CNO Financial Group Inc (CNO) 2015 Q2 法說會逐字稿

Good morning. My name is Benita and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2015 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. (Operator Instructions) I would now like to turn the call over to Mr. Adam Auvil, sir, you may begin.

Good morning and thank you for joining us on CNO Financial Group's Second Quarter 2015 Earnings Conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Erik Helding, Treasurer and Head of Investor Relations. Following the presentation, we will also have several other business leaders available for the question-and-answer period.

During this conference call we will be referring to information contained in yesterday's press release. You could obtain the release by visiting the media section of our website at www.cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K earlier today. We expect to file our Form 10-Q and post it on our website by August 3.

Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures, you'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we'll be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between second quarter of 2014 and second quarter of 2015.

And with that, I'll turn the call over to Ed.

Thanks, Adam and good morning. Our business performance and momentum remained solid as we again grew sales while maintaining pricing discipline along with expanding our customer reach and increasing earnings per share. NAP was up 1% on a consolidated basis, however, results by segment vary. We experienced weakness in bankers new annualized premium, which is down 3%, while achieving increases in policies issued, third party fee income, agent recruiting and the overall agent force.

Washington National sales were up 2%. Colonial Penn continues to perform well and posted robust sales growth of 12%. Operating earnings per share excluding significant items were $0.34, up 6% over the prior year. We continued to experience strong margins in our Medicare supplement, annuity and life insurance businesses, but this is somewhat offset by elevated claims in our supplemental health business.

We continue our solid track record of returning capital to shareholders. During the quarter, we increased our common stock dividend by 17% and repurchased $101 million of common stock. In May, we completed the recapitalization of our balance sheet. This greatly enhances the Company's financial flexibility and increases the amount of capital available for deployment.

Lastly, we continue to make solid progress on the ratings front, achieving two additional upgrades from Moody's and Fitch, while being placed on positive outlook by S&P.

I'll now turn it over to Scott to discuss our sales results.

Thanks, Ed. Beginning with Bankers Life, NAP in the quarter was down 3% primarily due to lower Medicare supplement and annuity sales. Medicare supplement has been impacted by both competitive pressures and consumer preference towards Medicare Advantage plans. Annuities continue to be negatively impacted by the low interest rate environment. These lower sales were partially offset by increased sales of long-term care, which were up 20% primarily due to increased sales of our shorter duration products.

Sales of third party products, largely Medicare Advantage and PDP plans, are not counted as NAP, but continue to be strong and allow us to leverage our distribution platform to grow our fee income. Fee income attributed to this business on a trailing four-quarters basis was $16.4 million, up 19% over last year. It is also important to note that this fee income generates non-life income, which is attractive because of our tax position.

While overall NAP is not growing at a level consistent with our long-term expectations, we are encouraged by the activity within the Bankers distribution channel. Issued policies in our core lines were up 1% for the quarter, while third-party policies issued increased by 26%. So we continue to reach more new customers and this is critical as it opens up new households that lead to future cross sales.

On the recruiting front, we continue to see positive results from the tactical actions we took earlier in the year. New contracts were up 5% in the quarter, making this the third consecutive quarter of positive results. Our focus will now be to keep up the recruiting momentum and convert these new recruits to productive agents. Collected premiums were down 1% in the quarter primarily driven by the reduction in annuity premiums reflecting a low interest rate environment in recent periods. Excluding annuity, collected premiums are up 1%. Annuity account values on which spread income is earned increased 1% in the quarter, driven by continued strong persistency.

As we look to the second half of the year, we will be focused on several fronts. First, as mentioned earlier, it will be important for us to convert our new recruits into productive agents. These efforts will be focused on training and mentoring programs. Next, given the importance of Medicare sales to open households and drive cross sales opportunities, we are increasing our marketing, promotion and agent recognition programs. We also recently launched several initiatives to reduce free-look cancellations, which improved sales conversion rates. Finally, we expect robust Medicare Advantage and PDP sales during the Medicare enrollment season, as we will be focused on maximizing the number of agents that get trained and certified to sell these plans through multiple third-party partners. Because of the results through the first six months of the year, the impact of low interest rates on annuity sales and our adherence to pricing guidelines, we are lowering Bankers full year NAP forecasts to flat to down 3%.

