CNO Financial Group Inc (CNO) 2018 Q1 法說會逐字稿

Good morning. My name is Sarah, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group First Quarter 2018 Earnings Results Call. (Operator Instructions) I will now turn the conference over to Mr. Adam Auvil. Please go ahead.

Good morning, and thank you for joining us on CNO Financial Group's First Quarter 2018 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 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 Investors section of our website and was filed in our Form 8-K earlier today. We expect to file our Form 10-Q and post it on our website on or before May 3.

Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements.

Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.

Throughout this presentation, we'll be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between first quarter 2017 and first quarter 2018.

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

Thanks, Adam, and good morning. First quarter 2018 was another quarter of progress for CNO. We continued to grow key metrics and our underlying fundamentals are strong. A number of our strategic initiatives are advancing from the pilot phase to implementation to scale. As expected, it will take time for these efforts to demonstrate their full potential. I'll go into more detail shortly as to why we are encouraged about these initiatives.

We posted solid earnings and demonstrated our financial strength. The diversity of our franchise continues to drive consistent and profitable earnings growth.

Operating earnings per share were up 29%. Excluding the impact from the change in tax rate, operating earnings per share were up 6%. Book value per diluted share excluding AOCI was $21.94, up 2% sequentially. Although we experienced noise in some key metrics this quarter, our capital position remains strong. Erik will provide details during his remarks.

We paid $15 million in common stock dividend this quarter. There were no common stock repurchases in the quarter. Our commitment to deploying 100% of free cash flow over time remains unchanged.

Moving to Slide 6 and our segment production results. Bankers Life total collected premiums were down 2% primarily driven by modestly lower annuity collected premiums. Annuity account values increased 4% due to strong persistency. Life NAP was down 8% for the quarter due in part to fewer producing agents. These results also reflect the impact of new underwriting procedures we implemented late last year to review prescription drug histories on our simplified issue business. Because we anticipate this strategic action will generate long-term improvements in our underwriting margins, we are comfortable with the short-term headwind to sales growth.

Health NAP was down 18% for the quarter, driven by a 20% decline in Medicare supplement sales. Fewer producing agents contributed to this result, but it is also reflective of the continued shift toward third-party Medicare Advantage plan sales which are not included in our reported NAP figures. Our Medicare Advantage inforce policies increased 17% as a result of higher sales.

Fee revenue was up 18% from continued growth in broker dealer and registered investment adviser client assets and the previously mentioned third-party Medicare Advantage offerings.

A strong job market, coupled with our ongoing strategy to implement a more targeted agent recruiting process, contributed to a 7% decline in total average producing agent counts.

Several initiatives designed to improve the productivity and retention of our agent force have recently been expanded nationally. While we anticipate that it will take time for these results to impact the overall size of our agent force, our decision to expand these initiatives is a signal of our ongoing commitment to improve -- to improving sales performance and fundamentally reshaping our agent force.

As an example, we piloted increased financial incentives to veteran agents for providing on-the-job training to help increase the productivity and retention rates of new agents. Based on positive results from the pilot, we expanded the program nationally in late 2017 and have already seen an increase in new agents achieving their production milestones.

Moving to Washington National. Total collected premiums were up 2% with a 3% increase in supplemental health, partially offset by the continued run-off of the closed Medicare supplement block. Total NAP was down 3% from the year ago quarter, driven largely by a 4% lower supplemental health sales in the individual channel. The sales results were modestly impacted by weather that reduced the number of active production days.

The PMA worksite channel once again posted double-digit growth and was up 15%. Continued recruiting initiatives in this channel contributed to an overall increase of 1% to the PMA average producing agent count.

For Washington National, we are seeing early success in a few key growth initiatives. In particular, our efforts to expand our geographic presence generated over $1 million in incremental NAP during the first quarter as part of a 14-state expansion.

We are also seeing great progress with initiatives to diversify the product offering and leveraging the breadth of the CNO portfolio in doing so. Life insurance sales grew 5%, building off a full year 2017 increase of 15%. Additionally, our pilot to sell short-term care in the PMA individual channel is gaining traction, and we plan to expand the pilot based on its early success.

For Colonial Penn, total collected premiums were up 1% in the first quarter driven by growth in the block and stable persistency. NAP was down 15% due in part to the deliberate decision to pull back on our marketing investment in the quarter as we remain price disciplined.

Lower-than-anticipated telesales agent counts also impacted sales. However, we are actively working to resolve the issue and expect the effects to be isolated to the first half of 2018. Due to sales efficiency efforts, web and digital sales saw a 16% increase from recent investments in the platform and user experience enhancements.

