations. With a pattern of favorable results in hand, we are seeing the pace of rate increases naturally slow, premium refunds increase and persistency improve.

Our benefit ratio guidance is stable in the 70% range in 2015 with continued steady increase in collected premiums. In the case of long-term care, we are working on various initiatives designed to positively impact claims trends. However, we are early in the early days of execution.

This quarter is another example of claims experience falling in line with our expectations. We continue our long track record of actual to expected results supporting the quality of our claims reserves. We are calling for a modest increase in our interest-adjusted benefit ratio in the 81% range.

This increase is somewhat the result of a refreshed modeling in the build of future lost reserves on certain older and more comprehensive benefit blocks of business. The more comprehensive policies continue to run off and collected premium is expected to decline, absent the impact of rate increases, thus dollar margins a headwind to our GAAP earnings.

Washington National's supplemental health benefit ratios fell back to just above 54% in the quarter. We are maintaining our benefit ratio guidance of 54% range for 2015.

Turning to slide 16 in investment results, while rates traveled lower throughout 4Q, we defended new money rates by remaining tactical in our investment strategy. Lowering turnover creates a manageable flow of assets to invest allowing us to be selective in finding enhanced yields without sacrificing credit risk.

We did experience favorable prepayment income in the quarter: this tends to be a natural result of lower rates and favorable spread conditions for issuers. Impairments in the quarter were limited to one equity investment for which we now have very little book value remaining.

There has been understandable focus on energy portfolios in the industry. We have included a slide in the appendix of our earnings deck that profiles our portfolio.

You will find our exposure to be roughly in-line with others in the industry with around 87% investment grade and limited exposure to oil-field services and refineries. We see credit losses as unlikely, but downgrades possible as market volatility persists.

Turning to slide 17 in the results of our actuarial work in the quarter. We tested virtually all of our $23 billion of liabilities and our overall margins were healthy and actually improved in aggregate over last year's results.

The net impact of freshly-priced new business and the natural run-off contributed positively as we would expect. Policy holder experience overall offset the impact of adjusting our long-term ultimate new money rates down 50 basis points across the board.

I mentioned pay-out annuities earlier as an area of loss recognition impact this quarter. This is specifically a block of only $200 million in reserves in Washington National but serves to point out just how sensitive a closed block with thin margins can be when adjusting long-term assumptions. Fortunately, we sold or reinsured the majority of our intrasensitive closed blocks during 2014, in part, motivated by lowering our overall long-term interest rate exposure.

Obviously, we're focused on long-term care which I will turn to in a moment. Before moving off this slide, it's worth noting that we did not record any meaningful statutory asset adequacy or premium deficiency reserve increases as a result of cash flow testing this year.

Turning to slide 18, and a deeper dive into long-term care testing results. Before I get started, it's extremely important to understand that our long-term care business is unlike most in the industry, and that influences our testing results and sensitivities.

A simple example is depicted by the pie chart where roughly 72% of our active life reserves are on policies with benefit periods under four years. This is not a product design decision, rather a result of selling into the middle market. There are many other examples that make comparisons more complicated and often not as relevant.

We have a lot of information on this slide, but I can summarize as follows. Our overall testing margins reduced by approximately $150 million and are thin at roughly 2% of net GAAP liabilities totaling $4.4 billion.

Margins were impacted negatively by rates, but not severely as we are ALM matched, have a shorter overall duration, and only a modest need to reinvest in this low interest rate environment. The overall impact on our margin was negative $50 million.

Morbidity had a more severe impact on our margins. We conducted a significant study covering over 12 years of claims data with a focus on strengthening our older age claims cost estimates. This resulted in a $460 million reduction in our loss recognition testing margins and we believe is a more appropriate estimate based on our experience.

We do not assume any improvement in morbidity or mortality. Related to our new morbidity estimates, we are filing a new round of rate increases which had a $230 million positive impact on loss recognition testing margins.