Turning to Washington National. Sales were up 2% this quarter, PMA was up 3% with the individual business up 1% and worksite business up 13%. Sales in the individual business were impacted by strong recruiting results, which sent PMA producing managers focus less on personal production and more on developing new agents in the quarter. The PMA average agent force was up 9%. Our independent channel was down 4% with sales that continue to be adversely impacted by the organizational restructuring of a large independent partner. As shared last quarter, the situation was isolated and while impacting sales through the first half of 2015, the changes in positioned this partner well for steady, profitable growth moving forward. Given year-to-date sales growth of 2%, the slower recovery than anticipated in our partner channel and delay in state approvals and rollout of new group health products, we are adjusting sales guidance down for Washington National to 3% to 5%. As part of the effort to achieve this range for the remainder of the year, we will be keenly focused on leveraging the successful growth in new recruits at PMA during the first half of the year, continuing to capitalize on strong momentum in life sales and a successful fourth quarter worksite enrollment season through tactical investments and additional support to both our PMA and partner worksite sales teams. Lastly, supplemental health collected premiums were up 5% due to continued growth in our in-force.

Moving on to slide eight. Colonial Penn continues to perform well and posted 12% sales growth in the quarter. Through the first six months of the year, sales are up 19% over the prior year. The positive results in the quarter was driven by strength in direct mail and web and digital generated activities. We continue to diversify our lead resources, deploy marketing dollars in a cost effective manner and make further improvements to sales productivity. Collected premiums were up 7% in the quarter due to strong new business generation and continued growth in the block. EBIT for the quarter was $4.2 million, up 11% over prior year largely due to growth in in-force earnings and an increase in the deferral of acquisition costs as we continue to shift to more direct mail and web based lead generation activities. Because of solid marketing productivity gains, strong sales results and growth in in-force earnings, we are increasing Colonial Penn's full year 2015 EBIT guidance to $3 million to $6 million and we are increasing full-year sales growth guidance to 12% to 15%.

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

Thanks, Scott. CNO posted another solid quarter on both the earnings and capital front. Adjusting for the one significant item in the period, we recorded operating earnings of $0.34 per share, an increase of 6% over last year. We experienced continued strength and stability in most of our business lines, but we did see elevated claims in our supplemental health business, which I'll discuss in more detail in the next few slides. Our capital position remains strong with consolidated risk-based capital of 443%. Leverage came in at 19.7%, which is in line with our expectations having recently completed the recapitalization of our balance sheet. Holding company liquidity increased to $385 million while returning $115 million of capital to shareholders.

Turning to slide 10, and our normalized segment earnings. Bankers Life posted EBIT of $86.4 million in the quarter, down slightly from the prior year. We continue to benefit from strong margins in our Life, Medicare supplement and annuity lines as well as from favorable call/prepayment income. But this was offset by lower margins in our LTC block due in part to the incremental build in future loss reserves. Washington National reported normalized EBIT of $29.1 million, down slightly from the prior year and due largely to the current quarter impact of claims experience in our supplemental health block. Colonial Penn reported solid seasonal earnings of $4.2 million. Sales and earnings results continue to benefit from marketing, productivity gains and lead generation diversification. Corporate segment earnings were generally in line with expectations.

Turning to slide 11, for a more in-depth discussion on our key health businesses. We had another solid quarter in our Bankers Life Medicare supplement block and recorded a benefit ratio of 68.7%. We continue to benefit from favorable claims experience and persistency. Earned premiums were flat year-over-year, largely due to the recent slowdown in sales. We continue to expect benefit ratios in the 70% range for the second half of the year. Our long-term care interest-adjusted benefit ratio came in at 84.6% for the quarter, slightly elevated due to marginally higher persistency. Claim activity for the quarter was in line with expectations and we continue to expect the interest-adjusted benefit ratio to be in the 84% range for the second half of the year. During the second quarter, we commenced our previously announced round of LTC rate increases and are pleased with the results thus far. Through June, we completed filings representing approximately 60% of the economic value assumed in 2014, year-end loss recognition testing. We have already received some approvals and are running slightly ahead of expectations, but recognizing it is still early in the process, we are not ready to make any adjustments to our overall expectations.

Moving to Washington National supplemental health. As outlined in our press release, we've made an adjustment to increase prior-period claim reserves by $9 million in the quarter. We have been experiencing elevated claim activity in this block over the past few quarters and as a result, we initiated an in-depth claims review. Our review revealed a shift in cancer claim trends in a subset of our block, related to higher cost and longer duration of treatment. Upon concluding the review, we determined the recent experience represents a new trend and decided it was appropriate to adjust reserves accordingly. The $9 million increase for prior period reserves resulted in a 65.7% interest-adjusted benefit ratio. Excluding this impact, the ratio was 59% for the quarter. As we expect this level of claims to continue, we are increasing guidance to the 58% range for the second half of the year.

