CNO Financial Group Inc (CNO) 2016 Q1 法說會逐字稿

Good afternoon, my name is Crystal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 Earnings Results Conference 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. I'd now like to turn the conference over to Mr. Adam Auvil. You may begin your conference.

Good morning and thank you for joining us on CNO Financial Group's first quarter 2016 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Erik Helding, Chief Financial Officer; and Gary Bhojwani, President. 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 on May 4.

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 will 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 first quarter 2015 and first quarter 2016.

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

Thanks, Adam and good morning. We are pleased with our first quarter results and encouraged by the signs of growth in our business.

We recorded consolidated NAP growth of 2% driven by continued strong results at Colonial Penn, which was up 14% and a rebound in sales at Washington National which grew 4%. Bankers Life sales were down 2% for the quarter, however agent recruiting has stabilized. Improved sales and continued strong persistency resulted in collected premium growth of 11%, along with 1% growth in policies in-force and 2% growth in annuity account values.

Operating earnings per share excluding significant items were $0.26, down 13% over the prior year, due primarily to relative weakness in alternative investment results. We continued our solid track record of returning capital to shareholders. During the quarter, we repurchased $90 million of common stock and paid $13 million in dividends.

We recently announced a strategic investment in Tennenbaum Capital Partners. TCP is a proven asset management firm, with a solid long-term track record. TCP will continue to operate on a standalone basis, with CNO having representation on its management committee. This minority stake and commitment to invest approximately $250 million over time to TCPs various funds provides access to skill sets outside of our core competencies, further diversifies our sources of income and are well suited to support our longer duration lines of business. Finally, these investments will increase non-life income and allow us to more fully utilize our valuable tax assets.

Turning to slide 7, and our segment results, Bankers Life recorded NAP of $60 million in the quarter. This was down 2% resulting from a decrease in life and Medicare supplement sales, partially offset by higher sales of annuities and long-term care plans with shorter benefit periods. Collected premiums were up 13%, reflecting an increase in annuity sales and strong persistency in our Medicare supplement and life blocks. Annuity account values on which spread income is earned increased 2% to $7.6 billion. Total policies in-force increased 1%, including a 10% increase in the number of third-party policies Inforce.

New agent recruiting was encouraging for the quarter, although recruiting pressures remain the process and technology investments made last year are positively impacting results. The average number of producing agents was down 6%, but the impact was largely offset by a 4% increase in productivity. Third-party fee income, which is primarily derived from the sale of Medicare Advantage plans was up 13% on a trailing four quarter basis, driven by higher persistency.

Turning to Washington National, sales were up 4% in the quarter. Worksite sales increased 27% driven by PMA and reflecting investments we've made in new agent recruiting, field leader development and geographic expansion. Individual sales were down 7%. We recently restructured the field organization to drive greater accountability in new household acquisition and anticipate improved results for the rest of the year. The average producing agent count at PMA was up 9% in the quarter with an increase in worksite agent recruiting and retention. Lastly, Washington National's supplemental health collected premiums were up 6%, reflecting steady sales and persistency.

Moving on to slide 9, Colonial Penn posted 14% NAP growth in the quarter, achieving record quarterly sales of $24 million. Sales results in the quarter were particularly impressive coming on the heels of 26% growth in last year's first quarter. The positive results in the quarter were driven by higher lead generation and continued success in direct mail and digital activities. Also sales productivity was higher despite a more challenging direct response TV advertising environment. Collected premiums were up 8% due to continued growth in the sales in Inforce.

First quarter EBIT was a loss of $7 million, reflecting higher seasonal television advertising spend. Inforce EBIT was $13 million in the quarter, up 20% from the prior year due to the continued growth in the block. For the full year we expect Colonial Penn EBIT to be in the breakeven to $6 million range. Somewhat wider range reflects the ongoing uncertainty relative to how the US Presidential Election will impact the cost to television advertising for the rest of the year.

I would like now to briefly comment on the recently issued Department of Labor fiduciary standards rule. CNO, like the rest of the industry is conducting a detailed review of the ruling and its implications. And while we are not in a position to definitively state if and how this will impact our business model when fully implemented, the diversity of our distribution channels, products and robust compliance culture give us confidence that any disruption should be limited.

