CNO Financial Group, Inc. (CNO) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Adam, and I will be your conference operator today. At this time, I'd like to welcome everyone to the CNO Financial Group, Inc. First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Jennifer Childe, Vice President, Investor Relations, you may begin your conference.

Thanks, Adam. Good morning and thank you for joining us on CNO Financial Group's first quarter 2019 earnings conference call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Paul McDonough, 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 cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K earlier today. We expect to file our Form 10-Q and post it on our website on or before May 6. 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 from those contemplated by the forward-looking statements. Today's presentations contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout the presentation, we will be making performance comparisons and unless otherwise specified, any comparisons will be referring to changes between first quarter 2018 and first quarter 2019. And with that, I'll turn the call over to Gary.

Thanks, Jennifer. Good morning, everyone, and thank you for joining us. Turning to Slide 5, I'd like to start today's call with a brief discussion of the acquisition we announced yesterday. Web Benefits Design or WBD is a leading on-line benefits administration firm based in Orlando, Florida that focuses on small and midsize employers. It has a best-in-class proprietary technology platform for employee benefit programs that allows WBD to provide its clients with a customizable suite of administration, compliance and communication solutions to manage employee benefits programs including insurance. WBD grew its employer client base in excess of 100% over the past 2 years. We expect the acquisition to accelerate the growth of Washington National's worksite business. Worksite is already one of our fastest growing higher multiple businesses. The transaction adds full service employer benefits administration capabilities and cutting-edge benefits technology to CNO and Washington National. This competitive advantage strengthens our value proposition for both new business and existing employer group retention. Washington National's insurance products will be made available to WBD's 1,000 employer customers with more than 250,000 employees alongside their current insurance carrier options. Armed with WBD's technology, our agents will now have access to employer partners that were previously out of reach due to the lack of a sophisticated benefits platform offer. This acquisition also creates numerous cross-sell opportunities for both companies. WBD's 200 affiliated brokers will be able to sell our insurance products, while our agents will provide an additional distribution channel for WBD. WBD employs a profitable recurring e-based model, that typically bills employers on a per employee per month basis. These revenues will add to our existing high return fee based businesses that will help improve our ROE. The transaction allows us to utilize our valuable non-life NOLs. The purchase price of $66 million was funded out of holding company cash. It represents less than one quarter of free cash flow. There is an additional earn-out, which is contingent upon the achievement of certain financial targets over the next several years. The acquisition is expected to add a $0.01 per share in 2020, with further improvement in 2021 and beyond before consideration of any revenue synergies. Besides providing a good understanding of the attractiveness of the WBD model, I want to underscore that this transaction aligns well with the M&A playbook we've been sharing with you over the past few quarters. This is the type of opportunity we may consider again in the future. It is by most measures, small yet strategic. It is a bolt-on business that fits squarely in our target of serving the middle market. It is accretive within 12 months, adds an existing revenue stream, and did not require incremental debt or other external financing. Finally, it helps scale the business, enhances our technological capabilities and poses limited execution risk due to the manner in which we structure the transaction. Importantly, we funded this transaction in the second quarter with holding company cash, even after purchasing $47 million of stock during the first quarter. Now, let's move on to our quarterly performance. Turning to Slide 6, we're off to a solid start in 2019 with operating earnings per share up 8% on an apples-to-apples basis, reflecting strong underwriting and investment performance. We continue to execute well against our strategic priorities, which are growing the franchise profitably, launching new products and services, expanding to the right, and deploying excess capital to its highest and best use. Turning to Slide 7, for a review of the growth scorecard, our first quarter production remained strong. In fact, this was the third consecutive quarter that all growth scorecard metrics were up. Life and health NAP grew 2%, and annuity collected premiums were up 25%. Total collected premiums within our operating segments increased 7% in the quarter. We continue to launch new products, which I'll talk about more in a few moments, while our investments in technology are driving further improvements in productivity. Turning to Bankers Life, I'm very pleased with the continued benefits we're seeing from the investments we made over the past few years to stimulate growth. Agent recruiting and retention initiatives help drive a 3% increase in our producing agent count, as well as continued improvement in first year retention. This marks the third consecutive quarter we realize growth in our producing agent count. Our approach remains to recruit fewer more productive agents, which is translating to stronger sales and better overall retention. Our expand to the right strategy to reach slightly younger wealthier consumers within the middle market is also progressing. Annuity sales, which are typically sold to a wealthier consumer, were up 25% and the average policy face value was up 5%. The asset value of our annuities is now $9.5 billion. And they serve as the largest driver of our earnings. We view our growing annuity block as an attractive element of our story. Our annuities are