CNO Financial Group Inc (CNO) 2017 Q4 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group Inc. Fourth Quarter 2017 Earnings Results Conference Call. (Operator Instructions) Thank you. Adam Auvil, you may begin your conference.

Good morning, and thank you for joining us on CNO Financial Group's fourth quarter 2017 earnings conference call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Erik Helding, Chief Financial Officer.

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-K and post it on our website on or about February 26.

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. Unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2016 and fourth quarter 2017. With that, I'll turn the call over to Gary.

Thanks, Adam, and good morning, everyone. 2017 was another strong year for CNO. We reported solid earnings growth and ongoing financial strength. Operating earnings per share were up 19% for the full year as we continued our disciplined approach to growing the enterprise. Our capital and liquidity metrics remain strong throughout the year. We returned $227 million in capital to shareholders during the year. Book value per diluted share, excluding AOCI, was $21.43 after a reduction of $2.23 due to impacts of the recently enacted U.S. tax reform.

Excluding the impact of tax reform, book value per share was up 7% from year end 2016. Erik will go into the details on the effects of tax reform on our financials. However, I would like to make a few brief comments. Passage, of the reform should provide a meaningful benefit to CNO over time. Unfortunately, the near term benefits will be modest due to the much discussed life sector provisions included in the final bill. Not all of the direct and indirect impacts of the new legislation are presently known.

We will continue to monitor and assess how CNO will be affected. We continue to grow and diversify the franchise in 2017, the majority of our growth scorecard measures were up for the year, highlighted by total collected premiums up 2% and annuity account values increasing 4%. Fee revenue was up 24% from full year 2016, primarily due to growth of the broker dealer and registered investment advisor. Many of the strategic growth initiatives presented at our Investor Day are advancing, and we are excited about the possibilities they offer. As expected, realization of results is taking time and we have an opportunity to accelerate the pace of rollout in 2018. We recently completed our annual actuarial assumption review and I'm pleased to report that aggregate margins remain strong. It is also worth noting that we did not report any charges as a result of the testing.

Moving to Slide 6 and our segment production results. Bankers Life total collected premiums decreased 2% for the quarter, but increased 2% for the year, both driven primarily by annuity collections. Annuity collected premiums declined 4%, despite reporting the second-highest production quarter over the last several years. This was primarily driven by continued success with a guaranteed lifetime income annuity or GLIA. We launched the GLIA in the third quarter 2016 and its immediate success created a strong comparable for the second half of 2017. Annuity account values increased 5% from the prior year, driven by strong net flows in recent quarters.

Life and health NAP were down 3% and 13%, respectively, for the quarter and 15% and 9%, respectively, for the year. The 7% decline in average producing agents over the last 12 months contributed to these sales declines. Veteran agents counts were essentially flat. During 2017, we piloted different initiative to counteract the expected decline in new agent contracts as we reshape our recruiting efforts.

Based on those results, we recently expanded several agent programs nationally, while continuing to pilot new and modified programs to improve our recruiting and retention of successful new agents. While we expect these programs will positively impact first year retention and lead to agent count growth, as we've previously mentioned, it will take some time for these improvements to appear in our aggregate results. We are observing notable improvement in our successful new agent metrics that lead us to believe our efforts will succeed.

Our broker-dealer and registered investment advisor client assets continued to grow, providing both fee income and increased customer retention. While the earnings results are not yet a sizable part of Bankers Life, we expect this business to continue to grow and support our strategy of providing complete health and wealth solutions to the underserved middle-income market.

Moving now to Washington National. Total collected premiums were up 2% with a 4% increase in supplemental health, partially offset by the continued run-off of the closed Medicare Supplement block. Total NAP was up slightly, with sales being negatively impacted by approximately 4% in the quarter due to the hurricanes in Puerto Rico and Florida.

We believe future impacts related to these disasters to be minimal, with the only ongoing effects related to the operations of the key independent partner in Puerto Rico. Supplemental health NAP was down 2%, while life NAP was up 28% in the quarter, driven by growth in the PMA worksite channel. This channel continues to benefit from recent initiatives to drive strong recruiting and improved productivity.

Individual NAP was up 6% at PMA, continuing the progress made over the recent challenges in that channel.

