CNO Financial Group Inc (CNO) 2015 Q3 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 Third Quarter 2015 Earnings Results Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Mr. Adam Auvil, you may begin your conference.

Good morning and thank you for joining us on CNO Financial Group's third 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 can obtain the release by visiting the Media section of our website at www.cnoinc.com. This morning's presentation is also available in the Investor section of our website and was filed in a Form 8-K earlier today. We expect to file our Form 10-Q and posted on our website by November 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 will be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between third quarter 2014 and third quarter 2015.

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

Thanks, Adam and good morning, everyone. CNO had another good quarter, as we continue to expand our customer reach and recorded growth in several key measures.

NAP was up 1% on a consolidated basis, while sales of third-party products, which are not included in NAP were up 10%. On a policies issued basis, sales were up 3%, and our overall policies In-force grew by 1%. Selected premium growth was robust, up 7% driven by a rebound in annuity sales, which also drove a 2% increase in annuity account values.

Growing the franchise is not only through sales, but also retaining satisfied customers. Operating earnings per share excluding significant items were $0.33, up 3% over the prior year. We continue to experience strong margins in most of our businesses and our supplemental health results stabilized. It's important to note that earnings in the third quarter of 2014 were particularly strong as we experienced outsized favorability in both mortality and morbidity.

We continue our solid track record of returning capital to shareholders. During the quarter, we bought back $124 million of common stock and paid $30 million in common stock dividends.

Lastly, we reached another significant milestone on the ratings front, in achieving an A.M. Best A minus financial strength rating. We expect this to favorably impact our businesses, especially our Washington National worksite business.

With that, I'll now turn it over to Scott to discuss our segment results.

Thanks, Ed. Beginning with Bankers Life, production in the quarter was mixed, NAP of $59.9 million was down 3%, primarily due to lower life insurance sales. While the number of new life insurance policies issued has grown this year, average issued premium has been lower, resulting in lower NAP for the product line. We experienced strong growth in annuity sales, driven by higher demand of our fixed-indexed annuity products. These contracts resonate well with those at or near retirement, as they blend protection of principal with the potential for account growth.

Sales of third party products, primarily Medicare advantage plans continues to experience strong consumer demand. Policies sold were up 10%. Fee income generated by these sales on a trailing four quarter basis was $16.6 million, up 16% over last year. This is important non-life income and enables us to more fully utilize our valuable NOLs.

Average producing agents was down slightly driven by a recruiting shortfall. After three consecutive quarters of recruiting gains, our July results were particularly weak and this resulted in a 19% decline in the number of new contracts. On a year-to-date basis, recruiting is down just slightly over the prior year. We recently rolled out a new applicant tracking system and recruiting activity has increased from July levels.

Given our year-to-date results, we currently expect Bankers Life's full-year NAP to come in at the low end of our guidance range of flat to down 3%. Lastly, collected premiums were up 6%, primarily driven by the increase in annuity sales.

Turning to Washington National. Sales were up 1% in the quarter, worksite sales were up 10% with strong growth in supplemental health and life insurance in the worksite market driven by TMA, our wholly owned marketing organization. Individual market sales were down 3%, this compared to an especially strong quarter of performance in the prior year.

Average producing agents at PMA remains robust and was up 7%. We anticipate Washington National sales growth to be near the low end of our previous guidance of 3% to 5% in 2015, with momentum in worksite sales offset by slower individual market sales growth.

Lastly, sales growth and strong persistency contributed to a 9% increase in Washington National supplemental health collected premium. As we look beyond 2015, we expect continued progress in the worksite marketplace assisted by the A.M. Best upgrade Ed mentioned earlier. The upgrade allows us to now compete for business opportunities that have historically been more rating sensitive.

Moving to slide 8, Colonial Penn posted 15% sales growth and is up 18% on a year-to-date basis. The continued positive results are driven by strong Direct Mail and web/digital generated activities, continued marketing cost effectiveness and higher sales productivity. We are currently expecting Colonial Penn's full-year sales growth to be near the high end of the 12% to 15% guidance range.

