CNO Financial Group, Inc. (CNO) Q2 2015 Earnings Report, Transcript and Summary

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 Second 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]. I would now like to turn the call over to Mr. Adam Auvil; sir you may begin.

Good morning and thank you for joining us on CNO Financial Group’s second quarter 2015 earnings conference call. Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Erik Helding, Treasurer and Head of Investor Relations. Following the presentation, we will also have several other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday’s press release. You can obtain the release by visiting the Media section of our Web site at www.cnoinc.com. This morning’s presentation is also available in the Investors section of our Web site and was filed in a Form 8-K earlier today. We expect to file our Form 10-Q and post it on our Web site by August 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 will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we will be making preference performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between the second quarter 2014 and second quarter 2015. And with that, I will turn the call over to Ed.

Thanks, Adam, and good morning. Our business performance and momentum remain solid as we again grew sales while maintaining pricing discipline along with expanding our customer reach and increasing earnings per share. NAP was 1% on a consolidated basis however results by segment vary. We experienced weakness in Banker's new annualized premium which is down 3% while achieving increases in policies issued third-party fee income, agent recurring and the overall agent work. Washington National sales were up 2%. Colonial Penn continues to perform well and posted robust sales growth of 12%. Operating earnings per share excluding significant items were $0.34, up 6% over the prior year. We continued to experience strong margin in our Medicare supplement, annuity and life insurance businesses but this is somewhat offset by elevated claims in our supplemental health business. We continue our solid track record of returning capital to shareholders. During the quarter, we increased our common stock dividend by 17% and repurchased $101 million of common stock. In May we completed the recapitalization of our balance sheet this greatly enhanced the company’s financial flexibility and increases the amount of capital available for deployment. Lastly we continue to make solid progress on the ratings front achieving two additional upgrades from Moody's and Fitch and being placed on positive outlet by S&P. I’ll now turn it over to Scott to discuss our sales results.

Thanks, Ed. Beginning with Bankers Life, NAP in the quarter was down 3% primarily due to lower Medicare supplement and annuity sales. Medicare supplement has been impacted by both competitive pressures and consumer preference towards Medicare advantage plans. Annuities continue to be negatively impacted by the low interest rate environment; these lower sales were partially offset by increased sales of long-term care which were up 20% primarily due to increased sales of our shorter duration products. Sales of third-party products largely Medicare advantage in PDP plans are not counted as NAP but continue to be strong and allow us to leverage our distribution platform to grow our fee income, fee income attributed to this business on a trailing four quarters basis the 16.4 million up 19% over the last year. It is also important to note that this fee income generates non-life income which is attracted because of our tax position. But overall NAP is not growing at a level consistent with our long-term expectations. We are encouraged by the activity within the banker’s distribution channel. We issued policies in our core lines were up 1% for the quarter while third-party policies issued increased by 26%. So we continue to reach more new customers and this is critical as it opens up new households that lead to future cross sells. On the recruiting front we continue to see positive results from the tactical actions we took earlier in the