simple in design and easily understood by our consumer base. They do not contain a roll-up rate or benefit base and 72% are within their surrender period. Our guarantees are fair but modest, and we achieve a spread that allows for a robust return on our annuity book. Due to strong persistency, they also add a robust and stable earnings stream. Currently 14% or 1 in 7 of our Bankers Life agents is duly licensed as a financial advisor, an insurance agent. This is up from 1 in 8 last quarter. This is important since financial advisors were responsible for more than 52% of our annuity sale this quarter. Our broker dealer and registered investment advisor businesses also continue to grow nicely. As the market recovered from the fourth quarter volatility, client assets increased to $1.2 billion, up 20% year-over-year. As I've shared before, consumer relationships tend to be stronger, when we can provide income and retirement solutions in addition to protection products. Our ability to serve both the income and retirement needs of our middle income consumers remains a key differentiator. Life insurance sales at Bankers Life were down 15% for the quarter. A significant portion of the decline is attributable to the modification of underwriting guidelines in late 2018. We continue to refine the underwriting in order to strike the right balance between sales and margins. We are also seeing a general shift in sales from larger life insurance cases to annuities. These trends are consistent with the demographics of our target market. Health NAP was up 1% overall. An increase in short-term care sales was largely offset by a decline in Medicare supplement sales, as we continue to see a shift in sales to third party Medicare Advantage products. Medicare Advantage sales were up 36% in the quarter, which demonstrates that we are gaining traction in the Medicare market. As a reminder, these sales are recorded as fee income and not included in NAP. We are comfortable with this shift, because sales of Medicare Advantage require less capital, allow us to utilize our non-life NOLs, and open up households for future cross-sell opportunities. Most importantly, we serve consumers in the manner that best suits their needs. Moving on to Washington National, overall sales were flat in the first quarter, as worksite strength was offset by weakness in our individual business. Worksite sales were up 24%, marking the fourth consecutive quarter of double-digit growth. Worksite now comprises roughly 50% of Washington National sales. We expect to enhance the growth and profitability of this attractive business line with the addition of WBD. The worksite performance in the quarter was largely attributable to the various growth initiatives discussed in previous calls, including geographic expansion and product portfolio diversification. Building on the successful 14-state geographic expansion program launched in 2018, this quarter we commenced sales activity in 6 additional territories that were previously underpenetrated. Overall, the market penetration remains in its early stages, leaving significant future potential as we build out these regions. We also remain pleased with the cross-sell initiatives and efforts to diversify the product mix. Strong momentum in life sales continued with first quarter sales up 78%. Life sales comprised 13% of our overall sales mix in the quarter, up from 10% in 2018 and 8% in 2017. Our individual consumer business was down 15% in the quarter. These results were disappointing, but not surprising. The farm and rural communities served by this business have faced considerable headwinds recently from the uncertain macroeconomic environment and natural disasters in key production states. We are rebuilding this business using key learnings from the successful agent pilot at Bankers Life. However, we expect a continued decline in sales through at least the end of 2019. Turning to Colonial Penn. Colonial Penn delivered another strong quarter of performance. Sales were up 20%, marking the third consecutive quarter of double-digit growth. In keeping with recent trends, growth was largely driven by increases in cost effective marketing spend, sales productivity improvements and the expansion of our lead generation sources. In March, Colonial Penn launched its Living Insurance product combination, which blends its simplified issue life insurance products with the new optional accelerated health benefit writers. Policyholders can act - access up to 50% of their traditional life insurance death benefit as an early lump sum payment if they receive a critical illness diagnosis such as cancer, heart attack or stroke. This product squarely addresses a critical concern among middle market consumers of not being able to access funds that they need to pay for unexpected health related costs. It also supports our expand to the right market strategy by appealing to individuals in their 40's and 50's with coverage of up to $50,000. Living Insurance as Colonial Penn's first new product in more than five years and demonstrates our commitment to product development to address changing consumer needs. It is currently available in 21 states and initial reception has been encouraging. As a national rollout expands later this year, we expected to be a key contributor to our future growth. Before I turn it over to Paul, on Slide 11, I'd like to remind all of you of our capital deployment strategy. We are committed to deploying 100% of our excess capital to its highest and best use. Our goal remains unchanged, the maximized return on invested capital over the long run. We will continue to weigh our options accordingly. We intend to remain flexible and opportunistic with our capital allocation decisions, while being responsive to changing market conditions. As we've demonstrated again this quarter share repurchases, common stock dividends, organic investments and M&A do not need to be mutually exclusive in any given period. I'd like to now reduce our new CFO, Paul McDonough. Paul brings the CNO a wealth of prior public company experience in insurance and retail facing industries. He has an accomplished track record of driving growth and effecting change. We're very pleased to have Paul on board and hope many of you will get the chance to meet him in the near future. With that, I'll now turn it over to Paul to discuss the financials. Paul?

