CNO Financial Group's (CNO) CEO Ed Bonach on Q4 2015 Results - Earnings Call Transcript

| About: CNO Financial (CNO)

CNO Financial Group, Inc. (NYSE:CNO)

Q4 2015 Earnings Call

February 11, 2016 9:00 AM ET

Executives

Adam Auvil - Director, Investor Relations

Ed Bonach - Chief Executive Officer

Scott Perry - Chief Business Officer

Erik Helding - Treasurer and Head of Investor Relations

Eric Johnson - Chief Investment Officer

Analysts

Randy Binner - FBR

Erik Bass - Citigroup

Ryan Krueger - KBW

Humphrey Lee - Dowling & Partners

Steven Schwartz - Raymond James

Yaron Kinar - Deutsche Bank

Michael Kovac - Goldman Sachs

Sean Dargan - Macquarie

Tom Gallagher - Credit Suisse

Operator

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Yearend Results for 2015. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Adam Auvil, you may begin your conference.

Adam Auvil

Good morning and thank you for joining us on CNO Financial Group's fourth quarter 2015 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer; and Erik Helding, Treasurer and Head of Investor Relations. Following the presentation, we will also have several other business leaders available for the question-and-answer period.

During this conference call, we will be referring to information contained in yesterday's press release. You could 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 in a Form 8-K earlier today. We expect to file our Form 10-Q and post it on our website by February 19.

Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most-directly comparable GAAP measures. You will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between the fourth quarter 2014 and fourth quarter 2015.

And with that, I'll turn the call over to Ed.

Ed Bonach

Thanks, Adam and good morning everyone. The strength of our business was again the evidence with our solid earnings, margins, cash flows and capital as we continue to expand our customer reach and recorded growth in several key measures. Although NAP was down, solid persistency led to increases and policies Inforce in annuity account values. While we’re pleased that we were able to show growth in these key metrics, we are disappointed in our overall sales results for the year.

We concluded our yearend actuarial assumption reviews, and I’m pleased to report that we continue to have strong aggregate margins. Eric will go into more detail on this later in this presentation.

Operating earnings per share excluding significant items were $0.38, up 12% over the prior year, as we continue to experience strong and stable margins in our businesses. We continue our solid track record of returning capital to shareholders. During the quarter, we repurchased $54 million of common stock and paid $13 million in dividends.

In looking at full year 2015 results, there are several accomplishments worth noting. While NAP results were mixed, we grew collected premiums, increased the number of policies issued and increase third-party fee income. Colonial Penn had a very strong year and as we have said in the past, success at Colonial Penn is not an accident. It’s the direct result of longer term investments in people, processes, products and technology. These investments have yield its strong growth in NAP, collected premiums and earnings.

Investments we have made in our worksite distribution channel are also paying dividends. Worksite sales increased by 13% in 2015.

Our financial results were solid as we posted double digit growth in operating EPS, grew diluted book value per share by 7%, further strengthen our capital position and increased financial flexibility in deployable capital by successfully executing on a recapitalization in the first half of the year.

We continued to generate strong cash flows and return capital to shareholders. For the year, we repurchased $365 million of common stock and paid $52 million of dividends. We increased our common stock dividend by 17% in the year, and maintained a competitive 20% payout ratio.

Last but not least, we continue our positive momentum on the ratings front, having achieved three additional upgrades in the year. With positive outlooks currently from Fitch and S&P, we believe the stage is set for achieving investment grid.

And I’ll turn it over to Scott to discuss our segment results. Scott?

Scott Perry

Thanks, Ed. Beginning with Bankers Life, NAP of $69 million was down 6% in the quarter, primarily driven by lower life insurance sales consistent with our experience through much of the past year. I’ll go in a more depth of the dynamics of our life insurance sales in a moment. Offsetting some of this decline there is an increase in annuity sales which were up 9% for the quarter, predominantly the result of strong demand for our fixed index products which offer consumers asset protection with the potential for account growth.

For the year, overall NAP was down 4%. Sales of third-party products which are not included in NAP and consists primarily of Medicare Advantage plans were down 14% in the quarter. However, we are experiencing higher persistency on the block than in previous years. And as a result, our number of third-party policies Inforce grew by 11% in 2015 while our total fee income grew 14% for the year.

Much of the sales challenges facing the Bankers Life segment can be traced back to agent count which has been stymied by softness in recruiting, primarily due to declining unemployment and higher cost of recruiting. While we have experienced an increase in the retention of our veteran agent force, which is up 3%, in order to regain momentum in new sales growth we need to become more effective in contracting new agents in today’s job market. On this point, we’ve implemented a new applicant tracking system, introduced new field incentives and broaden the channels we rely on to attract candidates to our business. This past year, roughly 40% of our offices grew their number of new recruits, suggesting that these initiatives do work, but it will likely take several quarters for us to successfully advance these practices across our system and show improvement in our recruiting and total agent count.

Let me provide you with some context related to our life insurance results, specifically Universal Life. Universal Life sales drove much of our NAP growth over the past couple of years, with significant increases in both the number of policies sold and the average premium per policy. 2015 saw a reduction in average premium per policy versus the prior two years, while the number of UL policies sold increased 2% to a level double that of our 2012 results.

The growth of UL sales over the past several years has been achieved through a concerted effort to cross sell Life into existing households and drive additional like training to a larger percentage of our agents. As we continue this effort in 2015, there were fewer sales of larger UL policies. In 2015 average NAP per policy dropped to more normal levels.

