CNO Financial Group, Inc. (NYSE:CNO)

Q1 2017 Results Earnings Conference Call

April 27, 2017, 11:00 AM ET

Executives

Adam Auvil – IR

Ed Bonach – CEO

Erik Helding – CFO

Gary Bhojwani – President

Eric Johnson – Chief Investment Officer; and President 40/86 Advisors, Inc.

Analysts

Randy Binner – FBR Capital Markets

Erik Bass – Autonomous Research

Sean Dargan – Wells Fargo

Ryan Krueger – KBW

Daniel Bergman – Citigroup

Humphrey Lee – Dowling & Partners

Yaron Kinar – Deutsche Bank

Tom Gallagher – Evercore ISI

Operator

Good morning. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group First Quarter 2017 Earnings Conference Call. [Operator Instructions].

Mr. Adam Auvil, you may begin your conference.

Adam Auvil

Good morning, and thank you for joining us on CNO Financial Group’s First Quarter 2017 Earnings Conference Call. Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Gary Bhojwani, President; and Erik Helding, Chief Financial Officer. Following the presentation, we will also have several other business leaders available for the question-and-answer period.

During this conference call, we will be referring to information contained in yesterday’s press release. You can obtain the release by visiting the media section of our website at 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 on May 3.

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’ll be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between first quarter 2016 and first quarter 2017.

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

Ed Bonach

Thanks, Adam, and good morning, everyone. We continued our strong performance in the first quarter of 2017. CNO’s diversified business model, coupled with disciplined execution of our strategy, resulted in solid financial performance and growth across most key metrics.

Growth highlights for the quarter include a 5% increase in collected premiums and continued strong annuity sales and solid customer retention. Operating earnings per share increased 26%, driven by favorable underwriting margins and investment income. We again generated considerable net free cash flow in the quarter and returned $57 million to shareholders after resuming our share repurchase program. We continue to be an industry leader in terms of returning capital to shareholders.

Turning to slide 6. We have a diversified business model that broadly reaches and serves the middle income market in the U.S. That diversification, and being a market focused company, means our success cannot be measured by one or two metrics. A basket of metrics best depicts our business growth, customer reach and retention. Our growth scorecard includes the pertinent metrics to help assess the growth of our business from our diversified product lines and services delivered through our various channels. A more granular view of the growth scorecard can be found in the appendix.

And with that I’ll now turn it over to Gary to discuss our segment results. Gary?

Gary Bhojwani

Thanks, Ed. Before turning to the segment results, I would like to make a few comments on the recently announced changes to our executive leadership team and provide an update regarding our implementation of the Department of Labor’s fiduciary standards rule. On the leadership changes, Mike Heard was appointed President of Washington National; Joel Schwartz was appointed President of Colonial Penn; and Gerardo Monroy was appointed Chief Marketing Officer. These moves were all internal promotions and demonstrate the commitment CNO has to developing and retaining strong talent. Additionally, these changes are designed to accelerate the company’s strategic growth, further strengthen the enterprise and position the organization for continued success.

Regarding CNO’s implementation status as it pertains to the fiduciary standards rule. Our, time line shifted commensurate with the delayed implementation date, however, our core strategy remains, with no material deviations expected until changes, if any, are definitive.

Moving to slide 7 in our Bankers Life results. Total collected premium grew 4%, driven primarily by annuities up 10% and continues the growth in this product line that we’ve experienced in recent quarters. Annuity account values increased 4% on recent sales momentum.

Health new annualized premium increased 10%, driven by growth in our Medicare supplement in short-term care product lines. New annualized premium from life products decreased 8% — 18%, excuse me. Trailing four quarter third party fee income primarily derived from the sale of Medicare Advantage plans increased 6%. Average producing agents decreased 6%, primarily due to fewer first year agents. As mentioned last quarter, we continue to evaluate all aspects of our agent recruiting model as we shift to more targeted recruiting of new agents and the attention and development of higher producing longer tenured agents. Additionally, while not yet material to our overall results, we continue to see customer assets and registered advisers growth in our BD and RIA businesses.