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

Thanks, Gary. CNO had another solid quarter of earnings. We reported net income per share of $0.50, up $0.14 or 39%. Operating earnings per share were $0.44, up $0.10 or 29%. Operating earnings per share excluding significant items were $0.43, up $0.08 or 23%.

As discussed on our fourth quarter earnings call, because we previously had an effective GAAP tax rate of approximately 36%, we expected an outsized benefit as a result of tax reform. Of the increases in income noted above, approximately 22 points of the improvement was related to having a lower effective tax rate.

Operating return on equity was 9.6%, increase from 2017 levels as we are benefiting from higher income and a lower corporate tax rate.

Holding company cash and investments were $378 million, down slightly from the fourth quarter due to lower statutory dividends from the insurance subsidiaries and the seasonality of expense payments between the holding company and its subsidiaries.

Estimated consolidated risk-based capital was 427%. The decline from the fourth quarter is primarily due to opportunistic investments made into several preferred stock and high yield ETFs as well as certain other assets which offered very attractive relative value in incremental yields but had higher capital requirements. These investments are highly liquid, and we have the ability to unwind them in a very short period of time should we wish to.

As we have stated in the past, it is our objective to run the company at a consolidated RBC ratio in the 425% to 450% range. As we continue to be within this range, we have not changed our capital management plans. Additionally, there is no change to expected future free cash flow generation or our willingness and ability to deploy 100% of free cash flow over time.

Turning to Slide 8 and our segment earnings. Bankers Life earnings reflect lower Medicare supplement margins of $9 million, primarily as a result of the implementation of Crossover processing that occurred in the quarter. As a reminder, Crossover is an industry-wide claims platform that provides for straight through processing of provider payments. As we have moved portions of our block over to this platform in the past, we typically see an uptick in the volume of small dollar claims and this did occur in the first quarter, as expected. Offsetting this were favorable investment income and expenses.

Washington National's earnings in the period reflect significantly higher supplemental health margins as we experienced lower levels of incurred claims.

Colonial Penn's results were slightly ahead of expectations as lower overall advertising spend offset slightly unfavorable mortality.

Our LTC and run-off segment recorded breakeven results, in line with expectations.

Lastly, corporate segment results were lower versus the prior year due primarily to the significant outperformance of our COLI asset in the first quarter of 2017. Partially offsetting the decline was lower expenses in the current quarter.

Turning to Slide 9 and our key health benefit ratios. Bankers Life Medicare supplement benefit ratio was 73.3%, in line with our expectations but higher than the prior year and the prior quarter as a result of the previously mentioned implementation of crossover claims processing. We continue to expect that the Medicare supplement benefit ratio will be in the 71% to 74% range for the remainder of 2018.

Bankers Life long-term care interest-adjusted benefit ratio, excluding the impact of rate increase related reserve releases, was 72.6%, better than expectations reflecting favorable incurred claims and persistency. We continue to expect the interest-adjusted benefit ratio to be in the 75% to 80% range for the remainder of 2018.

Washington National supplemental health interest-adjusted benefit ratio was 54.4%, significantly better than expectations due to favorable incurred claims as well as a prior period reserve redundancy that was released in the quarter. We continue to expect the interest-adjusted benefit ratio to be in the 58% to 61% range for the remainder of 2018.

We are encouraged by recent results in our long-term care and supplemental health businesses. And although we are not changing guidance on benefit ratios at this time, we are cautiously optimistic that recent trends will continue, and we'll provide an update on our second quarter call.

And with that, I'll now turn the call back over to Gary.

Thanks, Erik. We remain committed to the following 3 priorities and opportunities: number one, achieving our growth strategy through implementation and execution on our strategic initiatives; number two, addressing our legacy long-term care insurance exposure and further derisking the balance sheet. We continue to have active conversations with interested parties, and we'll update the market when appropriate. Number three, deploying 100% of free cash flow generation over time. Areas of deployment include investments to accelerate profitable growth, common stock dividends, share repurchases and funding potential long-term care risk reduction transactions. The amount and timing of deployment will be based on business and market conditions. Our aim is to deploy capital to its highest and best use over time.

Thanks for your ongoing interest in CNO Financial Group. We will now open it up for questions. Operator?

(Operator Instructions) Your first question comes from the line of Randy Binner from B. Riley.

So I have a question actually just right up on just the nature of the RBC change with the allocation to these preferred ETF investments. I understand -- I mean, I'm hearing that you can switch this because it's liquid and that it was your kind of a willful move. But optically, it kind of flattens the RBC trend. And so I'd like to understand better kind of what the opportunity is with that trade and maybe you kind of size it a little bit for us, if you could.