Our estimate is conservative, reflecting only rate actions to be filed in the next six months, focused primarily on our older blocks, with measured increases averaging 30%, and then a success rate applied of only 40% recognizing uncertainty in the regulatory process. In aggregate, our assumption equates to a 9% increase or roughly $50 million in annualized premium.

It's worth noting we have considerable direct experience to support our best estimate. We modestly adjusted our persistency assumption based on our experience study and, excluding periods impacted by rate increases, it had a $125 million positive impact on margins.

Finally, we have several initiative s underway that we believe will improve our claims experience over time, but have not included any specific provisions in our margins. While we remain concerned over our thin margins, overall we are pleased with the result and that we have a much more comprehensive understanding of our claims experience and have reflected that experience in our margin estimates.

Turning now to slide 19 and drilling into new money rate assumptions, our estimate involves a year-end process that incorporates our then-view of the capital market conditions together with our planned investment and ALM strategy. As noted earlier, overall impact to our loss recognition testing margins was 3% declined, or $110 million, including the impact recognized in our fourth quarter earnings on pay-out annuities.

However, our reserve and capital exposure to interest rates is fundamentally concentrated in our long-term care block. As a result, we show only our long-term care new money investment assumption here and the associated stress test on actuarial margins.

Holding new money rates flat for several years, then recovering results in a modest impact to our margins and no isolated loss recognition, down and flat forever has a more material impact on margins and holding all else equal would result in loss recognition event. The implied earnings and capital hit would be to first eat through your existing margin, then write down intangibles, causing roughly a $100 million GAAP earnings impact. This is a bit more severe an impact than in past tests for the simple reason that we have less margins supporting our long-term care business.

On a statutory basis, the stress test impact is to premium deficiency reserves where the margins and the outcome are similar. The estimated impact is much along the lines of what we have discussed in the past, roughly 25 points to 35 points of consolidated RBC ratio impact.

Something to be mindful of is highlighted on the bottom right of this slide. Our ability to duration match and slow turnover means we have only to invest the approximately $35 million of cash flow a quarter to support the new money rates in this business.

We have very little internal competition for longer-duration investment opportunities and our ability to tactically manage the portfolio is quite flexible. While we feel good about the adjustments we have made, we will need to monitor conditions closely as we move through 2015.

Turning then to slide 20 in capital, it's important to come away from this discussion on loss recognition, long-term care and interest rate risk knowing that we come at this challenge from a position of strength. We ended the quarter with a RBC ratio of 434%, a 9-point increase from the third quarter, statutory earnings in the quarter of $108 million came in strong and as expected.

You may have noticed we disclosed our Bankers Life legal entity RBC at 411% in the press release. This is up from 393% in the third quarter and important on a couple of fronts.

First, Bankers Life houses our long term care business and is understandably more exposed to low for long rates, so it's simply good risk management to keep their capital ratios robust. Second, Bankers Life is the flagship legal entity for CNO and drives most of our cash flow to the holding company. In our quest to upgrade our insurance company ratings profile, we target conservative capital levels for this legal entity.

Leverage held steady in the quarter at 17% despite continued capital deployment, and we ended the quarter with $345 million of liquidity and investments at the holding company. Our overall Outlook for 2015 is for consolidated RBC at 425%, leverage reducing to 16% absent any recapitalization and holding company liquidity of approximately $315 million.

While weighing down somewhat on ROE progression, we think it's important to maintain caution with respect to current interest rate environment and our tight LTC actuarial margins. We, however, continue to generate very strong free cash flow and are setting our 2015 repurchase guidance in the range of $250 million to $325 million recognizing we may alter this range as the year proceeds and alternative opportunities present themselves.

Turn to slide 21 in ROE development and outlook. Our normalized operating ROE came in as a high 8% range for the year supported by strength in core earnings and a more material jump in capital return to shareholders. We discussed at a high level our three-year plan at this past June's investor conference and potential operating variables including new money investment rates and long-term care performance.