Turning to Washington National, sales were flat in the quarter and up 1% for the year. Worksite sales were up 12%, a continuation of the strong results we have experienced in 2015. Successful development of new producing agents in the first half of the year, coupled with enhanced worksite capabilities, positioned us well for the fourth quarter enrollment season. Individual market sales were down by 7% continuing the trend we have experienced since the second quarter. Going forward, we expect to regain sales growth momentum in this channel by restructuring the field leadership to drive greater accountability and geographic coverage, adding recruiting support and introducing new products in mobile technology to enhance agent productivity.

We continue to see growth in the field force with average producing agents at PMA up 8% in the quarter, benefiting from recruiting and improved conversion of recruits to producers. In addition to recruiting, we are focused on improving productivity of our veteran agents in the individual market to a level more consistent with prior years.

Lastly, Washington National supplemental health collected premiums were up 3%, reflecting steady sales and persistency.

Moving on to slide nine. Colonial Penn posted 5% sales growth in the quarter and 15% growth for the year. The positive results were driven by continued success in direct mail and digital generated activities and higher sales productivity. Sales in the quarter were lower on a sequential basis, reflecting the seasonal nature of television advertising spent. Collected premiums were up 8% due to continued growth in the Inforce.

Fourth quarter EBIT was $6.7 million, up significantly over the prior year and due to business growth increased sale productivity and higher expense deferrals due to ongoing diversification of lead generation. For the full year, total EBIT was $5.6 million, near the high end of our guidance. Inforce EBIT was $14.8 million in the quarter, up 31% from the prior year, due to the continued growth in the block and lower expenses. For the year, Inforce EBIT was $53.6 million, up 8% from the prior year.

Looking ahead to 2016 we expect Colonial Penn EBIT to be in the breakeven to $6 million range, a somewhat wider range reflects uncertainty related to how the U.S. Presidential Elections will impact the cost of television advertising. It is important to note that is in prior years, Colonial Penn typically spends more on television advertising in the first quarter. As a result, we expect the first quarter 2016 EBIT loss in the $8 million to $10 million range.

I’ll now turn it over to Eric to discuss our financial results. Eric?

Erik Helding

Thanks, Scott. CNO posted strong earnings in the fourth quarter. Adjusting for the significant items in that period, we recorded operating earnings of $0.38 per share, an increase of 12% over last year. Operating ROE excluding significant items was 8.8%.

Our health businesses generally performed in-line with expectations and we experienced another strong quarter of favorable call prepayment income. Lastly, annuity results were favorable driven by growth and account values and the positive impact related to the unlocking of assumptions as part of our yearend review.

Our capital position remains strong with consolidated RBC of 449%. Leverage was 19.6% and holding company liquidity was $382 million. We repurchased $54 million of common stock in the quarter, a bit lower than the recent activity. We are price sensitive when it comes to repurchases and with the stock price north of $20 million for much of the quarter, we reduced accordingly. For the full year, we repurchased $365 million.

Turning to slide 11 in our normalized segment earnings, Bankers Life posted EBIT of $89 million in the quarter, down from the prior year. The decline is largely attributable to the combination of more favorable LTC claims experience in the fourth quarter of 2014, and a higher level of FLR accrual in the fourth quarter of 2015.

Washington National reported earnings of $31 million, up slightly from the prior year due primarily to continued growth in our supplemental health business.

Colonial Penn reported EBIT of just under $8 million, excuse me, $7 million, up significantly over the prior year and in-line with seasonal expectations. Sales and earnings results continue to benefit for marketing productivity gains and lead generation and diversification. As Scott mentioned, we expect to generate a loss of $8 million to $10 million in the first quarter of 2016, due to the seasonality of television advertising spend.

Excluding the impact of equity market volatility, corporate segment earnings were generally in-line with expectations.

Turning to slide 12. For the quarter, Bankers Life Medicare supplement benefit ratio was 70.8%, slightly above guidance. While elevated recalled that during the first half of the year, claims were better than expectations. For the full year, the benefit ratio of 69.6% was consistent with expectations. In 2016, we expect this ratio to be in the 70% to 73% range, reflecting a continue reversions the levels consistent with pricing.

The reported LTC interest adjusted benefit ratio was 79.6%, better than recent experience and due to higher reserve releases caused by policy holder actions related to the current round of rate increases. Excluding these impacts, the benefit ratio was 85.5%, slightly higher than expectations and due primarily to higher persistency and policy is not impacted by rate increase.

This is the first quarter where we have seen any material financial impact related to the current round of rate increases and we expect this to continue throughout 2016. The timing and amount with the financial impact could be difficult to estimate due to inherent difficult and projecting policy holder actions upon notification of the rate increase. Rather than guide to reported interest adjusted benefit ratios that we know will be volatile during the year, we are guiding to ratios that exclude rate increase impacts. On this basis, we expect the ratio to be in the 81% to 86% range in 2016.

Washington National supplemental health interest adjusted benefit ratio came in at 57.5%, another solid and stable quarter after experiencing elevated claim levels in the second quarter. For 2016, we expect this ratio to be in the 56% to 59% range.