Sure. Randy, this is Eric Johnson, and I'll take that. You will remember that in kind of the middle part of February, there was kind of a fairly strong shutter in the market, and some risk aversion obviously affected all equities and fixed income and credit markets as well. Spread widened fairly substantially, more in some spaces than in others. And during that dip, we took the opportunity to think about using some cash, which had prior been in very short-term, highly liquid. It basically enhanced cash strategy earning, basically, very little, and to deploy it tactically into a series of places: some preferred ETFs, a number of them that with the very diverse underlying constituents, 100, 200, 300 underlying constituents that are predominantly investment grade; also some noninvestment-grade, a small proportion of noninvestment-grade ETFs; also some BBB, BB-ish CLO paper, which widened out very substantially during that time; as well as some high-yield corps. If you to put that all together, it probably adds up to $300 million with the fixed investment grade constituent preferreds being probably 2/3 of that and the CLO and high-yield investments being -- comprising the other 1/3. The economy appears to have another 1 or 2 years lags left in the cycle. Corporate earnings continue to be -- to look pretty strong. Inflation trending up; rates are trending up on a relative value basis. And I think this has played out already relative to, let's say, kind of a traditional IT corporate kind of single A-ish investment. I think there's already been a fair amount of tightening of the spread on, for example, the ETFs versus IT corps, and that's playing out pretty well. I can also tell you that on a kind of return on capital basis, it has a very pronounced favorable benefit to the company. While I'm going to use all these numbers that are only illustrative, if you believe that our traditional investment basket produces something after the follow-up adjustment and after our capital charge, something like 12% in ROE, this basket probably produces something 50% higher, which is fairly significant on a fully adjusted basis for capital allocation as well as default charge. So it's a tactical allocation. We will revisit it as market conditions change. If the company's needs for capital change, we obviously have this and other ways to rebalance assets to reduce required capital from investments. It on balance, I think, will prove to be a good earner for the company, producing good income for the company, producing good return on capital for the company, avoiding the longer end of the curve, which is I think going to continue to struggle as rates go higher. So a lot of goods, some risk associated with it. But it -- and even adding the allocation, it fits well within the allocation boundaries that we subscribe to and that we live with. For example, high yield, corporate high yield, 4% going into the year. If you include what we did here, now we're 5%. So I think we've thought about it from a lot of different angles and understand the implications or risks in the returns and feel good about it.

Okay, great. And then just kind of housekeeping on forecasting RBC. The required capital went up by, I think, nominally something like $32 million, and so all of that is reflected in the first quarter. There's no kind of bleed-through to the second from -- you said it was mid-February. So that's all. The number we got at quarter end, that's our new denominator for RBC, correct?

Well, what you're asking is, I think, we completed this tactical reallocation during the February period, and so you wouldn't expect to see it in March and then certainly not in -- I can't promise what happens from here through the rest of the quarter, but as of now, you wouldn't see a similar effect.

Okay. And then just on the -- there's this kind of a specific mention of the LTC risk transfer is one of many potential uses of free capital. What are -- I guess, Gary, how should we think about the kind of the movement in the 10-year and how that affects those discussions, meaning the movement higher in the belly of the curve?

Randy, thanks for the question. I think the short answer, and I'll let Erik elaborate if he wants to, but I think the short answer is we don't see that affecting our looking at the different opportunities.

Yes, Randy. This is Erik. I think that's right. This question has come up in the past. And what we said is because we're pretty tightly ALM-matched that we're not overly sensitive to moves in interest rates. There is, obviously, some sensitivity there. But again, because of the match, we're in pretty good shape there. We're much more susceptible, obviously, to the mortality, morbidity and persistency assumptions. And when you look at our stress testing that we've discussed and disclosed in the past, that's really where the bigger impacts are. So I think higher rates help, but as we said in the past, the higher rates or the lower rates aren't necessarily a barrier to transacting for us.

Yes, I think maybe the only thing I would add to that, Randy, so obviously, we don't feel like it's a significant factor in terms of how we think about our options. But I do think that there are a lot of other folks out there that this move in interest rates increases their appetite.

Yes. I mean, I was thinking more like for the counterparties. So for the counterparty, it would seem this would give them more to work with on their side, and it seems like you're echoing that.

Yes. We've seen evidence of that.

Your next question comes from Erik Bass from Autonomous Research.

I want to come back to the investment portfolio changes and to see if I'm thinking about this correctly. I mean, it seems like what you're doing is taking some excess capital that was kind of reflected in your RBC, and you're just deploying it out of way to pick up a higher yield on that excess capital. But it would be tactical in the sense that if you needed that capital to either do a long-term care transaction or something else, you could easily unwind and get back. So am I thinking of it right that it's really a yield-enhancing mechanism on excess capital that you plan to hold for a period?

