CNO Financial Group, Inc. (CNO) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the CNO Financial Group Fourth Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Jennifer Childe, VP, Investor Relations. Please go ahead.

Thank you, Operator. Good morning and thank you for joining us on CNO Financial Group's fourth 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 yesterday. We expect to file our Form 10-K and post it on our website on or before February 25. 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 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 made will be referring to changes between the fourth quarter 2018 and fourth quarter 2019. And with that, I'll turn it over to Gary.

Thanks Jennifer. Good morning, everyone and thank you for joining us. 2019 was another productive year for CNO. Operationally, we performed very well. Life and Health sales were up 5% for the full-year, which included record sales in our work site and direct-to-consumer businesses. Annuity collected premiums were also up 12% for the full-year. Our underwriting results remain stable with all health benefit ratios falling within or better than our provided guidance ranges. Fee revenue was up 76%. Other key accomplishments in 2019 include our acquisition of Web Benefits Design in April, upgrades from two rating agencies so that our debt is now rated investment grade by all four rating agencies and the strategic technology partnership we announced in November. In 2019, we launched several new products including Medicare Supplement plan D and Living Insurance. We also piloted Humana Medicare Advantage and our own manufactured Medicare Supplement products through our direct-to-consumer channel. Results from the pilots are preliminary but illustrates the range and types of opportunities we expect to leverage with our industry-leading direct-to-consumer capabilities. Right now CNO is organized around three operating businesses, Bankers Life, Washington National, and Colonial Penn. Last month, we announced a corporate transformation that will consolidate our business segments into two divisions that are aligned with the consumers we serve, the consumer division and the worksite division. Changing consumer behaviors and expectations are driving this change. We're transforming our operating model to meet consumers how and where they want to do business. Each one of our three businesses has distinctive strengths and characteristics. Bankers Life has a top five captive agency force with deep and established customer relationships, agent distribution of this size and quality is difficult to replicate. Colonial Penn is a top five direct-to-consumer insurance business with significant brand awareness and a highly leverageable platform. Washington National has a fast growing worksite business and its niche consumer organization has breadth and depth to our agency force capabilities. Today these segments operate primarily in silos; brought together the opportunity is enormous. I am very excited about this transformation in our business and our go-to-market strategy. We'll talk in greater detail about this at our upcoming Investor Day in two weeks. Moving on to the fourth quarter results on Slide 5. Our fourth quarter performance was strong despite a challenging interest rate environment. Net investment impacts continue to provide significant earnings headwind, reducing operating income by $0.08 a share. This reduced income is attributable to both the lower interest environment and the up in quality portfolio reallocation we completed in the first quarter of 2019. Despite these headwinds, we grew our operating earnings per share by 4% excluding significant items in both periods. Our life and health production was strong with sales up 9%. Total insurance policy income was up 1% and all health benefit ratios were within or better than provided guidance. Fourth quarter annuity collected premiums were down 9%, which was attributable to two items. First, we're up against a difficult comp of 30% growth in the fourth quarter of 2018. Second, we took action during the quarter to proactively manage the participation rates on our annuities in order to balance sales growth and profitability in the current low interest rate environment. As a result of our pricing discipline, we will accept lower sales when market conditions warrant to ensure that we are putting business on our books that meets our return thresholds. We are comfortable with this trade-off and we would do it again in similar circumstances. We also implemented a new tax planning strategy in the fourth quarter that will allow us to use all of our NOLs that were set to expire in 2023 without being utilized. Our effective management of this app may translate to an incremental $194 million or $1.28 per share benefit to the company. Paul will cover this in more detail. Turning to Slide 6 for a review of the growth scorecard. In the fourth quarter, both total collected premiums and annuity collected premiums faced tough fourth quarter 2018 comparables of 10% and 30% growth respectively. You'll know that we circled the 4Q annuity collected premium and total collected