Turning to Washington National; total collected premiums were up 5% with a 6% increase in supplemental health, partially offset by the continued run-off of the closed Medicare Supplement block. First year collected premiums were up 2%, reflecting increased sales over the past two quarters. Total new annualized premium was up 5%, driven by a record first quarter at PMA. Worksite new annualized premium was up 2% and benefited from growth in our PMA producing agent count and higher life sales, resulting from the introduction of a new living benefits rider on our UL product. Individual NAP was up 7%, driven by momentum resulting from changes to the PMA field leadership structure implemented in the fourth quarter of 2016. New agent recruiting at PMA contributed to an increase of 6% in the average producing agent count in the quarter.

Moving on to slide 9, into Colonial Penn. Total collected premiums were up 6% due to growth in the block and stable persistency. First year collected premiums were down 2% due to lower recent sales. New annualized premium was down 10% as increased competition for television advertising had not abated in the postelection period. This has resulted in limited inventory of cost-effective TV spots, leading to reduced marketing spend and lower sales in the quarter.

We remain disciplined and opportunistic with our marketing spend, and will invest as attractive advertising buying opportunities become available. Partially offsetting this decline, is our continued progress in diversifying lead generation away from non-deferrable television advertising towards deferrable web, digital and direct marketing activities. All of these considerations are reflected in the full year EBIT guidance range of $5 million to $15 million.

I’ll now turn the call over to Erik to discuss our financial results. Erik?

Erik Helding

Thanks, Gary. CNO posted another strong quarter on the earnings and capital fronts. We reported net income of $0.36 per share, up 44% from the prior year. Operating earnings per share was $0.34, up 26% from the prior year. First quarter 2017 results were impacted by favorable underwriting margins and investment results, partially offset by higher expenses due to a true-up of our guaranteed fund assessment liability related to the Penn’s Treaty and solvency proceedings. Excluding significant items, net operating earnings per share was $0.35, up 35% from the prior year, and operating return on equity was 8.8%.

Turning to slide 11, our segment results. CNO posted combined EBIT excluding significant items of just over $107 million in the quarter, up 27% from the prior year. Results in the quarter reflect favorable annuity, long-term care and Medicare Supplement margins at Bankers Life; lower supplemental health margins at Washington National; favorable mortality and lower direct marketing spend at Colonial Penn; and higher corporate segment expenses that were partially offset by higher investment income. Lastly, our closed block LTC business reported approximately breakeven earnings, in line with our expectations.

Turning to slide 12 and our key health benefit ratios. Bankers Life Medicare Supplement benefit ratio was 70% in the quarter, slightly better than expectations due to favorable incurred claims. We continue to expect this ratio to be in the 71% to 74% range during 2017. Bankers Life long-term care interest adjusted benefit ratio, excluding the impact of rate increases, was 74.2%, better than expectations due to lower persistency and favorable incurred claims.

It’s also worth noting that the first quarter 2017 interest adjusted benefit ratio reflects no additional future loss reserve accrual as a result of the increased loss recognition testing margins we reported in the fourth quarter of 2016. We continue to expect this ratio to be in the 77% to 82% range during 2017. Washington National supplemental health interest-adjusted benefit ratio was 60.6%, up compared to the prior year due to higher incurred claims but in line with our expectations. We continue to expect this ratio to be in the 58% to 61% range during 2017.

Turning to slide 13 and our investment results for the quarter. We put money to work at 5.23%, somewhat higher than the previous quarter, largely related to duration extension trades to improve our ALM matches in lines of business with longer duration liabilities. Call prepayment activity was muted in the quarter due to the relatively lower levels of refinancing activity. We experienced solid alternative investment results as we benefit — benefited from allocation to income-based strategies and higher overall equity markets. Realized gains, losses and impairments continue to be moderate, and we continue to make progress in repositioning the recaptured assets. As of March 31, we had approximately $88 million with assets remaining, down from $121 million at year-end.

Turning to slide 14 and our capital position. Estimated consolidated risk-based capital was 446%, down from year-end, but within our targeted range. Results reflect approximately $70 million of statutory income, offset by dividends of the holding company of $128 million.