Turning to slide 12 and investment results where we had another good quarter. We continue our tactical approach to investing new money. We put money to work at just over 5% for the quarter, largely consistent with our plan. We purchased higher quality names in the energy sector and when spreads widened added high-grade corporates and select CMBS and mortgages. Prepayment income was elevated as the new issuance calendar was quite robust and issuers rushed to the market ahead of a potential Fed rate hike. Overall, credit conditions remained favorable and net realized gains and losses continue to be minimal. We recognized one impairment in the quarter related to a legacy private company investment and now no longer have any investment exposure to legacy private company investments.

Turning to slide 13, in May we took another significant step forward, when we successfully completed the recapitalization of our balance sheet. We took advantage of favorable market conditions to lock in a more permanent investment grade debt structure. We achieved a number of enhancements that improved our financial flexibility and cash flow, including moving to a more traditional unsecured structure, extending maturities, minimizing financial covenants, eliminating cash flow sweeps and restricted payments baskets and increasing deployable capital by eliminating $120 million of principal amortization payments and raising over $100 million of net proceeds.

Concurrent with the recapitalization announcement, Moody's and Fitch upgraded the Company's ratings. As previously announced, we recorded a charge of $21.3 million in the quarter related to debt extinguishment.

Slide 14 profiles our capital position. We ended the quarter with estimated RBC of 443%. RBC was positively impacted by investment results where upgrades in our bond portfolio outpaced downgrades. Statutory operating earnings in the quarter were $91 million and more than offset the $50 million sent to the holding company. We expect RBC to be in the 425% range for the remainder of the year.

We ended the quarter with $385 million of the holding company, up significantly from the first quarter and due largely to the net capital raised in the recap. We currently expect to maintain a minimum of $300 million for the remainder of the year absent any incremental opportunities for deployment. Leverage increased to 19.7%, consistent with our expectations coming off the May recapitalization. We expect to maintain leverage in the 20% range for the remainder of the year.

On a year-to-date basis, we have repurchased $187 million of common stock, which puts us well on our way to achieving at least the mid-point of our $350 million to $425 million repurchase guidance range for the year.

Turning to Slide 15. Our normalized operating ROE came in at the 9% range, driven by strong core earnings and ongoing capital return to shareholders. In prior calls, we have discussed our goal of increasing our return on equity over time and this remains a priority. The pace and trajectory of ROE build will depend on a number of variables, including absolute levels of capital, new money investment rates, line of business performance and the amount and pace of investments required to drive sales growth and increase productivity and operating effectiveness.

There are several catalysts, which could accelerate ROE expansion. These include non-organic growth initiatives, LTC reinsurance solutions and achieving investment grade.

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

Thanks, Erik. The investments that we have been making over the last few years to expand our reach and enhance productivity are paying off. Colonial Penn is a shining example of this as we added simplified issue products, diversified lead sources through direct mail, web and digital, enhanced systems and processes, plus added key talent. Our balance sheet, liquidity, cash flow and capital generation remain strong. Rating agencies continue to recognize this with further upgrades. Our objective of achieving investment grade status is in sight.

The resignation of Fred Crawford is a regrettable loss, but we have a strong team and I can assure you that Fred's leaving was not for any negative reasons regarding CNO. We have launched the search for our next CFO, and already have candidates in the process. A mark of the strong position that we are in and opportunity ahead is illustrated by the change in questioning. Undoubtedly, one of the main questions eight years ago when I joined and even when Fred joined three and a half years ago was why are you joining CNO. The question now is, why are you leaving CNO.

And with that, we'll now open it up for questions. Operator?

(Operator Instructions). Randy Binner, FBR Capital Markets.

Hi. Good morning. Thank you. I wanted to talk about sales and kind of how it's communicated and looking at slide six, in particular, of the presentation, is there a way because there's a lot of positive business activity you talked about, whether it's actual policies issued or recruiting, and it sounds like from what Scott said that this open enrollment period later this year is going to have probably more third-party business, which makes sense because people like Medicare Advantage policies. So is there a way we could think about communicating premiums originated or some other way of showing the third-party impact other than kind of the policy counts here because it doesn't -- the way it's presented now doesn't get to a kind of a dollar number we're looking at?