With that, I'll now turn it over to Eric to discuss our financial results. Eric?

Thanks, Ed. CNO posted first quarter operating earnings per share excluding significant items of $0.26. While this was down from the first quarter of 2015, these results were largely in line with our seasonal expectations. First quarter 2015 results benefited from significant outperformance on a number of fronts, while the current period was impacted by lower returns in our alternative investment portfolio. I'll discuss this in more detail on the following slides.

Operating return on equity, excluding significant items was 8.3%. ROE has stabilized over the past several quarters as tailwinds related to strong persistency have been largely offset by more moderate levels of sales growth and continued low interest rates.

Cash flow and capital continue to be strong. Consolidated risk-based capital was 441%, down 8 points from year-end. We posted statutory operating income of $80 million and recorded net realized losses of $10 million. Dividends to the holding company totaled $89 million. Holding company cash and investments were $375 million compared to $382 million at year-end. We size our excess and deployable capital at $225 million and remain committed to effectively deploying that capital over time. As you may recall, we have been expecting to fully utilize our life net operating loss carryforwards in 2016. We expect our life NOLs to be fully utilized in the second quarter and we will begin to pay cash taxes in the third quarter. Consistent with prior disclosure, we expect this to impact quarterly cash flows by approximately $15 million.

We repurchased $90 million of common stock at an average of $16.88. This compares to $54 million repurchased in the fourth quarter at an average price of $19.18. We often talk about being price sensitive and opportunistic with our stock buyback program and the first quarter was a good example of that discipline paying off. For 2016 we expect to repurchase $275 million to $375 million of common stock.

Turning to slide 11 and an overview of our segment earnings. Our alternative investment portfolio underperformed in the current quarter and significantly outperformed in the prior year. This contributed to a $7 million swing in income for the Bankers segment and a $3 million swing in the Washington National segment. In addition, Corporate segment earnings declined by $3 million versus the prior year due to a market value change in our COLI investment.

Income in Bankers Life was also impacted by significantly favorable Medicare Supplement claim experience in the prior year, compared to performance in the current quarter that was in line with expectations. This resulted in a $7 million reduction in earnings. Colonial Penn posted a loss of $7 million, a slight increase from the prior year due to increased advertising spend to continue -- to drive continued profitable growth.

Turning to slide 12, overall health benefit ratios were in line with expectations. Our Bankers Life Medicare Supplement business posted a benefit ratio of 71.1% and we continue to expect this ratio to be in the 70% to 73% range for 2016. Our Bankers Life long-term care interest adjusted benefit ratio was 75.3% on a reported basis. Current quarter results benefited from approximately $8 million of reserve releases related to shock lapses associated with the current round of rate increases. Excluding the impact of shock lapses the interest adjusted benefit ratio was 82.4%. We continue to expect this ratio, excluding the impact of shock lapses to be in the 81% to 86% range for 2016. Washington National supplemental health interest adjusted benefit ratio came in at 57.7% and we continue to expect this ratio to be in the 56% to 59% range for 2016.

Turning to Slide 13, and our investment results. We put money to work at 4.9% in the quarter. While spreads were wider in the early part of the quarter, lower treasury yields and the aging of the credit cycle made us reluctant to take on more risk in search of yield. Call and pre-payment income was down sequentially from the fourth quarter, but was slightly above the prior year. Gross realized gains and losses were elevated as we proactively moved to reposition our portfolio away from energy, CMBS and emerging markets. Lastly, impairments moderated and were limited two securities totaling $10 million.

With that, I'll turn the call back over to Ed.

Thanks Erik. CNO's management team is committed to achieving our 2016 priorities and longer-term objectives. At the top of the list is re-energizing growth at Bankers Life and Washington National, including the national rollout of Bankers Life broker dealer and registered investment advisor later this quarter. Despite headwinds, we remain committed to increasing ROE over time. So we will begin to pay cash taxes as Erik said, in the second half of the year, we expect capital generation and excess capital deployment to remain robust. We will continue our holistic approach to managing our long-term care business and remain committed to reducing our relative exposure over time.