premium decline in yellow. We did this to reiterate that these results were expected and by design. That said both were up nicely for the full-year. Our scorecard now reflects six consecutive quarters of growth in life and health sales, in client assets in our broker dealer, and in fee revenue. Turning to Bankers Life on Slide 7. Despite meaningful net investment income headwinds, our Bankers Life adjusted EBIT excluding significant items was up 2% year-over-year. We continue to make progress against our strategic initiatives namely to reinvigorate growth, to expand to the right, to reshape the agent force, and to optimize productivity. As I mentioned earlier, the fourth quarter was a strong quarter for fee revenue which was up 123% at Bankers Life year-over-year to $24 million. This reflected growth in our Medicare Advantage enrollment and changes in the assumptions we use to estimate the revenues on these sales. Life insurance sales at Bankers Life were down 2% year-over-year. We want and expect to see life insurance sales grow, appreciate the improvement as compared to two quarters. We also continue to see a general shift in sales from larger life insurance cases to annuities. Health NAP was flat. Growth in long-term care and supplemental health was offset by a decrease in Medicare Supplement. As mentioned, our annuity collected premiums were down this quarter but up 12% for the year, which helps drive the account value of our annuities up 5% which now stand at $9.1 billion. Our average annuity sale is now $90,000, up 3% from last year. Our broker dealer and registered investment advisor businesses also continue to grow nicely. Client assets increased 37% over the prior period to $1.5 billion. This sustained growth is significant for our agent force, as well as our overall business. Consumer relationships tend to be stronger when we can provide income and retirement solutions as well as insurance products. Our ability to serve the income retirement and insurance needs of our middle income consumers is proving to be a key differentiator, as evidenced by the growth in our agent retention and productivity metrics. We generated a 6% increase in our producing agent count which marks our sixth consecutive quarter of year-over-year growth. This growth is on top of a very strong 4% growth in 4Q 2018 and this is especially impressive given that unemployment rates are at historic lows. This also demonstrates that our strategy to recruit fewer but more productive agents continues to deliver positive results. We increased our advisor count by 7% in the quarter so that now nearly one in seven of our agents are registered to sell securities. Registered agents partner with our non-registered agents to provide financial advice to their clients. These efforts results in deeper, more meaningful client relationships, and are enabling our producers to be more productive. Not only are we seeing success with first year agent retention but we are also beginning to see more agents stand with us into their second and third years. Agent growth is an important leading indicator for sales growth and these trends suggest that our future remains bright. Moving on to Washington National on Slide 8. Sales were up 32%, a new quarterly record for Washington National that is on top of last year's record fourth quarter. These results reflect our efforts to diversify the product mix, our geographic expansion, and strong growth in worksite and consumer markets. Worksite sales were up 7% on top of record growth of 38% in the fourth quarter of 2018. This was fueled by a 14% increase in worksite producing agent count as well as an 11% increase in live sales. The consumer business saw marked improvement this quarter with sales up 57% year-over-year which compares to double-digit declines in recent quarters. This was led in large part by the independent partner channel, which has shown steady and consistent improvement throughout 2019. The combination of increased agent growth, along with a strong open enrollment season for supplemental health sales are key factors this past quarter. While benefits design delivered strong results this quarter with double-digit growth in both employer clients and covered employees. Both revenue and operating income also showed solid growth and were consistent with our expectations. The integration process at WBD continues to run smoothly with back office consolidation activities proceeding as scheduled. Our focus in 2020 will turn to realizing revenue synergies. As I mentioned earlier, as part of our corporate transformation, we will organize our operating model into a consumer and worksite division. Creating a separate division for worksite will bring a sharpened management focus to this fast growing business. We expect these actions to accelerate the growth profile of our worksite business, which already exceeds the growth rate of our peers and the overall industry. Turning to Colonial Penn on Slide 9. Colonial Penn, our direct-to-consumer business delivered record full-year sales which were up 7% year-over-year. This is attributable to our cost effective marketing spend that we accelerated during the