Collected premiums were up 8% due to continued growth in the block. Third quarter EBIT was slightly positive, and is currently running just below breakeven for the year, as we decreased advertising spend in the fourth quarter and project growth and In-force earnings. We continue to expect Colonial Penn's EBIT to be in the $3 million to $6 million range for the year.

Before I turn it over to Eric, I'd like to make a few comments about the investments we are making in the businesses. The strong growth results we are seeing at Colonial Penn over the last six quarters reflect the successful execution of investments made over the last three years to four years. Some of these investments, like our CRM system, required lengthy implementation schedules, but are now paying off in significant productivity improvements of our telesales organization.

During late 2014 and throughout 2015, we have been investing in growth and productivity initiatives that Bankers Life and Washington National. We expect most of the heavy lifting to be complete by the early part of next year and sales and productivity improvements to follow. We are focused on moving quickly to begin to reap the benefit of these important investments that better position us for future growth.

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

Thanks, Scott. CNO posted another good quarter on the earnings and capital fronts. Adjusting for the one significant item in the period, we recorded operating earnings of $0.33 per share, an increase of 3% over last year. Normalized operating ROE was 8.7%, relatively flat compared to last year, but as Ed mentioned, third quarter 2014 results were unusually strong and marked by significant mortality and morbidity outperformance.

Third quarter 2015 results were largely in line with expectations, although we did experience some volatility in our corporate segment results due to equity market performance.

As Scott noted, results of the Colonial Penn continue to be strong. While Colonial Penn's earnings in the period did not materially contribute to EPS or ROE, it's important to note that the continued growth in In-force at Colonial Penn is creating a real long-term value for shareholders.

Our capital position remains strong, with estimated consolidated risk-based capital of 440%. Leverage was 20.2% and holding company liquidity was $354 million. We repurchased $124 million of common stock in the quarter and $311 million on a year-to-date basis, well on our way to our repurchase guidance range of $350 million to $425 million for the year. We are tactical and opportunistic in our repurchases. So where we ultimately end up within the range will depend on share price performance over the remainder of the year.

Turning to slide 10 and our normalized segment earnings. Bankers Life posted EBIT of $79.8 million in the quarter, down from the prior year, but as noted, this is largely due to significant mortality and morbidity outperformance in the prior year. Current period results were largely in line with expectations, although we did experience moderately higher Medicare Supplement claims and lower levels of call prepayment income.

Washington National reported earnings of 30.6 million, up slightly from the prior year. Benefit ratios in our supplemental health business stabilized in the quarter, a good result coming off a couple of quarters of volatility.

Colonial Penn reported slightly positive earnings in line with seasonal expectations. Sales and earnings results continue to benefit from marketing productivity gains and lead generation diversification.

Excluding the impact of equity-market volatility, corporate segment earnings were generally in line with expectations.

Turning to slide 11, as I mentioned, we experienced moderately elevated levels of claims in our Bankers Life Medicare Supplement block and recorded a benefit ratio of 71.5%. Performance over the past several quarters has been particularly strong, and as such, we don't view the current period results as unusual, more just a reversion to longer-term expectations.

On a year-to-date basis, our Medicare supplement benefit ratio was 69.2%. We continue to expect this benefit ratio to be in the 70% range for the fourth quarter. Our long-term care interest adjusted benefit ratio came in just under 84% for the quarter, in line with expectations and we continue -- we expect continued stability in the fourth quarter.

Washington National supplemental health interest adjusted benefit ratio came in at 57.4%, in line with expectations. Incurred claims have stabilized and we continue to expect this ratio to be in the 58% range for the fourth quarter.

Turning to slide 12 and investment results. We continue our tactical approach to investing new money. We put money to work at 5.21% for the quarter, slightly above the second quarter as market volatility resulted in wider spreads for a period of time. After a couple of quarters of elevated call/prepayment income, third quarter results moderated some.

Overall credit conditions remain favorable and net realized gains and losses continue to be low. Impairments in the quarter were slightly higher, but due primarily to select names in the energy sector in Puerto Rico.

Before I turn the call back over to Ed, let me provide a brief update on our Bankers Life long-term care business. As discussed in our second quarter earnings call, we recently commenced a new round of rate increases. We continue to run ahead of expectations and expect to have all initial filings completed by the end of the first quarter of 2016.