Leverage was steady at 19.1%. Book value per diluted share was up $22.31, up slightly from year-end and up almost 10% on a year-over-year basis. Holding company cash and investments was $314 million, up from $264 million at year-end, due primarily to the previously-mentioned insurance subsidiary dividends.

We repurchased $43 million of common stock in the quarter, at somewhat lower levels reflecting the resumption of the buyback program in mid-February and the stock price that was elevated for much of the second half of the first quarter. For 2017, we continue to expect to repurchase $200 million to $275 million of common stock, absent compelling alternatives. We are quite sensitive when it comes to repurchasing our stock, and the absolute level of repurchases and where we end up within the range, will depend on the share price as we make our way through the year.

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

Ed Bonach

Thanks, Erik. Focused on the middle income market, coupled with distribution channels to reach this market and diversified products and services to meet our customers’ needs, remains CNO’s sustainable competitive advantage. Our first quarter results demonstrate again the strength of our business model and franchise.

I’m pleased to announce that we will be hosting an Investor Day on June 5 at the New York Stock Exchange. Invitations including additional event details will be distributed shortly. We are in the process of planning for the day and key themes are expected to include a discussion on the benefits of our diversified product and distribution business model, insights into how we plan to further grow our customer and product base, plans to leverage data to drive profitable growth across the enterprise and thoughts around our long-term care business and related risk reduction considerations. We hope to see all of you there.

With that, we’ll now open it up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from Randy Binner with FBR & Company.

Randy Binner

Hey, good morning. Thank you. I wanted to ask Gary a question and kind of dig a little bit more into the more targeted effort around recruiting, training, retaining agents. It’s really the big remaining lever to pull, I think for the company. And so, appreciate all the commentary, but maybe a little more detail, just on kind of what specific initiatives are going on? When you think you’re going to kind of see some of that pay-off with some better metrics on the scorecard?

Gary Bhojwani

Sure. Randy, thanks for the question. Let me maybe start with a high-level comment and then give you a little bit more color. First of all, in general what we’re trying to do is evolve to a model, where the number of agents that we bring in every year starts to go down over time, but the percent that we retain and the percent of those agents that go on to achieve what we refer to as successful new agent status, we have certain measures around that, those percentages go up.

So we envision longer-term having the front door go down, but the retention and the success rate percentages go up. And we want to do that through a few different ways. Number one, we have number of targeted pilots that are going on right now where we’re proactively recruiting potential agents or prospective agents that meet certain criteria, that have certain other professional experience in their past or certain other criteria. We’re proactively recruiting those folks, and we’re testing which of those profiles deliver the best conversion rates to successful new agent status. The other big thing that we’re doing, for the agents that we do have come on-board and that achieve that successful new agent status after the first 90 days, there are other things we can make in terms of compensation and retention and other types of measurements, to see if we can increase those percentages of retention over the longer-term.

So there’s a number of different things that we have in the mix right now. I would tell you that, if I look at the aggregate numbers on where we’re at right now, it’s far, far too early to call it a trend or call it sustainable, but I’m very pleased with what I see in the earlier results, because we are finding levers that we believe will work in the future for us. Now again, there’s still — these pilots are still too small of a scale for us to declare victory or to talk a lot about them, and frankly, there is a competitive dynamic to this too. I don’t necessarily want to talk about everything we’re doing and share all the different ways we are trying to approach it. But the broad theory to come back where I started is to reduce the front door if you will, reduce the raw number of brand-new agents we bring on every year and increase the success percentages and increase the retention.

Randy Binner

And that’s helpful. And I guess a follow-up there is, how — I’m imagining it is more difficult to kind of bring folks in the door for this type of work, given the strong job market. So what — is that a challenge still? And there is kind of an age old challenge with selling life insurance. Is that still a challenge, and how can you overcome it through these programs?

Gary Bhojwani

I’ve been in the insurance business for 25 years and I haven’t yet encountered an environment where people are knocking on our door, dying to become agents. So I think — look, it’s always there. There is no question about that. But I will tell you, and this part of the story that we tell. If you look at what’s happening broadly in America and you look at needs that the middle market has and you look at the opportunity to go out and help people and make a difference, there is a compelling story to be told there.

