CNO Financial Group's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.28.14 | About: CNO Financial (CNO)

CNO Financial Group, Inc. (NYSE:CNO)

Q1 2014 Earnings Conference Call

April 28, 2014 11:00 am ET

Executives

Ed Bonach – Chief Executive Officer

Fred Crawford – Executive Vice President & Chief Financial Officer

Scott Perry – Chief Business Officer

Erik Helding – Investor Relations

Analysts

Erik Bass – Citigroup

Chris Giovanni – Goldman Sachs

Randy Binner – Friedman, Billings, Ramsey

Mark Finkelstein – Evercore Partners

Operator

Good morning. My name is Beth and I will be your conference operator. At this time I would like to welcome everyone to our Q1 2014 Earnings Call. (Operator instructions.) Thank you. Erik Helding, you may begin your conference.

Erik Helding

Thank you, Operator. Good morning and thank you for joining us on CNO Financial Group’s Q1 2014 Earnings Conference Call.

Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Fred Crawford, Chief Financial Officer. Following the presentation we will also have several other business leaders available for the question-and-answer period.

During this conference call we will be referring to information contained in this morning’s press release. You can obtain the release by visiting the Media section of our website at www.cnoinc.com. This morning’s presentation is also available in the Investors section of our website and was filed on a Form 8(k) earlier today. We expect to file our Form 10(q) and post it on our website by May 7th.

Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements.

Today’s presentation contains a number of non-GAAP measures which should not be considered as substitutes for the most directly-comparable GAAP measures. You’ll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.

Throughout this presentation we will be making performance comparisons, and unless otherwise specified any comparisons made will be referring to changes between Q1 2013 and Q1 2014. And with that I’ll turn the call over to Ed.

Ed Bonach

Thanks, Erik, and good morning everyone. CNO posted another strong quarter and our businesses continue to perform well as we delivered growth in sales, collected premiums and earnings.

Consolidated sales were up 4% in the quarter and operating earnings per share increased by 42%. Our financial position remains strong with solid risk-based capital, holding company liquidity of over $300 million, and leveraged comfortably below 20%. In addition because of successful management of our in-force and proactive steps taken to address our underperforming closed blocks to business. We are increasing both the stability and quality of our earnings and return on equity.

We continue to return capital to shareholders, and repurchased $41 million of stock in the quarter. In addition, we recently doubled our common stock dividend. In March we announced the sale of Conseco Life Insurance Company or CLIC to Wilton Re. We are on schedule and still expect to close by the middle of the year.

Our strong performance, financial strength, and proactive in-force management continued to be recognized by the ratings agencies. In March, our debt ratings were upgraded by Moody’s and they maintained their positive outlook as well. In addition, S&P placed CNO on positive credit watch with intentions to upgrade upon the successful closing of the sale of CLIC.

Turning to Slide 6, over the past several years, we have been investing in our business platforms to enhance growth, and those investments have yielded positive results. As we outlined in our December outlook call, during 2014 we plan to invest an additional $45 million to $55 million in key initiatives to build upon that success and enable us to deliver ongoing sales growth rates that are above industry averages.

We are making significant investments to drive increased operating effectiveness in our back office and to enhance the customer experience. In addition, we are investing in agent growth and productivity, and we are developing new products and expanding our market reach.

With the sale of CLIC and the eventual elimination of nearly 400,000 policies, the majority of which are complex, interest-sensitive life policies, our ability to streamline our back office will be further enhanced. The investments we are making in our middle and back office will take some time to implement, but they are necessary if we are to drive operating efficiencies and to continue to right-size our cost structure.

Let me now turn it over to Scott to discuss our segment results in more detail. Scott?

Scott Perry

Thanks, Ed. Bankers Life’s results were positive in the quarter, up 4% to prior year. Sales growth came from our life and annuity lines which were up 16% and 13% respectively. These gains were offset by slower sales in long-term care, which were down 25%. This decrease is consistent with trends we have seen over the last couple of years as sales have shifted away from more comprehensive nursing home policies to short-term care policies.