We recently announced two executive leadership changes aligned with our commitment to profitably grow and deliver. First, I'd like to congratulate Erik on his promotion to Chief Financial Officer. Rewarding key talents and promoting from within the organization are core tenets of our culture at CNO. Erik earned this promotion, and has made valuable contributions to finance and the Company and we're confident that he will continue to be a key leader in driving shareholder value. Also it's with great pleasure that I welcome Gary Bhojwani to CNO. Gary is a proven insurance executive. His expertise and leadership will be invaluable in profitably growing our businesses. I look forward to working closely with Gary over the coming years to continue to improve our execution, achieve our strategic objectives and grow our Company.

Before opening the call up for questions, I'd like to have Gary provide a few comments. Gary.

Thanks for that warm introduction Ed. I'd also like to thank the rest of the management team for the wonderful reception that I've received over the last two weeks. I've been impressed by the dedication and passion of our associates. Their attitude and energy reinforces my decision to join the CNO team. CNO is uniquely positioned to help middle Americans -- middle-income Americans meet their financial security and retirement needs. I look forward to working with Ed and the rest of the management team to capitalize on this tremendous opportunity and to make a real difference for the people we serve.

Thanks, Gary. And now, we'll open it up for questions. Operator?

(Operator Instructions) Randy Binner, FBR.

Hi, good morning. Thanks. I just have a few. Just on the disclosure around some of the mark-to-market items that went through income as related to I guess it'd be alternatives, such as hedge funds and private equity and then the COLI. Just want to clarify, these are all kind of investment vehicles, if you will, that are in place and would be expected to mark back if the marks improved in the second quarter, is that right? There is nothing permanent in the way these mark-to-market.

Yes, Randy good morning, this is Eric Johnson. And I'll try to give you some color around that. While there's nothing permanent in the marks and these sort of investments you're talking about have a certain embedded volatility. We do have expectations after their long-term performance and do think that over a long period of time we are reasonably positioned to generate return sufficient with the kind of risks being taken. Having said that, the quarter-to-quarter results can vary. I mean, just if you are looking for something publicly transparent like various, as the Credit Suisse have a hedge fund index, one could look at or HFRX has an index you can look at, those were down during the quarter and that's reflected in our results. And while we can't promise what the second quarter will bring, I do think, you can expect that over time sufficient return to justify the exposure we will be extracting.

Okay, great. And then on Tennenbaum, did you disclose what you all paid for that if anything or is the payment basically your agreement to participate in allocating capital to their funds?

The amount that we paid was not disclosed, Randy.

Okay. Is it, I guess, I take it from that, it's not a material amount or?

It depends, who is defining material. It's a strategic investment, we did pay something for that, but we haven't publicly disclosed that.

Okay. And then I guess on DOL, I heard your comments that say that it's not the super impactful for CNO, probably mostly because -- I'm just looking for affirmation that we got this right, about 90% of your products simply are not covered by the DOL rule at all, and for products that are captive distribution can proceed as it did before, right, there's possibly some further disclosure and compliance procedures you have to follow for products that are in the impartial conduct standard under 84-24. Is that the right way to add a little detail to that?

I think in the most part, let me say that, we like the rest of the industry did not expect the fixed-indexed annuities to be included. That said, you're right, as far as the ballpark of what percentage of sales those are and about 25% of our fixed-indexed annuity sales are in qualified plan. So that's also further if you want to say, reducing that exposure. But how it will impact the career agent selling is yet to be determined, but also our rollout as the broker dealer and registered investment advisor gives us more options depending on how these final rules come into practice.

I'm just going to do one more. And this has to do with Bankers sales in the quarter. There is actually a little bit of switch from what we've been seeing recently where, I think you saw higher sales in some, what I'll call short-term care and annuities and lower sales in life and sub products. And is that kind of a one-off, is there a structural shift happening and what's making those products more attractive?

I think it's consumer needs and demand. And on the annuities, the majority of our annuity sales were fixed-indexed annuities and then times of low interest rates, but also low volatility index annuities offer potential attractive upside in participation and the stock market gains, while still providing protection to principal, so meets the customer needs. And 80% of our sales of so-called long-term care are with benefits of one year or less, 90% are with benefit periods of two years or less.