first nine months of the year when television advertising rates were more attractive. During 2019, we also benefited from strong increases in our sales productivity and our ongoing lead and sales diversification efforts. Fourth quarter sales were down 8% which was attributable to two items. First, we were up against a difficult comp of 17% growth in the fourth quarter of 2018. Second, we faced the challenging television advertising environment and pulls back on our marketing spend, which dampen growth. We have a price discipline and thoughtful approach to growing the business. When market conditions warrant, we will accept lower sales ensure we are putting business on our books that meets our return hurdles. We're comfortable with the trade-off and we will do it again in similar circumstances. One of the most attractive features of this business is its predictability. We can increase or decrease our marketing spend and predict our sales results within a narrow range. Due to GAAP accounting treatment dialing back our advertising spend in the fourth quarter had the effect of boosting our earnings. The strength of our industry-leading direct-to-consumer business is a core capability that we will invest in and advance in our new operating model. This year alone this business had 2.4 million unique visitors to the Colonialpenn.com website, carried out 1.2 million telesales interactions, and completed 34,000 web chat sessions since May or roughly 5,000 per month. Ultimately, we intend to enhance our customer experience where the consumers can seamlessly move between our brand and sales channels to buy our products, how and when they wish to purchase them. Direct-to-consumer is a key component of this experience. Moving on to capital deployment on Slide 10. I'd like to remind you of our capital allocation strategy. We are committed to deploying 100% of our excess capital to its highest and best use over time. Our goal remains unchanged to maximize return on invested capital over the long run. We will continue to weigh our options accordingly. Our capital position remains strong. With our shares trading at an average discount to book value of approximately 18% during the quarter, we maintain our accelerated pace of buybacks. We repurchased $75 million in the fourth quarter on top of $75 million in the third quarter. This brings our full-year capital returns to $319 million; including $252 million spend on share repurchases. This was nearly double the amount we spent on buybacks in 2018. It is the most we've deployed on share repurchases since 2015. As long as our stock remain highly undervalued and trades at a significant discount to book value, we intend to use share repurchases as our primary vehicle for excess capital deployment. Before turning it over to Paul, I would like to make a final point. While interest rate movements are outside of our control, we're not being complacent. We will continue to take proactive and decisive actions to mitigate the impact. The technology partnership we announced in November is expected to deliver $20 million in savings over five years, ultimately leading to run rate savings of $8 million per year in 2024. The transformation we recently announced which will consolidate our three business segments to two divisions is expected to reduce gross annual run rate spending by approximately $22 million by the end of 2020 before investing approximately $11 million of net savings in various technology and growth initiatives. Together these savings initiatives will dampen the impact from the challenging rate environment while providing a solid base for our future. We're laser-focused on generating stronger operating leverage and will continue to seek other opportunities to reduce our structural costs and minimize our expenses. 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 11. Operating income per diluted share was up 44% to $0.52 in the fourth quarter. Excluding significant items in both periods, operating income per diluted share was up 4% from $0.45 to $0.47, despite a decline in net investment income of $0.08. Contributing to the increase in earnings per share in the quarter were improved underwriting margins and increased fee income. For the full-year, excluding significant items, operating earnings per diluted share declined 2% or $0.03 to $1.80 despite net investment income declining $0.24 per share. The headwind from lower net earned rates was mostly offset by a higher level of invested assets, improved margins, and higher fee income. Earnings per share for both quarter and the year benefited from reduced share count due to share repurchases. The comprehensive annual actuarial review of assumptions had a fairly modest $10 million unfavorable impact on pre-tax operating earnings driven by a reduction in earned investment rates reflecting our up in quality trade in Q1 2019 and lower interest rates generally. It compares to a $1 million unfavorable impact in the prior-year period consistent with past practice, we've included these as significant items. Our long-term care business continued to perform as expected. Margin increased modestly as new business gains outpaced