Turning to slide 13 in investment results, we continue our taxable approach to investing new money. We put money to work at 5.17% capitalizing on market volatility that resulted in wider spreads. Call prepayment income was again favorable, with the fourth quarter seeing the highest level of activity in the recent past. The higher levels of growths realized gains and losses are reflective of tactical portfolio repositioning in the quarter. We trim positions at the longer end of the curve in certain sectors that were tight, and also trimming positions in sectors that were facing tougher fundamental issues.

In addition, we are considering refinancing one of our CLOs and in conjunction, rebalance some collateral to make overall asset composition more attractive. Taking together, this resulted in $2.5 million of net realized gains and $18 million of impairments.

Before moving on, it’s worth discussing our energy sector exposure. Our current asset allocation of $1.6 billion is roughly 6% of invested assets. We believe this is an appropriate and manageable allocation, as our investments in this sector tend to high quality, highly diversified and liquid. Please refer to slide 20 in appendix for more details on CNO’s energy sector exposure.

Turning to slide 14, we tested virtually all of our $23 billion of liabilities and overall margins were healthy and improved over last year. The net impacted new business and run-off of existing business add a $260 million. Policy holder experience updates were generally positive and increase margins by $50 million. We updated earn rate assumptions and this resulted in a decrease to margin of $35 million. Our new assumption flattens out the trajectory and pushes out recovery to the same ultimate rates by one year.

Slide 15 discusses our long-term care testing in more detail. Before diving into the results, it’s worth mentioning that CNO’s LTC business is different than most other blocks in the industry for a number of reasons. A simple example of this is depicted on the pie chart on the right hand side of the page. The chart shows that roughly 72% of active life reserves or 87% of policies have a benefit period of four years or less.

Furthermore, only 10% of reserves or 4% of policies have lifetime benefits. This greatly reduces the risk profile of the business and makes of less acceptable to large swings in margin due to small changes in experience.

Overall testing margins increased to $180 million in 2015, up from $100 million in 2014. The change in margins is attributed to an increase of $30 million related to net new business including the build in future loss reserve, an increase of $60 million related to experience including $40 million related to changes implemented to claims management protocols and a $10 million reduction related to updated interest rate assumptions.

With respect to experience, it’s important to note that a comprehensive persistency study was conducted including a thorough review by an independent third-party. In addition, we updated the claim cost study that was conducted in 2014, the results of which were also reviewed by the third-party.

Consistent with past practice, we do not assume any new rounds of rate increases or shock laps for the purposes of loss recognition testing. The table at the bottom of the slide provide sensitivities to key assumptions. As you can see, while the dollar impacts are not insignificant, we’d view the balance sheet impact related to any one sensitivity as manageable.

Lastly the table on the bottom right depicts the change in GAAP future loss reserves and statutory asset adequacy reserves. These additional reserves will continue to grow overtime and serve to protect our balance sheet from the cost ability of any material charges.

And with that, I’ll turn it back over to Ed for closing comments.

Ed Bonach

Thanks, Eric. With another year to complete, let’s take a somewhat longer term view of what we’ve accomplished over the last three years.

In 2013 we established various milestones to achieve by 2015. I think that you will agree that we delivered at or above these targets in most every way. These are signs of a sound strategy, solid business fundamentals, focus leaders and execution. As we look forward to 2016, I'm pleased with our progress on the CFO search. We are fortunate to have a number of outstanding candidates expressed interest in the position, and we have interviewed several of them. We have narrowed down the universe but I’m committed to taking the time that we need to secure the right executive for this important position.

Going forward, CNO will continue to be focused on some key priorities. Rebounding from the challenging year, Bankers Life expects to see recruiting and sales gains from infrastructure investments made over the last few years. Washington National will focus on address the clients in the individual market through continued agent growth, new product introductions and geographic expansion. Of course, we expect to continue to profitably grow Colonial Penn and diversify their lead sources in spite of the challenges of direct television marketing in the presidential election year.

Our in-house broker dealer and RIA would help to more fully serve our middle income customers as they moved from the accumulation to the distribution phase of their 41K plans and other assets. Our approach is to align the products and services to our customers’ needs for investment in planning solutions coupled with risk protection.

We know quite a bit about our customers, but we need to organize and utilize data more systematically to serve these needs. Reducing LTC exposure by half over the next three to six years, we’ll increase our financial flexibility in ROE, plus reduced beta. We will accomplish this by growing our non-LTC businesses and executing reinsurance solutions. We continue to be encouraged by the possibilities on the reinsurance front.

Augmenting our organic growth with acquisitions along with more fully utilizing our non-life tax asset remained priority. The flow of potential properties for acquisition is robust.

Finally, we’ll continue to effectively manage risk and deploy excess capital to increase profitability, return on equity and shareholder value.

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

Question-and-Answer Session

Operator

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

Randy Binner

Hey, good morning, thanks. I’ll keep it to a couple. I guess the first is on the GAAP recognition testing and this is referring to something on page – slide 15 of the deck. So you mentioned the experienced related benefit was pretty big at $60 million and you said $40 million of that was from a benefit to claims changes, could you flush that out a little bit more because that’s pretty – that’s by the largest single piece of the improvement there?

Erik Helding

Sure Randy, this is Erik. The $40 million was related to some of the claims management initiatives that we spoke to you about at the beginning of last year, and that we were in the process of piloting throughout 2015. So, a couple of those, specifically one we’ve progressed far enough along through that pilot process that we feel is appropriate at this time to actually incorporate some benefits into our loss recognition testing. And the pilot that we’re talking about really has to do with getting at the accuracy of billing of home healthcare providers.

