CNO Financial Group Inc (CNO) 2015 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the fourth-quarter and year-end results for 2015.

(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 fourth-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-K and post it to our website on February 19.

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 the 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 fourth quarter 2014, and fourth quarter 2015.

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

Thanks, Adam and good morning, everyone.

The strength of our business was again evident with our solid earnings, margins, cash flows and capital, as we continued to extend our customer reach and recorded growth in several key measures. Although NAP was down, solid persistency led to increases in policies in force and annuity account values. While we are pleased that we were able to show growth in these key metrics, we are disappointed in our overall sales results for the year.

We concluded our year-end actuarial assumption reviews and I am pleased to report that we continue to have strong aggregate margins. Erik will go into more detail on this later in the presentation.

Operating earnings per share excluding significant items were $0.38, up 12% over the prior-year, as we continued to experience strong and stable margins in our businesses. We continued our solid track record of returning capital to shareholders. During the quarter, we repurchased $54 million of common stock and paid $13 million in dividends.

In looking at full-year 2015 results, there are several accomplishments worth noting. While NAP results were mixed, we grew collected premiums, increased the number of policies issued, and increased third-party fee income. Colonial Penn had a very strong year, and as we have said in the past, success at Colonial Penn is not an accident. It's the direct result of longer-term investments in people, processes, products, and technology. These investments have yielded strong growth in NAP, collected premiums, and earnings.

Investments we have made in our worksite distribution channel are also paying dividends. Worksite sales increased by 13% in 2015. Our financial results were solid as we posted double-digit growth in operating EPS, grew diluted book value per share by 7%, further strengthened our capital position and increased financial flexibility in deployable capital by successfully executing on a recapitalization in the first half of the year.

We continue to generate strong cash flows and return capital to shareholders. For the year, we repurchased $365 million of common stock and paid $52 million of dividends. We increased our common stock dividend by 17% in the year and maintained a competitive 20% payout ratio. Last but not least, we continue our positive momentum on the ratings front, having achieved three additional upgrades in the year. With positive outlooks currently from Fitch and S&P, we believe the stage is set for achieving investment grade.

I'll turn it over to Scott to discuss our segment results. Scott?

Thanks, Ed.

Beginning with Bankers Life, NAP of $69 million was down 6% in the quarter, primarily driven by lower life insurance sales consistent with our experience through much of the past year. I will go into more depth of the dynamics of our life insurance sales in a moment.

Offsetting some of this decline is an increase in annuity sales, which were up 9% for the quarter. Predominantly the result of strong demand for our fixed index products, which offer consumers asset protection with the potential for account growth. For the year, overall NAP was down 4%.

Sales of third-party products, which are not included in NAP and consists primarily of Medicare Advantage plans, were down 14% in the quarter. However, we are experiencing higher persistency on the block than in previous years and as a result, our number of third-party policies in force grew by 11% in 2015, while our total fee income grew 14% for the year. Much of the sales challenges facing the Banker's Life segment can be traced back to agent count, which has been stymied by softness in recruiting, primarily due to declining unemployment and higher cost of recruiting. While we have experienced an increase in the retention of our veteran agent force, which is up 3%, in order to regain momentum in new sales growth, we need to become more effective in contracting new agents in today's job market.

On this point, we have implemented a new applicant tracking system, introduced field incentives and broadened the channels we rely on to attract candidates to our business. This past year, roughly 40% of our offices grew their number of new recruits, suggesting that these initiatives do work. (Technical difficulty). But it will likely take several quarters for us to successfully advance these practices across our system and show improvement in our recruiting and total agent count.

Let me provide you with some context related to our life insurance results, specifically, universal life. Universal life sales drove much of our NAP growth over the past couple of years with significant increases in both the number of policies sold and the average premium per policy. 2015 saw a reduction in average premium per policy versus the prior two years, while the number of UL policies sold increased 2% to a level double that of our 2012 results. The growth of UL sales over the past several years has been achieved through a concerted effort to cross-sell life into existing households and drive additional life training to a larger percentage of our agents. As we continue this effort in 2015, there were fewer sales of larger UL policies and 2015 average NAP per policy dropped to more normal levels.

Turning to Washington National, sales were flat in the quarter and up 1% for the year. Worksite sales were up 12%, a continuation of the strong results we have experienced in 2015. Successful development of new producing agents in the first half of the year, coupled with enhanced worksite capabilities, positioned us well for the fourth quarter enrollment season.

Individual market sales were down by 7%, continuing the trend we have experienced since the second quarter. Going forward, we expect to regain sales growth momentum in this channel by restructuring the field leadership to drive greater accountability and geographic coverage, adding recruiting support and introducing new products and mobile technology to enhance agent productivity.