Yes, Erik. This is Erik Helding. So I think what you're describing is fairly accurate. I think what I think about it is we manage the company's consolidated RBC in a range of 425% to 450%. And so I'd say anything within that range -- or anything above the lower end of that range isn't necessarily excess capital, but I get your meaning. I think the notion of using that perceived excess capital, I guess, would be correct if we felt like coming off the first quarter that we had to immediately rebuild the 450%, and that somehow caused the disruption of dividends from the insurance subs at the holding company. And that's just not the way that we're looking at this. In my prepared remarks, I specifically said no change in capital management strategy or free cash flow generation.

Got it. And then, I guess, as we think about the deployment of excess capital, you hadn't mentioned the general account as a potential bucket. So that's really -- the general account is kind of dealing with your existing RBC. The free cash flow you generate would be used for the buckets that Gary laid out in terms of the organic growth buybacks, dividends, M&A, et cetera. Is that correct?

Yes. Again, the way I think about it is sort of anything in the 425% to 450% range in terms of statutory capital is not, from my perspective, considered excess capital. What I consider excess capital is future free cash flow generated above and beyond that and everything above $150 million at the holding company, which is currently $230 million. And so for those things, yes, I would say they're more geared towards the things that Gary mentioned in his remarks.

Got it and the dividend paid to the holding company was lower than normal, I guess, this quarter but it's also something we've seen in the first quarter in the past. So is that why the cash position really didn't -- or declined slightly quarter-over-quarter?

Yes. That's one of the contributors. It's true that our first quarter earnings on a statutory basis as well as GAAP tend to be a little bit lower, and that was the case. And so we did, by design, a dividend up less to the holding company. The other, it wasn't necessarily an issue. It was actually something. It's seasonality that we have between the holding company and its insurance subs. The holding company pays expenses on behalf of the insurance subs, and it's the case that in the first quarter, one of those big payments is made and that's the incentive compensation that's paid to the directors and officers. And so that happened in the first quarter. If you look back historically, you could see that, that has happened and that, that net settlement amount tends to be a negative number for us. That was the case here again in this quarter. It was a little bit larger this time because there were some other payments that were made on behalf of the insurance subs. Now what should happen is -- what we're expecting to happen is in that in the second quarter, the holding company is going to basically get some of that back. And so I would expect that net settlement number in the second quarter to be kind of in the $10 million to $20 million positive range.

Got it. And if I could just ask one last one. What are the implications of the sale of Tennenbaum Capital Partners to BlackRock? And will this -- maybe without giving specific numbers, but will this free up capital for you? And I think your stake was held in the general accounts. Should we expect an RBC lift there?

Erik, this is Erik again. So I think the answer is to be determined. So obviously, first, there's a process that has to play out, which is the approval process and actually closing, which I think has been disclosed, that we expect that to happen in the third quarter. And then from there, it all depends on what the proceeds are reinvested in. So there could be a potential capital lift. There may not be, again, depending on if we invest in something similar, then there likely wouldn't be a capital lift. Now where you might see change in capital is when proceeds are actually paid out. We expect to do fairly well on that investment. The financial terms haven't been disclosed, and so we can't comment beyond that. But we're very pleased with how that's played out, and we do expect to benefit as a result of the sale.

Your next question comes from the line of Ryan Krueger from KBW.

My first question is just about on the RBC. I think in the past, you talked about more targeting the 450% range and then kind of closer to 425% if you were to do a long-term care derisking transaction. It sounds like now you view 425% to 450% as an appropriate range as is. I'm just curious what led to the change in general there.

Yes, Ryan. This is Erik. So I think you make a good point. I think in the past, and it's been a while, we have guided to the 425% to 450% range. Now in the recent -- in several -- recent several quarters, it's true that we actually have been running at 450%. So when asked about that level, I think what I've said is that this is about the appropriate level given kind of the risk profile of the company. And so I wasn't -- I was sort of confirming that 450% was the level that we intended to run at, but I wasn't necessarily saying that we wouldn't be comfortable running at 425%. So I think the general statement is the way we think about it and manage capital is really more 425% to 450%. Now adding on to your second comment, yes, absolutely, we believe in a post-LTC transaction world that we can and should potentially run at a lower level of capital amount. Is that 425%? Is that 400%? Well, that remains to be determined.

Okay. And then just on the lack of buyback in the quarter, was that more related to your evaluation of alternatives such as LTC derisking and potential M&A? Or I guess, how much of that had to do with your view of valuation in your stock as well?