Yes, Randy. This is Ed. Thanks for the question. It's something that we are looking at seriously as to how do we better portray the growth, the extended reach that we're having to serve the middle market and some type of whether it's premium equivalencies, number of customers or some other measure or maybe combination of measures is something we're looking at. We even have had discussions with our Board as to how do we determine success here in serving the middle market. So not ready to give you a definitive answer right now, but it's something that we're working on.

Yes. Hi, Randy. This is Scott. I'd add to that, that you hit, the obvious value to the organization is the fee income that we're building, but there's also the income that's generated to our agents, that is an important component of their total ability to earn an income and stay in the business and stay with us. And that obviously improves retention and shows up in their overall productivity. So Ed's absolutely right, looking for ways to demonstrate that in a broader way than just on a policy count basis.

Yes. The one other thing I'll add, Med Advantage is the prime example. Above and beyond what Scott and I said, it's a great lead source for others sales, roughly a third of the policies that are sold to MA customers result in a sale of another CNO product. So there's much more value than the one single sale or fee income.

All right. Great. I'm glad to hear the wheels are returning there, because I think investors are actually pretty receptive to definitional changes there if they follow the economics, so we'll stay tuned. And then I guess kind of switching topics, on the long-term care, this has been a topic of conversation on past calls. And it's interesting because on the Unum call, someone asked, now they have a different book of long-term care, but someone asked, if they could reinsure it or transfer the risk somehow, and they said there weren't a lot of buyers out there, but your book is over. It's a little bit better defined, it doesn't have a lot of its very, very worst legacy pieces with it anymore. And so, is there any update you can give us on kind of what the conversation is in the alternative market for reinsurance, risk transfer, or other way to divest the remaining long-term care piece?

Can answer it in part, at least, Randy, that there definitely is a market with more interested parties, potential buyers/resinsurers, many probably not surprisingly are entrants backed by private equity and those types of capital structures. We obviously have transacted with a party like that Beechwood Re with our former closed block, LTC. So it's definitely something that we're experienced in and well aware of how to do it and how to structure things.

Okay. So active conversations on that front?

Yes, there is, we're always in touch with the markets and reinsurers and not just for LTC.

I'm going to sneak one more in just because I've been wanting to ask this question all morning to the different life insurance companies and I don't know if Eric Johnson's there but the new money investment environment seems a lot better now than it was earlier in the year, and I realize you're still reinvesting below the portfolio yield and there is one timers in the investment income, but in general, your investment income held up pretty good and we saw that across a lot of the life insurers who reported last night. Can you quantify at all how much better in basis points new money is now versus kind of when we had these calls three months ago, particularly in investment grade? It just seems like risk spreads are a little wider and the ten year's higher.

Yes, Randy. Good morning. I'm very surprised to be answering your question this morning. I haven't said that at all. The interesting quarter during the second quarter or during the early part of the quarter, actually rates were a little bit lower and so, if you look at the kind of the new money rate average, average is high things and kind of a lower rate during the early part of the quarter and grading up during -- at the tail end as spreads widened, not just in corporates, which I think you mentioned, but also in some of the structured asset classes and consumer class spreads widened, pretty significantly high yield obviously following in that trend. And so, I would say you're looking at maybe a pick-up aggregating all of that maybe 20-ish basis points beginning at the end of the quarter on average of putting everything together. And I think if you kind of tracked our new money activity during the quarter, it would be reflective of actually lower rates in the earlier part and higher rates at the ending part.

What the quarter ahead offers us, we currently seem to be seeing a little bit of a flattener and the longer end of the curve hanging in there, a lot of more action in the shorter end of the curve, but yet there are opportunities that as spreads have widened there. We're seeing more opportunity in the structured asset classes, doing more in CMBS, more in ABS and -- which we like as those tend to be less interest sensitive, shorter duration assets, more kind of heavier credit and spread component with which we're comfortable and so, we are cautiously positive on where we are now versus where we are three months ago. And I think as Erik Helding said, have been tracking quite well relative to plan.

Yes. The only follow-up I'd have is, is this spread widening like a sign of deteriorating corporate health, meaning I think it's from like M&A and commodity volatility, right. So I guess it's just normal, is it good spread widening or is it bad spread widening?