We have finalized our new three-year forecast and essentially bumped out and flattened our ROE trajectory driven by the following key variables: the current low interest rate environment and a more muted recovery expectation, refreshed long term care actuarial work and associated GAAP build of reserves, installing our three-year sales plan and associated growth rates. Finally, we built into our forecast a bit more excess capital and recognition of the low-rate environment and LTC actuarial margins.

These are all variables that can improve over time and give rise to more aggressive ROE build but represents our best estimate given current conditions. We are as focused on the quality of ROE as we are the growth rate and are committed to continued ratings improvement and lowering the beta of our company driving long term valuation.

We continue to monitor markets and weigh the value of recapitalizing the balance sheet as leverage would be down to 15% come 2017. Markets continue to be constructive for strong double-Bs provided we remain disciplined on the capital front and are tactical in our execution. Most likely, timing is around the call date of our bonds, but we are monitoring conditions closely.

And with that, I'll hand back to Ed for some closing comments.

Thanks, Fred.

We'll continue to be focused on a few key priorities. First, we'll continue to increase the size and productivity of our agent force and grow our franchise. We'll continue to enhance the customer experience to better serve middle income Americans.

Our strategic Partnership with Cognizant is expected to accelerate the pace of increasing operating effectiveness. Furthermore, we'll continue to effectively manage risk and deploy capital to increased profitability, return on equity and shareholder value.

We'll now open it up for questions. Operator?

(Operator Instructions)

Erik Bass with Citi.

Good morning, thank you. First, one question on long term care. How much additional are you accruing for long-term care reserves on a stat and GAAP basis going forward to reflect the lower assumed interest rates? Would that imply if rates were to remain or follow your plan that, all else being equal, your reserve margin would increase year-over-year?

So, two ways to answer that question, one GAAP and one stat. And I would not isolate interest rates. In fact, in most cases, the future loss reserve from the GAAP standpoint is driven an awful lot by your claims expectations and the morbidity comments we made. Let's separate the two.

Let's start with GAAP. So under GAAP, we are building a future loss reserve to reflect certain portions of the business that are in future years in negative cash flow. Again, the build of that FLR is influenced by our study and our new projections for morbidity as well as our ability to achieve some of the near-term rate increase actions that were taking in increased premiums. We are building the FLR more aggressively. We have been building it now for quite a while at around $22 million a year and we would expect that build to climb kind of in order of magnitude of $10 million to maybe as much as $15 million annually of additional FLR build as we go through the financial plan. This is an estimate and it's based on a number of moving parts but weighs down on our GAAP results.

Separately is statutory. And under statutory, we're not under a position from a cash flow testing where we are required to put up either premium deficiency reserves or acid adequacy reserves on our long term care block. However, as an abundance of caution, we have been building a modest level of acid adequacy reserves in Bankers Life. And we've been building that at about $9 million a quarter on a statutory basis. Today, as we sit here, that asset adequacy reserve, which again is not required, is up around $55 million or so. Or think of it as roughly 15 points of RBC build in Bankers Life the legal entity. This was not required, but as an appointed actuary representing that legal entity we felt it prudent as the margins are thinner on long term care when tested on a stand alone basis. Hopefully that helps answer your question.

That does. And maybe your last point, you don't mention specifically aggregating long-term care with Med Supp, which I believe you may have the ability to do in Bankers. The $100 million is a stand-alone long-term care block on reserves. Is that correct?

So I'm not sure what you mean by the $100 million, but let me answer your question--

This is roughly the 2% of the reserves tested, I guess was around $100 million margin it looked like on a GAAP basis.

Yes, that is the margin on, from a loss recognition testing standpoint on the GAAP basis. On the statutory basis, the margin is roughly the same, and that is on all of our long term care business, house and Bankers Life. We have a very, very small amount of business in New York, it's sort of a rounding err, so it has not affected our results, really GAAP and stat basis. And then the $55 million of asset adequacy build was on that block of business. You are right, we are able to borrow from Med Supp excesses for the purposes of cash flow testing. But remember, premium deficiency reserves are tested on a stand-alone basis. That is where you would still find some RBC effect related to stress testing.