A 7% increase in agent productivity drove improved agent retention in the quarter; however, new agent recruiting was lower by 10% due in part to the severe weather which resulted in numerous cancellations and lower attendance at our job briefings. These factors resulted in a net decrease in our overall agency force which was down 3% in the quarter. It is important to note that although the number of new agents was down in the quarter, the number of successful new agents as defined by applications submitted and commissions earned, was flat year-over-year, a direct results of the investments we have been making in new agent training.

Collected premiums for Banker's Life were up 2% in the quarter, due mainly to increases in life and annuity products, which were up 12%. Overall health premiums were down 6%, mainly due to the continued decline in long-term care and the decline in Coventry PDP quota share premium as the program has converted to a fee-only arrangement.

Turning to Washington National, sales were up 7% in the quarter with PMA sales up 8%, and the Independent Partner’s channel up 2%. Both channels were impacted by adverse weather, and in particular in the work site market where several scheduled enrolments were postponed. Despite the bad weather, voluntary work site sales were up 5% and supplemental health sales were up 11%.

Sales benefited from momentum in our newer product, Active Care, and other cancer and critical illness policies. Supplemental health collected premiums increased by 5% and PMA producing agent count rose by 10% over prior year, driven by an increase in new recruits.

Moving on to Colonial Penn, sales were down 1%, and this was below our expectations. The decline was driven by a continued challenging television advertising environment as well as timing of our lead generation efforts during the quarter. Similar to Q4 2013, our lead generation efforts in early Q1 2014 faced incremental ad spend by general advertisers which limited available airtime . These factors led to increased marketing costs and negatively impacted lead generation and conversion.

Early in February, we implemented a series of internal initiatives focused on increasing the average premium on initial sales as well as proactively following up on pending applications. Additionally, we benefited from increased direct mail lead generation. These efforts positively impacted results in February and March, and we expect this to yield benefits in Q2 and the rest of the year. Colonial Penn recorded strong in-force results, generating an in-force EBIT improvement of 17%, mainly driven by a 7% growth in collected premium and favorable mortality.

Turning to Slide 10, our business segments are making strategic investments to help fuel growth in 2014 and beyond. At Bankers Life, we will continue to look opportunistically to add locations. We are shifting investments toward initiatives that are focused on driving increases in agent productivity. We are investing in sales force automation tools as well as the new CRM tool. We continue to emphasize advanced life sales training, and we are launching new branding and digital marketing programs. Lastly, we plan on making investments to drive growth in the number of agents that are also registered Financial Advisors.

At Washington National, we are investing in expanding work site distribution, including offering a more robust line of voluntary supplemental health and life insurance products. This includes the planned introduction in 2014 of three new group supplemental health products, and the recent launch of strategic relationships with two leading group life and disability carriers to provide our agents and group accounts with one source to meet their ancillary benefit needs. We are also actively focused on growing PMA through increased recruiting and initiatives to drive greater productivity and retention. The latter includes the Q2 launch of the next generation cancer product for the individual market.

Finally at Colonial Penn, we will continue to closely monitor and manage our television ad spend, and we will tactfully adjust marketing activities based on market conditions. We will continue the expansion of our Patriot Program, diversify our lead activity by growing our non-TV lead sources, and further increase our online presence , and these efforts should benefit sales in the second half of the year. Given the lower-than-expected sales results in Q1, we expect Colonial Penn sales growth to come in at the low end of the 6% to 9% range in 2014.

Let me now hand it over to Fred who will discuss CNO’s financial and investment results. Fred?

Fred Crawford

Thanks, Scott. CNO recorded another strong quarter on the earnings and capital front. If you adjust for significant items we recorded operating earnings of $0.28 per share, up over 25% versus last year’s quarter on a normalized basis. This quarter’s only significant item impacted corporate expenses and primarily consisted of a true-up of incentive compensation accruals for 2013 of approximately $3 million. Overall our core earnings drivers performed as expected and consistent with guidance provided on our outlook and year-end earnings calls.