Randy Binner

So, your benefit was that much on a perspective basis because you’re just more efficiently billing, I guess…?

Erik Helding

That’s correct. Well remember, this is present value over a number of years.

Randy Binner

What was the main problem the way – sorry, go ahead.

Ed Bonach

Yeah, Randy it’s billing accuracy from the providers as well as candidly being able to detect over billing their fraud.

Randy Binner

Okay got it, so it’s better for our protection, okay got it. And then on the mention of the wholly owned BD or RIA platform, two questions there. One, is that something you could build organically or would that potentially be kind of a material use for your deployable capital? And if so, with the stock price here, I’d be interested to hear how you kind of view that, meaning is that kind of go slower or go fast?

Scott Perry

So Randy, this is Scott. Little context on that, just so everybody is clear, we have about – today about 300 clear agents that are also registered to sell securities, they just have historically been registered through a third-party broker dealer. We established – to specifically answer your question, we built organically our own broker dealer and additionally filed and achieved – received approval on our registered investment advisor. So during the course of this year we’ll be moving those 300 advisors over from our third-party relationship on to our platform. And we expect to grow that as we expand this – to the rest of the agency force.

Now, up until – as we were using the third-party, we didn’t get the same economic benefits that we’ll be able to, from launching our own broker dealer, so by bringing this in-house we’re able to generate additional line like fee income and put that type of training and support in place that will allow us to grow our number of financial advisors. I think there is an opportunity to – from an M&A standpoint to look at adjacencies and ways that we can leverage those platforms and that is within our M&A scope.

Ed Bonach

Yeah, and in that Randy, as far as acquisitions and stock price with current levels of stock price that a notable discount to book value we’re not inclined to go and issue stock nor do we believe we would have to do that given the capital and liquidity levels that we have in the company.

Randy Binner

Yeah, I guess I was asking more specifically is like how would, I mean is there – could you even by a BD or a RIA now that would compete from an investment perspective versus just buying back your own stock at 80% of book value?

Ed Bonach

We think we’re in that position where one doesn’t necessarily preclude the other.

Randy Binner

Okay, and then just on the speedy thing, I mean how does this fit into the whole DOL fiduciary thing, is it meant to kind of be a post DOL fiduciary rule compliant organization? I mean because you’re kind of – this obviously the way that’s operates I assume is going to significant affected by those new rules. So if you could just update us on that piece that I’d be interested in?

Ed Bonach

Sure Randy. Again I think it’s important we talked about the DOL impact to CNO in the past. It's important to first start out on understanding that two-thirds of our business is health and life insurance that won't be impacted at all. That leaves about one-third of our business. We don't manufacture any securities. We don't have any plans to manufacture any securities.

So, and half of our fixed index business is associated with qualified business. So, again, as you kind of look at the scope of the deal overall, it really impacts the limited portion of the business that we manufacture. And in particular within fixed index annuities that appears that they are poised to follow under a less stringent set of regulatory requirement.

And having said that, absolutely to your question, we're building out both our broker dealer, and I mentioned the RIA, and you remember the RIA allows you to do fee-based planning, specifically to be compliant with any DOL rules and regs and actually gives us that leverage point to be able to pivot a fee-based model in that – in those areas of the business that we need to.

Randy Binner

All right, that's great. Thanks a lot.

Operator

Your next question comes from the line of Erik Bass of Citigroup.

Erik Bass

Good morning. Thank you. First, if you could please comment on the level of interest in closed block long-term care transactions that you're seeing in the market now given the recent decline in interest rates and the widening of credit spreads. I guess are you still seeing interests that you believe that getting a transaction done in this environment is still feasible?

Ed Bonach

Short answer, Erik, is yes. We think we – it is feasible. But at the same time, I want to remind everyone that we thankfully earned a position where we don't have to act within a short time period. So, short-term pressures or even somewhat longer term pressures on interest rates doesn't necessarily materially impact our ability or need to act. In that – as we talked with our – disclosing our last recognition testing results, the claims and the reserve levels play a very important part in the value of any of these work. So, while interest rates are important, the other elements and fundamentals of the business are even more important. So, we continue to be optimistic that not only is there interest, but there is actionable interest if we so choose.

Erik Bass

Got it. Thank you. And then for your long-term-care margin guidance, just to clarify, should we view the 81% to 86% sort of margin guidance as understating what you actually would expect to earn this year, given the likelihood that there will be additional shock lapses?

Erik Helding

Yes, Erik. This is Eric. That's absolutely correct. The actual reported benefit ratio should be lower as we go through 2016. So, what we'll do is we'll – every time we report earnings, we'll pull out the reserve-related impact of the shock lapse and present to you in normalized interest as the benefit ratio so that the analyst and investors can get a better understanding for what the run rate margins are of the business.

Erik Bass

Got it. Thanks. And if I could just sneak one last one in. How are you thinking about the level of the RBC ratio that you want to maintain near term? And this being a 450% sort of implicitly, you already have a buffer for any potential credit losses or ratings downgrades built in?

Erik Helding

Yeah. Hey, Erik. This is Eric again. So, I think where we're trailing in about right now is the level that we'd like to be in. It's in this 425% to 450% on a consolidated basis. That is a bit elevated, and it is higher than we think we need to run over the longer term. But for the time being, because we still have $4 billion of long-term care reserves, we have low interest rates and we are being careful about the next credit cycle, as you mentioned. We think we do need to run at slightly higher levels.