Hey, Ryan, this is Gary. Thanks for the question. You know what, there's not really a simple short answer for you because I would tell you that, at least the way think about it, there's not one driving issue. And so maybe I can just talk kind of at a high level as to how I look at this. The first thing I want to say is none of our shareholders should walk away thinking that buybacks are off the table. That is absolutely not the case. We continue to regard buybacks as a viable potential use of that capital. However, as you'll recall, after the 2017 results, we made a point of not providing a specific range of buybacks, and we've done that in the past, as you know, and we're not doing that presently. And the main reason we're not doing that right now, the simplest way I can explain it is I have a bias to want to grow the business. We have strong support from our Board of Directors, and we really want to carefully consider all of the opportunities that are out there, whether it has to do with risk reduction or investing more in organic growth or investing more in inorganic growth. There is, of course, also a factor we look at: where the stock is trading during the period in time when we're looking to deploy those funds. And when we looked at everything, the potential opportunities coming at us, where the stock was trading, where we are in the year, meaning, it was still the first quarter, when we looked at all of it, we felt like we were comfortable not deploying those funds into share buybacks. But I want to emphasize 2 major points. Number one, buybacks remain a viable option for us. Everyone should be very clear about that. I'm stopping short of committing to a specific range because of point number two, we have a bias to want to grow the business and really maximize the opportunity here. I think we have some very unique opportunities before us, and I think there's some really strong reasons why we should grow this business. I'm happy to talk about that separately if you want, but we think there's an opportunity here, and we want to keep our powder dry.

Just one follow-up. In terms of inorganic potential growth, what are the types of properties or businesses that are most interesting to you? Are they more around distribution or kind of full businesses?

To be honest, we've looked at a variety of different things. Some have to -- would be described purely as distribution. Some are manufacturers and distributors. Some are somewhere in between. Some take us in a different direction. Some build on existing strengths. What I really want more than anything else is, first, what's going to help us grow the business? Second, what's going to help us grow the business specifically with the middle market that we're focused on? And once we can find things that meet those 2 basic criteria, we're pretty open to a number of different opportunities. And frankly, I've been very pleased with what I've seen in the marketplace in terms of people talking to us.

Your next question comes from the line of Humphrey Lee from Dowling & Partners.

Gary, in your prepared remarks, you talked about some of the pilots that have been rolled out on a national basis. Can you talk about how like, in those pilots, like for example the productivity enhancement, how much did that help your sales force in terms of productivity enhancement? And how should we think about that being rolled out to a bigger stage? the And same thing on the short-term care in PMA, how should we think about that pilot as well?

Sure. Okay. So first of all, let me state the obvious. None of the pilots are working as fast as I want, and that is the nature of the beast. I think when you try things out, you try 5 things, and 2 of them don't work, and 1 works kind of well and the other 2 don't work so great, and so on. That's the nature of pilots experimentation. But I would love for all of it to move faster. A couple of other things that you touched upon. I was really very pleased with what I saw in terms of the short-term care pilot. Our PMA business has historically focused pretty much on one line of business. So to take that distribution force that's otherwise very talented and get them to learn and really get excited about a new product, as you might imagine, that takes a little bit of pushing to get those distribution folks to get excited about that. But we've crossed the threshold. It's off of a very small base, so we don't talk a lot about it. But I'm very pleased with that. I happen to think that, that distribution channel that we have there is capable of much, much more. And I'm really hoping the leaders of that channel are listening because they're constantly getting this push from me that I think they can do a lot more, and I think the short-term care is just one such example. So I'm very pleased with that. I would also point to the life insurance business. That channel has also done very well that historically didn't sell life. So we've taken a channel that's been historically committed to supplemental health. They've now started to sell life. They've now started to sell short-term care. And I would point out that one of the reasons they've been able to even get access to those things is because of our diversified model. Recall that within the CNO family, we manufacture those products either by Bankers Life or Colonial Penn or what have you, and we have our brands right now selling one of those products, and that's something that we're excited about. Am I willing to give you a specific number that's going to result in x million dollar more sale next quarter? No, I'm not willing to do that yet. I'm telling you that we continue to pilot these things, and I've been very pleased with that. In the case of Bankers Life, our biggest challenge there is reshaping the agent force. We've got an agent force that's captive to us, that depending on how you measure it, is the fifth or sixth largest captive distribution force in the country. We think there's an opportunity to refine the way we bring folks in and refine how many of them we keep. We have historically brought in a very significant number of agents. But then, when you wind the clock forward 2 or 3 years, we haven't kept many of them. There's been a lot of churn. And so our opportunity there, and I've talked about this before, instead of bringing in 7,000 or 8,000 and then 3 years later having 100 of them left, our goal is to bring in 3,000 and hope we have 200 or 300 left. And that's what we're trying to do. We're doing it with different pilots that have to do it with referrals, that have to do with giving better agent incentives, and all the while trying to drive productivity. That's the high level of what we're trying to do. I know you would like a target. I don't have one to give you. I can tell you that we recognize we've got to reshape that agent force, and that's what we're doing.

