CNO Financial Group, Inc. (CNO) Q1 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Chrystal and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2016 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Mr. Adam Auvil. You may begin your conference.

Good morning and thank you for joining us on CNO Financial Group's First Quarter 2016 Earnings Conference Call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Erik Helding, Chief Financial Officer; and Gary Bhojwani, President. Following the presentation, we will also have several other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday's press release. You could obtain the release by visiting the Media section of our 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 on May 4. Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between first quarter 2015 and first quarter 2016. And with that, I'll turn the call over to Ed.

Thanks, Adam, and good morning. We are pleased with our first quarter results and encouraged by the signs of growth in our business. We recorded consolidated NAP growth of 2%, driven by continued strong results at Colonial Penn which was up 14% and a rebound in sales at Washington National which grew 4%. Bankers Life sales were down 2% for the quarter. However, agent recruiting is stabilized. Improved sales and continued strong persistency resulted in collected premium growth of 11% along with 1% growth in policies in-force and 2% growth in annuity account values. Operating earnings per share excluding significant items were $0.26, down 13% over the prior year, due primarily to relative weakness in alternative investment results. We continued our solid track record of returning capital to shareholders. During the quarter, we repurchased $90 million of common stock and paid $13 million in dividends. We recently announced a strategic investment in Tennenbaum Capital Partners. TCP is a proven asset management firm with a solid long-term track record. TCP will continue to operate on a standalone basis with CNO having representation on its management committee. This minority stake and commitment to invest approximately $250 million over time to TCP's various funds provides access to skill sets outside of our core competencies and further diversifies our sources of income and are well suited to support our longer duration lines of business. Finally, these investments will increase non-life income and allow us to more fully utilize our valuable tax assets. Turning to Slide 7 and our segment results, Bankers Life recorded NAP of $60 million in the quarter. This is down 2% resulting from a decrease in life and Medicare supplement sales, partially offset by higher sales of annuities and long-term care plans with shorter benefit periods. Collected premiums were up 13%, reflecting an increase in annuity sales and strong persistency in our Medicare supplement and life blocks. Annuity account values on which spread income is earned increased 2% to $7.6 billion. Total policies in-force increased 1% including a 10% increase in the number of third-party policies in-force. New agent recruiting was encouraging for the quarter, and while recruiting pressures remain, the processing technology investments made last year are positively impacting results. The average number of producing agents was down 6% but the impact was largely offset by a 4% increase in productivity. Third-party fee income which is primarily derived from the sale of Medicare Advantage plans was up 13% on a trailing four-quarter basis driven by higher persistency. Turning to Washington National, sales were up 4% in the quarter. Worksite sales increased 27% driven by PMA and reflecting investments we have made in new agent recruiting, field leader development and geographic expansion. Individual sales were down 7%. We recently restructured the field organization to drive greater accountability and new household acquisition, and anticipate improved results for the rest of the year. The average producing agent count at PMA was up 9% in the quarter with an increase in worksite agent recruiting and retention. Lastly, Washington National supplemental health collected premiums were up 6%, reflecting steady sales and persistency. Moving on to Slide 9, Colonial Penn posted 14% NAP growth in the quarter, achieving record quarterly sales of $24 million. Sales results in the quarter were particularly impressive coming on the heels of 26% growth in last year's first quarter. The positive results in the quarter were driven by higher lead generation and continued success in direct mail and digital activities. Also, sales productivity was higher despite a more challenging direct response TV advertising environment. Collected premiums were up 8% due to continued growth in sales in in-force. First quarter EBIT was a loss of $7 million, reflecting higher seasonal television advertising spend. In-force EBIT was $13 million in the quarter, up 20% from the prior year, due to the continued growth in the block. For the full year, we expect Colonial Penn EBIT to be in the breakeven to $6 million range. The somewhat wider range reflects ongoing uncertainty relative to how the U.S. presidential election will impact the cost of television advertising for the rest of the year. I would like now to briefly comment on the recently issued Department of Labor Fiduciary Standards Rule. CNO like the rest of the industry is conducting a detailed review of the ruling and its implications, and while we are not in a position to definitively state if and how this will impact our business model when fully implemented, the diversity of our distribution channels, products and robust compliance culture give us confidence that any disruption should be limited. With that, I'll now turn it over to Erik to discuss our financial results. Erik?