Got it, and maybe just a final question. How should we think about capital generation in 2015? It looked like, kind of triangulating the map on your slides, that it would imply a sort of free cash flow in the $275 million to $300 million range. Is that kind of the right ballpark to think about?

I think that is about right. Our overall capital generation, which we would generally describe as the statutory pretax because we don't pay a significant amount of cash taxes at the moment. Pretax statutory earnings across the Company and before the moneys we send up to the holding company in form of managing fees and surplus notes, that's been traveling over several years around the $0.5 billion mark, and that continues to be the case, if not building gradually over time.

When I think about free cash flow to the holding company, your numbers are approximately correct when it comes to 2015. For example, we would expect to have statutory dividend pace in and around the 65ish, $60 million to $65 million a quarter range, absent any disruption. And so you think about those statutory dividends as being pretty close to our free cash flow, recognizing we send $130 million up to the holding company through surplus known interest payments and management fees, and that is more than enough to service our debt and cover holding company expenses, et cetera.

Got it, thank you.

Randy Binner with FBR Capital Markets.

Hey, good morning, thanks. I just wanted-- this is kind of a follow-up to what Erik was just asking on the free cash flow that comes out of the Company on a prospective basis. I wanted to look back at what came up last year and just understand better why there was not an upstream to the holdco in the fourth quarter and what the thinking is in leaving a higher RBC down at the insurance company because it seems like a very robust level of RBC downstairs? And wondering if there is any kind of shift in the plan of bringing up dividends in the holding company on more of a quarterly basis because you missed the fourth quarter.

Yes, the fourth quarter dividend decision was extremely tactical. In other words, there's no messaging content dated as it relates to our forward ability to generate free cash flow. What was tactical about it was real simply two things. We left a significant amount of capital down in Bankers specifically, and that was to do really two things. One is, absorb the liability adjustment we made to the deferred comp plan. That $15 million GAAP charge that I mentioned in terms of adopting the new society of actuary table, that is both a GAAP and statutory impact. That is an agent-deferred comps program, i.e. Bankers agent deferred comp program, so it actually hit the Bankers legal entity, so we wanted to absorb that by leaving a commensurate amount of capital down in there.

More importantly than that, is we drove the RBC in Bankers from 393 up to 411. That is arguably higher than it needs to be. I would tell you that our long term target for bankers is really more around 400 flat. Part of the reason we are doing that is what I said on my prepared remarks which is one, it is, in fact, just good risk management. That is now where we have the concentrated interest rate risk as we look forward. It's also where, as I mentioned, we capture all of our long term care liabilities. And if you are ever going to have a robust capital structure down in a subsidiary, it's going to be in Bankers. It's just good risk management.

The other dynamic is it's also a flag ship legal entity for the purposes of driving our insurance ratings as a company. And so, if you were to talk to particularly A.M. Best, where we are heavily focused because we are very close to moving into the A category, if we can continue to operate and be diligent in our capital management. That is really important to drive a good RBC in that entity. But frankly, if you talk to all four rating agencies, they will tell you that their ratings basis and basis for positive outlook and upgrades starts with the RBC formula and for CNO, it starts with what is going on in Bankers and then travels from there. So it will moderate over time. You should not view any more than a tactical move in the fourth quarter, no messaging content as to the quality of our free cash flow.

That's helpful. And I guess if your buyback guidance is approximating the capital generation per what you talked about with Erik Bass there then in Bankers is-- I'll call it stabilized with all the comments you made about reserve testing being benign. Then it would seem like that is a lot of cash to keep at the holding company so that is just in reserve for whatever scenario you see as most advantageous. I guess how would that not be buy back at the current stock price?

I mean really it's a matter of keeping our options open relative to the highest and best use for that money. If the marketplace hands us a buying opportunity, we might take advantage of that. If we have other opportunities that come around, then that is a good use of that money. We're trying to be balanced in it. Balanced with our dividend trajectory, common stock dividend trajectory, balanced in buying back our stock, which we believe to be good value over the long run. Some risk management, yes. But then also making sure we're open for non-organic opportunities or more strategic investments in our platform. So honestly, it's really just balancing, and I wouldn't over-read it.