For the full year, total NAP of $102 million was up 3%, which reflects an all-time high for this segment. This was driven by a record year for our wholly-owned PMA distribution channel.

In addition, the PMA worksite channel achieved its 4th consecutive year of double-digit growth. New agent recruiting in the PMA worksite channel contributed to an overall increase of 1% in the average producing agent count.

For Colonial Penn, total collected premiums were up 3% in the fourth quarter and 4% for the full year, driven by growth in the block and stable persistency.

NAP was up slightly in the quarter due to opportunistic advertising investment and increased sales productivity. Full year NAP was down 10% but in line with expectations as we chose to reduce television advertising spend as a result of the limited availability of cost-effective TV spots.

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

Thanks, Gary. CNO had a strong quarter in the earnings and capital fronts. While we reported a net loss of $0.42 in the quarter, the loss was driven by a charge related to the write down of tax assets as a result of the tax cut and jobs act that was enacted at the end of 2017. Excluding the impact of tax reform, net income in the quarter was $0.61 per share. Operating earnings per share was $0.51, up slightly from the prior year. Operating earnings per share, excluding significant items, was $0.47, up 34% over the prior year.

Operating return on equity was 9.2% in the quarter. Estimated consolidated risk-based capital was 446%, down 4 points from the third quarter, primarily due to a decrease in our admitted statutory deferred tax assets as a result of the previously mentioned Tax Reform Act. Holding company cash and investments was $397 million, up slightly from the third quarter. We repurchased $27 million of common stock at an average price of $24.38. For the year, we repurchased $167 million at an average price of $21.40.

Looking forward, we continue to expect annual free cash flow generation to be approximately $300 million, and we are committed to deploying free cash flow over time into investments to accelerate profitable growth, funding potential long-term care risk reduction transactions, common stock dividends and share repurchases. The amount and timing of deployment will be based on business and market conditions and other factors, including the price of our common stock.

Turning to Slide 8 and our segment earnings. Bankers Life earnings in the quarter reflect higher call/prepayment income of approximately $5 million and favorable LTC margins. Washington National's earnings reflect slightly lower investment income and slightly higher expenses, partially offset by stronger supplemental health margins. Colonial Penn's results for the quarter were in line with expectations. For the full year, Colonial Penn reported EBIT, excluding significant items, of just under $20 million, at the high-end of our expectations, due primarily to favorable mortality experience. 2017 results also reflect our disciplined approach to purchasing television advertising.

For 2018, we expect earnings for Colonial Penn to be in the $10 million to $20 million range. LTC and run-off results continue to be in line with expectations.

Lastly, corporate segment results improved over the prior year due to higher investment income and lower expenses.

Turning to Slide 9 and the results of our year-end assumption review. Overall, our GAAP testing margins increased by approximately $165 million to $4.2 billion. The increase was driven primarily by new business generation. Our testing margins represent 22% of net GAAP liabilities, consistent with last year and we incurred no loss recognition charges in the fourth quarter. With respect to our new money rate assumption, we made no changes to the ultimate rate but did push out the rate of recovery by one year, which had a modest negative impact to margins.

With respect to our long-term care blocks of business, our Bankers Life LTC margin was essentially unchanged from the prior year and stands at 7% of net GAAP liabilities. Our closed-block LTC margin improved slightly to 4% of net GAAP liabilities or approximately $20 million.

On Slide 10, we detail the impacts of the recently enacted Tax Cut and Jobs Act. We recorded a GAAP charge of $172 million in the quarter. The charge was comprised of $224 million write-down of our deferred tax assets, but was partially offset by a $52 million release of our valuation allowance to reflect increased utilization of nonlife NOLs. The charge negatively impacted book value per share by $2.23 or approximately 10%.

From a statutory perspective, the tax changes resulted in a decrease to our admitted deferred tax asset of $46 million, which represented a 9 point decrease in our consolidated RBC ratio.

Looking forward, we expect our effective tax rate to be in the 21% to 23% range, which will increase annual GAAP net income by approximately $60 million. Our cash tax rate will be approximately 13%, reflecting continued utilization of nonlife NOLs.