Thanks, Ed. CNO posted first quarter operating earnings per share excluding significant items of $0.26. While this was down from the first quarter of 2015, these results were largely in line with our seasonal expectations. First quarter 2015 results benefited from significant outperformance on a number of fronts, while the current period was impacted by lower returns in our alternative investment portfolio. I'll discuss this in more detail on the following slides. Operating return on equity excluding significant items was 8.3%. ROE has stabilized over the past several quarters as tailwinds related to strong persistency have been largely offset by more moderate levels of sales growth and continued low interest rates. Cash flow and capital continue to be strong. Consolidated risk-based capital was 441%, down 8 points from year-end. We posted statutory operating income of $80 million and recorded net realized losses of $10 million. Dividends with the holding company totaled $89 million. Holding company cash and investments were $375 million, compared to $382 million at year-end. We sized our excess and deployable capital at $225 million and remain committed to effectively deploying that capital over time. As you may recall, we have been expecting to fully utilize our life net operating loss carryforwards in 2016. We expect our life NOLs to be fully utilized in the second quarter and we will begin to pay cash taxes in the third quarter. Consistent with prior disclosure, we expect this to impact quarterly cash flows by approximately $15 million. We repurchased $90 million of common stock at an average of $16.88. This compares to $54 million repurchased in the fourth quarter at an average price of $19.18. We often talk about being price-sensitive and opportunistic with our stock buyback program and the first quarter was a good example of that discipline paying off. For 2016, we expect to repurchase $275 million to $375 million of common stock. Turning to Slide 11 and an overview of our segment earnings, our alternative investment portfolio underperformed in the current quarter and significantly outperformed in the prior year. This contributed to a $7 million swing in income for the Bankers segment and a $3 million swing in the Washington National segment. In addition, corporate segment earnings declined by $3 million versus the prior year due to a market value change in our COLI investment. Income in Bankers Life was also impacted by significantly favorable Medicare supplement claim experience in the prior year, compared to performance in the current quarter that was in line with expectations. This resulted in a $7 million reduction in earnings. Colonial Penn posted a loss of $7 million, a slight increase than the prior year, due to increased advertising spend to drive continued profitable growth. Turning to Slide 12, overall health benefit ratios were in line with expectations. Our Bankers Life Medicare supplement business posted a benefit ratio of 71.1% and we continue to expect this ratio to be in the 70% to 73% range for 2016. Our Bankers Life long-term care interest adjusted benefit ratio was 75.3% on a reported basis. Current quarter results benefited from approximately $8 million of reserve releases related to shock lapses associated with the current round of rate increases. Excluding the impact of shock lapses, the interest adjusted benefit ratio was 82.4%. We continue to expect this ratio excluding the impact of shock lapses to be in the 81% to 86% range for 2016. Washington National supplemental health interest adjusted benefit ratio came in at 57.7% and we continue to expect this ratio to be in the 56% to 59% range for 2016. Turning to Slide 13 and our investment results, we put money to work at 4.9% in the quarter. While spreads were wider in the early part of the quarter, lower treasury yields and the aging of the credit cycle made us reluctant to take on more risk in search of yield. Call and prepayment income was down sequentially from the fourth quarter but was slightly above the prior year. Gross realized gains and losses were elevated as we proactively moved to reposition our portfolio away from energy, CMBS and emerging markets. Lastly, impairments moderated and we're limited to two securities totalling $10 million. With that, I'll turn the call back over to Ed.

Thanks, Erik. CNO's management team is committed to achieving our 2016 priorities and longer term objectives. At the top of the list is reenergizing growth at Bankers Life and Washington National including the national rollout of the Bankers Life broker/dealer and registered investment advisor later this quarter. Despite headwinds, we remain committed to increasing ROE over time. Though we will begin to pay cash taxes as Erik said in the second half of the year, we expect capital generation and excess capital deployment to remain robust. We will continue our holistic approach to managing our long-term care business and remain committed to reducing our relative exposure over time. We recently announced two executive leadership changes aligned with our commitment to profitably grow and deliver. First, I'd like to congratulate Erik on his promotion to Chief Financial Officer. Rewarding key talent and promoting from within the organization are core tenants of our culture at CNO. Erik earned this promotion and has made valuable contributions to finance and the Company and we're confident that he'll continue to be a key leader in driving shareholder value. Also, it's with great pleasure that I welcome Gary Bhojwani to CNO. Gary is a proven insurance executive. His expertise and leadership will be invaluable in profitably growing our businesses. I look forward to working closely with Gary over the coming years to continue to improve our execution, achieve our strategic objectives and grow our Company. Before opening the call up for questions, I'd like to have Gary provide a few comments. Gary?

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

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

[Operator Instructions] Your first question comes from the line of Randy Binner from FBR.