Thanks, Gary, and good morning, everyone. Turning to the financial highlights on Slide 12. CNO reported net income per diluted share of $0.32 in the quarter and operating income per diluted share of $0.41. Adjusted to remove the earnings from the long-term care business that was ceded into Q3 2018 and excluding significant items, operating income per share was up 8% from $0.38 per share in Q1 2018. As Gary mentioned, this reflects solid underwriting and investment results. We continue to experience a fair amount of volatility in our non-operating income, reporting a loss of $0.09 per share in the current period as compared to a gain of $0.06 per share in the prior year period. This reflects unrealized gains and losses related to short-term volatility in the equity markets and interest rates, and does not reflect the underlying fundamentals of the business. Operating return on equity excluding significant items was 10.5% compared to 9.1% in the prior year and 10.3% at December 31, 2018. Holding company cash and investments were $230 million, up from $220 million at yearend 2018. As Gary stated, we repurchased 47 million of shares in the first quarter. CNO's estimated consolidated risk-based capital ratio was 416%, up from 393% at yearend. The improvement stemmed largely from the equity market recovery and an acceleration of our up in quality trade in our investment portfolio in the first quarter, which I'll expand on further in a few minutes. Before moving on to the segment results, I'd like to reiterate at present, our commitment to certain capital and liquidity thresholds remains in line with previous guidance, specifically we will continue to target RBC in the 400% to 425% range, minimum holding company liquidity of $150 million and debt to total capital, excluding AOCI, 22% to 25%. I will certainly take a closer look at these over the next few months in the context of our peers, rating agency views and from our own enterprise risk management perspective. With a more informed view, we may revisit these targets in the future. Turning to Slide 13 in segment earnings. Within Bankers Life, our earnings were impacted by $12 million in reduced income from alternative investments. Absent that decline, net investment income for Bankers would have improved on an increase in invested assets reflecting the growth of the business. Operating expenses within Bankers Life were elevated due to initiatives associated with our agent retention program, higher commissions associated with stronger Medicare Advantage sales and other cost impacts related to timing. The first two are highly correlated to our stronger sales in the period. So we believe these funds are well spent. They will also diminish somewhat in the second half of the year. The third is expected to completely reverse over the course of the year. Washington Nationals' earnings in the period were also impacted by $2 million of lower investment income from alternatives, which was somewhat offset by higher supplemental health margins, as we continue to experience lower levels of incurred claims. Colonial Penn's earnings were essentially flat versus prior year. In-force and earnings excluding significant items grew 16% over the prior year. This was almost entirely offset by higher levels of cost effective advertising spend in the period, which increases current and future period sales. As a reminder, a majority of Colonial Penn's advertising spend is not capitalized and deferred, which impacts short-term earnings. We continue to expect Colonial Penn's full year EBIT to be in the $12 million to $20 million range. Long-term care in run-off earnings were $2.5 million, we expect this segment to report normalized earnings of roughly breakeven, but quarterly results can be somewhat volatile. The prior year period included the earnings from the long-term care business that was ceded in Q3 2018. Lastly, the corporate segment benefited from $15.7 million increase and income from our COLI assets reflecting a $12.6 million gain in the current period and $3.1 million loss in the prior period. Turning to Slide 14 in our key health benefit ratios. Bankers Life Medicare supplement benefit ratio was 72.3%. Adjusting for typically favorable seasonality in the first quarter, we would expect the ratio to increase by a couple points for the balance of the year, all else equal, and to firm our guidance to 73% to 77% in that context. Bankers Life long-term care interest adjusted benefit ratio for the retained block of business was 77.2%. This is within our expected range of 74% to 79% for 2019. As a result of ceding a significant portion of this business in Q3 2018 and the resulting smaller base. We would expect more variation in the benefit ratio from quarter-to-quarter, while remaining within our expected range. Importantly, we expect much less exposure to extreme fluctuations in the long run due to the dramatic reduction in tail risk. I think, it's also worth noting that one point on the benefit ratio on a quarter and just over $60 million of earned premium is worth about $600,000 pretax that clearly not a significant source of volatility in our overall earnings. For those who may not be as familiar with their Bankers Life retained long-term care business. I'd like to take a moment to reiterate a few key characteristics. As we have said in the past our long-term care business is materially different than the rest of the industry. The majority of our sales, our products with benefit period of roughly one year, that's approximately 98% of new sales, benefit durations of two years or less with daily reimbursement caps. In addition, we continue to reimburse 25% of our new business, which we have done since 2008. Washington National Supplemental Health interest adjusted benefit ratio is 53.4% better than expectations due to continued favorable claims experience, while we have realized several quarters of better than expected claims we are leaving our guidance unchanged to 55% to 58% for 2019. You may recall that in the fourth quarter of 2018 we lowered the guidance range by 100 basis points from the previous range of 56% to 59%. Turning to Slide 15 in our investment results for the quarter. Responding to market conditions we have been incrementally moving up in quality since the middle part of last year, which took a much more active approach in the first quarter, taking advantage of the current risk on environment to reduce tail risk in the portfolio. We reduced our allocation to BBBs to 39% from 45% at yearend, a decrease of roughly $1 billion. Our equity investments total $41 million at March 31, down from $291 million at December 31, notwithstanding the positive mark to market in the period. Our CLO equity tranche investment is down to about $100 million from about $140 million, the lowest level since 2013. Income from our alternative investments declined by roughly $14 million in Q1 2019 versus Q1 2018, reflecting an up market in the prior period and a down market in the current period. Recall that we report our alternatives on one quarter lag that the performance we are reporting in Q1 2019 reflects market conditions in Q4 2018, when the S&P was down 13%, while our alternative portfolio was up 2% - excuse me 1% an excellent relative performance. Our new money rate move to 4.45% largely as a result of lower market rates as we made a conscious choice to move up in quality. Overall investment income was impacted by reduced income from our alternatives portfolio, lower prepayment income and to a smaller extent to move up in quality, benefiting from anticipated improvement in our alternatives portfolio in the first quarter. From the first quarter, we expect our earned yields to improve somewhat in the second quarter and beyond although we do not expect to return to 2018 levels. And with that, I'll turn it back to Gary.

