Good morning. My name is Benita and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2015 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Helding, you may begin your call.

Thanks, operator. Good morning and thank you for joining us on CNO Financial Group’s first quarter 2015 earnings conference call. Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Fred Crawford, 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 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 a Form 8-K last night. We expect to file our Form 10-Q and post it on our website on May 5. 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 the first quarter 2014 and first quarter 2015. And with that, I will turn the call over to Ed.

Thanks, Eric and good morning everyone. CNO posted another solid quarter and our business has performed well as we continued to grow sales, our customer reach and earnings per share. Consolidated sales were up 3% in the quarter in line with our 2015 guidance range. Sales at Bankers Life were down slightly, but agent recruiting continued to improve positioning the segment for future growth. Washington National sales were up 3% led by continued strong sales growth at PMA, our wholly owned agency. Colonial Penn sales were up 26%. While we had easier year-over-year comparisons in Q1 for Colonial Penn, our various investments and initiatives in our direct sales platform, including expanded product offerings, more diversified lead generation and increased marketing effectiveness have performed above expectations. Having the vibrant direct sales operation is a key part of serving the needs of the middle market. Our key financial ratios and capital ratios remain at investment grade levels. Our strong financial position and operating performance enables us to continue to return capital to shareholders through dividends and share repurchases. During the quarter, we bought back $86 million of common stock. Operating earnings per share, excluding significant items, were up 11%. Equally important to serving the middle-market is having products and solutions to address the cost at healthcare expenses in retirement. So, let me take a few minutes to tackle out CNO’s long-term care strategy. Out-of-pocket healthcare costs, excluding the cost of long-term care, are estimated at $220,000 through retirement for a 65-year-old couple. This exceeds the retirement savings of 54% of boomers. Middle income boomers on average estimate that the cost of 1 year in a nursing home is $47,000 yet the true cost is nearly double that. Also, half of boomers think long-term care is covered by Medicare, which it is not.…

Thanks, Ed. Beginning with Bankers Life, core sales in the quarter were down 2% mainly impacted by 10% lower annuity sales, reflecting the low interest rate environment in the quarter. Life sales were up 2% and long-term care sales were up 15%. This was largely due to increased marketing and sales of our one-year benefit period long-term care products resulting from increased consumer appeal and demand. These shorter duration products have been well received in the market and allow us to balance the risk of our in-force business. Med supp sales were down 7%. However, we expect this trend to reverse as new agents become more productive. We did see an increase in third-party med advantage and PDP production in the quarter, which is not reflected in NAP and expect sales of these and other source products, which leverage our distribution platform, open up new households and generate attractive non-life income to continue to grow going forward as we expand distribution. As result of study sales growth, Med Advantage fee income at $12.6 million was up 28% over last year on a trailing four quarter basis. As we mentioned last quarter, sales in the near-term are being impacted by challenges and recruiting we faced early in 2014, which led to a contraction of our overall agent force. We continue to see positive results from the tactical actions we took to respond to these challenges, with a 6% increase in new recruits in the quarter on top of the 9% increase in the prior quarter. In addition to tactical adjustments, we are investing in a number of initiatives designed to improve recruiting performance, automate field sales processes and improve agent efficiency. We expect these investments to further build on increased retention, higher productivity and an increase in the size of our…

Thanks, Scott. I will focus my results on earnings development and capital conditions, where we recorded another solid quarter on both fronts. If you adjust for the one significant item in the period, we recorded operating earnings of $0.31 per share an increase of 11% over last year’s normalized quarter. This quarter’s only significant item was the negative impact from a $3 million adjustment to reserves in our Washington National supplemental health business. The adjustment is part of the normal quarterly process of assessing incurred claim development. And in this case, we increased reserves to recognize the modest efficiency. While our insurance earnings drivers performed solidly in aggregate, we experienced somewhat mixed results in our core health margins offset by continued strength in annuity margins, better than expected seasonal earnings from Colonial Penn, and solid corporate investment results. Core capital ratios and holding company liquidity remains strong. We modestly stepped up capital deployment in the quarter and are comfortably on pace to achieve our common stock repurchase guidance for the year. Our press release details two areas of updated guidance for 2015. Scott covered Colonial Penn’s strong sales quarter and we bumped up our guidance accordingly. We also refined our LTC future loss reserve accrual estimates impacting interest adjusted benefit ratios. I will touch on that in a moment. Turning to Slide 12 and our normalized segment earnings, I’ll use this slide as a backdrop to provide a little more detail on the quarter. Bankers’ EBIT benefited from continued strength in Medicare supplement and related health margins and continued solid annuity results. During our fourth quarter call, we discussed the GAAP practice of building reserves when profits are followed by losses or so-called future loss reserves this pertaining to our long-term care business. In the first quarter, we refined our…