We continue to see growth in the field force with average producing agents at PMA up 8% in the quarter, benefiting from recruiting and improved conversion of recruits to producers. In addition to recruiting, we are focused on improving productivity of our veteran agents in the individual market to a level more consistent with prior years. Lastly, Washington National supplemental health collected premiums were up 3%, reflecting steady sales and persistency.

Moving on to slide 9. Colonial Penn posted 5% sales growth in the quarter and 15% growth for the year. The positive results were driven by continued success in direct mail and digital generated activities and higher sales productivity. Sales in the quarter were lower on a sequential basis, reflecting the seasonal nature of television advertising spend. Collected premiums were up 8% due to continued growth in the in-force.

Fourth quarter EBIT was $6.7 million, up significantly over the prior year and due to business growth, increased sales productivity and higher expense deferrals due to ongoing diversification of lead generation. For the full-year, total EBIT was $5.6 million, near the high-end of our guidance. Inforce EBIT was $14.8 million in the quarter, up 31% from the prior-year, due to the continued growth in the block and lower expenses. For the year, inforce EBIT was (Technical difficulty) $53.6 million, up 8% from the prior year.

Looking ahead to 2016, we expect Colonial Penn EBIT to be in the breakeven to $6 million range. The somewhat wider range reflects uncertainty related to how the US presidential election will impact the cost of television advertising. It is important to note that as in prior years, Colonial Penn typically spends more on television advertising in the first quarter. As a result, we expect a first quarter 2016 EBIT loss in the $8 million to $10 million range.

I will now turn it over to Erik to discuss our financial results. Erik?

Thanks, Scott.

CNO posted strong earnings in the fourth quarter. Adjusting for the significant items in that period, we recorded operating earnings of $0.38 per share, an increase of 12% over last year. Operating ROE excluding significant items, was 8.8%.

Our health businesses generally performed in line with expectations and we experienced another strong quarter of favorable call prepayment income. Lastly, annuity results were favorable driven by growth in account values and a positive impact related to the unlocking of assumptions as part of our year-end review.

Our capital position remains strong with consolidated RBC of 449%. Leverage was 19.6% and holding company liquidity was $382 million. We repurchased $54 million of common stock in the quarter, a bit lower than recent activity. We are price sensitive when it comes to repurchases and with the stock price north of $20 for much of the quarter, we reduced accordingly. For the full-year, we repurchased $365 million.

Turning to slide 11 and our normalized segment earnings, Bankers Life posted EBIT of $89 million in the quarter, down from the prior year. The decline is largely attributable to the combination of more favorable LTC claims experience in the fourth quarter of 2014, and a higher level of FLR accrual in the fourth quarter of 2015.

Washington National reported earnings of $31 million, up slightly from the prior year, due primarily to continued growth in our supplemental health business. Colonial Penn reported EBIT of just under $7 million, up significantly over the prior year and in line with seasonal expectations. Sales and earnings results continue to benefit from marketing productivity gains and lead generation diversification.

As Scott mentioned, we expect to generate a loss of $8 million to $10 million in the first quarter of 2016, due to the seasonality of television advertising spend. Excluding the impact of equity market volatility, corporate segment earnings were generally in line with expectations.

Turning to slide 12. For the quarter, Bankers Life Medicare supplement benefit ratio was 70.8%, slightly above guidance. While elevated, recall that during the first half of the year, claims were better than expectations. For the full-year, the benefit ratio 69.6% was consistent with expectations. In 2016, we expect this ratio to be in the 70% to 73% range, reflecting the continued reversion to levels consistent with pricing.

The reported LTC interest adjusted benefit ratio was 79.6%, better than recent experience and due to higher reserve releases caused by policyholder actions related to the current round of rate increases. Excluding these impacts, the benefit ratio was 85.5%, slightly higher than expectations and due primarily to higher persistency on policies not impacted by rate increase.

This is the first quarter where we have seen any material financial impact related to the current round of rate increases and we expect this to continue throughout 2016. The timing and amount of the financial impact could be difficult to estimate due to inherent difficulty in projecting policy holder actions upon notification of a rate increase.

Rather than guide to reported interest adjusted benefit ratios that we know will be volatile during the year, we are guiding to ratios that exclude rate increase impacts. On this basis, we expect the ratio to be in the 81% to 86% range in 2016. Washington National supplemental health interest adjusted benefit ratio came in at 57.5%, another solid and stable quarter after experiencing elevated claim levels in the second quarter. For 2016, we expect this ratio to be in the 56% to 59% range.

Turning to slide 13 and investment results. We continue our tactical approach to investing new money. We put money to work at 5.17%, capitalizing on market volatility that resulted in wider spreads. Call prepayment income was again favorable with the fourth quarter seeing the highest level of activity in the recent past.

The higher levels of gross realized gains and losses are reflective of tactical portfolio repositioning in the quarter. We trimmed positions at the long end of the curve in certain sectors that were tight while also trimming positions in sectors that were facing tougher fundamental issues.