Core capital ratios and holding company liquidity remains strong. We repurchased $41 million of common stock, recognizing we were effectively blacked out most of the quarter pending the announcement of the sale of CLIC. Before I drill into earnings and capital let’s turn to Slide 12 to briefly highlight the reporting changes in the quarter related to the sale of CLIC.

Q1 marks the end of OCB as a reporting segment. We moved the earnings and retained OCB blocks of business to Washington National which contributed approximately $2.5 million to the segment’s EBIT. This was a bit below our expectations due to volatility in indexed annuity margins. We would expect normalized quarterly EBIT of around $4 million to $5 million on these transferred blocks of business.

For purposes of reporting operating earnings we isolated CLIC earnings to be sold to Wilton Re into a single net income line item. The CLIC business generated about $6.7 million of net income in the quarter. This result includes realized gains of approximately $1.3 million and favorable mortality in the quarter. We believe a quarterly net income run rate of roughly $5.0 million would be expected on this business, recognizing it can be volatile.

Finally we allocated residual overhead of approximately $5 million to the surviving segments, principally Bankers and Washington National. After we close, Bankers’ earnings will benefit from the recapture of a life block from Wilton Re. We estimate this recaptured block will generate roughly $8 million in annualized EBIT for our Bankers segment. We entered into a two-year transition agreement where the revenue and expenses under the agreement will be recorded as a non-operating item and are expected to be largely offsetting – thus, very little impact to net income.

Having signed a definitive agreement to sell CLIC we recorded an estimated loss on sale of approximately $300 million in line with our pro forma guidance given during the March announcement. We currently anticipate net cash proceeds on the sale in the $220 million to $230 million range, recognizing this moves around with the performance of CLIC up until the time of closing. The life insurance recapture, together with an assumed reinvestment rate on proceeds supports the estimated dilution we guided to at the time of the announcement.

Turning to Slide 13 and our segment earnings, you can see in this graphic the removal of OCB as a reporting segment in Q1. As I mentioned, Bankers and Washington National were each respectively allocated approximately $2 million of residual overhead we expect to carry forward. Bankers’ EBIT benefited from continued strength in Medicare Supplement and annuity margins while long-term care benefit ratios came in at the 80% range, elevated but somewhat consistent with our experience in recent quarters.

Washington National posted a solid quarter of sales and collected premium growth in their supplemental health business with benefit ratios slightly elevated but not inconsistent with the higher end of our guidance. Overall, our normalized health margins came in as expected and we would not adjust the guidance provided during our year-end call.

Colonial Penn reported a loss in the quarter as we previously guided. As Scott noted, the pace and effectiveness of ad spend impacted both sales results and earnings in the quarter. We do not at this time anticipate a change in our EBIT guidance for the year in the $5 million loss range. Corporate investment results came in as expected, down somewhat from the strong outperformance in Q4 but consistent with market returns.

Turning to Slide 14 and investment results, we put new money to work at rates consistent with our 2014 expectations in the 5% range. While rates remain low and spreads are tight we defended new money rates by remaining tactical in our investment strategy. Invested assets came down roughly $500 million due to the transfer of assets to Beachwood Re under our long-term care transaction.

We highlight on this slide the approximate assets to be transferred as part of the CLIC sale. Overall asset levels in our core businesses continue to grow modestly. Realized gains were elevated due in part to readying of the transfer of cash and assets in support of the long-term care reinsurance transaction. Impairments were a bit elevated and concentrated in two legacy investments in private companies where earnings and cash flows have been slow to develop.

Slide 15 profiles our capital position. We ended the quarter with RBC ration of 427%, up approximately 17 points from year-end. Our RBC benefited from retaining additional statutory earnings in the quarter as we prepare for recapturing a life block from Wilton Re and the divestiture of CLIC. Leverage popped up 70 basis points in the quarter, reflecting the loss on the sale in the period. Recognize that once we close on CLIC we are required to pay down debt which would bring leverage down to the 16% range.