year. New contracts were up 5% in the quarter making this the third consecutive quarter of positive results. Our focus will now be to keep up the recruiting momentum and covert these recruits to productive agents. Collected premiums were down 1% in the quarter primarily driven by the reduction in annuity premiums reflecting the low interest rate environment in recent periods. Excluding annuity collected premiums are up 1%. Annuity account values on which spread income is earned increased 1% in the quarter driven by continued strong persistency. As we looked into the second half of the year we will be focused on several fronts. First as mentioned earlier, it will be important for us to convert our new recruits into productive agents. These efforts will be focused on training and mentoring programs. Next given the importance of Medicare sales to open households and drive cross sales opportunities we are increasing our marketing, promotion and agent recognition programs. We also recently launched several initiatives to reduce cancellation which improve sales conversion rates. Finally, we expect robust Medicare advantage of PDP sales during the Medicare enrollment season as we will be focused on maximizing the number of agents that get trained and certified to sell these plans through multiple third-party partners. Because of the results through the first six months of the year the impact of low interest rates on annuity sales and our adherence to pricing guideline we are lowering bankers full year NAP forecast to flat to down 3%. Turning to Washington National sales were up 2% this quarter G&A was up 3% with the individual business up 1% and work side business up 13%. Sales in the individual business were impacted by strong recruiting results which sent PMA producing managers focused less on personal production and more on developing new agents in the quarter. The PMA average agent force was up 9%. Our independent channel was down 4% with sales that continue to be adversely impacted by the organizational restructuring of a large independent partner. As shared last quarter the situation was isolated and well impacting sales through the first half of 2015 the changes position as partner well for steady profitable growth moving forward. Given year-to-date sales growth of 2% the slower recovery than anticipated in our partner channel and delay and state approvals in rollout of new group health products we are adjusting sales guidance down for Washington National to 3% to 5%. As part of the effort to achieve this range for the remainder of the year we will be keenly focused on leveraging the successful growth in recruits at PMA during the first half of the year continuing to capitalize on strong momentum in life sales and the successful fourth quarter work side enrollment season through tactical investments in additional support to both our PMA and partner work side sales teams. Lastly supplemental and health collected premiums were up 5% due to continued growth in our in force. Moving on to slide eight Colonial Penn continues to perform well and posted 12% sales growth in the quarter. Through the first six months of the year sales are up 19% over the prior year. A positive result in the quarter was driven strength in Direct Mail and web and digital generated activities. We continue to diversify our lead sources deploy marketing dollars in a cost effective manner and make further improvements to sales productivity. Collected premiums were up 7% in the quarter due to strong new business generation and continued growth in the block. EBIT for the quarter was 4.2 million up 11% over the prior year largely due to growth in in-force and an increase in the deferral of acquisition costs as we continue to shift to more direct mail and web based lead generation activities. Because of solid marketing and productivity gains, strong sales results and growth in in-force earnings we are increasing Colonial Penn's full year 2015 EBIT guidance to $3 million to $6 million and we're increasing full year sales growth guidance to 12% to 15%. And now, I'll turn it over to Erik to discuss CNO's financial results.