Got it. Just to touch on the agent force a little more. I understand the overall agent force kind of coming down at Bankers, as expected as you kind of focus more on the veteran agents. But I thought that you were hoping to kind of maintain the third-year-plus agents at least steady or kind of -- or maybe even grow a little bit. But the 2% decline kind of this quarter was a little bit of a surprise. Are you doing some pruning as well in the veteran agents group as well?

There's always some of that going on. And Humphrey, look, you make a very fair point. We would have like that 3-year-plus number to keep growing, okay? And we went from -- if you look at the data we have at Bankers Life, we went from 1,863 down to 1,847. So what is that? 16 headcount. On the distribution force, it's 1,800 strong. While I wanted that to go up and not down, it's hard for me to draw too many conclusions to a change of 16 headcount against the denominator of over 1,800. So some of it has to do with pruning. Some of it has to do with folks doing other things. Some of it has to do with time. This is just going to take a few quarters to play itself out. But in fairness, Humphrey, we did not want that number to go down, and that's not what we would have hoped. But I'm also not sounding the alarm bells given the relatively small fluctuation.

Yes. I guess it's just the kind of many companies now offering higher hourly salary above the minimum wage. Does it have an impact to kind of your agent retention?

Look, any macro trends in the employment market impact us because, as you'll recall, our agents are commission-only. They're not employees. They're 1099 producers and they work on a commission basis. And you have more folks willing to try a career change like that when you're talking about an 8% unemployment world than you are when you're talking about a 3% unemployment real world, and that's just the reality. So certainly, we're impacted by that. Absolutely. Would I be willing to say that, that 3-year swing of 16 bodies is driven because of that? I wouldn't be willing to say that. Maybe 2 or 3 of those 16 folks were driven because of that, but I wouldn't be able to say that all were driven because of that. I think we're working through this, and I would also point out that recognizing what's happening in the employment market, that's also have been one of the things we've done with the pilots in terms of when folks -- when some of these agents reach a certain threshold, we provide more support than we historically have and on a selected basis based on certain criteria. So those are the types of things we're trying to navigate through.

Your next question comes from the line of Sean Dargan from Wells Fargo Securities.

I have a question. If I just take a step back at a high level, I just want to make sure I understand the relationship between RBC holding company resources and your ability to do an LTC transaction. So the incremental investments you made, which what brought down RBC through buying preferred share ETFs, was done at the insurance sublevel. If you were to do an LTC transaction, would it be holding company cash be contributed to a counterparty? Or would it be capital in the insurance sub? I'm just trying to figure out what the relationship is.

Yes, Sean, this is Erik Helding. So maybe just a general comment. So any potential LTC transaction would be done between, in this particular one we're talking about, the Bankers Life and Casualty statutory legal entity and the counterparty. And so the transfer of assets and liabilities in consideration what happened between those 2 entities. So it first starts with the capital level and wherewithal of the legal entity to transact. Now if the legal entity doesn't have sufficient capital on hand to transact and maintain an adequate risk-based capital on a stand-alone basis, it would then be up to the holding company to help fund the transaction. So that's kind of how it works.

Okay. And the LTC block is not a discrete sub stacked under Bankers Life. So any -- transaction have to be an insurance transaction, is that correct?

So yes, you are absolutely correct. The LTC business that we're discussing is within the Bankers Life and Casualty legal entity. It's not a subsidiary company. So that is correct.

Your next question comes from the line of Alex Scott from Goldman Sachs.

First question I had was just on long-term care. You mentioned you're cautiously optimistic that some of the trends can continue. Just wondering like what you're seeing in the performance of the block that would give you the confidence to say something like that. Like is there anything around persistency or claims, the way that morbidity and mortality is coming in that's driving this comment?

Alex, this is Erik. So I'd say it's just general favorability that we've seen for at least 4 or 5 quarters in a row here. If you roll back to 2017, you probably remember that we were towards the low end, if not better, than the low end of the guidance that we had given. And in fact, I think during the middle of the year, we actually lowered guidance on the interest-adjusted benefit ratio. So in general, what we're seeing is yes, favorability in incurred claims and a slight favorability in persistency, so persistency being a little bit lower than what we're expecting, which when that happens, when people (inaudible) off, you're releasing reserves and that contributes to the lower benefit ratio. But there's nothing sort of acute. We have been discussing for a while that we've been looking at ways to improve claims management practices, and we continue to do things like that, and we think that is benefiting. It's hard to quantify, but we certainly think that that's benefiting us.