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

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

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

The amount that we paid was not disclosed, Randy.

Okay. I guess I'll take it from that it's not a material amount?

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

Okay. And then I guess on DOL, I heard your comments to say that it's not super impactful for CNO and probably mostly because, I'm just looking for affirmation that we got this right, about 90% of your products simply are not covered by the DOL Rule at all, and for products that are, captive distribution can proceed as it did before, there's possibly some further disclosure and compliance procedures you have to follow for products that are in the impartial conduct standard under 8424, is that the right way to add a little detail to that?

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

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

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

All right, understood. Thank you.

Your next question comes from the line of Erik Bass.

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

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

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

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

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

Yes, sure. I have the view or at least I believe I have the view that corporate credit is priced pretty strong right now and that the balance of the risks and the rewards while continuing to grind forward day over day and the technicals are very strong, I think viewed from the long-term which is what we do here, the balance of risk and rewards are not against the investor at this point in the market. And so over the last six months, I think we've been somewhat methodical about assessing our different areas of more riskier assets and making sure that we would be positioned how we want to be beginning in the fall last year with CLO mezz and CMBS mezz and continuing into this year with high yield, corporate high yield, as well as high yield energy and energy generally elsewhere in emerging markets. We've been very methodical about getting I'll say the higher risk credit areas into positions for the long-term that we want them to be in while at the same time not doing damage to the Company's earnings stream and book yield and all that. So it's been a very methodical process and everyone has worked very hard and I think making good judgements and I think we'll be positioned, when the credit cycle turns as it ultimately will, I think we'll be one of the few companies out there that will be profitably positioned to take advantage, which is what we want to be. And so while for now that involves a certain amount of discipline and patience, I think in the long-term that will serve us well.

Great, thanks, appreciate it.

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

A question about Bankers sales on a full year basis, while it's too early in the year, but with your first quarter in the books and some of the initiatives that you are taking place, do you think like achieving a positive sales growth at Bankers for this year will be feasible?

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

Okay. And then in terms of the implementation of rate increases for your long-term-care block, can you kind of suffice the portion of the book that you have gone through in terms of rate increases so far and especially the portion in the first quarter?

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

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

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

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

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

Yes, I'm happy to actually, and let me – I'll do it a little [indiscernible] and you can extract from it what you want, but our exposure is probably around $170 million in total. That would be divided up in the following rough proportions. Somewhere around 40% hedge funds and residual 60% being in a combination of credit, private equity and real asset strategies. Now I will tell you that the performance during the quarter was reasonably as expected across the great bulk of those strategies but was not in my mind was not sufficient in the hedge fund strategy, largely for two or three identifiable reasons. Most of the long/short strategies were highly correlated to kind of a long growth-short value trade which just was upside down for the quarter. The second factor would be value, which has extracted some difficulty. And the third factor was [Europe] [ph] stocks, particularly early in the quarter. So if you talk, that category lost basically between $3 million and $4 million for the quarter. That is the entirety of the matter we're discussing here today. And I hope that gives you some background as to what we're talking about. Now in my mind, we do have some work to do. I think as reflecting those allocations, some of the individual fund allocations underneath that and getting it exactly how we want it to be, and that work is not going to happen overnight. The nature of the asset class is it's not on an hotwire market, it takes time to rebalance, and this is going to take a quarter or two, but I'm very confident that in the longer run it will work the way we want it to work and it's never going to produce steady coupon like returns, it's not what it's intended to do, but we'll get it to where over a reasonable period of time it's producing more predictable returns. First quarter of last year was a great quarter, generated on a basis of about $7 million in profit on a much lower basis of assets coupled with big realizations on hedge funds near the end of their lives, compared to this quarter the hedge fund results created that comparison. Be that as it may, we realized that we have a little bit of work to do in this area and we'll reflect some urgency about it.

Your next question comes from the line of Steven Schwartz with Raymond James & Associates.

Got a few, but first as a follow-up to the discussion of alternative investment income or lack thereof, is it accurate that the majority of the shortfall and therefore the majority of those assets are housed in Bankers Life?

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

North of two-thirds, okay. Thanks. And then moving on to a couple of sales things, I'm just looking at the Page 13 I think it is of the presentation, the producing agent counts, and it's interesting to me that the agent count, total agent count for Bankers Life was up significantly from the end of the year and 9/30 but the averages were pretty much unchanged. Was a lot of that addition very, very late in the quarter?

We definitely built momentum in the quarter, Steve. I don't have the exact month by month breakdown available.