Erik Bass

Got it. Thank you.

Operator

Your next question comes from the line of Ryan Krueger of KBW.

Ryan Krueger

Hey. Thanks. Good morning. I had a follow-up on the broker-dealer RIA initiative. Will there be any material startup costs related to this or is that something you've already been incurring as you've been preparing for this?

Scott Perry

Hey, Ryan. Yes. And we – and yes and yes. There will be some. They're fairly modest, and we've been incurring them. And we'll incur some modest amounts during the course of 2016.

Ryan Krueger

Okay.

Ed Bonach

And, Ryan, Ed here. In our investments over the last three years that I noted, that's part of that roughly $100 million that we have invested. And the good thing is that we're able to not only self-finance that, but that $100 million is not material to our earnings stream all in all that our expense levels have continued to be quite stable.

Ryan Krueger

Okay. Thank you. And then moving to long-term care, can you give us a sense of where the long-term care new money rate compared to the overall company's 5.17% in the quarter? I'm just trying to get a sense for how it compares on the longer-duration portfolio to the assumptions you guys are using in reserves.

Erik Helding

Hey, Ryan. This is Erik. So, we've not disclosed the specific portfolio rate for the long-term care block. That being said, the number that we show you in the investment slide is the aggregate number. You can expect that the long-term care-related new money rate is going to be slightly higher than that. And we've largely been successful on achieving the target for 2015.

Ryan Krueger

Got it.

Erik Helding

So, with respect to going forward there, there is a slide in the Appendix that details what our interest rate assumptions are going forward for long-term care. And it mimics what we basically did last year with the exception that we have essentially pushed out the curve by one year and softened that recovery in year two by about 25 basis points.

Ryan Krueger

Okay. And then, lastly, on the $14 million in the margin from claims management initiative, do you still ultimately expect to achieve $100 million benefit over the longer term?

Erik Helding

That's correct. So, really, as we've installed this, the impact – the expected impact from just one of the initiatives, there were some other things that we're taking a look at which we'll continue to pilot throughout 2016 and into 2017. I wouldn't expect to build in the $400 million by the end of 2016. That'll likely come in over a couple of two, three, four years.

Ryan Krueger

Okay. Right. Thank you very much.

Operator

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

Humphrey Lee

Good morning. Thank you for taking my question. Regarding to your loss recognition testing, especially, for the run-on and run-off piece of $30 million improvement, can you provide some additional color in terms of the moving pieces [indiscernible] the run-off versus future loss reserve build?

Erik Helding

Sure, Humphrey. This is Erik. The net run-on, run-off, excluding the FLR, was actually about zero. So, really, the $30 million is largely attributable to the FLR build.

Humphrey Lee

Got it.

Erik Helding

And the net being zero is because, as you would know, we sold very little long-term care business, about $20 million to $25 million on an annual basis. And a vast majority of that tends to be short-term care, which has lower premiums and, therefore, in terms of dollars, lower dollars of margin.

Humphrey Lee

Okay. Got it. And then maybe a question for Scott. So, in terms of the sales the bank has in Washington National, while I understand the headwinds from weak recruiting and the changing customer preferences kind of has been a headwind for 2015 but then, how are they kind of different from what were you expecting when you revised your guidance on the third quarter call in terms of your full year 2015 outlook?

Scott Perry

Well, yes, Humphrey. We expected the pressures to be there, and that was reflected, I think, in lowering our guidance. I think, it's hard to peg that number exactly. It's one of the reasons why we're not providing it going forward. But directionally, we felt that we were going to be pressured, given what we were experiencing in recruiting and the impact that that has to absolute agent force size. And so, that's what we experienced. So, I think it's fairly consistent.

The experience at Washington National was more acutely related to our individual consumer marketing division results. And again, we feel some headwinds that was just hard to anticipate exactly the impact of those headwinds in advance. But directionally, I think we were expecting them to put pressure and push us towards the low end or even revising the guidance, which we did.

Humphrey Lee

Okay. And then, you talked about the recruiting agent being – reaching 2015. But looking at kind of 2016 year-to-date and based on what you've seen, how are we looking in terms of your agent recruiting and bankers?

Scott Perry

Hey, Humphrey. It's really too early to predict anything or to get any indication. There's a lot of moving parts when we look at what's going and compare it year-over-year. So, I rather not do that.

Humphrey Lee

Okay. Thank you.

Operator

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

Steven Schwartz

Hey. Good morning, everybody. Thank you for taking my question. Just a lot of stuff has already been asked. But I do want to follow up on a couple of things. Just to make clear on the interest-adjusted benefit ratio for LTC, the slide said no rate increase impacts. Is that just reserving – is that just referring to the reserve impacts by downs, lapses or is there something else going through there as well that needs to be taken out?

Erik Helding

Hey, Steven. It's Erik. It is just the reserve-related impacts. So, what we're leaving in there is the additional premiums that we're collecting from the rate increase.

Steven Schwartz

Okay. I just want to make sure. Okay. And then does the IABR continue to include $12 million a quarter in FLR?

Erik Helding

Well, yeah, the FLR was not was not $12 million. You may be thinking about the quarterly accrual on a statutory basis for asset adequacy reserves. The IABR on a GAAP basis, the accrual has been about $8 million a quarter.