In addition, we are considering refinancing one of our CLOs and in conjunction, rebalance some collateral to make overall asset composition more attractive. Taken together, this resulted in $2.5 million of net realized gains and $18 million of impairments.

Before moving on, it's worth discussing our energy sector exposure. Our current asset allocation of $1.6 billion is roughly 6% of invested assets. We believe this is an appropriate and manageable allocation as our investments in this sector tend to be high-quality, highly diversified and liquid. Please refer to slide 20 in the appendix for more details on CNO's energy sector exposure.

Turning to slide 14. We tested virtually all of our $23 billion of liabilities and overall margins were healthy and improved over last year. The net impact of new business and run off of existing business added $260 million. Policyholder experience updates were generally positive and increased margins by $50 million. We updated earn rate assumptions and this resulted in a decrease to margin of $35 million. Our new assumption flattens out the trajectory and pushes out recovery to the same ultimate rates by one year.

Slide 15 discusses our long-term care testing in more detail. Before diving into the results, it's worth mentioning that CNO's LTC business is different than most other blocks in the industry for a number of reasons. A simple example of this is depicted on the pie chart on the right-hand side of the page.

The chart shows that roughly 72% of active life reserves, or 87% of policies, have a benefit period of four years or less. Furthermore, only 10% of reserves, or 4% of policies, have lifetime benefits. This greatly reduces the risk profile of the business and makes it less susceptible to large swings of margin due to small changes in experience.

Overall testing margins increased to $180 million in 2015, up from $100 million in 2014. The change in margins is attributed to an increase of $30 million related to net new business including the build and future loss reserve. An increase of $60 million related to experience, including $40 million related to changes implemented to claims management protocols and a $10 million reduction related to updated interest rate assumptions.

With respect to experience, it's important to note that a comprehensive persistency study was conducted, including a thorough review by an independent third-party. In addition, we updated the claim cost study that was conducted in 2014, the results of which were also reviewed by the third-party. Consistent with past practice, we do not assume any new rounds of rate increases or shock lapses for the purposes of loss recognition testing.

The table at the bottom of the slide provide sensitivities to key assumptions. As you can see, while the dollar impacts are not insignificant, we view the balance sheet impact related to any one sensitivity as manageable.

Lastly, the table on the bottom right depicts the change in GAAP future loss reserves and statutory asset adequacy reserves. These additional reserves will continue to grow over time and serve to protect our balance sheet from the possibility of any material charges.

With that, I will turn it back over to Ed for closing comments.

Thanks, Erik.

With another year to complete, let's take a somewhat longer-term view of what we have accomplished over the last three years. In 2013, we established various milestones to achieve by 2015. I think that you will agree that we delivered at or above these targets in most every way. These are signs of a sound strategy, solid business fundamentals, focused leaders, and execution.

(Technical difficulty). As we look forward to 2016, I am pleased with our progress on the CFO search. We are fortunate to have a number of outstanding candidates express interest in the position and we have interviewed several of them. We have narrowed down the universe but I am committed to taking the time that we need to secure the right executive for this important position.

Going forward, CNO will continue to be focused on some key priorities. Rebounding from a challenging year, Bankers Life expects to see recruiting and sales gains from infrastructure investments made over the last few years. Washington National will focus on addressing declines in the individual market through a continued agent growth, new product introductions and geographic expansion.

Of course, we expect to continue to profitably grow Colonial Penn and diversify their lead sources in spite of the challenges of direct television marketing in a presidential election year. Our in-house broker dealer and RIA would help to more fully serve our middle income customers as they move from the accumulation to the distribution phase of their 401K plans and other assets. Our approach is to align the products and the services to our customer's needs for investment and planning solutions coupled with risk protection.

We know quite a bit about our customers so we need to organize and utilize data more systematically to serve these needs. Reducing LPC exposure by half over the next three to six years, will increase our financial flexibility in ROE plus reduce beta. We will accomplish this by growing our non-LTC businesses and executing reinsurance solution. We continue to be encouraged by the possibilities on the reinsurance front.

Augmenting our organic growth with acquisitions, along with more fully utilizing our non-life tax asset remain priority. The flow of potential properties for acquisition is robust. Finally, we will continue to effectively manage risk and deploy excess capital to increase profitability, return on equity and shareholder value.

With that, we will now open it up for questions. Operator?

(Operator Instructions)

Randy Binner, FBR.

Hi, good morning. Thanks. I will keep it to a couple. The first is on the GAAP recognition testing and this is referring to something on slide 15 in the deck. You mentioned the experience related benefit was pretty big, it's $60 million, and you said $40 million of that was from a benefit to claims changes. Could you flesh that out a little bit more? Because that's probably the largest single piece of the improvement there.