earned rate reductions. There were no material long-term care assumption changes as experience continues to align very well with expectations. We did reduce our ultimate new money rate assumption, now targeting an ultimate 10-year Treasury rate of 4%, which is down 25 basis points from the assumption last year. Within non-operating income we recorded a $14 million charge, related to our previously announced corporate transformation and strategic IT partnership. This was comprised of both severance and costs associated with our outsourcing arrangement. Also with the non-operating income, we reported a $194 million tax benefit in the quarter. As Gary mentioned, we initiated a tax planning strategy, which allows us to utilize over $900 million of net operating losses that would have otherwise expired unused in 2023. As a result, we reversed the related valuation allowance. This added $1.29 to year-end book value per share and contributed to a 13% increase for the full-year. Operating return on equity excluding significant items was 10.4% in the 12-months ended December 31, 2019, compared to 10.3% in the prior-year period. For the full-year, we generated about $330 million in free cash flow before capital retained to fund organic growth. Net of this capital strain, free cash flow is about $290 million. This compares to operating income excluding significant items of $282 million, which reflects free cash flow conversion of 116% before capital strain or slightly above 100% after. As Gary stated, we returned $319 million to shareholders during the year, which reflects more than 10% of our market cap as of the beginning of 2019. We also reduced our share count by 9%. At year-end, statutory capital was $1.7 billion. Our estimated consolidated risk-based capital ratio was 408% and holding company cash investments were $187 million. As I've mentioned in previous quarters, we have been reviewing our capital and liquidity targets, and intend to share our conclusions during our Investor Day on February 26. Turning to Slide 12 in segment earnings. The decline in investment income in the quarter impacted each of our operating segments, in addition to that some things worth noting. In our Bankers Life segment, earnings reflect improved underwriting, and increase in fee revenue and other income and an increase in operating expenses driven largely by continued spending on growth initiatives. Fee revenues in the quarter more than doubled to $24 million which reflects growth in our Medicare Advantage enrollments and includes changes in the assumptions we used to estimate the revenue on these sales. Washington National's earnings reflect favorable interest sensitive life results in the prior-year period and a slightly higher interest adjusted benefit ratio this quarter. Colonial Penn's earnings were up $1.4 million or 29% to $6.2 million due to growth in the block and lower marketing spend. As a reminder, a majority of Colonial Penn's advertising spend were non-capitalized which impacted short-term earnings. In-force earnings, which excludes the impact from the ad spend grew 6% over the prior-year of $18.8 million. Full-year EBIT was $14.3 million slightly above the mid-year guidance down 3% year-over-year reflecting increased marketing spend, notably full-year in-force EBIT was up 7% to $72 million. Turning to Slide 13 and our key health benefit ratios. Bankers Life Medicare Supplement benefit ratio was 74.2%, down from the 76% in the prior-period and in line with our 2019 guidance of 73% to 77%. Bankers Life long-term care interest adjusted benefit ratio for the retained block of business was 75% generally in line with the same period last year and within our 2019 guided range of 74% to 79%. Washington National supplemental health interest adjusted benefit ratio is 54.2% also generally in line with the same period last year, slightly better than our 2019 guidance of 55% to 58%. Turning to Slide 14 and our investment results for the quarter. Net investment income in the fourth quarter was down $18.4 million or 6% year-over-year despite a 3.5% increase in average invested assets. This is attributable to the following: number one, a decline in the booked and earn yields, which reflects the up in quality repositioning of the portfolio in the first quarter of 2019 as well as lower rates tighter spreads generally; number two, reduced prepayment income which declined $6.3 million year-over-year; and third, an increase in impairments which remain well within an expected range. The new money rate of 4.08%, which was down 58 basis points sequentially, reflects lack of new investments and alternatives in the fourth quarter. Relative to treasury rates and investment credit spreads, the 4.08% new money rate certainly reflects a healthy outcome. We do not undertake any significant additional repositioning of the overall portfolio in the fourth quarter. Before turning it over, I'd like to mention that we will be rolling out a new reporting structure at our Investor Day on February 26 and will be providing the revised presentation of our historical financial information at that time. And with that, I'll turn it back to Gary.