Well, we are happy to see higher spreads because we think there're more risk -- they compensate us better for the risks that we take inherently in being a spread-oriented business. There're some asset classes where the spread widening is really driven by technicals, CLOs would be good example of that. I think also high-grade, IG corps is a good example of that where most of the spread widening is just technically flow of funds driven, supply without great pick-up in demand and fear that demand will actually go the wrong way as the street is stepping away from inventory, all that adding up to wider spread. M&A is part of that dynamic.

There are other sectors where the supply and demand is still pretty favorable and I think you just have little bit more of a people stepping away from the market in general trade and that's more the structured classes. And so, technicals have a lot to do with it. There are some particular areas where obviously the fundamentals are shifting. I mean, the commodity classes you mentioned, energy, metals and mining, they are definitely shifting; the weight of fundamentals have changed quite a bit. We tend to be underweight those areas, luckily, and so -- or maybe not luckily, but we were checking this -- I was checking this morning and we're about half weight, for example, in metals and mining. So that may be an opportunity for us looking down the road. If we can be patient and let things bottom out, then maybe we'll buy some cheap bonds and it will be good for the Company in the long-run.

So, yes, also there's been some, I think deterioration in some of the underwriting standards. Our people talk a lot about that and in general, ratings upgrade, downgrade trend is not as favorable as it was a year ago, those things are for sure. So I just threw a lot of stuff up in the air. I think credit quality is still sufficient, though not as great as it was a year ago. It won't be as good a year from now as it is today, and we just have to kind of navigate through that.

That's perfect. Thanks for all the answers.

Erik Bass.

Hi. Thank you. Just on the Washington National supplemental health outlook, can you talk a little bit more about what's driving the higher claims, I guess it's the cancer product that you sell, an indemnity product, and has utilization gone up or is there a reimbursement component on treatments?

Yes, Erik. This is Erik. Yes, I mean I think it is essentially a utilization. So we've seen a few things here over the last several quarters, which have been emerging. I think the first one is really a move from intravenous treatment regimes to oral, which has the effect of being slightly more costly, oral treatment regimes tend to be more frequent and patients tend to last longer on those treatment regimes. And then additionally, what we see is, even after the initial treatment is done, medication continues for maintenance. So yes, I think that is essentially what you're getting at there.

Got it. And what are you on the hook for, I mean is it a kind of a fixed daily benefit or do you pay as long as treatment goes on? I guess another way of looking at it is, what's the risk that the benefit ratio could continue to move higher or are there sort of caps in your policies?

Yes, I mean there are fixed daily benefits. The cancer coverages or cancer policies that have emerged over time, older vintages tended to have more unlimited benefits and we have some of that, but not much. I think the number we saw was about 2% of our policies have unlimited benefits. So don't see a real exposure there. We did have an acute issue with unlimited chemotherapy benefits a couple of years ago, if you recall. We actually went and took rate increase on that block. So I think we've got that covered. Newer vintages have better policy coverages in terms of like limits, be it daily, weekly, monthly or even annual. So the newer vintages have better caps on those types of things. So I think what we're looking at here is really a subset, I mentioned in my remarks really a subset of our supplemental health block that's essentially 20%, 25% of our block.

Got it. That's helpful. And then Ed, just a question for you, I appreciate the update on the CFO search and the process you're going through there. I guess as you think more broadly, can you discuss the succession process that you have in place and how you think about building the management bench at CNO?

Yes. No. Fair question, Erik. CEO succession and succession in general is definitely a priority, CEO succession is something the Board is regularly engaged in and takes as one of their primary responsibilities. I take my role in that as to not only develop the talent we have, but when appropriate to add talent, Fred joining three and a half years ago, Bruce Baude joining about three years ago, are examples of that as well as developing talent through different opportunities in the Company, Gerardo Monroy is a great example of that, moving from the LTC area to President of Colonial Penn, so we take it seriously. We -- our team here, hopefully they never get tired of hearing it but they've heard it a number of times, I strongly believe it, we win and lose the talent. So we're opportunistic as well and when we can attract and bring in new talent, we'll do that and we invest quite a bit in developing our talent that's here to retain them and motivate them and give them more opportunity.

Thanks. Appreciate the answer. And just quick on the CFO search, I'm assuming it's an external process as well as potentially an internal process in ?

Yes. It'll be largely the same process we followed when we did the last search about three and a half years ago and internal candidates will go through the same process that external candidates do. And we think it's a thorough and an appropriate process.

Great. Thank you.

Ryan Krueger, KBW.