So are people knocking on a door to get in and do this for living, absolutely not. But we believe through adjusting the targeted way we recruit folks and refining the ways in which we compensate and measure them, we think we can find the right folks that want to do this for living, because we happen to think, there is a great living to be made, and we also believe it’s a noble profession where we go out and help people.

Randy Binner

All right. That’s really helpful. Best of luck in that. Thanks.

Operator

Your next question comes from Erik Bass with Autonomous Research.

Erik Bass

Hi, thank you. Gary, I also had a question for you and you briefly mentioned the leadership changes at Washington National and Colonial Penn. And I was just hoping you could expand on whether you expect any material new initiatives or shift in strategy at either of those businesses as a result?

Gary Bhojwani

Yes, sure. I think, if we look forward in our business, what we really see happening in the future, we see maintaining our three distinct brands. But we see an opportunity in these three brands to sell quite a few more products in each of them.

Right now, our Bankers Life brand, which is our captive or carrier channel brand has the access to the single largest portfolio of products. Longer term, when we think about Colonial Penn as our direct-to-consumer player and we think about Washington National as our independent channel player and wholly-owned distribution player, we see an opportunity for those two brands to continue to offer more products and help more of the middle market.

And really what the core of the strategy is about then, it’s about us not necessarily trying to force our middle market consumers to choose whether they want to work direct with the insurer or they want to work through an independent agent or they want to work with a captive agent. We want them to be able to choose however they want to work to satisfy their retirement and insurance needs, and we want to be able to meet those needs through any of those three channels.

So longer term, and this is — it’s very easy to say, it’ll take several years to build out the products, to build out the distribution strategies, to build out the systems, this will be a long-term project. But strategically, we see a tremendous opportunity here for all three of our brands to continue to coexist, but they have much more commonality in terms of the types of products and services they offer, so that those middle market consumers can access us in whatever way they choose.

Erik Bass

That’s helpful. And then on Bankers, you provide a lot of different growth metrics in your scorecard. It’s helpful. I was just hoping you could provide some sense of maybe benchmarks or targets that you’re looking at to gauge whether the business is on track and meeting your growth objectives?

Gary Bhojwani

Yes. So we, of course, like every other organization, we have a budget. We have targets that we look at. We compare ourselves to other competitors. There is a lot of different work that we do internally. I would tell you, at a high-level, we have — we know we have a lot yet to do, right? For us there is a lot of things we want to continue to grow and to improve. But when I look at the three organizations high level and I look at the type of production they’ve been able to deliver and the type of earnings they’ve been able to deliver, and I look at CNO as a whole, particularly in a sub-2% GDP world, we feel pretty good about where we’re going.

We feel very good, if I use bankers as an example, of the receptivity for the consumers to our broker-dealer, receptivity to our annuity products. We like the idea that they’re willing to look at us at Bankers to provide other types of insurance and planning services as evidenced by purchasing annuities and working with our broker dealer, and we see an opportunity to do many of those same types of things within Colonial Penn and Washington National. So the short answer to your question, yes, we have a number of different benchmarks we look at internally and externally. And so far, we’re not satisfied, but we are pleased with the progress we’re seeing.

Erik Bass

Got it. I expect maybe at Investor Day you would share more of what those metrics may be, just so that we can evaluate it from the outside as well.

Ed Bonach

Yes, Erik. We absolutely will be happy to have further discussion with you, and hopefully, at the Investor Day, we’ll get a chance to ask you how you gauge us and what you look at and what you compare us to.

Erik Bass

Perfect. Thank you.

Operator

Your next question comes from Sean Dargan with Wells Fargo Securities.

Sean Dargan

Hi. It looked like in Bankers, your results benefited from some healthy spreads. I know you called out the alternative performance. But is this something that will be sustainable to some degree going forward?

Erik Helding

Sean, this is Erik. I think, from a spread perspective, yes, I mean, the favorability that we saw on a year-over-year basis, I think is largely sustainable. Part of the improvement in margins was just general growth in the block. So we do think that is sustainable, assuming we don’t see a fall-off — drop-off in persistency and that sales sort of remain at their current level. So yes, I think to some extent the annuity favorability will continue.