Again, in 2015, I expect relatively stable capital generation. Obviously no change in the roughly $130 million we sent up to the holding company through surplus note and management. As I mentioned earlier, you could expect something in the neighborhood of $250 million, plus or minus of dividends up to the holding company. A little bit of spend down in liquidity and our share repurchase guidance range is out there. Recognizing we're early in the year, it's not uncommon for us to have a wider repurchase range and we start to refine it as we learn more throughout the year and guide a little more specifically.

All right, that's super. And since I got in so fast, I'll ask one more. This goes over to sales and to Scott Perry.

I guess the question is, and it's kind of a theme that we have been following with a bunch of companies, is this thing that is changing in the US economy, I guess is there's lower unemployment and there's lower gas prices. And so I think that if I could describe the sales setbacks that CNO has had over the last years, particularly in bankers, is it was maybe some of the hiring and retention processes weren't as robust as they could be. And It sounds like they are making progress there. But on a basic level, it seems like the folks you're selling to should have more money in their pocket and the folks who are driving around trying to sell these products should be able to have a lower gas price to support the activity.

The bottom line is, is it ready to think that that intuitive conclusion is right, that those are good things, lower unemployment, low gas prices will help drive these better sales guide we have for Bankers? I guess it's Washington National Bankers in particular.

Yes, sure Randy. I think there's-- certainly an improving economy helps the consumer. And the middle market consumer benefits from some of the things that you were saying and that can benefit our opportunities to sell them products. I think I talked about this in the past, the improving unemployment picture doesn't necessarily help us from a recruiting perspective. It means there's more opportunity, more salary or hourly opportunities out there than straight commission opportunities, and that can work against us.

So, I would say, generally sure. The consumer benefits and to the degree that our agents can get in front of them, it's -- it may make for an easier time making a sale than in a tougher economy. But the recruiting kind of works against us given the employment market picking up. The last thing I'd say, and it is also kind of an environmental issue that in particular is going to hit Bankers, and I mentioned in my prepared notes, the annuity interest rate environment. So crediting rates being held at these historically low levels, it looks like for another year, certainly are providing a headwind. Now, the agency force will shift to other products, but that is going to be a headwind that will face we're projecting throughout 2015.

All right. That's helpful. Thanks for the color.

Yes.

Colin Devine with Jefferies.

Good morning, gentlemen. First of all, thanks for the increased disclosure on the agents and the roll forwards. And also, I appreciate your color on how you're setting reserves for long-term care and not assuming rate hikes for the next 15 years in a different investment strategy. So we certainly appreciate that.

In looking at this, Fred, I want to follow up on a couple of things, right? First off, on long-term care, where do I find the testing that was done on the block in Washington National? Page 17 just goes in it for Bankers. What happened to the Washington National block? And then also, I'm not sure you directly answered Erik's question. Did you aggregate supplemental health and long-term care together for your cash flow testing or did you not?

So first question. Washington National, the legal entity and the reporting segment doesn't have long-term care. Once upon a time, the legal entity itself had a closed block of long-term care business, but that was part of what we reinsured away last year this time under that transaction. We don't have that in that segment, it's really all in Bankers.

And then, in terms of the answer to the question, from a cash flow testing perspective-- and realize that work is still being finalized because it's part and parcel to filing your final statements. As we sit here today, there would be a need for the long-term care business in Bankers to borrow, if you will, somewhat of the excess cash flow testing reserves in Med Supp, and they're able to do that. And realize, though, that is somewhat mitigated by what I said earlier in that we have been building to the tune of about $9 million a quarter for the better part of a year and a half now, and this continues, about a $9 million asset adequacy reserve which, again, is not required, but it's really been helpful in mitigating that need to borrow from an active life preserve perspective if you will from cash flow from Med Supp.

So there is a level of that that's happened in the past. Last year, it was relatively neutral and we didn't need to do that. This year, I think we would be a bit negative on a stand-alone basis and require some of the Med Supp excess margin if you will, from a cash flow testing, but mitigated by our steady build of this asset adequacy reserve.