Hi. Thanks. Good morning. I had a question on Bankers sales. The med supp and annuity drop-off in sales, I understand. But was hoping to get more detail on the life insurance side, you'd had very strong growth there for a number of years and it's dropped off in the last couple of quarters. Can you talk about what's going on there?

Sure, Ryan. This is Scott. The primary drop-off in NAP is related to a smaller premium per policy. We had, the last couple of years, some opportunities to expand our larger case UL business and we kind of did a lot of that, took some low-hanging fruit and cross-selling into some current households and we're seeing that taper off a bit replaced with more traditional life. So the combination of fewer larger case index UL sales offset by more traditional life is causing kind of the premium per policy, so on a policy count, life sales still looks pretty good but on a premium per policy and on overall premium basis, we've seen a degradation there.

Yes, Ryan. Well, first of all, good to have you back on the call and in coverage, so thank you for that. And with this, it somewhat ties into the earlier question on sales and how do we measure growth where undeniably serving more customers, selling more policies, be it life or otherwise, is all-in-all a good thing. And we're meeting the needs of that customer with the right size of policy, the right premium that hopefully bodes well for them that have wallet as well as confidence to buy other products from us and/or refer others to us.

Got it. Thanks. And then Washington National, are you increasing your new business pricing on the cancer product given the higher claim trends and do you expect that to have an impact on sales?

We haven't done that. We did introduce newer forms of policies a couple of years ago, but that isn't the case right now.

Yes. And with those newer policies, Ryan, to what Erik replied earlier on the limits, I mean, those have the multiple limits daily, monthly, annual, so we -- we're quite confident that helps to mitigate the risk and it's priced to reflect the benefits that are offered.

And those products began introduction in middle of 2013, and fully introduced in 2014. So we've had -- it those policy forms have been what we've primarily been selling since that point.

Okay. And then last one, I don't know if this is intentional or not, but you in previous quarters had an ROE target slide of 9.5% and then 10% after the recap. You've had some headwinds obviously on the Washington National benefit ratio. You didn't mention an ROE target this time. Do you still feel like that, that 9.5% to 10% is a good range for 2017 or you pulling back from that a bit?

No. We're not pulling back from it, Ryan. This is Erik. It remains our guidance. We executed on the recap. What I would say about the recap scenario that we put out there was that it assumed sort of an immediate deployment of the net proceeds or excess capital that was at the holding company. So that's where you really got a large proportion of the benefit or accretion in ROE. We've not done that yet, so as you can tell we're sitting on roughly $200 million of excess capital.

The reason for that is not that we don't feel like we can't go out there and buy more stock, we certainly can. We did increase our repurchase guidance range by $100 million and increased our common stock dividend in May. So we're returning a pretty decent chunk of capital to shareholders already, probably the largest in the life insurance sector, if I'm not mistaken.

So we'd like to have sort of the flexibility and dry powder available at the holding company to be opportunistic. So something we talked about on prior calls is being actively engaged in M&A. So that's something to have a little extra cash on hand if we are in a position to execute on that. Part of it could be, to be opportunistic to buy more stock than what we've guided to, so that would be another opportunity for us. So no change to what we're looking at for in terms of ROE. We're going through our planning process, we kick it off here as is customary, we would look to update you all and the streets towards the end of the year, as is customary.

Okay, great. Thank you.

Dan Bergman, UBS.

Hi. Good morning. Maybe just another question on the Bankers sales. With segment sales down 2% to 3% year-to-date, it seem like your revised full-year 2015 guidance (inaudible) down 3% would seem to imply that any positive inflection in the second half of the year would be modest if any. Given the improved recruiting in recent quarters, I'd expected the pace of sales improvement be somewhat higher. So any color on what factors are keeping the improved recruiting from translating into a more robust sales outlook would be helpful as well as any thoughts on when these headwinds might abate and sales growth in the segment would improve.

Sure, Dan. Recruiting started to pick up in the fourth quarter of last year. And it typically takes 6 to 12 months to get a new recruit up to higher productivity levels. If you look at in the appendix, you look at our productive agent counts, you'll start to see that quarter-over-quarter, second quarter is the first quarter that we started to see an improved -- a slight growth in the average productive agent count. We do expect to see some of that fourth quarter productivity coming through, it's hard to say, though, given the importance of the Medicare season, which occurs largely beginning at the end and throughout the fourth quarter. So, while we are optimistic that some of the fourth quarter and early first quarter recruits will start to show some improved productivity and start to stabilize results, that's kind of why the range, right. So we're down 2% to 3%, we're forecasting a range of flat to negative 3%. I think the flat assumes that we gain some of that benefit, and that gets us to -- kind of overcomes what we experienced in the first half of the year and the low end of the range assumes that we don't.