Okay. And the other question I had was just around potential LTC transaction. And you mentioned in the event that there's not enough at opco to fund it, potentially a holdco would help out. Would you -- how do you guys think about debt capacity? On the other side of that LTC transaction, if you've unloaded enough risk, is there an ability to take leverage up there?

Yes. Look, so I think maybe to clarify some of that, I don't recall saying that there wasn't enough capital at the holding company to fund a potential LTC transaction. So I just want to clarify that.

Oh. Then, I meant if. Sorry. I apologize.

Yes, that's fine. That's where I was going next is whether or not the Bankers Life and Casualty legal entity has enough capital on its own or it needs capital from the holding company, whether the holding company doesn't have enough capital, is going to depend on the size of the transaction, which blocks are transacted on and a number of different factors. So I just wanted to get that out there. So does that make sense?

Yes, okay.

And I'm sorry, did you have a follow-up question on that?

No. That's it.

Your next question comes from the line of Tom Gallagher from Evercore.

First, just a follow-up on the risk trend for long-term care theme. I think you guys had talked about mainly focusing on highly-rated counterparties, insurance companies when thinking about risk transfer. But we've definitely seen a change in the market. I know it's on the variable annuity side, but you've had investment consortiums, alternative managers getting involved now in terms of risk transfer. Is that on the table for you guys when you're thinking about alternatives here? Or is it really still insurance companies, highly rated counterparties are the main ones under consideration?

Hey, Tom, Gary Bhojwani here. Look, the short answer for me on this question is we're willing to look at a number of different opportunities, but we are highly, highly sensitive to how it will look to our shareholders and what the credibility of the counterparty is. And you can tell I'm hedging a little bit in my response because the point that I want to make sure our shareholders understand is we will be very sensitive to the quality of the counterparty, the structure, the deal and so on. We're very particular about that. The reason I'm hedging, though, is I've been surprised by the number of, as you put it, consortiums and other market opportunities that are out there right now. If you would ask me a year ago, are people going to be taking a run at variable annuity business? I would have said, no way. And you've seen some of the same things happen that I'm seeing right now. So I'm very surprised by the number and nature of parties that are out there looking to do things, and I don't want to rule out something that I haven't thought of today that would be quite compelling. But the quality and financial strength of a counterparty that we do any type of deal with will be a paramount consideration.

Got you. That's pretty clear, Gary. The other related question to that is, in addition to the counterparties, I think you've also seen some changes in the way state regulators are dealing with businesses that are housed within the same legal entities and potentially approving transactions which would carve out those legal entities, which could change the nature of some of these types of transactions, if you know what I mean. So I'm curious if you think, is that also a possibility here? Because in a vacuum, if it's only a reinsurance transaction, that could be done. It's more limiting. But if there is possibility or opportunity to get regulators to approve a carve-out of a sale instead of a reinsurance deal, I think that's a very different big difference in terms of the economics for you. But anyway, that's -- curious your thoughts on that.

Yes. So obviously, the nature of the question is purely speculative. I want to first emphasize that to make sure I keep our attorneys happy with me. I think that the movement we've seen in the marketplace, the growing flexibility by regulators, the growing amount of capital and the growing number of parties that are interested in transactions like this, I think all of that is good for a company like CNO. And I'll come back to what I said before. There are a lot of things that if you would have asked me just 12 months ago, would they potentially be happening in the marketplace? I would've said absolutely not, never going to happen. And here we are today, people buying variable annuity blocks and regulators allowing carve-outs and all sorts of stuff. So I think that's a good thing for us. I think that's a good thing for the optionality it gives an organization like ours. I'm not at a point where I can predict how we would react because it's so issue-specific. But again, I want to emphasize the credit quality, the strength, the character, the nature of the deal we do, we understand how important that is.

Okay. And then just on another topic. Gary, if you were to really try and distill what's happening on the sales front here, because I know organic growth and turning around sales momentum sounds like a big strategic priority, you were sort of highlighting how the improving jobs picture makes it harder. Is that really the biggest challenge for you in terms of why we're seeing the results today? Or maybe if you could just sort of drill down and explain why you think it's happening, why you believe you can improve it.