Okay Fred, let's go a little bit further with this then. Given how thin the margin is, the two questions is one, why not a closed block on the older piece, but also, tell me this isn't correct. But really, even with this narrow margin you have now, that's reflecting the benefit of the most recently full policies that you have priced with hopefully much higher margins. If we backed out the benefit of, let's say the 2014 premiums or the 2013, does that block go negative? Just how dependent is it on the assumptions of the business that you sold the most recently?

It's a good question, let me kind of answer it in a couple of different ways and may invite other commentary on it. But so first of all, what have we been selling in recent years? Be mindful that, probably for the better part of ten years now, the majority of what we have been selling has been very short duration, short benefit product which actually doesn't do too much to contribute to your margin. Why? Because it's a more narrow tail, less risky, shorter duration. It's got all the great risk profile, but as a result doesn't really build much in the way of reserves and doesn't really build much in the way of replenishing your margin.

Said differently, Colin, we haven't been attempting to sell our way out of a problem, if you will. We just sell what we sell, and the shorter benefits is really what the middle market needs. But, having said that, it doesn't add layers of enhanced margin over the years. You are right, the older, more legacy business, which is where we are really stressing our analysis and where the pricing increase is, the rate increase action has been taking place. That is, in fact, the blocks of business that weigh more on our margin. It's also the more volatile blocks of business that tends to be more sensitive to these assumptions. The issue of somehow carving it out as some kind of different sort of a block doesn't really fit with the way in which we are managing the business. And that is really whether you have to start when discussing the idea of sort of isolating a piece of your block.

Right now, this is all-- you have to sort of remember, and I know you do, but for everybody on the phone, you have to remember that once upon a time, we had $3 billion of reserves that were in fact carved off, did have different characteristics, were sold differently, were not open, and we took the hits and carved it off, it was $3 billion in reserves and it's gone. More recently, we moved $600 million of reserves off our balance sheet, which was a closed block, similar characteristics, reinsured under the Beechwood Re transaction.

What we are now left with is what we would call an active and open block. Every single day, we have a long term care policy with a client out there where potentially a Bankers field agent is still working with that client and that client's family actively cross selling and working with them. In other words, we're not managing it like a closed block, so we should be having our financial reporting and our analysis consistent with how we're managing the block. And it's one block. There isn't a block in the insurance industry of any kind of business where I couldn't cohort it in a way to where there's negatives somewhere offset by positives. That's how it works.

It's a good question, and it's a fair observation, particularly because so many people in our industry have gone the route of closed blocks. But this happens to be an open block managed that way, and so we collected together and tested that way.

Okay Fred, perhaps for the next quarter you can look into how many new policies you're actually selling to these old existing policyholders. You can't take that case and say these are still active clients because, if I think about it, they're probably much older clients. How much new business are you selling? Maybe that is something we can go into next quarter.

Colin, this is Ed. We may or may not provide that kind of detail, but also, our view of the customer isn't just the policyholder. It's their household so we don't look at it so myopically as simply the policyholder when we are serving our customer base.

Okay, fair enough, thank you.

This is Chris Nikele, and let me just add a little bit to answer one of your questions, Colin. With regards to what does the new business add to the margin? Our 2014 new business in long-term care added $36 million to margin. So it's not a substantial contributor margin as Fred said.

So and the other thing, when it comes to our stat margins verses our GAAP margins, as Fred said, we're adding to our asset adequacy reserves electively. And to the extent that those asset adequacy reserves build faster than we're building our future loss reserves that adds to the margin on the stat side and we'll begin to have our stat margin pull away, if you will, from the GAAP side.

Further, with regards to cash, loss recognition testing in our current margin of $100 million, I'll just point out that we don't have any morbidity improvement in that analysis. We don't take any credit for shock collapses that might occur as rate increases are put in place. And as Fred mentioned, we have a number of claims management initiatives which we have been testing, and the basis of those tests are actually rolling them out broadly in 2015. Based on the preliminary testing that we have done, we believe these initiatives will add north of $100 million of margin, but that's something that will show up as we implement them and select them in later loss recognition testing work.