Thanks, Paul. We've started the year strong and are executing well against our strategic priorities. Our investments in growth initiatives from the past few years continue to bear fruit. Yet, we remain in the very early stages. I'm excited to welcome Web Benefits Design and its best-in-class technology to the CNO family. The transaction is indicative of the opportunities that we may pursue going forward. I also hope you appreciate that share buybacks and growth are not mutually exclusive. We are investing for the future and believe CNO is well positioned to deliver significant value to our shareholders in the years ahead. Thank you for your interest in CNO Financial Group. We will now open it up for questions. Operator?

Thank you. [Operator Instructions] And your first question comes from Randy Binner of B. Riley FBR. Randy, your line is open.

Hey, good morning. Thanks. I'd like to ask a few questions about the expenses in Bankers. And, I guess, there was some commentary there that the growth related items should normalize throughout the year. And then there's more of a - I think kind of a permanent feature from some newer accounting. So can we dig into that a little bit, because that is probably a pretty big swing factor in how we look at it for earnings. And just wonder stand how some of these expense items might normalize over the course of 2019.

Sure. Hi, Randy. It's Paul. I'll take that one. So expenses year over year were up 15. 5 of that relates to growth initiatives related to our agent pilot program, lead generation and an investment in technology. 5 relates to commissions on our Med Advantage sales, obviously that's offset by the fee income on those sales, which you see in a significant increase in the fee revenue line, and then 5 relates to timing, which will essentially reverse in the second half. Something that I would emphasize, Randy, is that if you look at EBIT year-over-year, the decline is really driven by the decline in income from alternative investments flowing through Bankers in the quarter. And I think that the underlying business continues to be very healthy. And I would point to a couple of things, number one, the health margins that I referred to in my prepared remarks and the continued growth in the business overall.

And then, thank you for that. The first bucket of 5, the growth as a result of agent pilots and IT investments, is that just offset by revenue or does that normalize on an absolute basis?

It will certainly normalize and pay for itself over the long term. I would say that there is some expense that we're incurring in the current period, but isn't necessarily completely offset in the current period.

Okay. Just one more in the segment level and I'll drop back in the queue. In Washington National you said the individual sales will be lower throughout 2019. I just wanted to confirm I heard that correctly. And if it was a product - due to new product underwriting or if there was some other driver of that dynamic if I heard that right.

Yeah, hey, Randy, this is Gary. I'll take that one. You did hear it correctly. Basically, what's going on and maybe I can put this in context. The individual business within Washington National, not exclusively but predominantly consists of business we get from our entity called PMA. PMA markets almost exclusively to rural or farm households. And you've seen in the news all the difficulties that have been faced by that population, everything from weather to floods, to tariffs, all sorts of things. So there's been a lot of pressure on that population. Add to that, frankly, that we need to rebuild our distribution system there. We have not done a good enough job. In many respects, what we have going on at the PMA individual business is comparable to what we faced at Bankers Life a couple of years ago. We need to rebuild and continue to improve that agent channel. So it's a function of the customer they're serving, as well as the distribution. And that's why we think it'll take us a couple quarters to get it sorted out.

Okay. Got it. Thank you.

And your next question comes from Humphrey Lee of Dowling & Partners. Humphrey, your line is open.

Hi, good morning, and thank you for taking my questions. Just referring to the WBD acquisition, in Gary's prepared remarks, you talked about how it may open up to - open up access to some of the clients that you were not able to access to before. Maybe kind of can you talk about like how often did you run into situations that by not having a benefits administration platform prevented you to go any further, like just want to size kind of the market opportunities before talking about revenue synergies.

Yeah. So, Humphrey, this is Gary. First of all, thanks for the question and the ongoing support. We enjoy having you on these calls regularly. So thank you for that. In terms of WBD, maybe just a little bit of broader context, actually first, let me answer the question the way you asked it. I don't have a precise percentage to give you in terms of how many sales we've historically been shut out of by virtue of not having this technology. I don't have that number in front of me. I do want to try and give you a way to think a little bit about this. We have something around 400 agents that regularly sell this business that are currently dedicated to Washington National. WBD has relationships with 200 brokers and 1,000 employer clients. And those employer clients in turn touched 250,000 employees. So the way to think about the cross-sell potential is very simply to first think about the roughly 400 or so agents that we already have that are selling worksite business. And how they're going to try and go to market. And approach new clients that they previously couldn't access, as well as offer these services to existing clients, because it represents a more efficient way for them to handle their benefits administration. And then, we take the Washington National products and put them on the shelf with WBD's other offerings. Now to be clear, WBD maintains relationships with other carriers. And I want to be very clear that it's not our intent to displace all of those. We intend to put Washington National on the shelf next to those and let the consumers and the brokers pick the product offerings that make the most sense for them. That's the best way to think about the two areas of cross-sell. I would remind everybody that the worksite business, even without this has been growing double digits for 4 quarters in a row. If you look out in the space in general, the worksite business is the business that generally gets the highest multiple, when you look at some of the valuations on the Street. So we think that there's an opportunity here to really grow our worksite business in a very dramatic way.