Sure. I definitely want to talk about the challenges because we have challenges and it's not turning as quick as a I want. So I want to be clear about that, so no one thinks I'm playing hide the puck. But I also want to talk about some of the things that are going well. I mean, I have just been really, really pleased with the progress of our broker-dealer. And I know we don't yet have enough quarters under our belt where we're demonstrating results too, but I can tell you we've been extremely pleased by the number of our insurance agents that are taking that step and really stepping into the securities world and committing to this business as a true career and really are helping our middle market consumers in a way that they haven't been able to. I'm really, really pleased with how folks at Washington National have grabbed on to new products way outside of things that they've never sold before and making hay with life insurance products and short-term care and so on. So there are really some very strong pockets of encouragement on the sales front. The biggest challenge, though, clearly for us on the sales front is at Bankers Life. Some of that is impacted by bringing agents into this career that work on a commission basis and the employment picture impacts that. There's no question about that. That's a significant challenge for us. Some of it is where the consumer preference is right now. I mean if you think -- you've seen all the stats I have in terms of how many boomers are going into retirement. We know that as people go into retirement and their houses are paid for, their kid's college is done, or whatever it is, from a sheer financial planning standpoint, their need for life insurance goes down but their need for wealth management products and other things that provide income for life goes up. We're seeing some of that, and I don't think we're alone. I think there are other folks in our business that have seen life insurance sales come under pressure. So we're seeing some of those things. So I think the short answer in terms of what I would say is we're facing some headwinds relative to bringing agents into a commission-only career. There's no question about that. We're facing some headwinds in terms of the consumer and the fundamental demand picture for products like life insurance. However, we're facing -- not facing, we have some significant tailwinds in terms of there aren't 1 million other people down here competing for a middle-market consumer. We've got some tailwinds in terms of our insurance agents who are really embracing the opportunity that becoming a securities licensed professional offers. We're seeing some tailwinds in terms of the ability to cross-sell our products and grow our franchises within operations like Washington National. So there's a lot of different factors at work here. There's no one thing that's driving it all. And you're right. Anybody that's ever run a business knows, the hardest thing to do is change momentum. And it's going to take us some time and we're pushing through that.

Your next question comes from the line of Dan Bergman from Citi.

I guess to start, following up on the asset allocation change. Can you talk a little bit more about the decision to make much of the investment through ETFs? Is that mainly for liquidity purposes and the use of ETFs draw a higher capital charge than the underlying assets otherwise would, to start?

Yes. This is Eric Johnson. I'm happy to answer that for you. But I don't want to do an advertisement here for BlackRock or State Street or anybody -- or Investco or anybody else that happens to do ETFs. But I will say that if you're looking at like a PowerShares or something that has 200, 250 underlying constituents, it would be very difficult for us to get in and out of those, efficiently pay a lot of money on a bid offer. And it would be a very difficult task. So what you're getting in your wrapper is, in essence, you're getting a broad and diversified exposure on a defined basis that has a greater liquidity as a sum than the sum of the underlying components. The price you are paying for that is -- the underlying components in this one particular case I just mentioned are roughly 90% investment-grade NAIC rated. The wrapper, it had before a rating. There's a reverse R there. So you are paying a price for the administrative convenience and liquidity. On the other hand, you're getting a very high return on capital. At the end of the day, the distribution rate on something like what I just described to you is north of 6% on the invested dollar, which is very high. So there are trade-offs, in other words, and we -- unfortunately, with the curve, the way it is being so flat and rates headed where they're headed, which it seems the terminal rates are going higher, there are no easy buckets. In other words, in order to achieve the company's needs, we're not going to simply be able to run a very -- a simple model that buy single A bonds at the long end of the curve. That probably is not going to be the way to get the periodic earnings we need or the long-term value we need. So we're going to have to be smart and opportunistic, within boundaries that are appropriate for -- of capital and risk. So I think you should look at this in that context. We're not going to have a portfolio that's all passive. There are a lot of reasons that that's not going to be the case. But I think there are on a limited basis and carefully thought-out cases where a passive allocation can add value to a portfolio. Particularly, a good example is the case where you have something like we have in the first quarter. We have a fairly sharp, even discontinuous change in relative value when blow out in spreads. And to capture it, a quick way of capturing that, obviously, is something that gives you a broad exposure like an ETF. So you can grab that change in relative value very quickly, and then you can modify it over time.

Got it. Very helpful color. And maybe just quickly, a quick follow-up on the Bankers long-term care business. Was there any notable benefit that you saw from kind of the elevated -- potentially elevated mortality of adverse flu season in the favorable 1 quarter results?

Dan, this Erik. No, not really. I mean, mortality in the quarter was generally fairly benign, and we saw a little bit of an uptick in Colonial Penn, a little bit in our traditional life business and Bankers Life. But it was very marginal at best and really sort of benign in the quarter.

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

Thank you, operator, and thanks for joining us on today's call.

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