Thanks, Fred. Looking ahead, we are encouraged by the level of sales activity and pleased with the progress we are making to regain momentum on agent recruiting. We will continue to invest in initiatives to increase productivity and operating effectiveness, including leveraging our new strategic partnership with Cognizant to accelerate those activities. We will continue our holistic approach to managing our long-term care business and will begin filing our new round of rate increases this quarter. Our solid operating performance and financial strength coupled with favorable market conditions and continued progress on ratings bodes well for recapitalizing our balance sheet on or before October 1. Lastly, we are actively developing future catalysts and exploring non-organic opportunities to expand and accelerate profitable growth in our business. We will now open it up for questions. Operator?

Thank you. [Operator Instructions] Your first question comes from the line of Erik Bass.

Hi, good morning guys. Thank you. I guess, first just on the future loss reserve accrual for long-term care, just to clarify, is it interest rates that are the main driver of the increased accrual? And then you had said there is no change I guess to the underlying loss ratio and kind of claims experience, but does your guidance factor in any benefit from potential shock lapses as you start re-pricing this quarter?

Thank, Erik. Yes, this is Fred. No, this adjustment is not related to interest rates. And maybe it may serve everyone to step back a little bit and make sure you understand first how we go at this and then I can answer your question in terms of lapse rates. So, we are taking the following approach, where we calculate present value of future losses remembering this is a book of business that has gains followed by losses and the present value of gains. And in our particular case, because we have already built up an FLR of $120 million, you back that off the estimate of present value future losses. That then creates a ratio. You take the ratio of that net loss position to profits and that ratio is then what we applied to the essentially the gross profits going forward to build the FLR. In our particular case, it’s approximately a 50% factor that we are applying to those gross profits. Now, if you may recall back and if we didn’t comment on – and I will comment on it now that back when we are doing loss recognition testing, we did not factor in the potential windfall profits, if you will, from shock lapses related to rate increases, because they can be variable and arguably we think a somewhat consecutive approach, but prudent. Similarly, we don’t take that approach when calculating this accrual either and that gives rise to a slightly higher percentage that we are applying to the gross profits to factor to roll up or accrue the future loss reserve. And so to answer your question, no, we are not taking into account lapse rate profitability, now of course as we install rate increases that may happen. And if that happens, you will see first of all some level of those profits being set aside to build the future loss reserve more aggressively. You will also see some of that dropped to the bottom line to the degree shock lapse changes the trajectory, if you will, of the present value of future profits versus losses it could change that actual factor of 50%, i.e., improving it or bringing it down as well. These are all the types of things we will regularly monitor as we go forward.

Got it. That was helpful. But at this point, we should assume this is a good run-rate kind of level of accrual for this year, but in the future as well?

Yes, but recognizing that again we are in a period, where we are entering into rate increases. And as you go into rate increases, again, the profitability pattern will adjust accordingly and we will have to monitor that. So, while this is – we have estimated profits going forward, those profits can vary as you go through a period of rate increases. Eventually, it will settle down and settle out to a more consistent number.

Got it. And then you had mentioned reinsurance a couple of times and then we also recently saw American Financial Group announced the sale of its long-term care block and some other companies have suggested at least interest in exploring options for their long-term care blocks. What is your view on the appetite of capital for long-term care at this point and as the bid/ask spread narrowed at all?

Yes. It’s – I mean I think it’s a very interesting environment. I think we are absolutely seeing a growing level of interest. I think re-insurers both existing and newly formed re-insurers backed oftentimes by private capital and/or associated particularly with investment vehicles are finding a level of potential attractiveness related to the longer duration of the assets and what maybe their specialized approach to investing those assets. I think what’s also happening is as transparency has picked up considerably in terms of really understanding the nature of the liabilities, the behavior, understanding a little bit better the dynamics of the actuarial risk and issues and variability in the blocks. I think you are gradually finding private capital gaining a level of comfort in attempting to at least understand better the behavior of these liabilities and can a deal be struck? Is there something that they would find attractive to come into the business? The reason I spent some time talking about the makeup of our business is we happen to believe that if you are out there you are a re-insurer and you are looking to dip your toe into the long-term care business and find elements of it attractive. We happen to think the profile of our block of business is uniquely strong and just simply better able to forecast, estimate, appraise and we hope as a result of that, the bid/ask would be more narrow. Now, this of course is our view and we think it’s somewhat has basis based on what I said. We are looking to as Ed mentioned reduce the overall economic exposure to this business in half over the course of the next 4 to 7 years. We know we can’t just simply do that organically. We are going to need to see some level of growth of course in non-organic, non-LTC business. And we also think it’s going to take approaching reinsurance solutions on elements of the Bankers’ block and so we will continue to remain close to the marketplace and monitor that as we go.