Yes. Dan, this is Ed. I'll just add to that, the Medicare season, again, with our focus on serving the customer and not pushing Med supp over Med Advantage or vice versa, that's the other delta here that is hard to tell, is what will this enrollment season bring. Certainly, last year's enrollment season Med Advantage was favored by more customers than Med supp. We haven't expected or projected any material change in that. So that could be a delta either way there that factors into our guidance.

Very helpful. Thanks. Maybe staying with Bankers, the Medicare supplement benefit ratio was favorable again this quarter, similar to the strong results you've had in recent periods. Any additional color on what's driven the favorable claims trends would be really helpful. I mean, I know you kept your guidance range unchanged, but any thoughts on how likely you think this trend may persist at?

Yes. I mean, I think roughly 69% is generally in line with guidance. We put a 70% range out there. So I view that as being in line.

Great, thanks.

Colin Devine, Jefferies.

Thanks very much. Just a couple of questions, to follow-up on Washington National, is there anything that you can do retroactively to address the portion of the block that you're having the adverse experience on and just to confirm that it's about 25% of the blocks was the first question. Second, Ed, in terms of getting the -- accelerating the ROE improvement on the M&A front, maybe you can just give us a bit of an update on your current thinking in terms of where you might like to add to CNO? Thanks.

Thanks Colin. On the Washington National supplemental health, certainly rate increases is one potential lever that we have there, also how we manage claims to make sure that the dispensation of oral chemotherapy is in line with protocols is another thing there. As far as M&A, we continue to look for things that fit in with and augment our middle-market strategy. At the same time, we're very cognizant of trying to more fully utilize our non-life NOL and in that expanding our reach and diversification. So different distribution type of entities, lead generation type of entities, asset management type of entities tend to be closer to the top of the list there and with that again, focused on the middle market and staying close to our core.

Thanks. And then one follow-up, with respect to long-term care and the margin testing, is my memory correct, when we went through this last year that I think the positive margin was less than $100 million? And I assume obviously, you did factor in as you laid out some expectation of rate increases, you mentioned you're partway there. Could you just refresh us where the interest rate assumption was when you did the testing last year because, I think it's fair to say investor concern over how this is going to shake out this year is weighing on the stock a bit?

Yes, Colin. This is Erik. I can answer that question. So the margin at year-end 2014 was a little north of $100 million, I believe it was $110 million. We did factor rate increases into that margin, it was approximately $230 million, which offset some of the morbidity hit that we took when we did that extensive claim study. In terms of investments and new money rates, we had assumed new money rates of 5.50% and then increasing over time to 6.50%. So, that's the one area that we're continuing to watch, I think we're doing okay thus far this year so far. We are expecting rates to increase over time. So that is embedded in loss recognition testing, so we'll just have to see how that plays out.

Okay. And just to clarify again, if memory serves me right, you only factored in rate increases looking out over the next six months to a year, unlike some other companies who might have gone much further out, was that fair?

That's right. We factored in one round, the round that we're currently following for and that's it. To remind everybody, we were seeking rate increases of 30% to 40% on roughly half of the block and assuming roughly a 40% success factor. So that equated to roughly a 9% overall increase in premiums.

Yes. The other thing, Colin, I'll add is that we mentioned claims management process improvements that we're working on as well. No benefits from that were factored into our margin testing at the end of last year.

Okay. Thank you, very helpful.

Humphrey Lee, Dowling.

Thank you. Good morning. Just -- first of all thank you for providing that producing agent counts in the appendix; it's helpful. But looking at the numbers there just a question about the second year agents are trending down. Like first year, we see kind of a little bit of a gradual picking up for the past several quarters, while this three-year plus has been stable. For the second year, agents seems to be kind of trending down. Is it just simply the kind of a little bit of a rolling off of people after the first year not doing so well and then stop pursuing this as a career? And then if that's the case, is there any plan to kind of revitalize the productivity for the second year agents?