We ended the quarter with over $300 million of liquidity and investments at the holding company and we’ve sized our deployable capital at approximately $160 million. The sale of CLIC will increase holding company liquidity by $125 million including the impact of debt reduction with a portion of the proceeds. We provided updated share repurchase guidance during our CLIC transaction call in March.

We repurchased $41 million of stock in the quarter, all in the month of March, and expect to come in at the high end of our repurchase guidance range of $225 million to $300 million for 2014. We are in a strong capital position and remain dedicated to securing investment-grade ratings over time, a goal we believe is critical to unlocking additional shareholder value.

Turning to Slide 16 and ROE development, our normalized operating ROE continues to travel in the mid-8% range. In the quarter the sale of CLIC had very little impact on ROE as we calculate ROE on a trailing four-quarter basis and recognize you are not seeing the benefit of reinvestment rates on proceeds and the life insurance recapture. We are currently maintaining high levels of capital in both the insurance companies and at the holding company.

When excluding the impact of OCB transactions, average equity is up nearly $170 million as compared to this time last year, and up over $350 million on an end-of-period basis. Not surprisingly the two levers we continue to monitor are opportunities to redeploy our excess capital and the potential for another recapitalization.

As we have said in the past, the key variables on any recapitalization are market conditions, ability to achieve structural flexibility, and opportunistic deployment. All three need to come together to be truly impactful to our cost of capital.

We remain focused on a few simple drivers of sustainable shareholder value: investing back into our business to support growth, building ROE while lowering the beta in our business, and effectively deploying excess capital. And with that let me hand it back to Ed for closing comments.

Ed Bonach

Thanks, Fred. As I mentioned on our last call the sale of CLIC represents another significant milestone for CNO. The OCB transactions will allow management to focus its attention on growing our core franchises and serving the needs of our target customers.

We have been making and will continue to make significant investments in expanding our distribution, agent productivity and new product development. We believe this will result in sales growth rates that are above industry averages.

In addition, reducing complexity in our back office will allow us to continue to drive efficiencies in our operations and redeploy resources to seize upon the significant opportunity with middle-income Baby Boomers at or near retirement, agent into the sweet spot of our target market.

The elimination of historically volatile books of business will improve the stability and quality of our earnings and return on equity, as well as further advancing the reliability of future cash flows. We will continue to be tactical in our approach to excess capital deployment, balancing the desire to return capital to shareholders while maintaining financial ratios that are consistent with investment-grade ratings.

As Fred mentioned, we remain focused on a few simple drivers of sustainable shareholder value: investing back into our business to support growth, building ROE while lowering the beta in our business, and effectively deploying excess capital. We plan to host an Investor Day in New York City on June 26th and look forward to discussing some of the catalysts for these opportunities at that time.

And now we’ll open it up for questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Erik Bass, Citigroup. Your line is open.

Erik Bass – Citigroup

Hi, good morning, thank you. I guess this may be jumping ahead of Investor Day a little bit, but can you talk about how you’re thinking about the level of capital and holding company liquidity that you plan to hold above your long-term targets once the CLIC sale closes?

Fred Crawford

Sure. Erik, this is Fred. Right now, our policy remains consistent, and that is we think the appropriate level to run the company at is approximately 400% risk-based capital down in the insurance companies, leveraged at or below 20%, and holding company liquidity, we’ve long targeted to be at around $150 million plus or minus; or said differently around 12- to 18-months worth of emergency liquidity. Those are the policies, and anything above those levels we believe to be excess and potentially available for deployment.

So for example, when we sit here today with what we’ve reported here in Q1, I would size the amount of excess capital that we have down in the insurance company as being around $75 million – this after taking into account roughly $30 million we would transfer as part of recapturing the life block from Wilton Re. As I mentioned in my prepared remarks, we have about $160 million of excess capital or deployable capital up at the holding company as we sit here today, and then we would expect to bring in a net $125 million of additional deployable capital realizing a portion of the proceeds from the sale of CLIC we need to go to paying down debt.