Thanks, Scott. CNO posted another solid quarter on both earnings and capital front. Adjusting for the one significant item in the period, we recorded operating earnings of $0.34 per share, an increase of 6% over the last year. We experienced continued strength and stability in most of our business lines, but we did see elevated claims in our supplemental health business which I'll discuss in more detail in the next few slides. Our capital position remained strong with consolidated risk based capital of 443%. Leverage came in at 19.7% which is in line with our expectation having recently completed the recapitalization of our balance sheet. Holding company liquidity recorded increase to $385 million while returning $150 million of capital to shareholders. Turning to Slide 10 and our normalized segment earnings, Bankers Life posted EBIT of 86.4 million in the quarter down slightly from the prior year. We continue to benefit from strong margins in our life, Medicare supplement and annuity line as well as from favorable call prepayment income, but this was offset by lower margins in our LTC block due in part to the incremental bill and future loss reserves. Washington National reported normalized EBIT of 29.1 million, down slightly from the prior year and due largely to the current quarter impact that claims experienced in our supplemental health block. Colonial Penn recorded solid seasonal earnings of $4.2 million. Sales and earnings result continued to benefit from marketing productivity gains and lead generation, diversification. Corporate segment earnings were generally in line with expectations. Turning to Slide 11 for a more in-depth discussion in our key health businesses, we had another solid quarter and our Banker's Life Medicare supplement block recorded the benefit ratio 68.7%. We continue to benefit from favorable claims experience and persistency. Earned premiums were flat year-over-year largely due to the recent slowdown in sales. We continue to expect benefit ratio in the 70% range for the second half of the year. Our long-term care interest adjusted benefit ratio came in at 84.6% for the quarter slightly elevated due to marginally higher persistency. Claim activity for the quarter was in line expectations and we continue to expect the interest adjusted benefit ratio to be in the 84% range for the second half of the year. During the second quarter, we commenced our previously announced round of LTC rate increases and are pleased with results thus far, through June we completed filings representing approximately 60% of the economic value assumed in 2014 yearend loss recognition testing. We have already received some approvals and are running slightly ahead of expectation, but recognizing and still early in the process we're not ready to make any adjustments to our overall expectation. Moving to Washington National supplemental health as outlined in our press release, we made an adjustment to increase prior period of claim reserves by $9 million in the quarter. We have been experiencing elevated claim activity in this block over the past few quarters and as a result we initiated an in-depth claims review. Our review revealed a shift in cancer claim trends and subset of our block related to higher cost and longer duration of treatment. Upon concluding the review, we determined the recent experience represents a new trend and decided it was appropriate to adjust reserves accordingly. The $9 million increase for prior period reserves resulted in a 65.7% interest adjusted benefit ratio. Excluding this impact the ratio was 59% for the quarter. As we expect this level claims to continue, we're increasing guidance to the 58% range for the second half of the year. Turning to Slide 12 and investment results where we have another good quarter, we continue our tactical approach to investing new money. We put money to work at just over 5% for the quarter largely consistent with our plan. We purchased higher quality names in the energy sector and spread widened, added high-grade corporates and select CMBS and mortgages. Prepayment income was elevated as the new issuance calendar was quite robust and issuers rushed to the market ahead of the potential Fed re-hike. Overall credit conditions remain favorable and net realized gains and losses continue to be minimal. We recognized one impairment in the quarter related to a legacy private company investment and now no longer have any investment exposure to legacy private company investments. Turning to Slide 13, in May we took another significant step forward and we successfully completed the recapitalization of our balance sheet. We took advantage of favorable market conditions to lock-in more permanent investment grade debt structure. We achieved a number of enhancements that improved our financial flexibility and cash flow including moving to a more traditional unsecured structure, extending maturities, minimizing financial covenants, eliminating cash flow sweeps and restricted payments baskets and increasing deployable capital by eliminating $120 million of principal amortization payment and raising over $100 million of net proceeds. Concurrent with the recapitalization announcement, Moody’s and Fitch upgraded the Company's ratings. As previously announced, we recorded a charge of $21.3 million in the quarter related to the debt extinguishment. Slide 14 profiles our capital position, we ended the quarter with estimated RBC of 443% RBC was positively impacted by investments results or upgrades in organic portfolio outpaced downgrades. Statutory operating earnings in the quarter were $91 million and more than offset the $50 million spend to the holding company. We expect RBC to be in the 425% range for the remainder of the year. We ended the quarter with $385 million of the holding company up significantly from the first quarter and do largely with the net capital raised in the recap. We currently expect to maintain a minimum of $300 million for the remainder of the year absent incremental opportunities for deployment. Leverage increased to 19.7% consistent with our expectations coming off the new recapitalization. We expect to maintain leverage in the 20% range for the remainder of the year. On a year-to-date basis we have repurchased $187 million of common stock which puts us well in our way to achieving at least the mid-point of our $350 million to $425 million repurchased guidance range for the year. Turning to Slide 15 our normalized operating ROE came in at the 9% range driven by strong core earnings and ongoing capital return to shareholders. In prior calls we have discussed our goal of increasing our return on equity overtime and this remains the priority. The pace and trajectory of ROE build will depend on number of variables including absolute levels of capital, new money investment rates, line of business performance and the amount and pace of investments required to drive sales growth and increase productivity and operating effectiveness, there are several catalyst which could accelerate ROE expansion. These include non-organic growth initiatives LTC reinsurance solutions and achieving investment grade. And with that I’ll hand it back to Ed for closing comments.