And then, in terms of putting kind of Washington National's products on WBD's existing clients platform, like do you still have to go through the normal sales process to put your products on those platform - I mean, to kind of negotiate with each individual employer clients or it is just automatically in place?

Yeah, the process is a little bit more nuanced than that. One of the first things we need to do is work with the existing WBD leadership to position our products in the right way. They know their brokers. They know their customers and they know what combination of Washington National products and what configuration is going to be most attractive. So we've got to do some work with them to position the products properly on their platform. Then their brokers in turn will work with their clients and pick between Washington National and brand X. So to answer question, it's not an automatic with the clients or the end users, meaning the consumers, will take Washington National products. There's still a fair bit of work to be done to position it on the WBD platform than to be selected by the brokers and then to be positioned with the employers and in turn the employees.

Got it. And if I can sneak one more in. So now with the benefit administration platform in place, do you have any appetite to offer additional group products or something, even true group products on the platform?

So the question, the way you asked it, do we have the long-term appetite. To be honest, yes. But I don't think that's something we're going to work on right away. Right now, I really want to take our existing suite of products and make the most of those. And then, we can talk about other expansions into other types of group products. But I think we've just got an opportunity to make the most of what we have in front of us first.

Got it, really appreciate the color.

All right.

Thanks, Humphrey.

And your next question comes from Ryan Krueger of KBW. Ryan, your line is open.

Hi. Thanks, good morning. I had a question on the investment portfolio. So like, let's take the 20 to 25 basis points uplift in the second quarter would put you around 5.25% earn yield relative to about 5.4% last year, is that the right way to think about it? And is the delta largely related to the de-risking actions that you completed in the first quarter?

Yeah. Good morning. This is Eric Johnson. I think arithmetically you're in the right ballpark. I think, I understand that variable income has significant - in a particular quarter has a pretty significant and even magnified effect on earned yield for the quarter, just by the base of the calculation, and variable income year has a couple of components. The alternative exposures, which we described as well as mortgage prepayments, bond calls, and other calls and prepays in the quarter. And the range of results on calls and prepays can be anywhere from a couple of $1 million to near $10 million a given quarter depending on the direction of interest rates et cetera. And then obviously, we've seen that alternatives income just if you look back over the last eight quarters has ranged everywhere from a couple of million in a quarter into the around $18 million in a quarter. Though you don't have a fair amount of variation in those results if you multiply that by four from an annualizing effect, and you are talking about a pretty good impact on our deal. So I think the round estimate that you can pick up normalize out to roughly up 20 to 25 basis points. But really it would be based on the following things: one, kind of a normalized run rate of calls and prepays that in the kind of the middle-single-digits in the quarter; and then second something in the context of an 8%-ish return on the alternatives portfolio. If those conditions are true then you get to roughly the run rate you described.

Thanks. And then, do you anticipate further de-risking actions from here or they largely complete?

I tend not to want to look too much forward beyond the currently reported circumstances, but if you're asking for my kind of broader view, what I would say is that the markets are - there's not a lot of joy as a - from a bond investing respective pricings in the markets right now with rates and spreads where they are. And I - my personal opinion is that the not getting paid a whole a lot or for risking increments in today's market. So I think up in quality is a pretty easy trade right now. Having said that, I think, we have a very good portfolio that should produce putting aside everything - I just said about variable income, where we can take over very consistent results. And I'm happy with it as it stands today and I think that's what I would say on that.

Okay. Thanks a lot.

You're welcome.

And your next question is from Erik Bass of Autonomous Research. Erik, your line is open.

Good morning. Thank you. Just given the increase in your sales volumes and the shift in new business mix, is there any change in your expectation for statutory earnings and free cash flow? Or should we still think about the roughly $300 million annually is the right target.

Hi Eric, it's Paul. So the $300 million to $350 million of free cash flow generation on an annualized basis that we've reference in the past. I just want to clarify, this is consistent with our disclosure in the K. That is before consideration of capital required to fund growth, organic growth. In 2019, we'll deploy something in the neighborhood of $30 million to $50 million to fund our organic growth.

Got it. Thank you. And then, do you plan to rebuild a whole co liquidity in the second quarter to provide some dry powder for future opportunities are you comfortable running closer to the $150 million minimum target.