Erik Bass.

Hi, thank you. Just hoping you could provide some more detail on recruiting trends at Bankers and the agent retention? And then, I guess related, how much room is there do you think to further improve productivity?

Yes Erik, as far as the improvements in recruiting, we have been investing in the processes as well as some of the technology that helps in tracking recruits and training and getting recruits productive. Getting agents productive as soon as possible and maintaining that productivity is what helps to drive retention. And so we're focused on that, have been making investments there. So that is why we're encouraged that, recruiting has stabilized as opposed to being down in the prior couple of quarters. And with productivity improving, we think that will help grow the agent force over time. As far as how much more productivity gains we can get, we'll always strive to get more, but we do not have a specific number to provide you beyond the 4% productivity gain we achieved this quarter.

Got it. And should we anticipate any material changes to sort of the recruiting initiatives or some of the other initiatives that you've outlined for Bankers previously, given the transition from Scott to Gary in leadership?

Nothing specific, but as is I'll say typical and to be expected with new leadership being able to take a fresh look at things, I would expect that we will do some things differently. We have already been trying some different approaches to get the growth recurring and recruiting and the agent force and we're expecting that Gary will help to further that cause.

Thanks. And then if I could just sneak in one last one for Eric Johnson, just interested to see the reductions in energy and emerging markets exposure. Yes, can you comment specifically about the areas you reduced and how you're thinking about credit exposures going forward?

Yes, sure. Good morning. I have the view or at least believe I have the view that, corporate credit is priced pretty strong right now and that the balance of the risks and the rewards while continuing to grind forward day over day and the technicals are very strong. I think, viewed from the long-term which is what we do here. The balance of risk and rewards are not -- against the investor at this point in the market. And so over the last six months, we've been somewhat methodical about assessing our different areas of more riskier assets and making sure that we would be positioned how we wanted to be.

Beginning in the fall last year with CLO mezz and CMBS mezz and continuing into this year with high yield -- corporate high yield as well as high yield energy and energy generally, also emerging markets, we've been fairly very methodical about getting the, I'll say the higher risk credit areas into positions for the long-term that we wanted them to be in, while at the same time not doing damage to the Company's earnings stream and book yield and all that. So it has been a very methodical process and everyone has worked very hard and I think making good judgments. And I think we'll be positioned, when the credit cycle turns as it ultimately will, I think we'll be one of the few companies out there that will be properly positioned to take advantage, which is what we want to be. And so a while for now that involves a certain amount of discipline and patience. I think in the long-term that will serve us well.

Humphrey Lee, Dowling & Partners.

Good morning. A question about Bankers sales on a full year basis. While we're still early in the year with the first quarter (inaudible) and some of the initiatives that you are taking place. Do you think like achieving a positive sales growth at Bankers for this year would be feasible?

Good morning, Humphrey. Thanks. Well, we don't provide sales guidance. The things we're doing is definitely with the intention that we grow sales, not just at Bankers, but in all of our segments.

Okay. And then in terms of the implementation of rate increases for your long-term care block. Can you kind of [size] the portion of the book that has gone through in terms of rate increases so far and especially the portion in the first quarter?

Yes, Humphrey we've done virtually all of the filings by now. We've gotten our responses from the various departments on just over three quarters of those. When we do get the approval of a rate increase, we implement them quite quickly, but they're not effective until the next model premium, whether that's monthly, quarterly or annually, but we are quite up to date on that. So we're using as we have in other calls before a baseball analogy, where we're past the fifth innings, so official game on.

This is Erik, just maybe a little more color on that. So, as Ed mentioned, we filed essentially -- made all essentially all the filings. We've received approvals that represent about 87% of the expected financial impact. So obviously there's still some filings that we are waiting on to receive notification on, but those largely will be smaller increases that would likely have smaller financial impact going forward. So it's just a little bit extra color.

So if I think about the -- so you got the approval for 87% of the expected financial impact. How much of that has been reflected in the financial results in the first quarter?