Thanks Erik. The investments that we’ve been making over the last few years to expand our reach and enhanced productivity are paying off. Colonial Penn is a shining example of this as we added simplified issue products, diversified lead sources through direct mail, web and digital enhanced systems and processes plus adding key talent. Our balance sheet, liquidity, cash flow and capital generation remain strong. Rating agencies continue to recognize this with further upgrade. Our objective of achieving investment grade status is sight. The resignation of Fred Crawford is a regrettable loss but we have the strong team and I can assure that Fred leaving was not for any negative reasons regarding CNO. We have launched the search for our next CFO already and have candidates in the process. Our market has a strong position that we ran an opportunity ahead is illustrated by the change in questioning, undoubtedly one of the main questions eight years ago when I joined and even when Fred joined 3.5 years ago was why are you joining CNO. The question now is why are you leaving CNO. And with that we’ll now open it up for questions.

[Operator Instructions]. Your first question is from the line of Randy Binner with FBR Capital Markets.

I wanted to talk about sales and kind of how its communicated and looking at Slide 6 in particular of the presentation is there a way because there is a lot of positive business activity talked about whether its actual policies issued or recruiting. And it sounds like from what Scott said that just open enrollment period later this year is going to have probably more third-party business to make sense because people like Medicare advantage policies. So, is there a way we can think about communicating premiums, originated or some other way of showing the third-party impact other than kind of the policy counts here because it doesn’t the way it’s presented now doesn’t get to kind of a dollar number we're looking at.

Randy, this is Ed. Thanks for the question. It’s something that we are looking at seriously as to how do we better portray the growth, the extended reach that we’re having to serve the middle market and some type of whether it’s premium equivalencies number of customers or some other measure or maybe combination of measures is something we’re looking at even I’ve had discussions with our Board as to how do we determine success here in serving the middle market. So not ready to give you definitive answer right now but it’s something that we’re working on.

Randy, this is Scott. I’d add to that you hit the obvious value to the organization is the fee income that we’re building. But there is also the income that generated to our agents that is an important component of their total ability to earn an income and stay in the business and stay with us and that obviously improves retention and shows up in their overall productivity. So Ed is absolutely right, looking for ways to demonstrate that in a broader way than just on a policy count basis.

Yes, the one other thing I’ll add net advantage is a prime example above and beyond what Scott and I said, it's a great lead source for other sales roughly a third of the policies that are sold to MA customers result in a sale of another CNO product, so there is much more value than the one single sale or fee income.

I am glad you hear the wheels are turning there because I think investors are actually pretty receptive to definitional changes there if they follow the economics, they will stay tuned. And then I guess kind of switching topics still on the long-term care, this has been a topic of conversion on past calls and it's interesting because on the interim calls someone asked there is a different book of long-term care, but someone asked because insurer transfer the risk somehow and they said, they weren't lot of buyers out there but your book is older, it's a little bit better to find, it doesn't have a lot its very worst legacy pieces with it anymore and so is there any update you can give us kind of what the conversation is in alternative market for reinsurance risk transfer other ways to divest the remaining long-term care piece?

Can answer it and part at least Randy that there definitely is a market with more interested parties potential buyers/reinsurers, so many probably not surprisingly are entrance backed by private equity and those types capital structure. We obviously have transacted with a party like the recently which with our former close block LTC, so it's definitely something that we're experienced in and well aware of how to do it and how to structure things.

So active conversations on that front?

Yes there is, we're always in touch with the markets and reinsurers and not just for LTC.

I am going to speak one more and just because I've been wanting to ask this question all morning to different life insurance companies and I don't know fair chances there, but the new money investment environment seems a lot better now than it was earlier in the year? And I realized you're still reinvesting below the portfolio yield and there is one timers in the investment income but in general your investment income is held up pretty good and we saw that across a lot of life insurers who reported last night, can you quantify at all, how much better and basis points new money is now versus kind of when we had this calls three months ago particularly in investment grade, it just seems like risk spreads are little wider in the 10 higher?

I am very surprised to be answering your question this morning, having said that all.

I am always thinking of yours.

The interesting quarter during the second quarter during the early part of the quarter, actually rates are a little bit lower and so if you look at the kind of the new money rate average, average high things and kind of that lower rate during the early part of the quarter and grading up during at tail end as spread widened. Not just in corporate, which I think you mentioned but also but also in some of the structured asset classes and consumer classes spreads widened pretty significantly high yield obviously following in that trend. And so I would say you're looking maybe a pickup aggregating all of that maybe 20ish basis point beginning end of the quarter on average putting everything together and I think if you kind of tracked on money during the quarter it would be reflective of actually lower rates in the earlier part and higher rates at the ending part. What the quarter ahead offers us, we currently seem to be seeing a little bit of a flattener and the longer end of the curve hanging in there a lot of more action in the shorter end of the curve, but yet there are opportunities that as spreads have widened there, we're seeing more opportunity in the structure of asset classes doing more in CMBS more in ABS and which we like those tend to be less interest sensitive, shorter duration assets more kind of credit heavier credit and spread component with which we're comfortable. So we're cautiously positive on where we're now versus where we're three months ago, and I think as there Kelvin [ph] said have been tracking quite well relative to plan.