Certainly comfortable running close to the $150 million minimum target. I'd also clarify that our RBC target of $400 million to $425 million. I'm comfortable running at the low end of that target as well. So if you think about where we were on those two metrics of March 31. And you adjust for the capital that we deployed in the acquisition of WBD. We've got some capacity in Q2 on that basis. I would also reference my comments in the prepared remarks that we're committed to the current targets, I also want to explore them a bit and really understand them in the context of how we think about our risk profile. As I look at targets of other peer companies, our RBC target in particular appears to be high and there may be very good reasons for that, I just want to understand that better. To the extent that we conclude that there are high relative to our risk profile and we can get aligned with that on - with the rating agencies. There is the potential and I don't want to suggest that that's where it will land, I'm just saying that we'll look at it, and there's a potential that we free up some capital in that context. That wouldn't happen for a while that process would take some number of months.

Got it. Thank you. And if I could sneak one last one in for Gary, I guess, given the strength in Medicare Advantage sales. Would you ever consider underwriting your own product in order to capture more of the economics? Or are you happy having it as a distribution only product?

Hi, thanks for the question. For the foreseeable future, I'm happy having it a distributional only. The challenges involved with setting up that network that's a really heavy lift. And I feel good about the diversity of sources we have to grow Bankers Life. And I don't feel like taking on the heavy lift of establishing an MA platform would be worth the trade-off right now.

Got it. Thank you.

And your next question comes from Alex Scott of Goldman Sachs. Alex, your line is open.

Hi, good morning. The first question I had was just sort of a higher level, when we're thinking about return on equity since the de-risking transaction. I guess, the last couple quarters it sort of pointed to arguably an earnings power that's a bit lower than sort of like that tend to have to 11% type range that I think was being pointed to around the time that transaction and I just wanted to get a sense of - is it just that expenses have been a little higher there's been a few things here or there and that you still feel that over time that's a good way to think about where you guys will be able to get to in terms of in ROE? Or are we kind of in a period where there's going to be more investing? And until the broker dealer had some better scale and some of the things happen, you'll be a bit below that.

Hi, Alex. This is Gary. I'll start maybe at a high level and then I'll see if Paul wants to weigh in and add any more details. There's a few comments. The first thing and I think that it's really important. If you take a look at the proxy and take a look at the long-term incentive of the management team, we are tied directly to operating ROE. We have no incentive to the contrary, we have a very strong incentive to maximize to that. So that's the first point I want to make sure everybody understands. Our interests are directly pointed at improving ROE. The second point, I'd make, we've - I believe, this is right. I'll let Paul weigh in just a moment. But I believe we've improved our ROE by 140 basis points in 12 months. To be clear, I'm not yet satisfied, but I feel like that's a pretty good move in 12 months and will continue to do that. Now if you layer into that some of the comments that Paul made about our desire to over the long-term. This is not going to happen tomorrow. But over the long-term to reexamine some of the capital we're holding and so on. I think, there are multiple ways that we could look to improve that ROE. And I would just remind everybody that the growth continues and I think the benefit ratios normalized. On the growth front, we are only three quarters and so I'm not yet willing to call it a trend. But if we can keep it up for four to six quarters somewhere in there, I think, we have to call it a trend and I think that that provides some pretty good encouragement. Let me stop there and see Paul wants any comments about the ROE.

Hi, Alex. I think Gary's comments cover it. And I think that 10.5% is reflective of where we currently set and I think there's potential upside from there over time.

Okay. Thanks. Maybe my follow up question just some of the net investment income. Can you comment on, you guys satisfied it where you are in terms of de-risking the asset side of the portfolio following the 1Q adjustments? Or should we expect to see more of that is for kind of go forward into 2019?

Yeah. This is Eric Johnson. I really want to be careful about forward looking comments. Having said that, I think, I said earlier that I don't think that up in risk is, is kind of getting rewarded in today's market, and I think, it is a little bit late to be moving - to be going in that direction. So I wouldn't expect that. Having said that, I think we have very solid portfolio with pretty good looking metrics and results and they're very happy with where it is, and I think we're very happy with where it currently sits, and this market conditions change, we'll adjust and adapt to those as appropriate. But given the confluence of where the world is and where we are, I think, we're very satisfied.

All right. Thank you for the responses.

And your next question comes from Tom Gallagher of Evercore ISI. Tom, your line is open.

Good morning. Gary, I hear what you say on M&A and buybacks not having to be mutually exclusive. I guess, just on a related point when you think about the go forward here and the plan with capital deployment over the next 12 to 18 months. Given where your stock is would you still expect to have a balanced approach to share repurchase versus M&A? Or would your view be different if the stock for maintain around current levels?