Claims experienced for the first nine months of the year has been largely in line with expectations, and as such, it's unlikely that we would see any material impact of testing margins related to this assumption.

We continue to build our future loss reserve and increased our accrual in 2015. While this negatively impact short-term earnings, the increased accrual contributes to testing margins and helps defend our balance sheet from potential future charges.

Continued low interest rates are a challenge and could pressure margins. The amount of potential deterioration will depend on the assumed recovery of interest rates, as well as the projected ultimate rate.

If you recall from our 2014 loss recognition testing results, we pushed out the rate of recovery by one year and also decreased the ultimate rate by 50 basis points. The combination of these changes resulted in a $50 million decrease to margin. If we were to leave the ultimate rate assumption unchanged, the impact to margins from pushing out the recovery rate by one year would be closer to $15 million.

While it is still early, and we need to go through the formal testing process and update all assumptions, based on current trends, we anticipate year-end 2015 loss recognition testing margins for our Bankers Life long-term care business to improve modestly.

I'll now turn it back over to Ed for some closing comments.

Thanks, Erik. As Scott mentioned, we have been and continue to make investments to strengthen the foundation of our businesses. We are at different stages of these investments with initiatives that started several years ago at Colonial Penn, yielding results today and initiatives currently underway at Bankers Life and Washington National expected to generate profitable sales growth in 2016 and beyond.

We continue to explore options to reduce our long-term care exposure by roughly half on a relative basis over the next four years to seven years. As previously discussed, this will occur through a combination of run-off of the older, more comprehensive policies, increased sales of other lines of business and reinsurance of LTC.

The search for our new Chief Financial Officer is progressing and we expect to be in a position to have a candidate selected by the time we report fourth quarter earnings.

Lastly, we expect to provide 2016 guidance on sales, key earnings drivers and capital deployments as part of our fourth quarter earnings call.

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

Randy Binner, FBR, Inc.

I just wanted to kind of start at the end there with some of the long-term care comments. The first was for Erik, I think you're saying overall the loss recognition testing margins should have a modest improvement, that includes kind of understanding where yields are now, and the reason I ask it that way is I think that you needed the new money yield to stay more in like 550 basis points or better range on basis points, and I think you just said you are at 521 basis points. So am I understanding your comments correctly that the good guys kind of in everything else are offsetting that continued bad guy with low reinvestment yields?

Hey, Randy, it's Erik. So just to clarify, so our new money rate assumption for the long-term care business that was set for 2014 loss recognition testing purposes was 550 basis points for 2015 and then increased to 6% in 2016 and then 650 basis points, which was the ultimate rate. That's slightly different than the 521 basis points that we talked about in the investment slide, that is the aggregate new money rate for the Company. So the 550 basis points for this year is specific to long-term care. The comments with respect to margin and potential margin improvement for this year. Yes, they were meant to be all inclusive and include potential deterioration related to long-term care. So you'll note that we've framed up sort of the potential for margin deterioration in terms of what happened last year where we pushed out the rate of recovery by one year, and then also decreased the ultimate rate by 50 basis points. That resulted in $50 million of margin deterioration. So that could happen again this year, alternatively we could leave the assumption unchanged and that would obviously result in no margin deterioration. A third scenario would be that we just push out the rate of recovery and leave the ultimate rate unchanged and that was the $50 million deterioration that I talked about. Does that help?

Sorry, Randy, this is Ed. One thing I'll add to what Erik said, going back to the 521 basis points new money rate that we've achieved here this year, that as Erik said was the aggregate for all lines of business with a positively sloping yield curve, which we've had in long-term care being our longest duration liabilities, the new money yield on long-term care is higher than 521 basis points, we haven't disclosed specifically what it is, but it is higher than 521 basis points.

Got it, okay, that is helpful. And then I guess just kind of a more pointed question. Well, I'm sorry, one more on long-term care. So Ed you mentioned that reinsurance continues to be a goal, there was a transaction that was notable in the kind of the riskier area of the life insurance market, recently with (inaudible) and Phoenix. And so to me that implies a lot of things that I guess are possible. How would you characterize the market as you talk to counterparties around a potential risk transfer?