Sure, Randy. This is Erik. The $40 million is related to some of the claims management initiatives that we spoke to you about at the beginning of last year. And that we are in the process of piloting throughout 2015. A couple of those, specifically one, we've progressed far enough along through that pilot process that we feel it is appropriate at this time to incorporate some benefits into our loss recognition testing. And the pilot that we are talking about really has to do with getting at the accuracy of billing of home healthcare providers.

So your benefit was that much on a prospective basis because you're just more efficiently billing?

That's correct. And remember this is present value over a number of years.

What was the main problem with the way --?

Randy, it's billing accuracy from the providers as well as, candidly being able to detect over billing or fraud.

Okay, got it. So it's better for protection. Got it. On the mention of the wholly owned BD or RIA platform, two questions there. One, is that something you could build organically or would that potentially be a material use for your deployable capital? And if so, with the stock price here, I would be interested to hear how you view that? Meaning is that go slow or go fast?

So Randy, this is Scott. A little context on that. Just so everybody is clear, we have about today, about 300 career agents that are also registered to sell securities. They have historically been registered through a third-party broker dealer.

We established -- to specifically answer your question, we have built organically our own broker dealer and additionally, have filed and received approval on our registered investment advisor. During the course of this year, we will be moving those 300 advisors over from our third-party relationship onto our platform. We expect to grow that as we expand this out to the rest of the agency force.

Up until -- as we were using the third-party, we didn't get the same economic benefits that we will be able to from launching our own broker dealer. By bringing this in-house, we are able to generate additional run like fee income and put that type of training and support in place that it will allow us to grow our number of financial advisors. I think there is an opportunity from an M&A standpoint, to look at adjacencies and ways that we can leverage those platforms and that is within our M&A scope.

And in that, Randy, as far as acquisitions and our stock price, with current levels of our stock price at a notable discount to book value, we are not inclined to go and issue stock nor do we believe we would have to do that given the capital and liquidity levels that we have in the Company.

I guess what I was asking more specifically, could you even buy a BD or RIA now that would compete from an investment perspective versus just buying back your own stock at 80% of book value?

We think we are in that (technical difficulty) position where one doesn't necessarily preclude the other.

Okay, and just on this BD thing. How does this fit into the whole DUL fiduciary thing? Is it meant to be a post-DOL fiduciary rule compliant organization? Because you are -- this obviously, the way this operates, I assume, is going to be significantly affected by those new rules. So if you could just update us on that piece, that would be interesting.

Sure, Randy. Again, I think it's important we talk about the DOL impact to CNO in the past. It's important to first start out on understanding that two-thirds of our business is health and life insurance that won't be impacted at all. That leaves about one-third of our business. We don't manufacture any securities. We don't have any plans to manufacture any securities. And half of our fixed index business is associated with qualified business.

Again, as you look at the scope of the DOL rule, it really impacts a limited portion of the business that we manufacture. And in particular with fixed indexed annuities, it appears that they are poised to fall under a less stringent set of regulatory requirements. Having said that, absolutely to your question, we are building out both our broker dealer and I mentioned the RIA. And remember, the RIA allows you to do fee-based planning, specifically to be compliant with any DOL rules and regs. And actually, it gives us that leverage point to be able to pivot to a fee-based model in those areas of the business that we need to.

All right, that's great. Thanks a lot.

Erik Bass, Citigroup.

Good morning. Thank you. First, if you could please comment on the level of interest in close block long-term care transactions that you're seeing in the market now given the recent decline in interest rates and the widening of credit spreads? Are you still seeing interest and you believe that getting a transaction done in this environment is still feasible?

Short answer, Erik, is yes. We think it is feasible. But at the same time, we want to remind everyone that we thankfully are in a position where we don't have to act within a short time period. So short-term pressures or even somewhat longer-term pressures on interest rates doesn't necessarily materially impact our ability or need to act.

In that, as we talk with our disclosing our loss recognition testing results, the claims and the reserve levels play very important parts in the value of any of these books. While interest rates are important, the other elements and fundamentals of the business are even more important, so we continue to be optimistic that not only is there interest but there is actionable interest if we so choose.

Got it. Thank you. For your long-term care margin guidance, just to clarify, should we view the 81% to 86% margin guidance as understating what you actually would expect to earn this year given the likelihood that there will be additional shock lapses?

Yes. This is Erik. That's absolutely correct. The actual reported benefit ratio should be lower as we go through 2016. What we will do is we'll every time we report earnings, we will pull out the reserve related impact of the shock lapse and present to you a normalized interest adjusted benefit ratio so that the analysts and investors can get a better understanding for what the run rate margins are of the business.

Got it, thanks. And if could just sneak one last one in. How are you thinking about the level of the RBC ratio that you want to maintain near-term? And does being at 450% sort of implicitly already have a buffer for any potential credit losses or ratings downgrades built in?