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

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

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

Okay, got that and realize that. Okay, and then one more, Erik, we discussed this last night but I'm wondering if you got a handle on the operating expenses, the other operating expenses at Bankers Life, they were up $5 million from the fourth quarter?

Yes, that's true. We do see some seasonality in the first quarter of the year. I think you'll notice if you look year-over-year, the numbers seem pretty comparable. There's a couple of things at play here. The biggest is probably related to funding of our field spending plan. We do that in the first year we make a contribution into their accounts. That allows them to sort of get a jumpstart on lead generation, recruiting activities, so on and so forth. So that was about $3 million of it. The rest of it is just incremental on either one-time expense, we had some higher guarantee fund assessments, maybe $0.5 million, and some additional expenses associated with launching and building out the broker/dealer and registered investment advisor and that's probably about $1 million but that would continue going forward.

Your next question comes from the line of Yaron Kinar with Deutsche Bank.

Couple of questions. First on the productivity gains in Bankers Life, are those originally driven by the growth in the annuity business?

Yes.

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

I think the short answer, Yaron, is no and some of the main reasons for that is, number one, these annuities are sold through our Bankers career agents. They are not selling away to other companies for basis points of either commission or credited rate. Secondly, we're selling to middle-income Americans. Our average annuity contract is in the $45,000 range. And so not that there couldn't be risk if rates rise and some policy holders decide to take their money and put it elsewhere, but given the relative size being small on average for our middle-income customers, that helps to mitigate that risk as well as continuing relationship of the Bankers' agent with their customers.

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

Okay. And in terms of free cash flow generation?

Interest in general?

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

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

Okay. And then a follow-up question from Eric Johnson. I think you had mentioned that basically you're looking for ways to derisk the portfolio a little bit on the hedges and especially I guess in the energy business or energy portfolio, emerging markets, maybe some of the CMBS, where are you seeing opportunities though where you're increasing leading?

Good question. I mean we have had over the last couple of quarters we have continued to produce new money rates roughly in the 5% range, which suggests that we are continuing to find ways to make sufficient margin for the Company. And so we've been doing a lot of work in the RMBS, non-agency, esoteric ABS, kind of up in structure in CMBS, IG Corp. financial areas, those are all areas where we've been kind of very tactically doing pretty well. And for example, and this is not a little bit of a factoid, last year we probably added roughly 2% or 3% of our assets in the non-agency and consumer ABS area, which is a good diversifier for us away from corporate credit risk. It falls in nice places on the curve and where it falls on the curve is kind of in the intermediate space, offer us a much better spread and spread against risk to corporate. So we've been very methodical and very tactical about meeting the Company's needs, but at the same time recognizing distinct corporate credit has just had such a great run and certainly with what's going on at the ECB and just with the technicals recently, you get the points where it just in the long-term doesn't reward you. So that's I think is all kind of coming true.

Got it, that's very helpful. And then maybe one quick one, where should we look for TCP's results once they are reported?

This is Erik. They will be reported within the Bankers Life segment. It essentially will come through as investment income.

Okay, thank you very much.

The next question comes from the line of Ryan Krueger with KBW.

Erik, you just touched on this a little bit in terms of some of the seasonal expenses in Bankers, but I think you also tend to have higher [documerization] [ph] in the first quarter in Bankers and maybe a little bit in Washington National. So I'm just wondering that if you had any sort of rule of thumb on how to think about kind of the seasonality that occurs in Bankers and Washington in the first quarter versus the rest of the year?

Sure, Ryan, good question. So there's definitely some seasonality. We talk usually mostly about Colonial Penn which I think is very widely understood now, but there is definitely some seasonality as you know in Bankers Life in a couple of different areas. First, mortality in general, that tends to be couple of million dollars elevated on the life side for us. And then the amortization as you noted is definitely higher, and this relates to the fourth quarter, the prior fourth quarter's annual open enrollment period where people are selecting Medicare Advantage or Medicare supplement plans the become effective on 1/1 of the following quarter. So we record the lapses in that quarter and adjust amortization accordingly. And for Bankers, that's roughly, if you were going to flash backwards or flash forward into the second quarter, that's probably about $5 million differential in amortization.

Got it, thanks. And then you had mentioned there's another $3 million of higher operating expenses in the first quarter from…

Yes, that's correct, yes.

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

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

Okay, thanks, and apologies for missing that answer before.

The next question comes from the line of Michael Kovac from Goldman Sachs.

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

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

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

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

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

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

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

No.

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

All right, thanks Chrystal and thank you everyone for your interest and support of CNO.

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