While the GAAP impact from the tax change was substantial, because of the changes to the calculation of taxable income, we expect annual tax cash flows to increase by a modest $10 million for the next 8 years.

With respect to earnings per share and ROE, we expect the changes to result in increases of approximately 22% and 225 basis points, respectively.

Lastly, it is important to note that the consolidated RBC ratio does not reflect potential changes to the calculation of acquired capital. If changes were made to reflect the lower corporate tax rate, we estimate that CNO's required capital would increase by approximately $80 million and result in a corresponding decrease in our consolidated RBC ratio of approximately 65 points. And with that, I'll turn the call back of the Gary.

Thanks, Erik. As we enter 2018, CNO strategic priorities remain unchanged. We will continue to serve the middle-income market through our diverse distribution channels and unique combination of both health and wealth product offerings and the insurance and securities solutions.

Growth will be achieved through a combination of new products and services by expanding to the right and by enhancing our customer experience. Our segment focus for 2018 also remains unchanged. Our Bankers Life segment will continue to reshape its agent recruiting and retention processes, introduce new products and market and grow the BD/RIA business.

Washington National will advance its initiatives on geographic expansion, new products and capitalizing on recent investments in distribution technology. Colonial Penn will focus on increasing sales productivity, lead generation diversification and testing new products.

We remain committed to addressing our legacy long-term care insurance exposure and further derisking the balance sheet. As you know, our block is different than most in the industry. This gives us the flexibility to transact when the deal economics make sense. We continue to have active conversations with interested parties and we'll update the market when appropriate. Capital deployment remains a priority and it is important to remain flexible with these decisions due to ever changing market conditions.

Our goal is to maximize return on invested capital over the long-term and we will weigh our options accordingly.

CNO Financial Group is well positioned for 2018 and the future. Our team is focused and motivated on delivering value and exceptional customer service to our current and future customers. Our strategy is sound and our market opportunity is considerable. Execution will be the key to our success. We will now open it up for questions. Operator?

(Operator Instructions) Your first question comes from Randy Binner with B. Riley FBR.

I want to pick up on the capital return commentary there by Gary at the end and just want to clarify that there is no guidance for 2018 buyback now, and if that is the case, I understand your comments around continuing to, ultimately, return free cash flow to shareholders, but I think it would be helpful to understand in a little more detail, kind of, how you might size an ongoing buyback or capital return program relative to your other options, meaning how long would you be comfortable holding these high cash levels at the hold co?

Randy, I'm going to make some general comments, and then I'll let Erik jump in and add, if you'd like to. So first of all, thanks for your continued support and thanks for the question. I'd like to just generally comment and share our perspective on the entire question of capital return and share buyback. The first thing I'd point to is our past actions. I think if you look back at our actions over the last several years, we've clearly demonstrated a willingness to return money to the shareholders when we think it makes sense. The second thing I'd point to is our strong free cash flow. So in addition to the willingness, we clearly have the ability. Now what we stated is that we want to deploy the cash flow in a way that makes the most sense, and I'll sure you can appreciate, that's going to depend on what the market conditions are. We believe in our business, we want to grow our business and we have a range of options and one of those options is buying stock back. Like everything else in our life, our interest in buying our stock back will correspond directly to the price it's trading at as well as the other options. So you are correct in understanding that we don't have a specific range to provide you, that's intentional on our part. But you're also correct in understanding that we intend to deploy 100% of our free cash flow. Erik, would you like to add anything to that?

No, that sums it up perfectly.

All right. And I just want to ask a detailed question, in case this doesn't -- I'll drop back in the queue but -- in the case it doesn't get asked. But I appreciate the new net present value of the NOL calculation you did. In the background of that, I think, does the tax rate that we apply to the nonlife NOL, does that change now to the statutory rate of 21%?

So, Randy, this is Erik, so the way to think about this is the life, nonlife income dynamic sort of hasn't changed. So we'll continue to carry over life income to utilize our nonlife NOLs. But obviously, to a lesser extent than we could if we had greater non-life income. So I think that dynamic persists. Does that answer your question?

I guess, I'm saying is like the -- when we -- when you use nonlife, there's a portion of life that comes over, is that portion now -- it used to be a portion that was dictated by a 35% rate, is that portion now at 21% rate?