Yes, the only follow-up I have is, is this spread widening like a sign of deteriorating corporate health meaning I think it's from like M&A and commodity volatility right. So, I guess it's just normal it could, is it good spread running or is it bad spread running?

Mixed well, we're happy to see higher spreads because we think there are more risks -- they compensated better for the risk that we take inherently and being a spread oriented business. There are some asset classes where the spread widening is really driven by technical. The CLL will be good example of that. I think also high grade IG corps is a good example of that where most of the spread widening is just technically flow upon driven supply without great pickup in demand and few of the demand will actually go wrong way in addition of The Street stepping away from inventory, all that adding up to wider spread, M&A is part of that dynamic. There is other sectors where the supply and demand is still pretty favorable and I think you just have a little bit more of people stepping away from the market in general trade and that’s more of the structured classes. And so technically we had lot of do with it there in some particular areas where obviously the fundamentals are shifting, I mean the commodity classes you mentioned energy, metals and mining they’re definitely shifting the way of the fundamentals have changed quite a bit. We tend to be underway in both areas luckily and so or maybe not luckily, but I was checking this morning and we’re about halfway for example in metals and mining. So that maybe an opportunity for us looking down the road if we can be patient and let things bottom out then maybe we'll buy some cheap bonds and it will be good for the company in the long run. So there is some I think deterioration in some of the underwriting standards our people talk a lot about that in general ratings upgrade, downgrade trend is not as favorable as it was a year ago those things are for sure. So I just do a lot of step up in the air I think credit quality is still sufficient not as great as it was a year ago, won’t be as good a year from now that it is today and we have to kind of navigate through that.

Your next question is from the line of Erik Bass.

On the Washington National supplemental health outlook can you talk a little bit more about what’s driving the higher claims? I guess it's the cancer product that you sale sell in indemnity product and as utilization gone up or is there a reimbursement component on treatments.

Erik this is Ed. Yes, we think it is essentially utilization so we’ve seen a few things here over the last several quarters which have been emerging. I think the first one is really a move from intravenous treatment regimes to oral which has the effect of being slightly more costly oral treatment regimes tend to be more frequent and patients tend to last longer on this treatment regimes. And then additionally what we see is even after the initial treatment is done medication continues for maintenance. So yes, I think it's essentially what you’re getting at there.

And what are you on hook for us, I mean is it a kind of a fixed daily benefit or do you pay as long as treatment goes on. I guess another way of looking at is what sort of risk with the benefit ratio could continue to move higher or are there sort of caps in your policy?

Yes, I mean there are fixed daily benefits, the cancer coverages or cancer policies have emerged over time all advantages tend to have more unlimited benefits and we have some of that but not much I think the number we saw about 2% of our policies have unlimited benefits. So we don't see a real exposure there. We did have an acute issue with unlimited chemotherapy benefited couple of years ago if you recall. We actually went and took rate increase on that block. So I think we’ve got that covered. New advantages have better policy coverage in terms of limits be it daily, weekly, monthly or even annual. So the new advantages have better caps on those types, I think what we’re looking at here is really a subset I mentioned in my remarks really a subset of our supplemental health block that's essentially 20%, 25% of our block.

And then Ed just a question for you I appreciate the update on the CFO search and the process you are going through there. I guess as you think more broadly, can you discuss the succession process that you have in place and how you think about building the management bench at CNO.

Fair question Erik, CEO succession and succession in general is definitely a priority. CEO succession is something the Board is regularly engaged in and takes as one of their primary responsibilities I take my role in that as to not only develop the talent we have but when appropriate to add talents. Fred joining 3.5 years ago, Bruce Baude joining about three years ago are examples of that as well as developing talent through different opportunities in the company Gerardo Monroy is a great example of that moving from the LTC area to credit into Colonial Penn. So we take it seriously. Our team here hopefully they never get tired of hearing as they’ve heard it a number of times I strongly believe that we win and lose with talent. So we’re opportunistic as well when we can attract and bring in new talent will do that and we invest quite a bit in developing our talent that’s here to retain them and motivate them and give them more opportunity.

And just quick on the CFO search, I'm assuming it's the external process as well as potential and internal process?