Okay. If we use that figure you just gave us of the $36 million, is it then fair to conclude that really the $100 million is come from what's been sold the last three years? Roughly?

No.

Okay.

Dan Bergman with UBS.

Hi, good morning. I guess starting with buybacks. When we think about your guidance from 2015 shared purchases, is there any assumed benefit from a potential recapitalization factored into this guidance? Or should we just think about any such benefit, if a recap is done this year, as kind of being incremental upside to the $250 million to $325 million range you gave.

That's correct, there is no recapitalization assumed in the buyback guidance. If we were to recap, that is a decision we would have to make, including working with our board on the use of proceeds, but what is implied in the ROE pick-up, if you look at the ROE slide and you've see a little margin in there for pick-up in ROE related to recap, is basically the mechanical exercise of increasing the leverage and with the net proceeds doing a buyback to jump the ROE. But in our guidance is no assumed recap in terms of repurchase.

Great, thanks. And then maybe shifting gears to sale. Given that the year-over-year consolidated sales growth has slowed down steadily during the course of 2014 and then goes up 4% in the first quarter and came down to 1% growth last quarter, I just wanted to see if you could provide some incremental color on the factors you are seeing to give you confidence that sales growth could re-accelerate from current quarter levels to that 3% to 6% range you were talking about this year.

Sure, this is Scott. I think as Ed mentioned in his comments, we experienced some acute setbacks in 2014. At Bankers, it was very specifically around recruiting. And what we had experienced is a slow-down and a sluggishness in recruiting that resulted in an average agency force that was smaller than the previous year, and therefore even though we add growth and agent productivity, fewer total average agents resulted in the flat and sluggish sales. And we have seen in the fourth quarter a-- with some targeted efforts, improvements, and we expect those improvements to continue in 2015 and those improvements are coming from a number of tactical moves that were made that we believe are sustainable to get us back to historical levels.

So again, it's not something that has to be-- we don't have to drive significant growth, because we're the productivity and the retention improvements in the developing and veteran agency force are occurring. But we do need to get back to historical levels at Bankers. And those two things will get us to that 3% to 5% range for 2015.

At Washington National, you know strong three quarters. The fourth quarter was really negatively impacted by the one instance that I mentioned that the partner that went through some reorganization restructuring. That will be a bit of a drag in the first half of this year, and that drag is assumed in our forecast. And we expect the second half of that year will be kind of out of that with the continued strengths that we have seen at PMA both in the individual market and the worksite market will continue throughout the year.

And I will, even though it seems like a long time ago, if you recall in 2014, we did experience a real tough start to the year at Colonial Penn. And the rest of the year was strong, and we finished at 4%, but if you back out to January, I think our total year results are closer to the 6% that we saw in the fourth quarter. So that was kind of an acute situation that we recovered from but we expect. That is why we are comfortable with expecting sales ranges closer to the 6% range that we are forecasting.

Great, thanks. And then I guess finally, I wanted to see if you had any updated thoughts around more of your medium- and long-term sales growth post-2014. Is that still a mid to high single digit type of level that you are looking for?

Yes, I think it's mid to high single digit, it's difficult to, at this point, a lot of it will hinge at Bankers on the interest rate environment and our ability in the annuity market. But we are confident that all three of our segments are targeting a growing market and there's growth opportunity that should get us into that mid to higher single digit rate.

Great, thanks so much.

Sure.

Erik Bass with Citi.

Hi, thank you for taking the follow-up. I guess one thing, just to clarify first. I think at investor day you had showed about 100 basis point lift from a recap on the ROE versus 50 basis points now? So just was curious as to what is changing that?