Great, thank you very much. Just one quick clarification, you had mentioned on I think the conditions are favorable for recap. Is there anything technical that would preclude you from pursuing a recap now?

No. I mean, it’s really just watching the markets doing what we have been doing, which is balancing what we can achieve in the marketplace with a recognition that there is a penalty we need to pay to go certainly any sooner than the October 1 call date, but even then, there is a call premium required on our bonds. So, it continues to be weighing those economics, but the main point I think I want to drive home is that we have gotten through a year end period. We now are posting a first quarter. And as we discuss our position with rating agencies, as we discuss our situation with bankers and look at the marketplace, we believe CNO continues to be – there continues to be strong demand to invest in CNO, particularly CNO debt if that opportunity were to arise. So, we are watching all those variables right now and have to continue to monitor and be ready if the market hands us an opportunity that we think is a strong NPV for our shareholders.

Perfect. Thank you very much, Scott.

Yes.

Your next question is from the line of Randy Binner.

Hey, good morning everyone. I have had some technical difficulties. So, I am going to ask a couple of questions and I hope that I am not being redundant, but just back on the FLR, I just want to make sure I understand that right, so it’s not an interest rate change, it’s a behavior change – and the behavior change and the assumptions would be in response to how behavior would react to higher rates that are being put through on the block? Is that a good layman’s way of describing it?

I wouldn’t describe it that way. Again let’s kind of level set here. So, first, last year, 2014, we had been building a future loss reserve at a rate of about $5.5 million a quarter. And we have been doing that for quite a while. And as I said we ended the year with a future loss reserve balance of about $120 million. As we entered into 2015, we adjusted our approach to the build of the FLR. We had been building the FLR on more of a percentage of premium basis and we move to more of a percentage of gross profit basis. And in doing that, we also needed to of course reset our expectations for gross profits coming off of all the loss recognition testing work being done at year end. And so we reset that process and had an estimate for what that was going to mean to the build in the FLR, i.e., a higher build in FLR and that factored into our 81% roughly long-term care interest adjusted benefit ratio range. Now, fast forward to first quarter, what’s changed? Well, what’s changed is in refining that calculation, that percentage of gross profit approach, we took a hard look at not just the rate increases, which of course have been embedded in our estimates all along. They were part of the year end work, but the more tactical and technical dynamic of how should we be estimating policyholder behavior after rate increases are installed, most notably lapse rates. And so in looking at that, we made the decision that it would not be in our view prudent and perhaps modestly conservative, but would be more prudent to not include the profits associated with shock lapse in that present value profit calculation thus driving down the ratio, driving down that 50% ratio applied to gross profits, so in making that decision, that naturally resulted in a slightly elevated accrual for FLR. To give you some numbers around it in the first quarter, for example, we accrued about $9 million in our FLR. So, again, last year a pace of $5.5 million a quarter, first quarter, we accrued $9 million. What are we seeing going forward that factors into the 84% interest adjusted benefit ratio roughly a range of $9 million to $11 million again depending on the quarterly timing of gross profits and applying that factor. Does that help?

Yes, thank you. That absolutely helps. Sorry, I got dropped from the call, so I didn’t get all of the explanation, that’s more conservative, that makes sense. So, couple of follow-ups. One, what caused you to reevaluate that decision to not anticipate the benefit of – the benefit from higher price increases? Was it an internal decision? Was it an external decision? Was it, I mean, an auditor decision? What changed?

Yes. No, it was not an auditor decision although we work actively with our auditors on this approach. GAAP is interesting, right. GAAP says hey, if you have profits followed by losses, you must develop a future loss reserve accrue, but then it falls a little short and precisely what methodologies one would use. And so we as a management team and as an actuarial and accounting team need to come up with a supportable, viable, sensible, practice of building that reserve. And that’s what we did. Nothing really changed dynamically in the way we think of the business. It was really a matter of further refining as we were entering into that very first quarter of posting the FLR into our financial statements. And in doing that, we simply made the call that it made sense for us to be careful about including too much in the way of shock lapse related benefits.

Okay. And just is there any shock lapse benefit or is it zero?