Steven Schwartz

$8 million. Okay.

Erik Helding

And that would be the expectation for 2016 as well.

Steven Schwartz

Okay. And then...

Erik Helding

And again, this is excluding the impact of the rate increase because I recall when we have shock lapses, there will be reserves released. But roughly half of those reserves will be swept up and accrued into additional FLR approval.

Steven Schwartz

That's great. Okay, and then just on the pre-page, what would you consider the more normalized level?

Erik Helding

Yeah, tough question. It's been bouncing around quite a bit. I'd say a couple of years ago, our expectation, we were seeing pretty consistent – excuse me. Consistently about $2 million to $3 million a quarter. It's been running about twice that level for the last couple of years. So, hard to peg but something certainly in the $3 million to $6 million range seems to be kind of the norm as of late anyway.

Steven Schwartz

Okay. Thanks, Erik.

Operator

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

Yaron Kinar

Good morning, everybody. Just want to ask, one follow-up on the long-term care margins sensitivity testing. You call out the claims management bucket and the experience assumptions. Are there any other large buckets that you can maybe talk about?

Erik Helding

I mean, obviously, the experience here – sorry, Yaron, this is Erik. The experiences, obviously a lot that goes in there. There's mortality and morbidity, there's persistency. So, I'd say net-net so, excluding the impact of the claims management initiative, that net-net number was about $20 million and there were puts and takes in there. But I think probably the one place where we had some positive was on the persistency side. And that was a result of conducting that detailed persistency study.

Yaron Kinar

Got it. And then in terms of the headwinds you're facing in Bankers and the initiatives you're taking to result from the issue, is it fair to say that it's probably more of a 2017 event where we actually start seeing the inflection point?

Scott Perry

Yeah, Yaron. Scott here. I think that's a fair observation. I mean, as I mentioned in my comments, we did – about 40% of our agencies did help recruit the previous year. We've begun to make some shifts in process and in buying technology and best practices. And as we drive those across the organization, we expect them to have an impact. But it will take some time to drive those best practices across the entire organization. We certainly are hopeful for 2016, but we recognize that it's going to take some time for those things to take hold. And we'd expect to see that improvement in 2017.

Yaron Kinar

Got it. And then one final question on the energy exposure. I'm actually surprised we haven't really gotten questions on this until now, but can you maybe walk us through the unrealized loss positions in the energy portfolio as a whole and specifically in the below investment grade portion of the portfolio?

Eric Johnson

Yeah. Good morning. This is Eric Johnson. I can do that. Portfolio as a whole is a $1.6 billion. Think about it, for the purpose of your question, in two parts. Part one would be the investment grade portion, which is about – a little in excess to $1.4 billion. And that probably is about – at about a $0.95 on the dollar mark-to-market. A little off, but not much. So, fairly representative of an index portfolio.

The non-investment grade portion is up a little more than $190 million. The mark-to-market on that is in the context of minus – is around minus $40 million in total, which is around $0.76, $0.77 in a dollar. It's a – it will trade a little higher than in an indexed portfolio. It has some different composition, characteristics. Having said that, in terms of looking forward, one sees all kinds of ratings migration and actual default loss forecast ranging very widely. We're aware of all of those, and we have our own. And we think that probably the current level of unrealized losses may not be representative of the experience that will emerge in the portfolio, but does reflect some stresses in the market and in our portfolio as well.

But in allocation, particularly the non-American grade portion, obviously, it's not oversized relative to our company, although it's a little large relative to the index. And it's something that we're working very actively, turned over very aggressively over the last 12 months. I would expect that we'll continue to actively manage that allocation. And I don't expect that it will derail the company's larger activities and plans.

Yaron Kinar

That's helpful, helpful color. One quick, final question. Do you happen to know what the RBC impact would be of a one notch downgrade over the overall portfolio, energy portfolio?

Eric Johnson

That's all we talked about yesterday. And there's a couple of ways to look at that question. The word notch means different things from a kind of statutory accounting perspective and then from an investment practitioner perspective. And our notch across the whole deal would be around 8 RBC points. A statutory accounting notch, meaning everything going from, let's say, from any NAIC 1 to 2 or 2 to 3 or 3 to 4, in a whole shooting match, will be around 30 RBC points. If you ask me what my expectations for the year would be, putting aside the technicality, it could fall somewhere between the two.

Yaron Kinar

Great. Thank you very much.

Operator

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

Michael Kovac

Great. Thanks for taking the question. Just wanted to come back to the buyback guidance. In terms of thinking about what would put you at sort of low or the high end of that guidance, what is your thinking around that, and then maybe more specifically in terms of being opportunistic in the first quarter relative to where your stock price is trading today?

Erik Helding

Hey, Mike. It's Erik. So, the range, obviously, $275 million to $375 million is a bit wider than we usually go out with. But it's wide because we recognize we're at the beginning of the year and there's a wider range of possibilities.

What could make us get to the high end of that range would be – or low end of the range is really the stock price itself, and compelling alternatives. So, to the extent we have no compelling alternatives and the stock price is lower, yes, it's likely we'll buy back towards the high end of the range. If the stock is particularly weak, there could be the opportunity to even buy back more than the high end of the range. We certainly have the cash flow and capital to do so. Conversely, if the stock is very strong, trading north of book value for the same period of time, it's likely we would be coming in at the low end of the range.