So Tom, first of all, thanks. Thanks for the question. Let me comment a little bit on just how I look at buybacks and remind everybody at this key data point. So first of all, we continue to have the ability to execute on buybacks, right. We've got the cash flow that supports it. Secondly, we continue to have the right incentives, again, look at our incentive plan and we have all the right incentives in order to drive ROE and so on you can see that. The third thing, we still have a couple of $100 million left in the authorization, so we can do it from that standpoint. And so it really comes down to trying to balance the value that our stock represents, when it's trading this far below book as against what the other uses are. And one of the things that at least I try and do when I look at opportunities like that WBD, I try not to make the mistake of confusing a short-term tactical decision like buying back stock and what it will do for next quarters' returns. I try not to confuse that with something that represents a long-term investment like WBD that can open up all new brokers, employers and consumers. I think, those are two very different things. Now, I don't think, I can be blind and just look at one or just look at the other, because that we all know, buybacks by definition are fine, and we have to be growing the business. So we're constantly looking at this balance. I think, WBD is a good example of walking that balance that's the right size, it's accretive, and we don't have to take on debt and so on. So I'd like to be able to continue to do things like that. But we're constantly looking at this against our stock. I don't have a formula to give you, Tom, I don't have a detailed way to look at this, I can share with you what our thinking is and how we try and balance this. But by definition that's a judgment call. The last comment, I would make, I would just ask everyone to look at the empirical data and I see some of the write-ups that were done. Even though, we did a very substantial transaction, a risk reduction transaction, we right away went back to buying back stock, because it was compelling. If you look at the data over the last several quarters and with the benefit of hindsight you can see that in the periods of time when we didn't do buybacks, I believe it was just one quarter, might have been two, I can't remember exactly. But it was to prep and fund for that LTC transaction. Allowing for that we've actually been quite consistent, and I feel like somewhere in the market commentary that got lost. So I would really encourage everyone to take a look at just the data and try and understand, we're trying to walk this balance, I think WBD is hopefully an example that the market can use to understand how we want to walk this balance. Tom, did I answer your question? I know, I said a lot…

You did. Yeah. Thanks, Gary. If I could maybe shift gears to Paul, just I'd like to get your initial observations that you might offer in terms of the opportunities on the growth side balancing that with differing opportunities for capital deployment. And then I know you mentioned you're evaluating the overall capital management plans as it relates to RBC and whole co cash. But what's your kind of an overall initial view on the set up here made maybe what some of the potential opportunities, potential value that that you see here?

Sure. Hey, Tom. Listen, I've been here for four weeks. So I honestly don't have a whole lot to share other than to say I'm really pleased to be here. I'm really excited about the opportunity to grow this business, I think, it represents a very significant opportunity for us as a company to create value and make a difference for our target market. Beyond that I really don't have any specific share, Tom.

Okay. Fair clear. Four weeks is not - maybe not enough time to draw any real informed decisions on strategy change, I get that. The - Eric, just one final question for me to pivot at a BBB, you said it was a $1 billion reduction. Any reason why it was focused on BBB, not below investment grade was it just that that's where the better risk award opportunity was? And would blow investment grade be an area you'd also be focused on?

Hi, good morning. To be clear, it wasn't me who said the $1 billion, but it was Paul, but it - that is an accurate figure. But we don't have a $1 billion of below investment grade corporate bonds in total. I think the total amount we have is probably around $600 million or $700 million. So that wouldn't apply. Having said that, if you look at how our portfolio is set up, there's - it's - we have always been a little bit - walked pretty carefully around the high yield market that we have some exposures there very carefully selected quite diverse benchmarks more toward a kind of a BB versus singles, and no CCCs at all. And so I feel that has performed very well for us even back in the days of the great financial crisis, never lost a penny there. And so that's an area, we handle very thoughtfully. With BBBs, we've always run at a - in kind of the middle 40s as a percent of invested assets and that's been for 10 years. And it's produced outstanding returns and spreads across all the companies here. And it's something we have learned to manage pretty thoughtfully. And then in today's market and particularly in the first quarter that was - the - everyone here started to trade goldilocks and pretty much to be just the relative value away, particularly at the bottom end of the triple - the weak end of the BBB market. You get better value in strong double frankly than in weak triples I think. And so, while we actually went up in quality and that's what led us to reduce out of the weak triple, we did not add to high yield. We actually reduced high yield as well. It was really just the relative value trade, which means that at some point in the future when you're getting paid, we may well go back at it as we have historically. It's right now just not getting paid for the risk taken. We did when - if you looked at our - are making close to right $7 billion of BBBs to be in the quarter, we didn't take the top $1 billion and give them to somebody else. I mean, it was quite the opposite. And I think we position ourselves as well to have dry powder for the future. And really contribute some good ROE when the markets provide it, which I don't think they - if you look at the yield differential between strong doubles, weak triples, and even weak single As, that all come together. And that is really the motivating factor.

Okay. Thanks.

You're welcome.

[Operator Instructions] And your next question comes from Dan Bergman of Citi. Dan, your line is open.

Hi, thanks. I guess, to start just for Bankers Medicare supplement, it sounded like a seasonal losses, lost impact was a couple points on the benefit ratio. I just wanted to see if there are any other drivers like re-pricing actions that drove the sequential decline in that ratio this quarter. Just trying to get out of that from seasonality, if there's any change in the underlying risk performance or trends versus what you saw in the second half of last year. And finally, just relatively, any update in terms of the re-pricing actions you're taking there?