So through the first quarter about 70% of those rate increases have been implemented into the system. That doesn't necessarily mean that, all the financial impact has been recorded as of the first quarter because it takes some time for depending on the next premium due date a policyholder may not have received the notification yet. So that'll come in over time. And in addition, people that did receive their notification and that did act or did not act in the first quarter who may make a change in the second quarter. So there's a little bit of a lag and a little bit of a carry over. I think it's safe to say, we're going to continue to see rate increase impacts throughout the rest of this year and then it'll probably tail-off as we enter 2017.

Okay, thank you for the color. And if I can sneak one more in for -- maybe for Eric Johnson real quick. In terms of your alternative investment portfolio, can you share the mix between hedge funds and private equities?

Yes, happy to actually. And let me -- I'll do a little filibuster and then you can you can extract from it what you want. But our alternatives exposure is probably around a $170 million in total. That would be divided up in the following rough proportions; somewhere around 40% hedge funds and with the residual 60% being in a combination of credit private equity and real asset strategies.

Now I will tell you that the performance during the quarter was reasonably as expected across the great bulk of those strategies, but was not in my mind -- was not sufficient in the hedge fund strategy, largely for two or three identifiable reasons. Most of the long-short strategies were highly correlated to kind of a long growth, short value trade, which just was upside down for the quarter. The second factor would be Valiant, which extracted some difficulty and the third factor was the Europe stocks, particularly early in the quarter. So if you [thought] that category lost basically between $3 million and $4 million for the quarter, that is the entirety of the matter we're discussing here today. And I hope that gives you some background, as to what we're talking about.

Now in my mind we do have some work to do. I think as reflecting those allocations, some of the individual fund allocations underneath that and getting it exactly how we want it to be. And that work is not going to happen overnight, the nature of the asset classes is not a -- are not [wired] market. It takes time to rebalance and this is going to take a quarter or two. But I'm very confident that in the longer run, it will work the way we want it to work and it's never going to produce steady coupon like returns. That's now what it's intended to do. But we'll get it to where over a reasonable period of time, it's producing more predictable returns. First quarter of last year was a great quarter, generated on a basis of about a $7 million in profit on a much lower base of assets, couple of big realizations on hedge funds near the end of their lives. Compared to this quarter's hedge fund results creates a bad comparison, be that as it may, we realize that we have a little bit of work to do in this area and we'll reflect some urgency about it.

Thank you. I appreciate the color.

You're welcome.

Steven Schwartz, Raymond James & Associates.

Hey, good morning guys. I got a few. The first as a follow-up to discussion of alternative investment income or lack thereof. Is it accurate that the majority of the shortfall and therefore the majority of those assets are housed in Bankers Life?

Yes. I would be guesstimating the rough proportions, but I -- it's North, certainly North of two-thirds.

North of two-thirds. Okay, thanks. And then moving on to a couple of sales things. I'm just looking at the page 13, I think it is of the presentation of producing agent counts. And it's interesting to me that the agent counts -- total agent counts for Bankers Life was up significantly from the end of the year-end in September 30, but the averages were pretty much unchanged. Was a lot of that addition very, very late in the quarter?

No, we definitely built momentum in the quarter, Steve. I don't have the exact month-by-month breakdown available.

Okay. And then on Washington National, I think you said in one of the slides that, worksite sales were up 24%, that's an incredible number. I'm wondering if somebody could dig more into that, what's going on there?

Yes, one is where we've been making investments in I'll say, worksite technology, that helps the employer, but also helps the agent in enrolling people in the worksite. Second is, we've definitely invested in the leadership and talent there. And third, we've expanded into different states and geographies that we had not been in previously.

Steven, this Erik, I'd also add that the worksite portion of our total Washington National sales is roughly a quarter, three quarters of it comes from the individual side. So between the quarter for instance, worksite sales were about $8.5 million and $9 million and that was up 27%. So that -- you are starting off a little bit of a smaller base as well.

Okay, got that. I didn't realize that. Okay. And then when more Eric, we discussed this last night, but I'm wondering if you got a handle on the operating expenses, the other operating expenses at Bankers Life, they were up $5 million from the fourth quarter?