Yes, I believe it's still the 35 [times] the 21% rate.

Is it -- Yes. So that's what I'm asking. Is it 35, the 10 [times] 21% or is it 21%, 10 times 21%?

Yes. No, no, it's 35 [times] 21%. So that's how you get to the cash tax sort of 13%.

Your next question comes from Ryan Krueger with KBW.

Erik, could you provide some additional detail on kind of the underlying moving parts within the LTC reserve margin that got you to the same place in terms of any change you think to morbidity and mortality assumptions and new business and other aspects like that?

Sure, Ryan. So similar to past years, what we saw was roughly kind of a run on run off dynamic that added about $30 million of incremental margin. And then what we saw was, from an experience perspective, actually very little movement related to morbidity versus mortality it was kind of mid-single digits. Where we saw offsetting impact actually was on pushing out the new money rate assumption by year and that was about $10 million, which is consistent with the past periods and then a little bit of negative movement related to expenses, which is just an annual process that we go to just sort of true-up unit cost assumptions.

Got it. And then, I think, in Colonial Penn, you picked up the margin spend a bit this quarter. Are you starting to see improving market conditions there that would lead to better potential growth going forward?

Thanks for the question, Ryan. We definitely saw some opportunities in the fourth quarter. We've seen some limited opportunities here in the first quarter, but I would say not to the same degree, and we'll continue to do what we've been doing for a long time when we see the opportunities, we'll move relatively quickly and if we don't, we'll stay disciplined on that.

Your next question comes from Erik Bass with -- from Autonomous.

Just wanted to come back to one thing on capital, where -- I guess looking over the past year, you have built up holding company liquidity and deployed less than 100% of the cash flows you generated in 2017. So just curious to what we should read into that. And do you want to build up a cushion in case there's opportunities for outside deployment whether it's an LPC transaction or M&A? Or is that something with uncertainty around tax reform? And I guess should we think of there being capacity of sort of excess capital to deploy above 100% of your free cash flow going forward, if there's an opportunity to do so?

Yes, Erik. This is Erik, so thanks for the question. So there's a couple of things that happened over the course of 2017. So recall at the end of -- towards the end of 2016 that we had to utilize a bunch of our excess capital to support the recapture of the closed-block LTC business. So there was a period of time where we did rebuild some capital before reentering the share repurchase market. And then as we went through the course of the year, because of strong free cash flow generation, that balance did build. And now what happened was that -- because the share price was strong and got stronger as we went through the year, we did just buyback less stock than we otherwise would have. So that contributed to kind of the accelerated growth at the holding company. What I would say is, where we stand today at just under $400 million, it's a place that we've been before. If you recall, prior to the recapture this is pretty much where we were, we do like to have excess capital on hand, we have about $250 million available. That's a very comfortable position to be in, it gives us a lot of flexibility, gives us the opportunity to be opportunistic in terms of deployment. So comfortable. And I don't think this is an excessive level either, and this is about in terms of excess capital about 7% for our GAAP equity, which is pretty fairly consistent across most of our peers. So in terms of your other question, yes, it absolutely gives us the opportunity to do something more significant beyond the $300 million of annual cash flow -- free cash flow generation. So -- but to Gary's earlier remarks, that's going to be dependent on opportunities to actually deploy that.

Got it. That's helpful. And I guess, would you think than your base case is to deploy the $300 million, kind of, keep excess capital at a similar level unless there is an outsized opportunity?

Yes. We're going to manage it, as Gary said, kind of, as we go through the year. What I would say is my comments were very specific that we expect to deploy that $300 million over time. It may not be the case that it all gets deployed within one year, it may take a little bit longer. But certainly, it's on us to deploy that capital on a highest and best use possible over time, and over time doesn't mean indefinitely for sure.

And then just one last one. Just on the margin guidance for bankers Med Supp looks like it changed slightly and this is something that's more temporary due to, I think, there was an adjustment you're making or is it something that you would think is ongoing?