Michael Kovac

Okay. That's helpful. And then, I know you don't want to speak specifically about the impact of what you expect for the shock losses on the LTC loss ratio. But in terms of timing, can you help us think about over sort of what period will you be ruling out the actual rate increases to your policyholders. Is it mostly completed today? Is it mostly sort of the first half or can you maybe give us any guidance on that?

Erik Helding

Yeah. Mike. Erik again here. So, most of the filings have been completed at this time. There are some – there are probably a larger number of filings but they have small financial impact. And we've received approvals for our roughly 70% of the expected financial impact.

So, approvals, we hope will continue to come in over the course of 2016. Implementation of those approvals will continue to happen over 2016 as well and as policyholders who received notifications reach their anniversary date, that is when they will have to act on the rate increase. They'll either have to accept it, will have to accept a downgrade of their benefits or they'll lapse.

So, it's somewhat of a slow burn in terms of recognizing the financial impact in your income statement. What I would say though it 2016 every quarter will heavy in rate increase activity and that will continue into, at least, the first half of 2017.

Michael Kovac

Okay. That's fair. So, the actual implementation will bleed into 2017?

Erik Helding

Implementation of terms of yes. Policyholders reaching their anniversary dates and having to act, correct.

Michael Kovac

Okay. Thanks. And then one final one. The third party fee income in bankers has been pretty strong. It look like it slowed a little bit in the fourth quarter. But can you give us sort of your thoughts going forward into 2016 and beyond as to where you sort of expect to grow this, maybe not a specific number but relative to those recent year and quarter?

Erik Helding

Yeah. I think we're expecting consistent growth as we've experienced. I mean that block has, as I mentioned in my comments, the persistency is improved and that's a dynamic that we're seeing in the marketplace as there is less plans switching going on and made plan switching. So, although it has a dampening effect in new sales, it has a positive effect on persistency. And that's what's coming through and allowing us to grow that block.

We'll continue to offer the consumer the choice, and the consumer preference will somewhat drive whether we offer or sell the third-party product over the manufactured product. But we expect to continue demand for third-party products, in particular, Medicare advantage.

Now, one of the other things that's a little early to expect this in 2016 but certainly by 2017, the comments I made around the broker dealer and the RIA income that today is not captured because of third-party relationship will begin the flow through our BD and RIA as fee income. So, that's going to be a driver towards future growth of fee income along with the traditional way we've done that up until this point.

Michael Kovac

Okay. Thanks for the answers.

Operator

Your next question comes from the line of Sean Dargan of Macquarie.

Sean Dargan

Hi. Thanks. I just want to come back to the shock lapse and LTC. And what you're saying seems to be a little bit different than what some other LTC carriers are saying. Particularly one large one has said that essentially, nobody lapses the product because the cost of paying for a nursing home out of pocket is a less economically sound decision. So, I'm just wondering, is there something about your customer base that's different in how they make that decision?

Ed Bonach

Yeah. Sean, this is Ed. I think one thing we believe is at least some differentiation is we're focused on serving the middle market customer. And those that serve more affluent customers, their customers, most likely, have more financial flexibility on accepting rate increases than ours do in certain circumstances.

Sean Dargan

Okay. Thanks. I know it's early, but the rollout of the BB in RIA, do you – can you share with us internally how you're thinking about how long it would take to use up the non-life NOL?

Ed Bonach

Sean, Ed here again. On one hand, it's early from the standpoint to having our own BB RIA. But to Scott's point, we do have these bankers/agents that are securities licensed and have been selling through these third party broker dealers. So, we have some idea of a potential starting days and where it could go.

Right now, we do have the disclosures as to what we assume in our tax valuation allowance as far as expected future non-life income. As you can see, hopefully, by our results in 2015, we continue to look for difference ways to increase that. The broker dealer RIA is one element, but we're going to continue to look for ways that – our objective is to use it all, even though we don't currently have things in place that would allow us to release more of the allowance at this time.

Sean Dargan

Okay, got it. Thank you, Ed.

Operator

Your next question comes from the line of Tom Gallagher of Credit Suisse.

Tom Gallagher

Good morning. Ed, first, wanted to ask you a question on how you're thinking about the long-term care risk transfer opportunities? I guess you've been talking about it for a while. I know you did one in early 2014. But can you comment on I guess from a high level why is it taking a while to get something done? Is it just market conditions? Is it price? Is it structure? Just at a high level, can you comment on – is it really just the terms that you're waiting for things to get better on?

Ed Bonach

My answer is first a drawn analogy back when we had the closed block segments OCB. And that – we – first of all, you are not in a situation where the house is on fire and we have to do something in any time period. That was very much taking into consideration when we set the objective roughly a year ago of over 4 to 7 years, and now over 3 to 6 remaining years. So, in no way did we every expect that we would have to necessarily do something within a shorter time period.

Secondly, one of the key things that we look at in any potential transaction is how will book value be impacted and most likely, it would take a hit, especially if we include some of the more volatile, longer duration or longer benefit period product. But how will ROE increase, how will the multiple appraised to book increase and how will our beta decrease? We wanted to be a good trade so that the net of all of those turns out to add value to the company and the shareholders.