Yes, you know, essentially it's sort of redialing in the borrowing cost estimates that we would have in today's market and spread environment trying to do our best to also be a little bit conservative in what we could actually get in the way of yield. A little bit of redialing also of what we would expect to issue. I'll give you an example, and that is, I think it would be to our benefit if we do go to market to think in terms of, you know, bonds and longer duration and non-callable in nature, which is a bit more investment grade in its profile. So it's a little bit to do with what we would issue and the cost of that.

Also, when we did do our test this last time, we had a range of 75 basis points to 100, and quite honestly, that range of benefit from recap had everything to do with exactly what leverage we would dial in and for how long. So for example, last time we recapped, we levered up to 22.5% and then quickly brought it down through amortization to 20%. We would, this time around, we could do something like that as well, which would help boost the range of ROE over time. But we're just kind of dialing in a more conservative approach for upside 20% leverage assuming market rates, longer duration which is going to have more cost or weigh down more on interest expense and just being more tactical in that way.

Got it, that's helpful, thanks. And then maybe if I could just ask one bigger picture question on long-term care. Is there a framework that you would think about for calculating the intrinsic value of a long-term care block? I guess I am wondering if there is an approach similar to what companies did with variable annuities a few years ago with things like the MCV analysis that could shed more light on the cash flows and the value of a long-term care block under different scenarios.

Yes, I mean it's interesting, it's sort of along the lines of an imbedded value. Some companies would characterize it as an economic capital approach. Most companies do have a dynamic ability to do that, not so much that they want to walk around with those values necessarily as meaning anything, but rather, it's really the stressing of those values up and down for a given variable, and that can lead to you hedging away some of the risks or what have you.

One of the things that I think is a good fact pattern for this Company is that there's a reason why we're one of the few, if not maybe even still the only company, to do a substantial reinsurance deal on long-term care is because part of doing a reinsurance deal requires precisely what you are saying. Which is essentially calculating an imbedded value or an appraised value on the block of business and all the cash flows, but more importantly, having a buyer and seller be close enough on those estimates to where a deal can get done. I think I have said this before to people, but we take the same sorts of approaches to our reserving practices and assumptions on our Bankers Life block as we did on those closed blocks of business, and we any that lends some credibility to our approach for the reserving and the value being real and how we think about it.

We don't have a published imbedded value calculation on our long term-care business only. Something I would relate to that Ed mentioned, which is kind of important about us, and that is we're not a product-driven company. It's not as if we have a long-term care division that sells through long-term care independent distribution. And we monitor the economics and profitability on a stand-alone basis because that's how we sort of incent our managers and talk to the value creation. This is one of a number of products that is either going to be in favor, out of favor, or satisfy a solution on behalf of our households or clients, and that is how we look at it. So we have much more information around Bankers and Bankers legal entity valuation than we do the carve-out of long-term care.

Got it, no that's helpful and I appreciate the thoughts. I just think given some of the market concerns about the product, and embedded value-type analysis particularly with your block where it is more, as you said, you have more history and more credibility in the cash flow outlooks under different scenarios, would certainly be something that would be helpful or be interesting to see to the extent you could share more.

Yes, I think what is safe to say from a valuation perspective is there's no question that our long-term care business obviously weighs down on our ROE and considerably. You know, I would say in general, something to the tune of a couple hundred basis points of weight placed on our ROE relative to what it would be without the business, and that is for the simple fact of carrying a fairly good amount of capital to support that business with very little in the way of GAAP earnings once you fully load expenses and everything else. So, I would say our basic message is, we're obviously trying to over time change the profit profile of that business through what we are selling, through what is running off and aggressive in-force management where we have the ability. So we're doing everything within our management power to turn that tide and create more of a contribution. But look, there's no question that it is weighing down. What we are focused on, though, is having it not hurt the balance sheet capital, capital quality. And effectively lowering the beta of our long-term care business means we lower the beta of CNO, and that should create value.

Got it, appreciate the comments. Thank you.

And we have no further questions, thank you, at this time. I would like to turn the conference back over to our presenters.

Thank you, operator. And thanks to everyone on the call for your interest in CNO Financial Group.

Thank you very much for your participation. This does conclude today's conference call, and you may now disconnect.