Yes, that's true. We do see some seasonality in the first quarter of the year. I think you'll notice, if you look year-over-year the numbers seem pretty comparable. There's a couple of things at play here, the biggest is probably related to funding of our field spending plan. We do that in the first year. We make a contribution into their accounts that allows them to sort of get a jumpstart on lead generation, recruiting activities so on and so forth. So there's about $3 million of it.

The rest of it is just incremental either one-time expense. We had some higher guaranteed fund assessments, maybe $0.5 million or/and some additional expenses associated with our launching and building out the broker dealer and registered investment advisor and that's probably about a $1 million, but that would continue going forward.

Yaron Kinar, Deutsche Bank.

Good morning, everybody. Couple of questions, first on the productivity gains in Bankers Life. Are those originally driven by the growth in the annuity business?

Yes.

Okay. And I guess as I think about that, I'll take one step back, as that business grows, as annuities grow, does the risk profile change a little bit or does the economics profile of Bankers change a bit? I mean, I would think that it's a lower cash generative business and maybe exposes you a little more to market risk as that business grows? Is that true and if so, how do you account for that? Have you -- are you looking at the overall business profile?

I think the short answer Yaron is, no. And some of the main reasons for that is, number one; these annuities are sold through our Bankers career agents. They are not selling away to other companies for basis points of either commission or credited rate. Secondly, we're selling to middle-income Americans.

Our average annuity contract is in the $45,000 range. And so, not that there couldn't be risk if the rates rise and some policyholders decide to take their money and put it elsewhere, but given the relative size being small on average for our middle-income customers, that helps to mitigate that risk, as well as continuing relationship of the Bankers agent with their customers.

Yaron, this is Eric. I'd also add that we hedge those indexed annuity sales. They're very straightforward, basically S&P options. So we have very tight hedging on that. So don't think we have much risk there either.

Okay. And in terms of free cash flow generation?

Just in general?

For the annuities business as opposed to the rest of Bankers.

Yes, we are -- our main earnings are not different than anyone else in the industry, it's on the spreads. And so that's why we're continuing to be encouraged by the growth in the reserves, the account values there going up another couple of percent. So it's not just how much we sell, it's the persistency on that and with the investment results that we continue to have, we're earning our price for spreads in large part. So that bodes well for the future if we can keep that business with us and growing.

Okay. And then a follow-up question for Eric Johnson. I think you'd mentioned that you're -- basically you're looking for ways to de-risk the portfolio a little bit on the edges and especially I guess in the energy business or energy portfolio, emerging markets, maybe some CMBSs, where are you seeing opportunities though, where are you increasing [leaning]?

Yes, good question. I mean, we've had -- over the last couple of quarters, we've continued to produce new money rates and in the roughly in the 5% range, which suggests that we are continuing to find ways to make sufficient margin for the Company. And so, we've been doing a lot of work in RMBS non-agency, esoteric ABS, kind of up in structure in CMBS, IG Corp Financials, are areas, those are all areas where we've been kind of very tactically doing pretty well.

And for example, this is not a little bit of a factoid. I just -- last year we probably added roughly 2% or 3% of our assets in the non-agency and consumer ABS area, which is a good diversifier for us, away from corporate credit risk, falls on -- in nice places on the curve and where it falls on the curve is kind of in the intermediate space, offers us a much better spread and spread against risk to corporate.

So we've been very methodical and very tactical about meeting the Company's needs, but at the same time recognizing that -- I just think, corporate credit just had such a great run and certainly with what's going on with the ECB and just looking at the technicals recently, you get to a point where just in the long-term doesn't reward you. So, that's -- I think it's all kind of coming true.

Okay. That's very helpful. And then maybe one quick one, where should we look for TCP's results, once they're reported?

Yaron, this is Erik. They'll be reported within the Bankers Life segment. Essentially it'll come through as investment income.

Ryan Krueger, KBW.

Hey, thanks. Good morning. Erik, I know you touched -- you just touched on this a little bit in terms of some of the seasonal expenses in Bankers. But I think, you also tend to have higher DAC amortization in the first quarter in Bankers and maybe a little bit in Washington National. So I was just wondering that, if you had any sort of rule of thumb and how to think about kind of the seasonality that occurs in Bankers and then Washington, in the first quarter versus the rest of the year?