Erik, this is Erik again. Where we are traveling in and about right now is the level that we like to be in. It's in this 425% to 450% on a consolidated basis. That is a bit elevated and it is higher than we think we need to run over the longer-term. But for the time being because we still have $4 billion of long-term care reserves, we have low interest rates and we are being careful about the next credit cycle, as you mentioned, we think we do need to run at slightly higher levels.

Got it. Thank you.

Ryan Krueger, KBW.

Hi, thanks. Good morning. I had a follow-up on the broker dealer RIA initiative. Will there be any material startup costs related to this or is that something you have already been incurring as you have been preparing for this?

Hi, Ryan. Yes and yes. There will be some. They're fairly modest and we have been incurring them and will incur some modest amounts during the course of 2016.

And Ryan, Ed here. In our investments over the last three years that I noted, that's part of that roughly $100 million that we have invested and the good thing is, is that we are able to not only self finance that, but that $100 million is not material to our earnings stream all and all. That our expense levels have continued to be quite stable.

Okay. Thank you. Moving to long-term care. Can you give us a sense of where the long-term care new money rate compared to the overall Company's 5.17% in the quarter? I am trying to get a sense of for how it compares on the longer duration portfolio to the assumptions you guys are using in reserves.

Hi, Ryan. This is Erik. We have not disclosed the specific portfolio rate for the long-term care block. That being said, the number that we show you on the investment slide is the aggregate number. You could expect that the long-term care related new money rate is going to be slightly higher than that. We have largely been successful in achieving the target for 2015.

With respect to going forward, there is a slide in the appendix that details what our interest rate assumptions are going forward for long-term care. And it mimics what we basically did last year with the exception that we have essentially pushed out the curve by one year and softened the recovery in year two by about 25 basis points.

Okay. And then lastly on the $40 million in the margin from claims management initiatives, do you still ultimately expect to achieve the $100 million benefit over the longer-term?

That's correct. Really, all that we have installed is the expected impact from one of the initiatives. There are some other things that we are taking a look at which we will continue to pilot throughout 2016 and into 2017. I wouldn't expect to build in the full $100 million by the end of 2016. It will likely come in over couple two, three, four years.

Okay. Thank you very much.

Humphrey Lee, Dowling & Partners.

Good morning. Thank you for taking my questions. Regarding to your loss recognition testing, especially for the run-on and run-off piece of the $30 million improvement. Can you provide some additional color in terms of the moving pieces, the run-off versus future loss reserve build?

Sure, Humphrey. This is Erik. The net run-on run-off, excluding the SLR, was actually about zero. Really the $30 million is largely attributable to the FLR build. And the net being zero is because, as you know, we sell very little long-term care business, about $20 million to $25 million on an annual basis. And the vast majority of that tends to be short-term care, which has lower premiums and therefore, in terms of dollars, lower dollars of margin.

Okay. Got it. And then maybe a question for Scott. In terms of the sales at Bankers and Washington National, while I understand the headwinds from weak recruiting and the change in consumer preferences has been a headwind for 2015, but then, how are they different from what you were expecting when you revised your guidance on the third quarter call in terms of your full-year 2015 outlook?

Yes, Humphrey, we expected the pressures to be there and that was reflected I think in lowering our guidance. It is hard to peg that number exactly and it's one of the reasons why we are not providing it going forward. Directionally, we felt that we were going to be pressured, given what we were experiencing in recruiting, and the impact that, that has to absolute agent for size and so that's what we experienced. I think it's fairly consistent.

The experience at Washington National was more acutely related to our at individual consumer marketing division results. And again, knew we would feel some headwinds. It was just hard to anticipate exactly the impact of those headwinds in advance. But directionally, I think we were expecting them to put pressure and push us towards the low-end or even revising the guidance, which we did.

Okay. Then you talked about the recruiting agent being weak in 2015. Looking at 2016 year-to-date, and based on what you have seen, how are we looking in terms of your agent recruiting and Bankers?

Hey, Humphrey, it's really too early to predict anything or to get any indication. There's a lot of moving parts when we look at what's going on and compare year-over-year. I'd rather not do that.

Okay. Thank you.

Steven Schwartz, Raymond James.

Hi, good morning everybody. Thank you for taking my question. Just a lot of stuff has already been asked, but I do want to follow up on a couple of things. Just to make clear on the interest adjusted benefit ratio for LTC, the slide said no rate increase impacts. Is that just reserving -- is that just referring to the reserve impacts by downs, lapses, or is there something else going through there that needs to be taken out?

Hi, Steven. It's Erik. It is just the reserve related impact. What we are leaving in there is the additional premiums that we are collecting from the rate increase.

Okay I just want to make sure. And then does the IABR continue to include $12 million a quarter in FLR?