If you tally that all up, you come into something around $360 million if you fast forward to the closing and bringing in these businesses - $360 million of deployable or excess capital altogether, and so when you think about the use of that capital going forward, our practice really remains the same. First, we’ve put a little bit of a down payment on that through doubling the common stock dividend and signaling that we’d go to the high end of the range of our repurchase – said differently, approaching $300 million in repurchase for the year.

Beyond that, it becomes a matter of assessing opportunities for that capital over time in such a way that maximizes the return for the shareholders. And that’s no different than we’ve always done. I think the only difference would be that with the performance of the stock over the last couple of years, the IRR expectations on buying back stock are competing more regularly with alternative potential opportunities of deploying that capital.

Having said that, if you think about us, a company our size buying $300 million worth of our stock back or up to $300 million, that’s arguably a sizable commitment of capital towards buying our stock back, so we obviously believe that to be an attractive return. Does that help?

Erik Bass – Citigroup

That’s helpful. And I guess you had talked kind of the year outlook of keeping a buffer north of the $150 million of holding company liquidity near term in part to support the continued upward ratings migration. Is that still consistent with your thinking at this point?

Fred Crawford

When we communicate with the rating agencies, we really impress upon them that we want them taking ratings action based on our long-term capital policy and that’s effectively what they do as a matter of practice. So you should not view excess over and above our policy levels – i.e., 400% RBC or $150 million at the holding company – as somehow being pegged to support further ratings upgrades. Arguably at 400% RBC and a good amount of liquidity at the holding company, leverage down at 17% plus but if we pay down debt nearly 16%, those are very solid investment grade-like ratios.

And even the agencies themselves have said that in their comments. So, I wouldn’t view our current stance on capital as somehow necessary to support further ratings improvements.

Erik Bass – Citigroup

Got it, thank you. And just one other quick one. you had mentioned the opportunity for kind of further back office streamlining. Should we think about that as meaning that you can get some of the CLIC-stranded expenses out over time or were you speaking more broadly about opportunities to drive efficiencies and bring down costs across the organization?

Ed Bonach

Yeah, Erik, this is Ed. We’re really speaking to both. I mean there certainly are some costs that are directly identifiable pertaining to CLIC that we expect to be able to eliminate. If not, they won’t be upon close but more at the end of the transition services agreement, but then we believe there are other efficiencies that we’ll be able to gain with having a less complex back office as well as the ability to focus on our core businesses.

Erik Bass – Citigroup

Great, thank you very much.

Operator

Your next question comes from the line of Chris Giovanni, Goldman Sachs. Your line is open.

Chris Giovanni – Goldman Sachs

Thanks so much, good morning. I guess a fair amount of investment going into improving the sales but also the efficiency in the back office as you guys have just mentioned, so I wanted to see if you could sort of attempt to quantify what the efficiency opportunity is – whether that’ s a dollar amount or thinking about it as an expense ratio?

Ed Bonach

Chris, we haven’t identified or at least publicly declared that yet. We would expect in some ways to touch on that at Investor Day but a lot of that will be developing post the close of the CLIC transaction.

Chris Giovanni – Goldman Sachs

Okay. And then can you talk a little bit about Bankers’ agent accounts? It seems like you’re attributing a lot of the 3% shortfall just to (inaudible). Have you seen any signs whether it was late in the quarter or Q2 to date that you’re seeing that improvement in the agent count? And then along those lines sort of the plans for branch expansion?

Scott Perry

Sure Chris, this is Scott. As I mentioned in my comments, the recruiting is what impacted the agent count because retention was up, productivity of the base force was up, and we did see some impact from the weather on job briefings. There has also been a trend over the last year and a half or so that has affected recruiting, and that’s that job board activity has gotten more expensive. And so, we’ve been shifting some of our focus away from job board activity into other sources of recruiting, and as the field has been adopting these new strategies, we’ve felt some of that impact.