Sure, Ryan. Good question. So there's definitely some seasonality. We talked usually, mostly about Colonial Penn, which I think is very widely understood now. But there is definitely some seasonality as you note in Bankers Life and a couple of different areas. First, mortality in general, that tends to be a couple of million dollars elevated on the life side for us. And then the amortization as you noted is definitely higher, and this relates to the fourth quarter -- the prior fourth quarter's annual open enrollment period, where people are selecting Medicare advantage or Medicare supplement plans, that become effective on [one-one] of the following quarter. So we record the lapses in that quarter and adjust amortization accordingly. And for Bankers, that's roughly, if you are going to flash backwards or flash forward into the second quarter, that's probably about a $5 million differential in amortization.

Got it, thanks. And then you had mentioned right, there's another $3 million of higher operating expenses in the first quarter from (multiple speakers)?

Yes, that's right, that's correct.

Okay, got it. Okay. Alright, thanks. And then on the alternative investments, could you guys just discuss the mix of the portfolio little in terms of hedge funds, private equity, other components?

Yes, sure. I want be careful because I said this about five minutes ago and I'm sure I'll say something just slightly different this time. That doesn't mean I don't know what I'm talking about, It just means, I'm getting old. But it's roughly $170 million, it's roughly 40%, 45% hedge funds and the residual in a combination strategy is credit, real assets and private equity. Without getting into much detail, I think results were reasonably satisfactory across broad bulk of the strategies, but the hedge fund results, particularly were not in my mind satisfactory for the quarter. While they were directionally consistent with the market as a whole and transparent index as one can look up, but I think we have little more beta there than we needed to. So they are directionally consistent, but a little farther out. That 45% of the portfolio was a 100% of the loss and I don't want that to be for the long-term, how this thing works. So I would suspect that over the coming months and quarters, you may see some realignment in that portfolio. I don't think it's too large or too small, but I think we can do some work to better -- make it more consistent with our longer term earnings needs and that work is already underway.

Michael Kovac, Goldman Sachs.

Hi, thanks for taking the question. One on sort of longer-term looking at the long-term care business and I know that in the past Ed, you've discussed that higher interest rates would help increase interest for potentially future block sales or other parties interested in taking some of that risk. But another point that's often come up is negotiating potentially what fair value is for future premium rate increases that you maybe already filed and have differences in sort of opinion of what you'll ultimately get. So I'm wondering now that you're close to 90% of the way through the expected financial impact of the most recent rate increase filings, if that is sort of helping in any of those discussions today?

Yes, Mike. Definitely every day that goes by helps to I'll say, removing assumption with actual experience. So that has been going in line or slightly ahead of our expectations which all in if you focus just on that, that helps from our side.

So, are you seeing any sort of renewed conversations or an increase in those conversations in the past several months?

I'd say, we've been steady in our analysis and discussions in pursuit of this. So not any material change, plus or minus, this is something that is a longer-term objective for us. And these kinds of potential transactions don't happen overnight. So we've kept our oar in the water and keep rowing.

That's helpful. And then switching gears, just a quick one on the Department of Labor, can you quantify, how large you think some of the compliance costs would be, I'm not sure if you said that earlier? And then on the same topic, a point clarification, I believe you said 25% of the FAA businesses in the qualified channel today from your sales, just wanted to make sure that was correct?

Yes, your 25% is correct. As far as incremental costs, we haven't gone through our analysis yet, but in keeping with my prepared remarks, we don't expect them to be significant from the standpoint that we believe with the diversification of our distribution including having our BD and RIA rolled out nationally by the end of this quarter, along with our current compliance structure, that we don't see a significant expectation of extra cost.

And if I could, just one follow up on that, are you -- in conversations that you're having with distribution, are you seeing any impact on the non-qualified channel from some of the -- from the rule potentially being rolled out here?

No.

There are no further questions at this time. Presenters, do you have any closing remarks?

Alright. Thanks Crystal, and thank you everyone, for your interest and support of CNO.

This does conclude today's conference call. You may now disconnect.