Yes, largely the same process we followed when we did the last search about 3.5 years ago. And internal candidates will go through the same process that external candidates do and we think it's a thorough and appropriate process.

Your next question is from the line of Ryan Krueger with KBW.

I had a question on banker's sales the meds up and annuity drop up in sales I understand. But was hoping to get more detail on the life insurance side. You had very strong growth there for a number of years and it's dropped off in the last of couple quarters. Can you talk about what's going on there?

Sure Ryan this is Scott. The primary drop off in NAP is related to a smaller premium per policy. We had the last couple of years some opportunities to expand our larger case [UL] business and we kind of did a lot of that and took some low hanging fruit and cross selling into some current household. And we're seeing that taper off a bit replaced with more traditional life, so the combination of fewer larger case index [UL] sales offset by more traditional life is causing kind of the premium per policy. So on a policy count life sales still looks pretty good. But on a premium per policy and on overall premium basis we've seen a degradation there.

Ryan well first of all good to have you back on the call and in coverage so thank you for that. And with this it's somewhat ties into the earlier question on sales and how do we measure growth were undeniably serving more customer selling more policies be it life or otherwise is all in all a good thing. And we're meeting the needs of that customer with the rate size and policy the rate premium that hopefully bodes well for them to have wallet as well as confidence to buy other products from us and or refer others to us.

And then Washington National, are you increasing your new business pricing on the cancer product given the higher claim trends and do you expect that to have an impact on sales?

We haven’t done that we did introduce newer forms of polices a couple years ago but that isn't the case right now.

And with those newer polices Ryan what Erik replied earlier on the limits. I mean those have the multiple limits daily, monthly, annual so we were quite confident that helps to mitigate the risk and it's price to reflect the benefits that are offered.

And those products began introduction in middle of '13 and fully introduced in '14. So we've had those policy forms have been what we've primarily been selling since that point.

And then last one, I don’t know if it's intentional or not. But you in previous quarters had an ROE target slide of 9.5 and then 10% asset to recap you had some headwind obviously and watched the national benefit ratio. You didn’t mention an ROE target this time, do you still feel like that 9.5% to 10% is a good range for 2017 or you're pulling back from that a bit?

No we're not pulling back from it Ryan, this is Erik, it remains our guidance. We executed on the recap but I would say about the recap scenario that we put out there was assume sort of an immediate deployment of the net proceeds or excess capital that was at the holding company. So that’s where you really got a large proportion of the benefit accretion in ROE. We've not done that yet so as you can tell we're sitting on roughly $200 million of excess capital. The reason for that is not that we don’t feel like we can't go out and buy more stock we certainly can we did increase our repurchase guidance range by $100 million and increased our common stock dividend in May. So we're returning up pretty decent chunk of capital to shareholders already probably the largest and the life insurance sector if I'm not mistaken. So we like to have sort of the flexibility and dry powder available at the holding company to be opportunistic. So something we talked about on prior calls is been actively engaged in M&A, so that's something to have a little extra cash on-hand in a position to execute on that, part of it could be to be opportunistic to buy more stock than what we've guided to, so that would be another opportunity for us. So no change to that what we're looking at for in terms of ROE, we're going through our planning process. We kicked it off your as is customary. We would look to update you all in the streets towards the end of the year as is customary.

Your next question is from the line of Dan Bergman with UBS.

Maybe just another question on the Bankers Sales, but segment sales down 2% to 3% year-to-date, it seems like your revised full year 2015 guidance was down 3%, didn't imply that any positive inflexion in the second half of the year be modest, if any, given the improved accrued the recent quarters I'd expect to the paces might be somewhat higher, so any color on what factors are keeping the improved recruiting from translating to a more robust sales outlook would be helpful as well as any thoughts on when these headwinds might abate and sales growth segment going to improve?