Our expectation is that we’ll get recruiting consistent with where we were last year, so relatively flat. And we think it’s more prudent to grow our agency force through a combination of improved productivity which drives better retention and through a sort of steady flow of recruiting – and that’s where our expectations are on the initiatives we’ve put in place to get us there. And one of them is what you referenced, which is expansion.

So we expanded a net number of branches last year of 25. This year we are projecting to be in that 15 range. For Q1 we only net opened one office but we have eight to twelve that’ll be coming on line in Q2 and early in Q3 so we think we’ll easily achieve the 15 net new locations. And expanding our footprint will be one of the ways that we’ll improve our recruiting activity.

Chris Giovanni – Goldman Sachs

Okay, thanks. And then just a last question, just on long-term care: so just maybe looking for conversations that you’re having in the marketplace either with the industry or regulators, because there seems to be increased focus around the re-pricing process and if minimum loss ratios should maybe be met before submitting for price increases. I’m recognizing you guys are maybe further along than some of your peers but how are you kind of thinking about and handling those dialogs?

Scott Perry

Well right now, Chris, we handle them on a state-by-state basis. As you know, I think one of the approach differences that you’ll see with us versus some others that are in the marketplace is we have for a number of years installed what we have considered to be block-wide if you will price increases and now we’re into more tactical execution of rate increases on a state-by-state basis.

More particularly what we’re doing is going back into states where the dialog tended to be asking for a rate increase of X and getting something less than X, but allowed to come back with additional support for additional rate increases. That’s effectively what’s embedded in our loss recognition testing and cash flow testing is that type of an assumption, which is relatively modest.

We’ve been very successful in getting the rate increases that we’ve gone after and we continue to press that. Beyond that there’s a bigger dialog that’s taking place, and I don’t think we’re alone in this dialog – I think we’re one of the leaders in it – and that is working again on a state-by-state basis to discuss really the long-term vision if you will for long-term care given the challenges in maintaining that marketplace and providing that type of solution for policyholders in our case the middle market.

It’s a challenging marketplace to create a product and sell it effectively that has the right balancing act between our risk-adjusted return requirements and the value proposition of policyholders, particularly if you’re coming into the exercise feeling as if there’s very little flexibility over time to adjust according to the experience and the contract. So we’re having that kind of dialog which is a little bit more of a longer-term strategic issue.

Chris Giovanni – Goldman Sachs

Okay, I appreciate the thoughts, thanks.

Operator

Your next question comes from the line of Randy Binner, FBR. Your line is open.

Randy Binner – Friedman, Billings, Ramsey

Alright, thank you. I just wanted to follow up real quick on Erik Bass’ question and the response from Fred. Fred, when you said there was $125 million kind of coming in from CLIC proceeds, I just wanted to clarify that’s net of the associated debt pay down?

Fred Crawford

That’s correct, yeah. That’s correct, Randy. We would expect to get between $220 million and $230 million; $125 million we’d retain as capital at the holding company with the remainder paid down on debt. And that’s because the current debt provision essentially requires you to pay down debt with any proceeds in excess of $125 million.

Randy Binner – Friedman, Billings, Ramsey

Okay, got it. And then I guess I’m going to kind of stick with the modeling stuff: I just wanted to clarify, so there’s kind of $5 million of run rate CLIC earnings that was talked about coming back in and then around $5 million of overhead, and then a discussion of $8 million of EBIT that kind of comes potentially from the Bankers’ recapture. That’s all kind of pre-tax operating income or EBIT – those are all apples-to-apples kinds of numbers when we’re putting that into our model, is that right? The $5 million, the $5 million and the $8 million?