Yes. I would summarize it as, it is a viable market, there is a good mix of players, meaning traditional long-standing reinsurers all the way to some newer entrants backed by private equity. There are the players that have done transactions in the LTC space. And with that, I think we continue to believe and experience that our long-term care business, given the less duration than most books in the industry, given the stability of the business, the lower average benefits with less than 5% having any type of lifetime benefits and the vast majority of our products having less than four years of benefits, it's kind of book of business that the potential bid ask is likely to be narrower. So that would seem to indicate there is an opportunity to do a transaction or transactions, but we're obviously not at that point to have something in the hand or announced.

And just wanted to get one more and -- affects the model that I think, I picked up somewhere the comment was that the Medicare is up benefit ratio and bankers, you expect that to be higher through the fourth quarter this year, or just higher like more like this kind of above 70% level, going out for a while?

No, for the fourth quarter, we expect the meds benefit ratio to be 70%.

So 70% and then the kind of stabilizing around 70% going forward? Because that would be the more normal?

As Ed mentioned, we are a little early in the process and we'll be providing outlook for 2016 on our fourth quarter call.

Erik Bass, Citi group.

Just wanted to touch on a couple points for long-term care. You mentioned obviously some of the favorable items that could benefit the reserve margin when you do your fourth quarter review. Do you expect to recognize the full benefit of better rate experience in the claims management initiatives that you've undertaken in 2015 or is that something where you'd see a partial benefit this year and then there'd be potential for further benefit in 2016?

And I guess secondly, given the potential for the improvement in margins, would you contemplate any changes to the level of the future loss reserve accrual for 2016?

So with respect to rate increase assumption, so obviously as we progress through that process and make our way through year-end loss recognition testing assumptions, we will update our rate increase assumptions, including success factors. So I'm not sure if the angle of your question was what would reflect a 100% success factor or something more than 40%, which was in our current assumptions, but the idea is if we continue to run favorable, that would be something more than 40% success factor.

Second part of the question on claims management initiatives, we talked about earlier in the year, a potential benefit of roughly $100 million contributing to margin, we don't expect to recognize all of that here for year-end 2015 testing purposes, more just a portion with potential benefits out in 2016 and 2017. Does that answer your question?

Ryan Krueger, KBW.

I just wanted to follow-up, then I guess may be on what Erik was just asking. Because the future loss reserve is somewhat of a newer mechanism, at least than I'm used to. Is that something that -- if claims experienced was pretty consistent with your expectations in long-term care, should we expect the benefit ratio to generally remain stable or that may kind of cause somewhat of an increase over time, just kind of naturally as that flows through?

Hey, Ryan, it's Erik here. And operator, if you could please check the logistics on your side, it appears that the analysts are being cut-off, if we could avoid that going forward, that'd be much appreciated. And I apologize for that, everybody on the phone.

So that to answer your question, so the build in the FLR, could that come down, could that go up, it depends on what happens with respect to year on loss recognition testing. So it may change, though things work favorably and we build margins that may reduce the future loss reserve accrual on a go-forward basis, it may not though, it depends.

And then with respect to -- will the benefit ratio overtime go down? Not likely, this is -- what's going to happen is as we make our way through the rate increase process, we will likely start to see elevated shock lapses which would have the effect of reducing the benefit ratio in the near time, but over the long range we expect the benefit ratio to be in this range if not slightly increase over a longer period of time due to aging.

Yes, the other thing, Ryan I'll add to what Erik said is, on the shock lapses, recall that we will not have all of the shock lapse reserve go into earnings, we will take half of that and put it into the FLR. So that will also impact the future FLR build, but to what extent again is to be determined depending on what degree of shock lapses we have.

But just to make sure I understood correctly. Just you would except potentially some modest increase overtime in the benefit ratio just naturally as the book ages, is that the right way to think about it?

Yes, that's correct.

And then shifting to sales, can you give a little bit more perspective on, I guess what exactly drove the big drop-off in bankers recruiting and what you did to try to correct that going forward?

First of all, as I pointed out in the call, we -- my comments, we did have three consecutive strong quarters. We had a strong quarter, the second quarter of this year, some of that -- we accelerated some activity that would normally have fallen into July, we didn't really have good visibility into that. And we had -- our pipeline was reducing, it was getting a little soft. One of the things that we've done to avoid this and it caused really a very soft July, as I mentioned, and we started to see some recovery in August and September.