The FLR was not $12 million. You may be thinking about the quarterly accrual on a statutory basis for asset adequacy reserves. That IABR on a GAAP basis, the accrual has been about $8 million a quarter, and that would be the expectation for 2016 as well. And again, this is excluding the impact of the rate increase because recall, when we have shock lapses, there will be reserves released. But roughly half of those reserves will be swept up and accrued into additional FLR accrual.

That's right. Okay and then, just on the prepays. What would you consider the more normalized level?

Tough question. It's been bouncing around quite a bit. I'd say couple of years ago, our expectation, we were seeing pretty consistently about $2 million to $3 million a quarter. It's been running about twice that level for the last couple of years. Hard to peg, but something certainly in the $3 million to $6 million range seems to be the norm as of late anyway.

Okay. Thanks, Erik.

[Hiran Kana], Deutsche Bank.

Good morning, everybody. Just wanted to ask Scott one follow-up on the long-term care margin sensitivity testing. You call out the claims management bucket and the experience assumptions. Are there any other large buckets that you could maybe talk about?

Obviously, the experience. I'm sorry, Hiran, this is Eric. The experience, there's obviously a lot that goes in there. There's mortality, morbidity, there's persistency. So I'd say net-net, so excluding the impact of the claims management initiative, the net-net number was about $20 million and there were puts and takes in there. But I think probably the one place where we had some positive was on a persistency side and that was a result of conducting that detail persistency study.

Got it. And then in terms of the headwinds you're facing in Bankers and the initiatives you are taking to resolve some of the issues, is it fair to say that it's probably more of a 2017 event where we actually start seeing the inflection point?

Yes, Hiran. Scott, here. That's a fair observation. As I mentioned in my comments, we did about 40% of our agencies did out recruit the previous year. We've begun to make some shifts in process and implying technology and best practices and as we drive those across the organization, we expect them to have an impact. But it will take some time to drive those best practices across the entire organization. We certainly are hopeful for 2016, but we recognize that it's going to take some time for those things to take hold and we'd expect to see that improvement in 2017.

Got it. And then one final question on the energy exposure. We haven't really gotten questions on this until now. Can you maybe walk us through the unrealized soft positions in the energy portfolio as a whole and specifically, in the below investment grade portion of the portfolio?

Good morning. This is Eric Johnson. I can do that. Portfolio as a whole is a $1.6 billion. I think about it for the purpose of your question, in two parts. Part one would be the investment grade portion, which is about a little in excess of $1.4 billion. That probably is about at a $0.95 on the $1 mark-to-market. I'm a little off, but not much. It's fairly representative of an index portfolio.

The non-investment grade portion is a little more than $190 million. The mark-to-market on that is in the context is around minus $40 million in total, which is around $0.76 to $0.77 on the $1. With little -- trades a little higher than an index portfolio, has some different composition of characteristics.

Having said that, in terms of looking forward, once these all kinds of ratings migration and actual default loss forecast, ranging very widely. We are aware of all of those and we have our own and we think that probably the current level of unrealized losses may not be representative of the experience that will emerge from the portfolio but does reflect some stresses in the market and in our portfolio as well.

In allocation, particularly the non-investment grade portion that we're, obviously is not oversize relative to our Company, although it's a little larger relative to the index. It's something that we are working very actively, turned over very aggressively, over the last 12 months. I would expect that we will continue to actively manage that allocation and I don't expect that it will derail the Company's larger activities and plans.

That's helpful. Helpful color. One quick final question. Do you happen to know what the RBC impact would be over one notch downgrade over the overall portfolio, energy portfolio?

That's all we talked about yesterday. There's a couple ways to look at that question and the word notch means different things to, from a statutory accounting perspective and from an investment practitioner perspective. NRF's a [role] notch across the whole deal would be around 8 RBC points.

A statutory accounting notch, meaning everything going from let's say from NIC 1 to 2, or 2 to 3, or 3 to 4, the whole shooting match, would be around 30 RBC points. If you ask me what my expectation for the year would be, putting aside the technicalities, it falls somewhere between the two.

Great. Thank you very much.

Michael Colebatch, Goldman Sachs.

Great. Thanks for taking my question. Just wanted to come back to the buyback guidance. In terms of thinking about what would put you at the low or the high-end of that guidance, what is your thinking around that? And maybe more specifically in terms of being opportunistic in the first quarter relative to where your stock price is trading today?

Hi, Mike. It's Erik. So the range, obviously, $275 million to $375 million, it's a bit wider than we usually go out with. But it's why because we recognize we're at the beginning of the year and there's a wider range of possibilities. What could make us get to the high-end of that range or low-end of the range is really the stock price itself and compelling alternatives.

To the extent we have no compelling alternatives and the stock price is lower, yes, it's likely we will buy back towards the high-end of the range. If the stock's particularly weak, there could be the opportunity to even buyback more than the high-end of the range. We certainly have the cash flow and capital to do so. Conversely, if the stock is very strong trading north of book value for a sustained period of time, it's likely we would be coming in at the low-end of the range.