Yes, Erik. So I think there's probably two things. One is, if you recall at the beginning of 2017, our benefit ratio guidance was, in fact, 71% to 74%. As we went through the first half of the year, we had some favorable experience and that resulted in us lowering our guidance to 70% to 73%. So there's a portion of that, that I think is going to, sort of, revert back to the mean and then there's another portion, which is something new for 2018 and that is on a portion of our business, we've converted that to an Auto-adjudication platform called Crossover that will result in -- likely result in a higher volume of small dollars claims. And so we think that's probably going to add about a point to our benefit ratio. And so the combination of those two factors led us to increase the benefit ratio back to the previous guidance. Now on the second piece, there may be an opportunity to get some of that back as we think about rate increases for 2019.

Your next question comes from Dan Bergman with Citi.

Given some of the nuances around both the cash tax impacts to tax reform and your specific tax assets, I just wanted to get a sense of how your current guidance for around $300 million of annual free cash flow generation should trend over time. Should we think of this as more applicable longer term or is there any kind of step up or step down we should have in our heads?

Yes, Dan. This is Erik. Thanks for the question. For the next 8 years or so, I would expect the $300 million to be a pretty good number. It really isn't until beyond that 8 years where you start to close the differential between the kind of, the GAAP tax number or the GAAP tax savings and the actual cash tax savings. So that's again, 9-plus years out. So for the near and intermediate-term, the $300 million is going to be a pretty good number.

And then if there are updates to the RBC formula that end up reducing your RBC by 65 points or so, do you have any initial thoughts on whether you would intend to build that back towards your, I think, the current 450 or so RBC? Or would you, kind of, consider a lower RBC target? I'm not sure if you've had any sense from the rating agencies yet on how they would view this, but any thoughts would be much appreciated.

Yes, Dan, I think where we stand right now is that it remains to be determined, I think, there's a couple of things that have to happen. One is the NAIC has to act and they have to determine when they're going to implement a change and how they'll implement a change. And so if they were to implement the change in 2018 and do it all at once, then we would be faced with a 65 point reduction in RBC. If they were to believe that change in over time, then, obviously, it would be much more gradual. And so that has to happen and then, obviously, the rating agencies have to react to that and they have to, sort of, put their stake in the ground to opine as to how they view the financial condition of insurance companies in light of the tax changes. So it's TBD. Where I stand right now is when you've got the dynamic of increasing cash flows here over the intermediate, near intermediate-term, and even greater increased cash flows over the long-term, where I stand is, over time, we should be able to run at lower levels of capital.

Your next question comes from Sean Dargan with Wells Fargo.

If I could go back to the topic of the capital build. I want to make sure I'm thinking about a potential long-term care transaction the right way. Because it seems to me that from a rating agency perspective, you're kind of, damned if you do, damned if you don't, because it's my perception that they view LTC as a credit negative but if you do some sort of transaction, there would probably be a negative impact to shareholders equity and then your leverage would be higher. And so I'm wondering if part of the thinking behind building capital is that if you do a transaction, your leverage would be within an acceptable range?

Yes, Sean, this is Erik. So I think the way you are thinking about it is probably correct and that is that this is sort of a multi-faceted exercise that we have to go through as we, kind of, explore our options, and clearly relative levels of capital are a consideration. Cash flows and coverage are a consideration. Risk reduction, especially under stress scenarios is a consideration. So we have to put all of that together and sort of, do the calculus to determine what sort of the best outcome for the company and for our stakeholders.

Okay. And when you think about, I don't know if it's intrinsic value, but what value or what kind of multiple your stock needs to be trading below to buy back your stock? Can you just walk us because it doesn't sound like you have immediately more accretive use of deploying capital, so I'm just wondering what the thought process is there?

Yes, Sean, this is Gary. So you guys have noted that we're not providing a specific range. And again, the balance we are trying to walk here, we don't have a number in our heads, to answer the question, if it gets below x, y, z multiple what would do that. We've always said for the last several years we'll buy more when it's cheaper and less when it gets more expensive. We are going to be stand by that and then in terms of specific actions in a given quarter, we will look in that quarter and see what the alternatives are there that are available to us and what the relative value is on those. So we don't have a multiple in our minds.

Your next question comes from Humphrey Lee with Dowling & Partners.