Fred Crawford

No, not quite. So the $5 million of unallocated or unabsorbed if you will overhead, or stranded overhead, is a pretax number of course – that’s an expense number. The $8 million of income from the recapture of the life business is an EBIT figure, so $8 million of annual EBIT – so that’s an annual number and an EBIT number. And then the last number is CLIC, and the CLIC line item that you’re seeing in our financials is actually a net income line item so it is after tax and after net realized gains and losses. And so that $5 million I referred to as more of a steady state level of income being sold away is a net income number after tax.

Randy Binner – Friedman, Billings, Ramsey

After tax, okay. That’s perfect, thanks. And then just one more on sales if I could…

Fred Crawford

Randy, one other cash flow, to just make sure you don’t miss, is realize that you ought to assume something for the deployment of that $220 million to $230 million that we’re taking in. And there’s really two mechanisms, right? One is if I’m putting down presumably something around $100 million to $110 million down on debt I have an interest expense savings. And then when we did our announcement we assumed a reinvestment rate on proceeds, a conservative reinvestment rate on the remaining proceeds of roughly 3%. So just an additional footnote to your ins and outs.

Randy Binner – Friedman, Billings, Ramsey

Sure. I mean I guess I would ask as long as you brought it up why would you assume such a low reinvestment rate of 3%?

Fred Crawford

Just the conservative nature of a CFO.

Randy Binner – Friedman, Billings, Ramsey

Okay. I guess on sales, just in case this question doesn’t get asked – I hear the weather and the bounce-back, and the investments of branches and IT and training, but I think we’ve talked about a sales goal of 8% to 9% annualized for ’14. And so you know, Q1 can be slow and there’s the weather, and is that still on its annual goal given if you net all these comments together? Is that still something that’s attainable?

Scott Perry

Randy, this is Scott. Yeah, this is just one quarter and this quarter actually on a comparative basis, comparing the progress over the prior year is better than we started out last year at Bankers in particularly who weighed down the total results a bit. The leading indicators for all three segments are looking strong so we’re not backing off of that original guidance.

Ed Bonach

And also, Randy, this is Ed – our overall expectation for sales was in the 6% to 8% range for the enterprise for 2014.

Randy Binner – Friedman, Billings, Ramsey

Right. sorry, I think I said 8% to 9%. So 6% to 8% for ’14 and then kind of 8% to 9% for ’15.

Ed Bonach

Yes.

Scott Perry

That’s right.

Randy Binner – Friedman, Billings, Ramsey

Okay, thank you.

Operator

Your next question comes from the line of Mark Finkelstein, Evercore. Your line is open.

Mark Finkelstein – Evercore Partners

My first question goes back to some of the discussion around expenses and I think, Fred, your opening remarks. I guess I’ll ask the question this way: would you be disappointed if the expense initiatives that you implemented ultimately or the expense plan wasn’t able to at least diffuse the expenses related to CLIC reallocation of expenses?

Fred Crawford

I don’t know if I would answer it in that way in terms of disappointed or not. As Ed mentioned, any sort of initiatives we take on the infrastructure of the company are just designed around taking, addressing frankly the overall cost structure of the company which is north of $600 million annually – about $350 million, $380 million of which are a bit more middle/back office or shared service in their orientation.

So when we think about investing in our infrastructure to lower our cost structure it is really looking at the totality of that bucket of expenses and not necessarily pinpointing a specific unabsorbed overhead dynamic. What’s important, what’s driving this by the way, just to step back a bit, is realize OCB was a segment for reporting purposes but never really was a business – and I think everybody’s understanding that it was an accumulation of blocks of business where we focused our attention and management time and ability around it and then reported on it accordingly.

When it comes to the actual operating of that business it borrows if you will from across the company, from across administrative platforms to operate. And so when it comes to reducing costs associated with the spinoff of CLIC yes, there’s an element of direct expense reduction that will take place in a reasonable period of time – most likely at the first-year anniversary or around that period of time after closing the deal. And that’s very natural. But then there’s a larger bucket of expenses that really involves having to adjust the way that we do business across the company, realizing small portions of everything we did or attributed or allocated if you will in some respects to this CLIC business – some more direct than others.