Thanks, Paul. I'm proud of the progress we made in 2019. We executed well against our playbook posting solid operational and financial results. We allocated capital prudently returning $319 million to shareholders in the same year we completed the acquisition of Web Benefits Design to invest in our fast growing worksite business. Growth initiatives that we implemented over the past few years and our ongoing investments in technology are paying off. We took a hard look at our cost structure and identified significant savings opportunities that will dampen the impact from the low interest rate environment and strengthen our ability to execute on our strategy. The organizational changes we recently announced to transform our business are also expected to generate meaningful revenue synergies and boost our growth rate. As we enter 2020, we expect to build on our momentum and deliver another year of profitable growth. We are creating a leaner, more integrated, and customer centric organization that positions us well for the long-term success and shareholder value creation. Before we open it up for questions, I want to remind you that the CNO Investor Day is on February 26, 2020, in New York. Please note that pre-registration is required. We issued a press release a few weeks ago with registration instructions. If you have any questions, please email Jennifer at ir@cnoinc.com. Thank you for your interest in CNO Financial Group. We will now open it up for questions. Operator?

[Operator Instructions]. Your first question comes from Randy Binner with B. Riley FBR. Your line is open.

Hey, good morning. Thanks. I wanted to ask a few questions about the tax improvement on the valuation allowance. So I guess first, could you describe maybe in a little bit more detail, the nature of the tax planning strategy that allowed you to have that recovery of the valuation allowance?

Sure. Hey, Randy, it’s Paul. So we're changing a tax method of accounting, which allows us to allocate certain indirect costs of overhead to improvements that we make on our buildings and facilities. And so essentially, we allocate those costs, we then capitalize those costs which increases our taxable income in the period 2020 to 2023 and allows us to utilize NOLs that we previously thought would expire unused in 2023. And therefore reverse the valuation allowance that we had against those roughly $900 million or so of NOLs we thought would expire unused we had a valuation allowance against it with this tax strategy we're able to reverse that allowance.

And is that strategy is that -- was that -- was the use of that something that changed with the tax change, tax law changes a few years ago?

No, it's not a function of those changes. So the tax strategy would have been available to us and others at other times. But our facts that didn't really align with it until now, which is the reason that we're adopting it now as opposed to some previous period.

Okay, great. And then just to make sure we have the numbers right, so on Slide 25 of your presentation so that now shows $532 million of NOLs, is that -- is there any more valuation allowance or is it just this $532 million of NOLs now?

That's exactly right. So $532 million of DCA is related to $2.5 billion of NOLs and no valuation now against any of those NOLs.

Your next question comes from Erik Bass with Autonomous Research. Your line is open.

Hi, thank you. Given the acceleration and business growth the actions you're taking on expenses and the fact that we're now close to anniversarying the up in quality trade. Do you think we're at the point where you would expect the EBIT for the operating businesses to show consistent year-on-year growth ex-disclosed items?

Sure. So Erik very high-level, I said a couple of things. Number one, we will continue to face an earnings headwind from net investment income through 2020 driven by the combination of the impact of the up in quality and continued low rates and tighter spreads,. So that that dynamic will persist not as pronounced in 2019, but will nevertheless persist. Our intention and you've seen some of this already is to offset that through expense management.

I think one other thing I would add to that, Erik, we'll be talking more about this at Investor Day. But the type of visibility we provide, I think will be greater in terms of the operating earnings because of the reorganization. So we're using the reorganization as an opportunity to change the way we report Paul mentioned that. So I think you'll get a greater sense of visibility and the rest of the comments, I certainly agree with what Paul shared.

Got it. Thank you. And then I know you also plan to give a more detailed update on capital at the Investor Day, but is it reasonable to assume that you could sustain the level of capital deployment from the past two quarters on a near-term basis, just based on your free cash flow and current excess capital?

Sure. So Erik, what I'd say is that relative to revisiting our target capital levels I think we're landing in a good place there. And again, we'll give you some specifics on the Investor Day. What that means for share repurchase, I think I prefer to pump that to Investor Day as well, when we start to give sort of more wholesome guidance broadly with respect to capital as well as across the business.

Got it, okay. Now, that's fair. I guess I was just looking at even based on your existing targets, it looks like you still have excess capital and so you said are generating pretty material free cash flow?

Yes, that's certainly fair.

Your next question comes from Humphrey Lee with Dowling & Partners. Your line is open.

Yes, thank you for taking my questions. Paul, you mentioned that you continue to see net investment income headwinds in throughout 2020 because of the environment and also the repositioning that you've done, should we anticipate that kind of similar five to six basis point kind of quarterly decline in your book yield as kind of as a run rate assuming kind of the environment state you're seeing?