Sure Dan, recruiting started to pick up in the fourth quarter of last year and we typically take six to 12 months to get a new recruit up to higher productivity level. And if you look at in the appendix, look at our productive agent counts, you'll start to see that quarter-over-quarter second quarter versus first quarter that we started to see an improved growth, slight growth, in the average productive agent count. We do expect to see some of that fourth quarter productivity coming through, it's hard to say though given the importance of the Medicare season which occurs largely at the beginning or at the end and throughout the fourth quarter. So, while we're optimistic that some of the fourth quarter and early first quarter recruits will start to show some improved productivity and start to stabilize results, that's kind of wider range, right, we're down 2% to 3%, we're forecasting a range of flat to negative 3. I think the flat assumes that we gained some of that benefit and that gets us to overcome what we experienced in the first half of the year. And the low end of the range assumes that we don't.

Yes, Dan, this is Ed, just to add that on the Medicare season, again with our focus on serving the customer and not pushing meds sup over med advantage or vice versa, that's the other delta here that is hard to tell as what rolled this enrollment season bring, certainly last year's enrollment season med advantage was favored by more customers than meds sup. We haven't expected or projected any material change in that, so that could a delta either way that factors into our guidance.

Maybe seeing with Bankers the Medicare supplement benefit ratio was favorable again this quarter similar to the strong results you had in recent periods, any additional color on what's driven the favorable claims trend that would be really helpful, I mean I know you kept your guidance range unchanged, but any thoughts on how likely you think this trend might persist that?

I mean I think roughly 69% is generally in line with guidance. We put a 70% range out there so I view that as being in line.

Your next question is from the line of Colin Devine with Jefferies.

Just a couple of questions to follow up on Washington National, is there anything that you can do retroactively to address the portion of the block that you're having the adverse experience on and just to confirm that's about 25% of block was first collection? Second, Ed, in terms of getting accelerating the ROE improvement on the M&A front maybe you can just give us a bit of an update on your current thinking in terms of where you might like to add to CNO?

On the Washington National supplemental health certainly rate increases is one potential lever that we have there also how we manage claims to make sure that the dispensation of oral chemotherapy is in line with protocols is another thing there. As far as M&A, we continue to look for things that fit in with and augment our middle market strategy at the same time we're very cognizant of trying to more fully utilize our non-life NOL and in that expanding our reach and diversification. So different distribution type of entities lead generation type of entities, asset management type of entities tend to be closer to the top of the list there and with that again focused on the middle market and staying close to our core.

And then one follow-up, with respect to long-term care and the margin testing, is my memory correct when we went through this last year that I think the positive margin was less of 100 million and I assume you did factor as you laid out some expectation of rate increases you mentioned you're part way there, could you just refresh us where the interest rate assumption was when you did the testing last year because I think it’s fair to say investor concerned over, how this is going to shake out the shares is weighing on the stock a bit.

Colin this is Erik I can answer that question. So the margin at year end 2014 was a little north of 100 million, I believe it was a 110 million. We did factor rate increases into that margin. It was approximately $230 million which offset some of the morbidity hit that we took when we took that extensive claim study. In terms of investments and money rates we had assumed new money rates of 550 and then increasing over time to 650. So that’s the one area that we’re continuing to watch I think we’re doing okay this year so far. We are expecting rates to increase over time. So that is embedded in loss recognition testing. So we'll just have to see how that plays out.

And just to clarify again if memory serves me right, you only factored in rate increases looking at over the next six months to a year unlike some other companies who might have gone much further out, was that fair?

That’s right. We factored in one round, the round that we’re currently following for and that said to remind everybody we were seeking rate increases of 30% to 40% on roughly half of the block and assuming roughly a 40% success factor. So that equated to roughly a 9% overall increase in premiums.

Yes, the other think Colin I’ll add is that we mentioned claims, management process improvements that we’re working on as well. No benefits from that were factored into our margin testing at the end of last year.

Your next question is from the line of Humphrey Lee with Dowling.

First of all thank you for providing producing agent count in the appendix is helpful. But looking at the numbers there just a question about the second year agents trending down. Like first year we seek out a little bit of a gradual picking up for the past several quarters while this three year plus has been stable. But the second year agents seems to be kind of trending down is it just simply the kind of little bit of rolling off people after the first year not doing so well and then stop pursing this as a career. And is that the case, is there any plan to kind of revitalize the productivity for the second year agents?