So what we’ve retained in the business and reallocated into the segments would be truly those expenses that are fixed in nature, that you just don’t have a direct nature of that expense and so therefore not a practical ability to reduce it. So that’s just to give you some color, Mark. I know it’s not specifically answering a specific number that we have in mind but I just want you to understand that we’re not going at this with a “Let’s reduce this amount of overhead that was previously allocated to CLIC.” We’re really stepping back and saying “What does the cost structure of the company need to look like long run to remain and frankly become more competitive in the markets we serve, the middle market?”

Mark Finkelstein – Evercore Partners

Okay, that’s helpful. LTC, interest adjusted benefit ratios – again, a little bit higher than your longer-term kind of thoughts on it, or near- to medium-term. Should we still be thinking about a 79% or is there anything structurally in the business that pushes that higher that we should be considering?

Fred Crawford

We’re not yet ready to sort of readdress our guidance on that benefit ratio based on this particular quarter’s performance only because there’s a number of moving parts to it, most notably persistency and where persistency is happening and not happening. And so we’re not seeing what we call deterioration in the underlying business from the standpoint of say claims activity and morbidity and so forth.

But we have been seeing movements in persistency and depending on the block of business involved – whether it’s more comprehensive and an older piece of business that we’ve written, say nursing home inflation for example, or whether it’s some of the newer business and short-term type insurance that we’ve been providing that makes a big, big difference in the benefit ratio. So we’re not yet re-guiding. The ratio has been elevated and the biggest driver of that elevation in the last couple quarters has been greater persistency particularly in nursing home inflation or some of the more comprehensive products.

So we’re watching it. I think if you follow our statements about long-term care and the loss recognition testing results and cash flow testing results, we continue to put this block of business in a watch pattern where we’re watching it very closely. We do not have terrific margins in this business from an actuarial perspective and so we need to actively manage it every single day and have a team surrounding that as we speak.

Mark Finkelstein – Evercore Partners

Okay. And then just finally, I think you talked about it in the press release and you alluded to it in some of your comments, Fred, how much was the favorable mortality in Bankers and the kind of favorable loss experience in Med Sup that we should be thinking about? Or did you say that that was offset by some other element?

Fred Crawford

Yeah, so if you just look at line of business, you don’t necessarily have this kind of calculation but I do from an internal analysis perspective – if you just look at the life insurance line of business year-over-year and its implied EBIT contribution, year-over-year life did better by about $2 million to $3 million of EBIT than it did last year. We think that’s not all necessarily over-performance related to mortality (inaudible, to more life insurance business and we’re certainly growing it. So you can sort of really generically view that performance year-over-year as one part growth and one part a bit of a mortality benefit.

When you come to Med Sup, Med Sup relative to what we would normally expect – so we guided to, for example, a benefit ratio of around 70%. The quarter’s benefit ratio more or less equates to about a $5 million or so better outcome than we otherwise would have planned for in the quarter, and that has something to do with some level of modest redundancy that’s in that number where we’re effectively taking reserves down that were put up from prior periods due to the continuation of strong prior performance there. So we’re getting a little bit of a kicked up level of earnings off of Med Sup as performance continues to be more consistently strong, and it would be roughly in that range.

Mark Finkelstein – Evercore Partners

Okay, alright. Thank you.

Operator

Your next question comes from the line of Humphrey Lee, UBS. Your line is open. He seems to have disconnected.

Fred Crawford

Sure. We can come back to him later if he reconnects.

Operator

Yes. Your next question comes from the line of Ryan Krueger, KBW. Your line is open. (Operator instructions).

Ed Bonach

Are there any other callers in the queue?

Operator

Not at the present time, sir.

Ed Bonach

Well if for some reason we’re having technical problems we apologize. Certainly we’ll respond to other questions on calls directly then from the analysts. Thank you for your interest in CNO and we hope that you’ll be able to take part in our June 26th Investor Day. Operator, you can end the call.

Operator

This concludes today’s conference call. You may now disconnect, thank you.

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