Yes, good morning, Humphrey. This is not Paul, this is Eric Johnson. And let me if you don't mind, I'll answer that for you. I want to answer it on a couple of levels. I mean, one is kind of give you a rule of thumb so you can think about your model and then the other being perhaps a little more specific, or relating to the quarter which just passed. One kind of rule of thumb, you could think about at least in terms of new money rates would be something in the order in a quarter of 10-year treasuries plus 200 maybe 225 basis points. So it's something you can externally keep an eye on. And so, for example, last quarter, if you had an average tenure of roughly 1.80 and the new money rate landed at around 4.08, that's pretty much in line with that rule of thumb. So that would be a way of thinking about it going forward. Now you'll also probably then ask me well, the prior quarter the money rate was much higher. It was roughly 55 basis points higher in the third quarter. But what happened if you fall off a cliff or something? No, we didn't fall off a cliff. It is a measure that's highly sensitive to a fairly small number of events. We had one investments in the third quarter not replicated in the fourth quarter that generated a tariff at very high book yield, and it generated roughly 45 basis points of that 58 basis points difference one investment. So we'd like to have one investment like that every quarter and we certainly look for them. But what you should expect is something in line with the rule of thumb I gave you affected by from time to time specific individual opportunities that may drive that number upward in a given quarter. I hope that helps you with that question.

Eric, we've in the past talked about what the Street should expect in terms of overall book yield. You want to share that again as well too please.

Yes, happy to do that. I said now this will be the third quarter in a row. I've said that you should all think of book yield in the current environment, trading at a rate somewhere between three and eight basis points a quarter. This quarter was I think roughly six. I'll take it down a level. At Washington National, the book yield was down two basis points. Bankers Life it was down nine basis points. Bankers came-off a little bit more because there's more new money coming through the system in Bankers and it has a little more LIBOR floating rate exposure, floating rates came down a little bit in the quarter so a little higher delta in the quarter. But you should expect applying the rule of thumb I gave you on new money rate that that would produce roughly something between three and five basis points erosion in today's market in book yield plus whatever noise factors that will emerge from as I just described. So interestingly enough, when you factor all that into core income meaning repeatable book yield and earnings, core income for the quarter, investment income was quite stable. It was down maybe $4 million or $5 million at Bankers and basically down about $0.5 million at Washington National. Most of the noise in the quarter really came from prepayments being down $6 million and alternative being down year-over-year, down about $8 million, although up a little bit quarter-over-quarter. And so when you have one-timers come-off like prepayments being down $6 million that $6 million change in prepayments affected earned yield for the quarter by 12 basis points. The earned yield for the quarter was down 14 basis points. So 12 of the 14 came from the reduction in prepayments. Core income was quite stable. There's some noise around the edges that that we have to do a better job I think of articulating and giving you rules of thumb to understand and I think we'll be able to do some of that at Investor Day, so you can see through that noise. And Gary can send the earnings call talking about sales and efficiencies and all the good things happening with the company.

That's very helpful.

Thanks, Eric. Humphrey do you have a follow-up. You could.

Yes, I have a second question. So looking at your fee income as you pointed out is very good. Obviously there's some corresponding expenses related to those fee business, given the growth that you have in these fee businesses like how should we think about the margin for the business as we are modeling the top-line and the expenses going forward?

Humphrey, it's Paul. I will take a crack at that. In the context of trying to stay true to our principle of not providing guidance I guess I'd say number one that the margins were quite stable in line with expectations. I guess the only thing I call out is sort of noise in the quarter relative to your modeling relates to the change in assumptions that we made for the accounting of our Medicare Advantage business. So this is ASC-606, I'm sure you're familiar with that, which was effective in January 1, 2018, and requires that we estimate the life time of revenue and expenses or net revenue for that business. We didn't feel that we had sufficient data to make that estimate until the fourth quarter of this year. And now that we have sufficient data, we booked an estimate for that life time net revenue. And that increased both our revenue and our expenses in the quarter. The net impact of that was about $6.5 million. Away from that, I'd say that our margins were consistent with our expectation in stable relative to recent period.

Okay. So maybe I will follow up off-line but thanks for that.

Sure.