Humphrey this is Scott. It’s a good question, second year agent count is an area of opportunity for sure and what you’ll typically see is as you see an increase in recruitment generates the decrease in retention of second year agents but having said that what we’d like to be able to do and the number of initiatives that we have been working on beginning in ‘14 and they’re just starting to rollout are really targeted to give agents more tools to improve agent productivity. First year agent productivity is largely around the initial training, getting successful some of the basic products and I think we have good systems and processes in place already. I think a lot of the tools that we’re investing in, digital tools, mobile tools, customer relationship management tools are really targeted to the second and third year so the developing agent, so they can better manage their business and get over that what we refer to it as a soft more slump in the business as you’re absolutely right that second year is tough and the more people we can pull through and allow to enable to be successful in second and third year. The much better we’re going to be improving our overall agent for size and through improved retention of those developing agents.

Humphrey, the other thing to keep in mind is the absolute number is important, don’t get me wrong but we also look at the percentage that represents how many first year agents made it to the second year. So when you have lower recruiting like we did in the second half of last year the second year absolute number is likely to remain lower than the past few just because of the sample or the size of the population that can even go into the second year. So the success rate percentage is something that’s quite important that we monitor.

And maybe a question for either Ed or Erik, just maybe a reminder to us what is your buyback philosophy and how price sensitive with respect to your buyback program? Especially given where your stock has been today.

Yes I think what we've said in the past is we are certain two screens. We are price sensitive and so we will buyback more when the stock is trading below book value or further way from intrinsic value. And lesser the trade closer to intrinsic value and then the caveat that we always put out there is that our buyback of guidance is absent compelling alternatives. So we think that return on our stock is pretty good and has that stock trades lower it's even better. But we also are time and in fact that we need to grow the enterprise and our other investments that we need to make to drive growth to create value for shareholders apart from just buying back the stock.

And just one last question, so Ed mentioned about being cognizant about utilizing the non-life NOL when you're thinking about M&A. Can you maybe give us some color or an update where do you see opportunities in setting non-life NOLs utilizations.

One is going the enterprise even if it's growing the life side. We can carry over 35% of life income, also of course growing the life side and the assets related to it. We generate non-life income through the management of the investments supporting the life companies. So that’s another example another is we talked about a few times today the fee income that bankers life agents generate by selling endorsed third party products like Medicare advantage and growing that. The other opportunities really come more back to my M&A answer that to the extent that we can find properties that help expand our reach and grow us but also have characteristics like PMA that’s wholly owned and is a non-life entity making a process distributing products for us if those kinds of things that we're putting more at the top of our list than looking at M&A.

So you mentioned that the fees income that you generated from selling the third party Medicare advantage products would be considered as non-life income. So in that case willing the economic value for selling those fee based third party products would be more attractive than selling your Medical supplement and Medicare and supplement products at least based on the utilization of NOLs.

Not necessarily because with Medicare supplement where we take underwriting risk we have more sources of profits with a product where we take, we manufacture and take the risk. Now that said the economic value of sales like med advantage in the fee income that’s a key part of what we're looking at is that how do we define growth of the enterprise as oppose to simply using new annualized premiums because obviously it's quite clear again this quarter sales of med advantage and other products like PDP don’t get into that number at all.

Your final question is coming from the line of Sean Dargan with Macquarie.

Want to stay on NOL for one moment. Ed since you’ve got to the company whenever the topic of selling CNO has come up, I think the standard answer has been that you have tax benefits that would not transfer to a buyer under a change control. I think you’ve used up most of the life carry forward do you still think that’s really something that’s holding back. And specifically ask given recent events and the fact that I think bankers is in particular an attractive property that comes with its own distribution.

We don’t comment on M&A specifically that way. But I'll say in one way certainly the fact that we’re utilizing more the NOL that get smaller if it is detriment it's less of the detriment. The other thing is that NOL if there was an acquisition it's doesn’t totally disappear how much of that could be used by the acquirer depends on two important factors, and one is, the price paid so the fact that our stocks resume in the last several years and we’re trading in the $4 billion market cap makes a big difference versus several years ago and then the other factor which hasn't really changed much in the last couple of years is long-term government interest rate, but there again those are two important factors that go into determining how much of any NOL could be used by an acquirer.

And we have no further questions.

No more questions. Operator is that what you said?

Yes sir. There are no further questions

All right, thank you everyone for your interest in CNO.

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