One of the things we've done, in the quarter we introduced a new applicant tracking system, this has been coming for a while but it was fully implemented and up and running starting in the beginning of this quarter. That system, besides doing a lot of other things will give us good visibility into the pipeline, so we can get in front of this sooner. And it's just getting more recruits into the process, and into the flow.

So, we -- that's what we did to mitigate this going forward and then we can take action around that if we see either our schedules or our shows, which are people coming to our career briefing slowing down. So the main action we took was to fully implement and get everybody up and trained in the field utilizing the new applicant tracking system.

Erik Bass, Citi Group.

Maybe to follow-up on the question Ryan was just asking. I mean, is there anything in terms of the competition for recruits that has changed or I guess now it's been a struggle little bit to grow the banker's agent count for the past year or so, and you've mentioned some of it -- the competitors being more competitive and copying some of your recruiting tactics, anything going on there? So I guess, just any thoughts around that.

Yes. No, I don't think there has been any change, I'd say, just kind of the consistent team. And I've also mentioned in the past that it has, as the economy improves and the job market gets better, it affects -- it further pressures recruiting into straight commission roles. So I wouldn't say that we've seen any changes but those factors continue to be headwinds. Recruiting is always and will continue to be a focus of the banker's field and we're certainly looking for ways to improve our results, both in the volume of candidates and the quality of those candidates.

I think it's important to remember that the way we intend to grow the agency force is through a combination of new recruits and the retention of our base force. And you retain your base force by driving productivity improvements, and we expect those two things combined and we're doing a number of things we've talked about in the past around salesforce automation and lead generation tactics to support the productivity of the base force.

And we expect a combination of those things that will allow us to grow our agency force. But certainly, the headwinds we're seeing in recruiting continue and will need to continue, and we'll continue to look for ways to improve our effectiveness.

Can you remind us what your plans are in terms of opening new branches or locations for bankers and how many of those have been opened year-to-date?

I don't have the year-to-date number in front of me, we're standing at about 315 locations and we're pretty comfortable with that number. We don't have any purposeful plans, I mean, we'll be looking at more opportunistically. And as we open we also close some given dynamics that are going on in a particular local market. So I think our strategy around that is more to digest the expansion that has taken place over the last three years and then look up opportunistically for new locations where we have the market opportunity and the talent to staff that office.

Is that a change from your approach, previously when you had talked about, I thought it was sort of opening 10 to 20 branches or not branches, but locations per year?

Yes, that was -- it's not really a change, I think we've just come to the end of that cycle. I think -- would we get back to opening, we're in every state. We have decent location penetration. Are there some opportunities? Yes, but I think it's going to be less of a purposeful effort and more, as I mentioned earlier, kind of opportunistic where we have the talent lining up with the opportunity.

Humphrey Lee, Dowling Partners.

Just a question on the long-term care, especially on the rate increases. There is in the recent article by Moody's -- report by Moody's talking about potentially maybe a little less accommodative regulation from the regulators. And I was just -- and you talked about your success rate has been higher than your 40%. But do you see a change in terms of the sentiments from the regulators from a year ago versus where you are right now?

I would say the short answer is yes, but that's why we factored in a 40% assumed success factor with this round of rate increases where our prior round was just north of 60% success factor. So we did expect that state insurance departments were being inundated with rate increase requests, that was slowing down the process and in certain places, making it more difficult to get full rate increases approved. So all considered in our 40% assumption.

And then may be a question for Scott. In terms of banker's staff selling third party policies and getting a fee income in that regard, how much kind of potential in that particular type of activities and can you potentially add more product line ups from third parties through your bankers channel?

Yes, Humphrey, it's a good question. The answer is we will continue to assess what the middle market consumer needs, and we will then assess whether or not it makes sense for us to, as a manufacturer to offer that product or to go source it through a third party. So I think the answer, the short answer to your question is, yes there are likely other opportunities. However, we're careful because it is a matter of shelf space, it's a matter of making sure it's the right product that meets the consumer need and it's also something that the agency force can fit into the portfolio.