Hi, Humphrey. This is Scott. It's a good question. Second year agent count is an area of opportunity for sure. And what you'll typically see is, you see an increase in recruitment, you'll generally see a decrease in retention of second year agents. But having said that, what we'd like to be able to do and a number of the initiatives that we've been working on beginning in 2014, and that are just starting to roll out are really targeted to give agents more tools to improve agent productivity. First year agent productivity is largely around the initial training, getting successful with some of the basic products. And I think we have good systems and processes in place already. I think a lot of the tools that we are investing in, digital tools, mobile tools, customer relationship management tools are really targeted to the second and third year, so the developing agent. So they can better manage their business and get over that what we refer to it as a sophomore slump in the business, as you're absolutely right; that second year is tough. And the more people we can pull through and allow to -- enable to be successful in second and third year, the much better we're going to be at improving our overall agent force size and through improved retention in that -- of those developing agents.

Yes, Humphrey. The other thing to keep in mind is the absolute number is important, don't get me wrong, but we also look at the percentage that represents of how many first year agents made it to the second year. So when you have lower recruiting like we did in the second half of last year, the second year absolute number is likely to remain lower than the past few just because of the sample or the size of the population that can even go into the second year. So the success rate percentage is something that's quite important that we monitor.

That make sense. And thank you for the color. And maybe a question for either Ed or Erik. Just maybe a reminder to us what is your buyback philosophy and how price sensitive with respect to your buybacks program, especially given where your stock has been today?

Yes. I think what we've said in the past is we have sort of two streams, we are price sensitive. So we will buyback more when the stock is trading below book value or further away from intrinsic value and less as it trades closer to intrinsic value. And then the caveat that we always put out there is that our buyback guidance is absent compelling alternatives. So we think the return on our stock is pretty good and as that stock trades lower it's even better. But we also are cognizant of the fact that we need to grow the enterprise and our other investments that we need to make to drive growth to create value for shareholders apart from just buying back the stock.

Okay. Thank you. And just one last question. So, Ed mentioned about being cognizant about utilizing the non-life NOL when you're thinking about M&A. Can you maybe give us some color or an update, where do you see opportunities in adding non-life NOLs utilization?

Humphrey, one is growing the enterprise, even if it's growing the life side, we can carry over 35% of life income, also of course, growing the life side and the assets related to it. We generate non-life income through the management of the investments supporting the life companies, so that's another example. Another is, we talked about it a few times today, the fee income that Bankers life agents generate by selling endorsed third-party products like Medicare Advantage and growing that. The other opportunities really come more back to my M&A answer that to the extent that we can find properties that help expand our reach and grow us, but also have characteristics like PMA that's wholly owned and is a non-life entity, making a profit, distributing products for us, it's those kinds of things that we're putting more at the top of our list and looking at M&A.

So you mentioned that the fee income that you generated from selling the third-party Medicare Advantage products would be considered as a non-life income. So in that case, wouldn't the economic value for selling those fee-based third-party products would be more attractive than selling your Medicare supplement products at least based on the utilization of NOLs?

Not necessarily because with Medicare supplement, where we take underwriting risk, we have more sources of profit with the product where we take, we manufacture and take the risk. Now, that said, the economic value of sales like Med Advantage and the fee income, that's a key part of what we're looking at as to how do we define growth of the enterprise as opposed to simply using new annualized premiums because obviously, as it's quite clear, again this quarter sales of Med Advantage and other products like PDP don't get into that number at all.

Okay, thank you.

Sean Dargan, Macquarie.

Want to stay on the NOL for one moment. Ed, since you've got to the Company, whenever the topic of selling CNO has come up, I think the standard answer has been that you have tax benefits that would not transfer to a buyer under a change of control. I think you've used up most of the life carry-forward. Do you still think that's really something that's holding back M&A? And I specifically ask given recent events and the fact that I think Bankers is in particular an attractive property that comes with its own distribution.

Thanks, Sean. We don't comment on M&A specifically that way, but I'll say in one way certainly, the fact that we're utilizing more of the NOL, that gets smaller, if it is a deterrent it's less of a deterrent. The other thing is that any NOL, if there was an acquisition, it doesn't totally disappear. How much of that could be used by the acquirer depends on two important factors, and one is the price paid, so the fact that our stock's risen in the last several years and we're trading in the $4 billion market cap, it makes a big difference versus several years ago. And then the other factor, which hasn't really changed much in the last couple of years, is long-term government interest rate. But there again, those are two important factors that go into determining how much of any NOL could be used by an acquirer.

Okay, thanks. That's all I had.

And there are no further questions.

No more questions. Operator, is that what you said?

Yes, sir. There are no further questions.

All right. Thank you, everyone, for your interest in CNO.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.