We have assumed zero. That’s both in our loss recognition testing and in the establishing of this 50% factor. Now, what do we expect? Hard to tell. Of course, historically, we have seen that benefit. And one of the things I would tell you that I did not like about the percentage of premium approach and this happened actually to me when I first arrived at the company, we are in the tail end of installing rate increases. And we actually saw what I would call kind of windfall profitability related to shock lapses. And of course we would get on the call with you and say hey, that’s a notable item, adjust that out of your numbers when it comes to our run-rate. In the whole time you are thinking to yourself, wouldn’t it be more prudent or wouldn’t it be a better practice or helpful for us to start the process of building that reserve by applying more of a gross profit percentage, right, certainly more prudently establishing your balance sheet as you go forward for the potential risk based on your estimates. And so I think this is just a very good approach. I think it’s become a more customary approach of how to do this. And so what will happen is if we do see shock lapses we will be setting some of that aside to build future loss reserves, but it’s likely that some of that would also flow through as is naturally the case.

Okay, got it. And then if you haven’t already quantified the next round of rate increases kind of what percentage of rate increase is targeted on what percentage of the block?

Yes. So, if you recall from last quarter when we sort of discussed our approach to rate increases, we are going at rate increases state by state largely concentrated in the more comprehensive buckets of policies that we have. And we are on average looking at filing as low as 20% and as high as 40% rate increases. However, for purposes of our estimates, we have assumed only a 40% success rate on those increases, that then resulting in 9% or roughly $50 million of premium. And so what we are doing right now is we are in the process of starting those filings and we will be starting the kind of the first wave, if you will, of those filings here in the second quarter. There will be a level of continued filings as we move throughout the year. It’s quite a process. As I think by now you know it’s state-by-state, it’s complex, there are separate calculations and packages that are performed for each state based on what they need and want to support any rate filing. And so we tend to go at it in a graduated phased way throughout the reminder of the year, but starting in the second quarter.

Okay, understood. And then one more if I can sneak it in. I think maybe Erik Bass get into this, but I mean, there has been re-insurers, you have looked at it long-term care books, is there other institutional interests that you have seen out there and potentially take in these liabilities?

Is there other than re-insurers?

Right. Yes, is there anything outside there any other structures that are developing?

Yes, I mean, it’s a good question. I would say, we tend to as part of generalizing say re-insurers or reinsurance, but there are players out there working through I guess I will call it more synthetic structures to transfer the risk. This is not new. This has been under development, if you will, among various banks, bank-owned re-insurers etcetera, for a while. My view Randy is that those types of structures are first, they tend to be loaded with boxes and arrows, which typically means there could be challenges with really holistically transferring the risk. And so I am skeptical of those types of structures working. However, we want to remain open to it and look at it. So, there are alternative structures out there, but they usually involve the primary company retaining a level of risk and/or stop loss if you will where risk can come back at you. And my big rule of thumb here is if I transfer risk, but keep elements of the tail, I probably haven’t done much for myself. So, if you are going to come at us with reinsurance solutions, but come at us with an idea. However, if you could keep detail that would be great, that ain’t going to work.

Understood. Thanks for the response.

Your next question is from the line of Dan Bergman.

Hi, good morning. You mentioned the goal of reducing your, I think with the relative economic exposure to long-term care by roughly 50%. First, can you give you a little more color on how you are measuring or defining relative economic exposure and how we should think about that decline? And secondly, is there any sense you can give of how much of this should come from the natural run-off of the book versus what would need to come from reinsurance or similar non-organic sorts?

So, let’s talk about this notion of cutting our exposure in half and kind of what the elements are, that drive that. And then I will answer your question specifically. So, what we are talking about here is first of all growing the 85% of non-LTC business that makes up CNO disproportionately to long-term care, right and that’s both organically and non-organically, okay. And so that’s why the longer range associate, because we would expect it to happen over longer range. The second is just the natural run-on and run-off of the block itself. We are bringing on naturally shorter duration as we have mentioned and lower premium per policy, policies on to our books. And what is naturally running off, because it’s much older, where mortality comes into play and other forms of lapsation is generally the more comprehensive long-term care business that has to happen. They will also be the business that when we install rate increases if you are going to see a level of lapsation, you would see it there as well. So, what I would call the natural run-on and run-off of the actual block of business itself. And then last but not the least is well, is there something non-organic you can do with the long-term care block itself, i.e., re-insurers. And that’s where we would see reinsurance playing a role in possibly reducing our exposure through a transaction and thus the reinsurance discussion. Now, your question of what do you mean by economic exposure? I think of economic exposure in a couple of different ways, okay. One simple way is to look at the amount of reserves as compared to the total reserves on your balance sheet. And as you might know, that’s closer to in fact even a little bit north of…

That’s very helpful. Thanks. Maybe just to follow-up of the buckets you mentioned, I mean any sense of how much might need to come from reinsurance to hit that 50% target or is it – do you have any moving piece?