In terms of long-term [CAGR] experience, which has been pretty favorable in 2017 and better than your interest adjusted benefit ratio target. But your guidance for 2018 remain unchanged at 77% to 80%. I guess why do you think the performance in 2018 is not repeatable? Is it just simply you would expect some reversion to the mean. But in that case, would it be even, kind of, further deteriorate at some point? How should we think about the experience in 2017 versus your outlook?

Hi, Humphrey, this is Erik. Thanks for the question. I think it is fair to say that in 2017, our performance was better than expected. If you go back to the beginning of 2017, when we gave guidance for the interest-adjusted benefit ratio, you may recall that it actually was 77% to 82%. And we were running favorable to that by a couple of points. And then we did adjust guidance down to 75% to 80%. So we continue to run little bit favorable to low-end of that range, a point or two is not a material variance and it doesn't take very much for us to get back to the high-end of that change. So I would characterize it, 2017, as outperformance and expect our performance to be more in the middle of the range for 2018.

But when we think about the outperformance in '17, was it mortality related or claims management that you put in place for your blocks of business?

Yes, I think it was really more just claims, in general. I don't think there's any specific thing to call out in terms of reduced frequency or severity, I think it was just claims in general, it was a little bit lighter than expected.

But in that case, I would expect the claims management would be a structural improvement to, I guess, how your block will perform? Or is it I'm not thinking about it properly?

I don't think you're not thinking about it properly. I mean, we certainly expect ongoing claims management initiatives to benefit the company over the long term. I think, I would just caution that, remember, we've got $4.5 billion of long-term care reserves in our Bankers Life segment. And it doesn't take a lot to move claims around by 1% or 2%.

Okay. And then just shifting gears on capital. So I hear that you want to maintain some flexibility and it looks like organic growth, based under the sequence how you list those deployment options, organic growth will probably be the priority, but if I think -- were to think about the normal basis, excluding any prospects of acquisitions, what would be your baseline organic growth requirements that you'll need in any given year?

Humphrey, this is Gary, I want to make sure I understand your question. Are you asking me what type of organic growth we expect? Or what organic growth level we would want to invest in? I want to make sure I understood the question.

Yes. So it's, like, organic growth investments. So I would assume you'll would need some of the $300 million to deploy for organic growth. But in the absence of acquisitions or anything that augments your overall business profile, what would be the organic growth requirement in any given year?

Yes, Humphrey. I think the best way to answer that is to just, sort of, go back to Gary's comments and say we're not going to give a specific allocation amongst any of the alternatives that we laid out, either in the press release or on the call here. And so our objectives are pretty specific: growth, risk reduction, commitment to our common stock dividend and share repurchases if the stock price makes sense and so. We're going to manage those decisions on an ongoing daily basis and see what opportunities are out there and see what the market conditions allow for.

Your next question comes from Alex Scott with Goldman Sachs.

First question was just on expenses. I was interested in if you had any commentary around what we could expect for 2018, just given the expense load was a little bit higher for Washington National as well as Bankers Life. And does that incorporate some of the investment in the business and tax spend and will it continue? Any kind of guidance would be appreciated.

Yes. Alex, this is Erik. Thanks for the question. So for bankers, we were up year-over-year. I would say, probably 1/3 of the increase was related to, sort of, new initiatives and just accelerated profitable growth, mainly, building out the full buildout of our broker-dealer registered investment advisor. I'd say the balance was a mix of some higher incentive compensation and other accruals and then just some seasonal timing. And then for Washington National, I think it's a pretty similar story. We had about a quarter of the increase related to initiatives spend in prior periods. We had a little bit of excess litigation here in the fourth quarter. And then again, the balance of it was largely just timing-related. I think about 1/2 -- in both cases, about 1/2 is expected to [occur] and roughly 1/2 shouldn't.

Okay. And then in terms of the capital generation, you say -- I hear you on, sort of, being price sensitive on the share repurchases. But I was wondering like how price sensitive would you be thinking about the use of it towards the risk transfer transaction like do you think about where your stock price is and what you would sort of, see implied in valuation when you think about dilution and that sort of thing from a transaction? Or are those decisions made more around what you're seeing in the actuarial data and the cash flow testing you're doing on step basis and so forth?