Your next question comes from Thomas Gallagher with Evercore ISI. Your line is open.

Good morning. Paul, just a follow-up to the Humphrey's question, you just answered this $6.5 million net impact. Would that have been a pre-tax earnings benefit for Bankers and would you expect some of that or none of that to occur as you head into 1Q?

Sure. So it’s pre-tax and as you said, it's all in Bankers and so on Page 7 of our supplement, you will see going through the revenue line and the commission expense and distribution line. As far as what it looks like next year because of the seasonality of the business and the timing of booking, the related revenue and expense, I would expect to see both the revenue and the expense in 2020 to mirror very much the timing in 2019 because much of it gets booked in the fourth quarter.

Got it. So we should see a similar $6.5 million pre-tax earnings uplift but it should be more of a 4Q 2020 event, is that a fair way to think about it?

Yes.

Okay. But not and will the much higher level of fee income you had at Bankers in 4Q, will that also come down just from a revenue standpoint as we roll into 1Q because I think seasonally 1Q in 2019 was also high. So I was just curious how we should think about seasonality for fee, fee income or fee revenue?

You're right. So 1Q 2019 was high. I'd expect to see something very comparable in 1Q in 2020 and the same for Q2 and Q3 and then Q4, the dynamic you saw in Q4 2019 should be repeated in Q4 2020.

Got you. And then just to kind of close the loop on your net investment income comment. Just taking your prepared remarks, the $0.08 a share interest rate related headwind, I mean that's 17% of earnings. Now, you clearly have produced some other nice offsets against that. But as we think about the actual earnings headwind related to interest rates just taking Eric's comments and doing some back of the envelope math, I get something significantly less than that from an ongoing earnings from an EPS headwind standpoint, I get something around 6% to 8% range of an EPS headwind, does that sound about directionally right in terms of when you quantify it and just overlaid against the EPS expectations?

I don't think there's anything wrong with your math, Tom. The only thing I would point out is that you're always going to have some volatility from the variable components of NII. So I think the math you're doing relates to the headwind from just the sequential decline in our book yield. Then you have to factor in the plus or minus that may occur in every quarter almost will occur, you just don't know whether it's going to be plus or minus from the variable components, falls, prepays, primarily.

Yes, Tom, this is Eric and maybe I can, I gave you a rule of thumb around the new money rate, which I think may be useful to you and I'll give you a rule of thumb also which may be useful to you around alternatives and prepays as well. And I think Paul feedback was correct to say there's going to be variability in these two items that is more significant than in new money and book yields. And so the one thing is that is certain is that the exact rule of thumb won't produce an exact result. But just as a frame of reference, alternative investments, we like alternatives but I use the term pay rent that have a carry, as opposed to that are market directional and pure equity content. And so the way I think about that portfolio is I want to produce a carry of around between 8% and 10%. And so if you want to think about, let's say, let's use 8% as a rule of thumb for kind of quarter-on-quarter income from alternatives, I think that is reasonable recognizing that there are going to be quarters where that is going to have a bell curve, that's going to start at minus five and go up to plus 20 in return based on market conditions. And then when you look at prepayment, I'm just looking back here, Tom. And we had prepayments on a quarterly basis everywhere from $2 million to $10 million in the given quarter over the last three years that number is very, very hard to. As you know, it's not a number we can manage and it's very difficult to predict going into a quarter. But if you want to kind of pick an average number of six, I think that would be a rule of thumb that you could apply, recognizing that it's going to actualize somewhere north or south of that depending on the given quarter. So and I think I've now given you three rules of thumb you can apply that will help you understand how to think about investment income here. There's going to be this $21 million -- billion excuse me, color portfolio and all kinds of moving parts and there's going to be $3 million items going this way and that way in a given quarter. And I don't think we're going to have, where the rates are high or low. We're not going to get around that. Having said that, I think that -- this would be a way of producing a normalized over the term of things view.

Your next question comes from Alex Scott with Goldman Sachs. Your line is open.