That's helpful. I know you don't want to speak specifically about the impact of what you expect for the shock losses on the LTC loss ratio, but in terms of timing, can you help us think about over what period will you be rolling out the actual rate increases to your policy holders? Is it mostly completed today? Mostly the first half or can you give us any guidance on that?

Mike, Erik again here. Most of the filings have been completed at this time. There are probably a larger number of filings but they have small financial impact. We have received approvals for roughly 70% of the expected financial impact. So, approvals we hope, will continue to come in over the course of 2016.

Implementation of those approvals will continue to happen over 2016 as well, and as policy holders receive notifications, reach their anniversary date, that is when they will have to act on the rate increase. They'll either have to accept it, they'll have to accept a downgrade of their benefits or they will lapse. It's somewhat of a slow burn in terms of recognizing the financial impact in your income statement. What I would say though is 2016, every quarter will be heavy in rate increase activity and that will continue into at least the first half of 2017.

Okay that's fair. The actual implementation will bleed into 2017?

Implementation in terms of yes, policy holders reaching their anniversary dates and having to act. Correct.

Okay, thanks, and one final one. The third-party fee income in Bankers has been pretty strong. It looks like it slowed a little bit in the fourth quarter. Can you give us your thoughts going forward into 2016 and beyond as to where you expect to grow this? Maybe not a specific number but relative to the most recent year and quarter?

Yes, I think we're expecting consistent growth as we've experienced -- I mean that block has, as I mentioned in my comments, persistency is improved. And that's a dynamic that we are seeing in the marketplace is there's less plan switching going on, MA plan switching. Although it has a dampening effect in new sales, it has a positive effect on persistency. That's what's coming through and allowing us to grow that block.

We will continue to offer the consumer the choice and consumer preference will somewhat drive whether we offer or sell the third-party product or the manufacture product. We expect to continue demand for third-party products in particular, Medicare Advantage.

One of the other things, it's a little early to expect this in 2016, but certainly by 2017, the comments I made around the broker dealer and the RIA income, that today is not captured because of third-party relationship, will begin the flow through our own BD and RIA as fee income. That's going to be a driver towards future growth of fee income along with the traditional way we've done that up until this point.

Thanks for the answers.

Sean Dargan, Macquarie.

I want to come back to the shock lapse and LTC. What you're saying is it seems to be a little bit different than what some other LTC carriers are saying. Particularly one large one has said that essentially nobody lapses the product because the cost of paying for nursing home out-of-pocket is a less economically sound decision. So I'm just wondering is there something about your customer base that's different in how they make that decision?

Yes, Sean. This is Ed. One thing we believe is at least some differentiation as we're focused on serving the middle market customers. And those that serve more affluent customers, their customers most likely have more financial flexibility on accepting rate increases than ours do in certain circumstances.

Okay. Thanks. I know it's early, but the rollout of the BD and RIA, can you share with us internally how you're thinking about how long it would take to use up non-life NOL?

Sean, Ed here again. On one hand, it's early from the standpoint of having our own BD RIA, but to Scott's point, we do have these Bankers Life agents that are securities licensed and have been selling through this third-party broker dealer. So, we have some idea of a potential starting base and where it could go.

Right now, we do have the disclosures as to what we assume in our tax valuation allowance as far as expected future non-life income. As you can see, hopefully by our results in 2015, we continue to look for different ways to increase that. The broker dealer, RIA is one element. But, we are going to continue to look for ways that our objective is to use it all, even though we don't currently have things in place that would allow us to release more of the allowance at this time.

Okay. Got it. Thank you, Ed.

Tom Gallagher, Credit Suisse.

Good morning. Ed, first wanted to ask you a question on how you're thinking about the long-term care risk transfer opportunities. I guess you have been talking about it for a while. I know you did one in early 2014. But can you comment on from a high level, why is it taking awhile to get something done. Is it just market conditions, is it price, is it structure? Just at a high-level, can you comment on, is it really just the terms that you're waiting for things to get better on?

My answer is first, to draw an analogy back when we had the closed block segments OCB. First of all, you're not in a situation where the house is on fire and we have to do something in any time period. That was very much taken into consideration when we set the objective roughly a year ago of over four to seven years, and now over three to six remaining years. In no way did we ever expect that we would have to necessarily do something within a shorter time period.

Secondly, one of the key things that we look at in any potential transaction is how will book value be impacted and most likely, it would take a hit, especially if we include some of the more volatile longer duration or longer benefit period products. But how well ROE increase, how well the multiple of price to book increase and how will our beta decrease. We want it to be a good trade so that the net up all of those turns out to add value to the Company and the shareholders.