This is Gary, Alex. I think the driver for us will be that trade-off between what we see is the future risk and the valuation. That's really the driver for us. We want to be clear, we're not seeing some gigantic adverse trend in our actuarial modeling that's causing us to consider that risk transfer. We think that longer term it makes sense to consider that if we can do it on the right terms and we have the benefit of having a block that's performing well, so we can hold out and wait for those right terms to come, and if they don't come, that's okay, too. So there's not some giant problem that's coming there would cause us to want to do it sooner rather than later. It would really come be about the price, that's really what it'll come down to.

Your next question comes from Tom Gallagher with Evercore.

Just a few on long-term care, also. The -- is there anything about the -- what we should be thinking about long legal entity lines, where risk transfer would make more sense, if -- from what you're seeing and the age of your blocks. Like should we be thinking more about the block you recaptured from Beechwood Re being more available from a risk transfer standpoint as an opportunity? Or is it bankers, which I guess would probably have to be a reinsurance transaction? Can you talk a little bit about structuring and about -- and I realize it's sort of a hypothetical question, but I want to understand are there any nuances we should be thinking about with the potential law solutions or opportunities here?

Yes, Tom. This is Erik. Thanks for the question. So I think, for either the Bankers Life business or the closed-block business, the long-term care policies within those businesses all do reside in legal entities that have "other stuff" in them. And so the spin-off of a legal entity or outright sale is less likely. And so as a result, the reinsurance option would be more likely. Now with respect to differences or preference in transacting on one versus to the other, sort of depends, if you look at the closed-block, it's very stable, it's got a very high attained age in the mid-80s, and so it hasn't surprised us from a liability perspective of the last -- of recent times. And it's running off at a fairly rapid pace about 10% to 11% per year. So I think, there's an opportunity to transact there. But I also think that we don't necessarily have to and if we didn't, I would feel comfortable keeping that business on our books. The Bankers Life is a little bit different, it does have a higher attained age, but it has an outsized reserve balance relative to the rest of our business, not only the Bankers Life, but for CNO. And so we have $4.5 billion reserves and there is the -- the bulk of that is concentrated in legacy business that has more comprehensive business. You're going to have more tail risk there. That tail risk is a lot different than the rest of the industry but it is still tail risk. And so we have to be mindful of that and when we do stress testing. And we highlighted this at the Investor Day, there is margin risk and capital risk there. So we have to be mindful about that when thinking about risk reduction.

That's helpful. And just a related question to that point, Erik. I guess on the Genworth call, they were talking about lifetime benefits business seeing deterioration on that portion of its block and their margin went down as a result. Just curious -- and I know lifetime benefits are much smaller percent of your block, but are you also seeing a divergence in performance of your non-lifetime benefits versus lifetime benefits, as you guys have looked at the claims [of] element?

Tom, a couple of years ago, when we did a comprehensive claim cost study, I think it was in 2014, we saw a deterioration in related to claims, but it was more related, not specifically to inflation, but to older-aged claims. And so was from there that we embarked on a new round of rate increases. And as we got to 2016, we actually saw that abate a little bit and it's been very steady. So I don't know that we've see anything acute specifically, related to inflation, but experience over the last couple of years has been very steady. I would also note that and you noted as well, the lifetime inflation in terms of policies is just 4% of our overall book. So there is more limited risk there, anyway.

Right, and then the final question on this topic. The -- do you guys expect any real change in regulation? I know that NAIC has started with variable annuity reform and it looks like they're getting closer to being done with that. Do you -- would you expect long-term care to be a next big focus of NAIC and where -- any ideas for how that might evolve?

Yes, Tom, this is Gary, thanks for the question. I've had some meetings recently with industry folks as well as regulators, it's pretty clear to me that the regulators recognize they've got to do something here. I think that's been eminently clear. They see some of the problems coming and they also see the demographics need that they have. As to whether or not it's the next thing they tackle, I would not want to hazard to guess there, I'm sure you've seen in some of the industry press they're talking about some other things with best interest care standards and so on. So I don't know what's going to be next, but I will confirm for you that based on my conversations, this is definitely moving up on the top 10 list.

This ends the Q&A session. I'll now hand it back over to the presenters for closing comments.

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

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