So, the last thing I'll say is that, if we look at our business, we've got a lot of varieties that can be reinsured and we have interest from third parties to reinsure. So, a business that's more recent issued in the last 5 to 10 years, business issued 10 to 15 years ago, and business issued much longer than that. So, trying to figure out what is our best opportunity to trade and get that shareholder value creation is really what's guiding us and where are our analysis is focused.

Tom Gallagher

Got you. And then, if I think about, I guess, just broadly how you're thinking about capital management for the company. And I appreciate the fact that if your stock price is low, you want to buy more. But how much are you factoring in a stress test? I mean, obviously, we're in a low-interest rate environment right now. And when I think about what could go right, what could go wrong, I guess my bigger concern would be if rates keep going down, I think the whole industry's stock prices will be under pressure. And I wouldn't think the natural reaction would be to buy more stock. I would think it would be to anticipate potential other needs for capital if rates remain well. So, I don't know. Just can you help me understand how you're thinking about it, particularly right now, given the environment we're in? Thanks.

Erik Helding

Yeah. Tom, this is Erik. We are thinking about it and, obviously, we do run stress test on an annual basis. And we go through exactly the scenarios that you're laying out. So, one thing I can tell you is we are monitoring credit conditions, obviously, very closely. We do have some interest rate risk that's in our long-term care business that's in Bankers. So, we run our Bankers' risk-based capital at north of 425%, so that results in 450% or so on a consolidated basis. So, that's higher than we think we need to run it over the long term, especially if we can reduce our long-term care exposure.

So, what you're saying is what we're doing when we think about risk. We're holding extra capital in the insurance companies. We've got about $230 million of excess capital at the holding company that, frankly, we do get questions, why aren't you buying back more stock? Why aren't you doing this? Why aren't you doing that? It's because we are monitoring risk very carefully, and we don't go all in on any one sort of deployment endeavor.

The other thing I'll add, Tom, is the fact that we continue to have very strong cash flow generation. So, roughly $350 million annually of deployable free cash flow from our businesses that each year, we have that classy problem of how much do we retain in the capital of the insurance companies, aka, RBC. How much do we have as liquidity in the holding company and how much do we deploy in the dividend stock buybacks and other uses.

Tom Gallagher

I appreciate that, guys. And just last question. Is Beechwood Re a contingency risk that we should be considering here or is there more than enough overcollateralization to deal with that under most stress scenarios?

Erik Helding

I'll answer that two ways. First, with any reinsurance, the company has counterparty risk. And regardless of which entity that is, that is reinsured. With Beechwood, we have the overcollateralization trust that give us additional protection above and beyond the assets supporting the reserve. So, from that standpoint, we've got extra protection and we feel comfortable and obviously had those put in place from the outset.

Tom Gallagher

Okay. Thanks.

Operator

Your final question comes from the line of Randy Binner of FBR.

Randy Binner

Hey, thanks. I just had a couple of follow-ups. One, I just wanted to confirm that there's been no sale – and I apologize if I missed this. There has been no sales guide for 2016. Is that correct? Just kind of rebuilding your outlook into 2017.

Ed Bonach

Randy, you're correct on no sales guidance. The reason is not rebuilding here. It's very much in keeping with what we started to talk more about and disclose more about starting in the third quarter is that growing the enterprise has several different metrics. And as we talked even more today in Q&A about the BD, that's another element where sales to the BD RIA as we move forward will also not be included in NAP or new annualized premium. So, to look at only one measure of growth being NAP and guiding on that, we believe, does not serve anyone well.

Randy Binner

All right. Fair enough. And then just back to the credit piece. Is there any way to characterize how that unrealized loss, either the $44 million I think Eric Johnson said in the BIG Energy your $100 million overall energy, can you characterize at all how that's changed year-to-date?

Eric Johnson

Sure. I can. It's about 25% larger year-to-date than it was – could be at the end of the year, consistent with overall movement in credit spreads.

Randy Binner

Okay. And so – okay. So, the $44 million is 25% there. Got it. And then are you seeing other asset classes that are showing kind of material shift from a gain to a – I mean, from an unrealized gain to unrealized loss position outside of energy or from your perspective to-date is it's still isolated energy?

Eric Johnson

Oh, no. It would be fair to say that there are various segments, there'll be credit markets that are substantially wider period over period from the beginning of the year, and that certainly is true in corporate high yield, it's true in some parts of the securitized market, CMDS as one example. It's true in a number of markets, and it's doing a number of markets and it certainly would affect any credit portfolio including ours.

Randy Binner

Good. Then, I mean, are those all the way being in a loss position, those other buckets? Unrealized...

Ed Bonach

I just want to be a little careful about disclosure.

Randy Binner

Sure.

Ed Bonach

Okay. But what I think I can say is that if high yield is, let's say, 70 basis points wider than it was at the beginning of the year, on an index basis, our portfolio is probably 50 basis points wider. So, take 50 basis points by about a 5% allocation, just what we have in corporate high yield, and that would be the change in the unrealized for corporate high yield. It may be at a small unrealized, although to be honest, I don't know the number. I think if it's unrealized, our loss is small.

Randy Binner

Right. Fair enough. That's really helpful. Thanks a lot.

Ed Bonach

You're welcome.

Operator

And now...

Adam Auvil

Operator, are there any more questions?

Operator

And there are no further questions at this time. I will hand the call back over to the moderator for closing remarks.

Adam Auvil

All right. Thank you, everyone, for your interest of CNO Financial Group.

Operator

And this concludes today's call. You may now disconnect.

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