So the last thing I'll say is that we look at our business and we've got a lot of varieties that can be reinsured and we have interest from third-parties to reinsure. Business that's more recent, issued in the last 5 years to 10 years, business issued 10 years to 15 years ago and business issued much longer than that. Trying to figure out what is our best opportunity to trade and get that shareholder value creation is really what's guiding us and where our analysis is focused.

Got you. And if I think about, I guess just broadly, how are you thinking about capital management for the Company. And I appreciate the fact that if your stock price is low, you want to buy more, but how much are you factoring in a stress test? Obviously, we are in a low interest rate environment right now and when I think about what could go right, what could go wrong, I guess my bigger concern would be if rates keep going down, I think the whole industry's stock prices will be under pressure.

I wouldn't think the natural reaction would be to buy more stock. I would think it would be to anticipate potential other needs for capital if rates remain low. So I don't know, can you help me understand how you're thinking about it particularly, right now given the environment we are in? Thanks.

Tom, this is Erik. We are thinking about it and obviously, we do run stress tests on an annual basis and we go through exactly the scenarios that you are laying out. One thing I can tell you is we are monitoring credit conditions obviously, very closely.

We do have some interest rate risk that's in our long-term care business that's in Bankers. So we run our Bankers risk-based capital at north of 425%, so that results in a 450% or so on a consolidated basis. So that's higher than we think we need to run it over the long-term, especially if we can reduce our long-term care exposure.

What you're saying is what we are doing when we think about risk. We're holding extra capital in the insurance companies. We have got about $230 million of excess capital at the holding company that frankly, we do get questions why aren't you buying back more stock, why aren't you doing this, why are you doing that? It's because we are monitoring risks very carefully and we don't go all-in on any one deployment endeavor.

The other thing I will add, Tom, is the fact that we continue to have very strong cash flow generation. Roughly $350 million annually of deployable free cash flow from our businesses that each year we have that classy problem of how much do we retain in the capital of the insurance companies, aka, RBC? How much do we have at liquidity in the holding company and how much do deploy in the dividend stock buybacks and other uses?

All right. Appreciate that guys. And just last question, is Beechwood Re a contingency risk that we should be considering here or is there more than enough over collateralization to deal with that under most stress scenarios?

I'll answer that two ways. First, with any reinsurance, the Company has counter-party risk regardless of which entity that is that is the reinsured. With Beechwood, we have the over collateralization trust that give us additional protection above and beyond the assets supporting the reserves. From that standpoint, we've got extra protection and we feel comfortable and obviously, had those put in place from the outset.

Okay. Thanks.

Randy Binner, FBR.

Hi, thanks. I had a couple of follow-ups. One, I wanted to confirm that there's been no sale, and I apologize if I missed this, there's been no sales guide for 2016? Is that correct? Just kind a rebuilding you're looking into 2017?

Randy, you're correct on no sales guidance. The reason is not rebuilding year, it's very much in keeping with what we started to talk more about and disclose more about starting in the third quarter. Is that growing the enterprise has several different metrics. And as we talked even more today in Q&A about the BD, that's another element where sales to BD RIA as we move forward, will also not be included in NAP or new annualized premiums. To look at only one measure of growth, being NAP, and guiding on that we believe does not serve anyone well.

All right, fair enough. Just back to the credit piece. Is there any way to characterize how that unrealized loss, either the $44 million I think Eric Johnson said in the BIG energy or $100 million overall energy? Can you characterize at all how that's changed year-to-date?

Sure. I can. It's about 25% larger year-to-date than it was at the end of the year, consistent with overall movement in credit spreads.

Okay. So the $44 million is 25% there. Are you seeing other asset classes that are showing material shift from a gain to -- from an unrealized gain to an unrealized loss position outside of energy or is it from your perspective to date, is it still isolated to energy?

No, it would be fair to say that there are various segments via credit markets that are substantially wider period-over-period, from the beginning of the year. And that certainly is true in corporate high-yields. It's true in some parts of the securitized markets, CMVS as one example. It's true in a number of markets and it certainly would affect any credit portfolio including ours.

Are those all the way being in a loss position, those other buckets? Unrealized loss?

I just want to be a little careful about disclosure here. What I think I can say is that if high-yield is let's say 70 basis points wider than it was at the beginning of the year on an index basis, our portfolio is probably 50 basis points wider. Take 50 basis points by about a 5% allocation, which is what we have in corporate high-yield and that would be the change in the unrealized for corporate high-yield. It may be at a small unrealized, although to be honest, I don't know the number. If it's unrealized by a loss, it's small.

All right fair enough. That's really helpful. Thanks a lot.

Operator, are there any more questions?

There are no further questions at this time. I will hand the call back over to the moderator for closing remarks.

All right. Thank you everyone for your interest in CNO Financial Group.

This concludes today's call. You may now disconnect.