Sure. Hi, Dan. It's Paul. So the seasonality is the biggest driver on the margin. We did have a rate increase effective Jan 1, 2018. That rate increase was largely offsetting the claims trend. Again, we're quite happy with where we are at 72%, seasonally adjusted to a 74% or 75%. We will file for an additional rate increase of Jan 1, 2020, based on claims experienced from the second half of last year and the first half of this year. From where we sit today, I wouldn't try to project the range next year. But based on all information that we have today, I can affirm the current range and would expect it to be flat into next year. But where it ends up will depend on the experience between now and then.

Got it.

The last point I'd make, Dan, is that there should not be an expectation that we return to the levels that we were at in 2017, right. And I guess, the final point I'd make is, the business is profitable at current levels. And again, we're happy with the way it's currently performing within this range.

Got it. Thank you. And then maybe just a little bit of a bigger picture question, following the Web Benefits acquisition, so in terms of CNO's product distribution technology lineup, are there any other big holes or areas in which you feel like you either need to or like to add capabilities? I guess, just trying to get a sense of what other areas might be of the most interest to you in terms of future acquisitions.

Dan, this is Gary. We put a fair bit of muscle into, if I think about it as an example, at Washington National, we deployed technology - Workbench, yeah, Workbench. And so, I feel good about the technology we have at least as it currently exists for our agents to work with our consumers. I think we could use some more technology assistance both at Bankers and Colonial Penn. Neither of those businesses have as much a web functionality as I'd like. I think that's a longer term issue. And I want to be clear, I'm not signaling an acquisition of a web company or something like that, but you asked about where I think we need some technology. And then, as you probably know, this stuff is moving so fast right now there's a number of places, where if I brought agents in, they'd probably give me a list as long as my arm about places they'd like technology solutions. But we continue to work on it. I don't see any major gaping holes at the moment. But on the margin, there are incremental spots I'd like to see us improve.

Great. Thank you so much.

And your last question comes from Jeff Schmitt of William Blair. Jeff your line is open.

Hi. Good morning. Looking at producing agents in Bankers Life, and it looks to be third consecutive quarter growth there, how much that is being driven retention versus sort of more active for or more success in recruiting? I guess, more specifically, how much of that is growth in first and second year agents versus those three years plus?

I'll speak to it generally. And then, hopefully, while I'm talking, my colleagues will track down the exact numbers, because I know we have them. The plan, and we've talked about this for a few quarters now, and we've been executing against it, is to recruit fewer, not more. So the increase there is not because we're recruiting more. We are consciously trying to do the opposite. We're trying to recruit fewer. We're trying to have the yield go up, meaning how many stick around, so that is going up. And then, we're trying to have the productivity. So of the ones that stick around, we're trying to make sure they're selling X plus 2 instead of just X dollars, meaning - so they're more productive for us. Do we have the earlier year stats, Paul?

Yeah, so, Jeff, it's Paul. I would just refer you to Slide 21 of the deck for this call, which discloses the agent counts by quarter from Q1 of last year through the present quarter. So on a year-over-year basis, the total quarterly average producing agents in Bankers Life is up 3.2%.

Right. I'm curious how much of that is driven by first and second year agents versus those that are three years plus.

Yeah. And I don't have that information in front of me. And I'm not sure we're choosing to disclose at that level.

Yeah, I think there's going to be a significant portion of it, that's going to be attributable to the first and second year, just remembering some of detail that I've seen. But the point I wanted to make is it's not just straight up hard recruiting.

Okay. And then, maybe could you discuss the broker dealer, what you've sort of learned there from an agent perspective? And is there any change in outlook and in terms of how many you think agents will sell that over time?

Okay. So we remain convinced that long term that is a key to our success. We remain convinced of that, because it fundamentally changes the consumer relationship when they entrust an agent or an advisor with assets. Now they've got a relationship where they look at that agent or advisor as representing their investments as opposed to simply sending them a check for a premium which they regard as an expense. But there's a lot of reasons why we think long term it's beneficial. In my mind, that's one of the key reasons, it changes the relationships. In terms of the outlook, we have previously said that our long term goal is to get roughly 1 in 5 of our agents to have a securities license. We have progressed pretty steadily. We went from 1 in 8 to now 1 in 7 and we continue on that path. So we see no reason to change our goal of 1 in 5, so roughly 20%. And to put that in context, the Bankers Life field-force, just the raw number of agents, I've seen differing data on this, but somewhere between the fifth or sixth largest captive distribution force. And if we can take that and have 1 in 5 of those or roughly 20% have a securities license, that really has a lot of power to it over the long run. And if you just take a look at our annuity sales, that is indicative of the type of power that that portion of our channel can have. At the current penetration, they already represent 52% of our sales and the annuity face amount has been growing steadily, meaning that population, that subset of the bankers agents that are securities licensed, they're getting into younger and generally wealthier homes. And they're developing deeper relationships. So that I think has the potential for a lot of benefits down the line. So we remain committed to it. It's growing nicely. And we see no reason to back off of our 1 in 5 target.

Okay. Great. Thank you.

And we have no further questions in the queue at this time. So I'll turn the call back over to Jennifer Childe for closing remarks.

Thanks again for your interest in CNO Financial. We look forward to speaking with you again next quarter.

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