Yes, it’s going to be moving. And I would say this that the really nice thing right, okay. So, as I mentioned earlier, so we have $4.4 billion of reserves. And as I mentioned $1.2 billion of it is claims reserves, which are very well in hand. We feel very comfortable with the quality of those reserves and how they performed particularly strongly about that when you realize the mix of our business and that there is far less risk of things like the sort of the continuation of claims, if you will, related to lifetime benefits. We just simply don’t have that type of risk. So, you then start to look at the remaining active life reserves of roughly 3.2. And so when you think of the size of our business, it’s not like we have to go to market with a $3 billion long-term care reinsurance transaction. I think what makes a lot of sense is quite honestly a little bit of what we just did here more recently albeit with a closed block, look at $0.5 billion, $600 million perhaps in the high side $1 billion transactions, which are easier for the perspective market to absorb and dip their toe in water, really move the dial for us. And I also like the idea of not putting all of our eggs in one basket. I think it’s likely the case that you would look at one or two different types of structures over time to get it done right. Now, remember all of this is essentially assuming that the bid/ask works for us. Because if I may ask comfortable with the dynamics of the in-force as I am and where I see the economics going, I am going to be more demanding on what I expect to see in the way of pricing in bid/ask. I am not in some position of desperation here. And so I think we are in good shape, but we are going to do what you would expect us to do and that is negotiate and move when it makes sense in balance for our shareholders.

Great, thanks. Maybe just one last one, shift gears to sales, it looks like one driver of the Bankers sales decline was depressed annuity sales due to the low rate environment. Is there any sense you can provide about what level of interest rate or even just annuity sales is embedded in your 3% to 5% 2015 guidance? I mean, I guess asked another way, if rates remain near 2% through the rest of the year, could that drag on annuity sales cause you to miss the Bankers segment sales guidance or would the pickup in overall sales over the course of the year from recruiting be enough to offset that?

So, we did assume some level of continued pressure and interest rate in our forecast. So, it’s still at risk, but more to your last point, Dan, we would expect that the agency force still has to make a living and we see a product shift and offsets in other areas. There is the second half of the year – there is a – we have made an assumption of a modest improvement or leveling out of crediting rates. And so to the degree that doesn’t happen that presents some risk, but we would expect to be able to pivot and shift to other product lines.

Great, thanks.

And this question is from the line of Humphrey Lee.

Good morning, guys. Just to follow-up on Bankers sales, so my understanding is for last quarter, you have a pretty good recruitment growth and [indiscernible] again for this quarter. Just remind me kind of the ramp-up period for new recruit, was it like 180 days? So, if so the first batch of the stronger recruit should come through to production in the second quarter, is that the right way to think about that?

Humphrey, that’s correct. It’s about a 6 to 9 month ramp up depending upon obviously when they came on in the quarter. So, yes, we would expect the second quarter to start to begin to see some benefit of those fourth quarter recruits come through and then in the third quarter some benefit of the first quarter of this year recruits come through, correct. And they are likely going to come through in those product lines like traditional life, critical illness and med supp, so simplified issue, smaller premium per policy type business.

Okay. And then in terms of that in Washington National that one producer restructuring like how much of the impact was it in kind of – in this quarter and how should we think about it for the balance of the year?

Sure. It was a significant impact for that 20%. So, let me just step back and remind everyone that the 80% of Washington National production comes from our captive wholly-owned agency, PMA. The partner channel contributes today 20% and this was one of our larger partners for sure. So, backing that out, it had a significant impact, sales went from up 3 to up 9, so it was significant. We expect the second half of the year that, that partner will stabilize, but we aren’t expecting growth from that particular partner. So, we have spent and continue to spend time building on the other partnerships, that we have and expanding into additional partnerships. So, we become less dependent on one large organization, but we would expect that to continue to impact us in the second quarter and with some improvement in stabilization in the second half of the year.

And Humphrey, that was considered in our guidance and that’s why we have reiterated our guidance.

Okay, got it. Thank you.

And there are no further questions. Are there any closing remarks?

No, just thank you everyone for your interest in CNO.

And this concludes today’s conference call. Thank you for your participation. You may now disconnect.