So we look carefully at other opportunities, and we do a little bit today with ACA plans, that might be in area of future expansion and we'll continue to keep an eye on those consumer needs and other opportunities for expanding third-party distribution or developing products on our own.

Another good example of third-party activity that isn't factored into our results yet, but ultimately in our reporting, we will reflect this, and that's the activity of our financial advisors. So our financial advisors are by definition selling third-party products and that's currently not reflected in our activity, but we expect to reflect it in the future.

And if I can may sneak one more in. I know some Japanese life insurers talked about buying nursing home or long-term care facility as part of their investment strategy. And AIG talked about investing into nursing home facilities in the U.S. as well. Since you've talked about finding ways to utilize your non-live NOLs, have you considered kind of looking into buying sort of nursing home facilities or investing into areas to, for one, as a natural hedge to your long-term care position, and second of all, to generate some non-life earnings.

Thanks for the question, Humphrey. I would say, thought about it but in keeping with where do we have the right and ability to compete, we don't see that as being a place where we've got enough expertise to own and operate facilities like this. So that would not be something that is in our current screen of M&A. On the margin, if there is an investment of bond that is related to one of these types of properties, certainly it'd be considered but more on its investment merits, like other industries.

Dan Bergman, UBS.

Following-up on some earlier questions, you mentioned an expected natural increase in the long-term care benefit ratio over time, is there any additional sense you can provide on maybe the order of magnitude or pace of this expected increase? I guess I'm just trying to get a sense about how to think about the pieces for the expected GAAP earnings trajectory for the long-term care business considering natural runoff, this change in the benefit ratio and price increases, so any commentary would be helpful.

Sure, Dan, this is Erik again. So it's -- I would categorize it as sort of a slow process and a build to -- something which would probably be into the high 80s, low 90s over several years, perhaps 6 years to 8 years to 10 years. Little difficult to pinpoint exactly what that timelines is going to be, but that's sort of the order of magnitude and it's in keeping with sort of the rationale for why we're building a future loss reserve is because we have profits right now and we'll have them for the -- again the next six years to eight years and those periods will be followed by losses, so we built the FLR now and then reduce it once we get into that inflection period.

Yes. It's great, thank you.

And maybe I'll add to that of course, that's I'd say, status quo that sales are not materially different than the levels we have now or the mix of the long term care sales aren't materially different. And it's also without any future rate increases or transactions.

Maybe switching gears a little bit just on to the expenses you've been incurring related to investments for growth in the bankers and Washington National units, I wanted to see if you could provide any additional color on the types of investments you're making and maybe any sense of the magnitude of these investments, and how much is it suppressing near-term earnings, and then related to that, what type of payback you would expect from these investments down the road?

So we have been, as Scott mentioned in his remarks, and then Scott and I had been investing in growth and productivity initiatives for a longer period of time at Colonial Penn in more recent periods specifically in Bankers Life and to some extent Washington National. What's going on right now at Bankers Life is really a couple of things which is adding to our expenses. First is the rollout of salesforce nationwide to our career agency force that is essentially a CRM system that the field force will use to manage lead, manage client's et cetera. So that is being rolled out right now, and there will be an ongoing cost associated with that.

The second thing that's going on right now is that we are building out and staffing up our broker-dealer, as Scott mentioned, our own in-house broker-dealer and registered investment advisor eventually. So that will add expense and has added expense and will continue in the future.

Order of magnitude, we called about $4 million of incremental expense, not all of that was related to these growth and productivity initiatives, I'd say roughly half were. In terms of the payback, yes, we would expect those expenses to continue in the future. However, what you should see is increased agent productivity, which should lead to increased sales and then eventually increased income as we move the financial advisors that Scott spoke about over to our own platform and generate incremental fee income.

Tom Gallagher, Credit Suisse.

Ed, I was wondering if you could talk about broader discussion on what you're considering with long-term care risk transfer? What are the opportunities out there as you see them? And when you think about kind of the gambit of things that you might undertake, would most of them be capital consumers or have you set aside some level of capital in your overall risk management framework that would actually be released?