Hi. First question I had was on I guess just the growth that you're getting on new annualized premiums, fees, et cetera and how it's going to translate to top-line and earnings growth, if we kind of set aside the LTC and run-off and set aside the NII pressure that's been discussed, I guess. Yes, maybe even tell it another way like how much growth in NAV and the fee revenue do you need to sort of offset the run-off? Like what's the lapsed trend? How do I think about the dynamics there and how much growth you can actually get from the kind of sales growth that you're seeing?

Hey Alex, it’s Paul. I guess once again, it's hard for me to answer that question without giving you earnings guidance. I think those are assumptions you have to build into your model just trending our historical data.

Okay. Maybe the follow-up on cash flow, I was just interested if you had any thoughts on one I think the last time you guys gave it as $300 million, $350 million or so, I was wondering if you could provide any color on that, I appreciate that the excess capital part of the conversation and whatever you're going to do on RBC ratio is maybe separate and you don't want to talk about that yet, but just maybe the ongoing business if there's any color on how that's trending and how much you plan to use behind new business growth in 2020?

Sure. So Alex, I'll first just kind of level set with respect to 2019. As I mentioned in the prepared remarks, for the year our gross free cash flow was about $303 million net of the capital to support our organic growth, free cash flow of about $290 million. I think I'll point to the Investor Day to give forward-looking statements. But I would say now that given that the business is very stable you wouldn't expect that gross free cash flow number to change materially.

Got it. And so the impact of this DTA change in particular that that would have just a modest benefit from year-to-year, is that more front-end loaded the impact that it has?

You're talking about the tax strategy, what was that impact to free cash flow?

Yes, just like what if I should think about that it's just been like a level benefit over time or it's because of the years it impacted in the way it's been utilized? If it has a bigger impact on your term cash flow?

Yes, so the tax strategy actually has no impact on our cash taxes through 2023. During that period, we're simply recording higher taxable income strictly for tax purposes, not affecting our GAAP or stat books, but higher taxable income which allows us to utilize the NOLs. In 2024, we would expect to reverse the method of accounting that's allowing us to do this, which will actually create a new NOL that we would utilize in 2025 to 2029. So the cash benefit is really in the 2025 to 2029 period.

[Operator Instructions]. Your next question comes from Dan Bergman with Citi. Your line is open.

I believe you said you lowered the assumed long-term new money rate by about 25 basis points to a 4% 10-year Treasury yield as part of the annual review. I was just hoping little more color on that assumption. How long is the grade up period to that 4% level and I was just hoping you could remind us what is the sensitivity of the long-term care margin to any changes in that assumption?

Sure. Hey, Dan it's Paul. So yes we reduced the ultimate new money rate assumption by 25 basis points and the grade up to that is five years. As far as the impact, I think to give sort of a fulsome picture of that, I would refer you to the disclosure in our 10-K in our Risk Factors. We provide four scenarios, interest rate scenarios and the impact that that has. So that I think gives you a context and obviously that's, that's a bit dated. Now, we'll be filing our 2019-K, right before Investor Day and so you'll have that updated context. Our intention is to repeat the same type of disclosure. But you also saw in real time this year, the impact of that assumption along with other changes and assumptions on our long-term care book. And there was no income statement impact from that. And the margin of our long-term care business actually improved slightly with the unfavorable impact from lower earned rates offset by the margin created by the new business.

Got it, thanks. And then maybe moving just to the run-off long-term care block. I think earnings on that businesses remain positive, I think at least the past six quarters or so. So I just want to see if there's any additional color you could give on what you're seeing in terms of how that block is developed, what's driven the strong recent results and whether we should continue to expect that to fall back down to break-even going forward?

Sure. So our experience there has been very much in line with slightly better than expectations. And I guess that's the first point. The second point is, as you know, from our disclosures, there's very little margin in the closed block. And so there's a lot -- there's not much margin for error. But the experience has been very good. So that hasn't been an issue.

Got it. But in terms of earnings, still kind of thinking about break-even as you move forward?

Yes, for modeling purposes, I think break-even is a bunch you should model.

There are no further questions queued up at this time. I will turn the call back over to Jennifer Childe.

Thanks very much for your interest in CNO. I look forward to seeing you at our Investor Day on February 26.

This concludes today's conference call. You may now disconnect.