Tom, thanks. One way that we think of it and I describe it is, we would expect a smorgasbord of options and what I mean by that is that from the different potential counterparties, interested reinsurers, we definitely see transactions being reinsurance, co-insurance or potentially a funds-withheld type of arrangement. We are still very much committed to long term care through Bankers Life career agents, it meets important needs in the middle of market and to serve them, we believe continuing to sell the product is important.

With that we would retain administration and so the reinsurance construct is what we envision. In that the reason I say a smorgasbord is that if you think about, first of all, one slice is the vintages of issue years. And some third-parties are interested in the most seasoned business. So those could be issues in the 1970s and 1980s with a much higher attained age, pretty much the claim, mortality lapse dynamics have been demonstrated over multiple years and that provides certain counterparties something they are interested in.

That said, those products or that cohort would have the lower durations or the least number of years of duration due to their high attained age. So there are other parties that are looking for long durations and the longest would be the more recent issues that way. Also there are different types of coverages, we have comprehensive home healthcare, nursing home care, and again different counterparties have different interests there. And then later on are still selling the business, selling new business, some parties as RGA has been a new business reinsurer for us since 2008, they continue to be a reinsurer and are interested in new business.

So as we look at that, we understand to accomplish our objectives, we're going to have to have not just more new business or more recent business, be the only part of any transaction, we're going to need to have some of the policies that are issued prior to 2000 in the mix because they have the highest average reserves, they are the ones that are having the accruals for future loss reserves on them. So they will be in part in the equation. So hopefully that helps to give you some color there. Did that answer your question?

And when you think about overall capital planning framework, are you setting aside -- do you have a large budget in terms of your capital that you're setting aside, the potential to be able to reinsure some of the pre-2000 book? I assume there would be a cost associated with it.

No, fair question, and sorry I didn't answer that right away. First, I mean our capital in the insurance companies with 4.40% RBC is above what we would expect to carry in the longer term environment. We consciously did build Bankers Life RBC north of 400% recognizing that's where the long-term care business is and we have been, for some time, carrying excess liquidity at the holding company.

That said, what charge if any we have in the magnitude of any charge or any cash outlay will depend quite a bit on what part of the smorgasbord we're picking from because a combination of different issue years, different policy types, could have a mix of policies that are accruing the future loss reserves and those that aren't so that could help mitigate any potential cash outlay or charge.

And then my only other question is on -- and I apologize if you referenced this earlier. But your energy portfolio, are you comfortable with your exposure there considering -- I think you might have trimmed some of it this quarter but how are you thinking about that overall?

This is Erik Johnson. I just knew someone was going to ask about this today, notwithstanding that, I didn't write any notes down, but I mean obviously management teams are expecting oil prices to stay lower for longer, lot of folks out there are cutting costs, reducing capital spending, folks joining programs on more profitable acreage. Looking very hard at 2016 CapEx announcement by producers feeling lower all the time, rig markets under a lot of pressure, and certainly in this area selectivity is critical, we, I think, are exhibiting a lot of that.

This year we've turned over probably about 25% to 30% of our energy portfolio and most of that's been in up end quality direction. And I feel we've made some good choices that will sustain themselves, notwithstanding (inaudible) for longer environment. We're not really -- our strategy is not to play for time and hope that the oil prices will go back up in three months or six months. It would have strong hands over a sustained period and clip good income. Certainly the story's not over, we still have continued work to do and when you see spreads widen as much as they did, for example, during the third quarter and also they'll be as high as it was and we're going to have to deal with that. So I'm not sounding at all clear, but what I am saying is that I think we're in a good position over the long term to do well in this area.

Go ahead, Eric?

No please, I'm done there.

I just wanted to follow-up the 25% to 30% turnover. Did you do most of that in the last quarter or two or you've been doing that for a longer period of time?

This is something we've been talking about and acting on throughout the whole -- pretty much throughout the whole year, pretty steadily and I think it probably continues through the fourth quarter. It's a volatile sector and risks and opportunities unveil themselves over as we speak. And so I think this will continue and certainly it's reflected in the gains and losses through the first three quarters. And I think that pattern will persist through the fourth quarter.

Operator, are there any other questions?

There are no further questions.

All right. Thank you and thanks to everyone on the call for your interest. And again, I apologize for some of the cut-off question.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.