On the other lines of business, obviously for Medicare supplement and long-term care, we were favorable to our expectations, favorable to the benefit ratio guidance that we provided, but we did not update guidance or change guidance for the remainder of the year. So I think that will revert back to kind of the higher elevated benefit ratios that we guided too.

Sean Dargan

Great. And just one more. I was wondering if you had any update on potential counterparty appetite to come up with a solution of at least part of the Bankers Life LTC block. Has there been any shift out there in the environment over the last quarter?

Ed Bonach

Sean, this is Ed. Short answer, no shift, but that’s not a negative answer. There continues to be, we believe, strong viable interest. We hopefully understandably so can’t comment any further about those players and where we are in those discussions. But there definitely are qualified players, longer standing, higher rated reinsurers and counterparties that have interest.

Sean Dargan

Okay, great. Thank you.

Operator

Your next question comes from Ryan Krueger with KBW.

Ryan Krueger

Hi, good morning. I had a question on technology, it’s become an increased point of discussion within the industry as the industry tries to improve customer facing technology. I guess, just curious on where you feel — how you feel CNO is positioned there at this point?

Gary Bhojwani

Sure. Ryan, thanks for the question. This is Gary. We have — it’s a broad question, so I’m going to give you a few different bits and pieces to try and respond to it. First of all, if you think about our Colonial Penn business model and the accessibility that our consumers have and the things we try and do over the web, I think we have something that I would say, reasonably competitive from a technology standpoint with the direct-to-consumer model. There are other enhancements we’re looking at particularly as we continue to shift away from the more expensive non-deferrable television advertising to other web-based deferrable expenditures and businesses. So I think, there’s some good things we’re doing there.

I would say, we’re at the front to early end of it. Couple of other examples that I can give you. If we look at what’s happening in Washington National and our PMA business in particular, we have a variety of technology solutions that we’ve deployed in the last 12 months or so. Our worksite technology and other things, where our agent and our producers, when they’re out meeting with prospective buyers can actually provide certain types of information, collect certain types of information, so on. There are two I would describe our consumer-facing technology efforts kind of at the early stages, but I’m encouraged by the progress.

Within Bankers, we have similar types of technology. We don’t yet have them as accessible in front of the consumer. We have a number of — we refer to internally as insurance desk technologies, we would like them to be more portable and more out there on the iPad and so on, so we’re working towards those things. On the whole, I would say, that our three businesses are at the front-end of a variety of different technologies. I don’t feel like we’re particularly ahead in any area.

I don’t think like we’re particular behind. We have a number of different examples in each of the three businesses. And then internally, we’ve got a number of different things that we’ve done over the last several years, everything ranging from a finance transformation, where we spent considerable time and money building out a unified general ledger system and so on. So there’s a lot of different investments internally that frankly other folks are probably better qualified to speak to than I am. But those are the high-level things in terms of consumer facing.

Ryan Krueger

Okay. Appreciate it. And then on Colonial Penn, is — it’s the cost of advertising remains high. Is this a situation where you just have to accept lower sales activity or other alternatives that you can pursue outside of that?

Gary Bhojwani

Yes. I would want to emphasize a couple of things. First of all, if we remember that when we talk about the advertising, we’re strictly talking about the television advertising. Let’s remember that we still do web, we still do mail, we still do a number of other things. And those efforts continue unabated, and if anything, we’re trying to accelerate those where we can, and we expect to see future success. And this isn’t — this won’t be a one or two quarter thing, this will be a two or three year thing. But as we broaden Colonial Penn’s product portfolio constituent with other comment, we would expect to see other success there.

So I wouldn’t want us to get too focused on the television advertising and the strain that puts on the business model. The other point I would make is, even if the television advertising was available today at levels that we felt were more reasonable, we still would want to be pressing these other models, because we think as our consumers continue to evolve, it’s important to do so.

And frankly, there is just a simple economic issue with the television advertising not being deferrable. So we have lots of different reasons to want to continue to accelerate those efforts.

Now as to the substance of your question, if the TV ads rate stay this way, can you expect this trend to consider? I would say, in the short term perhaps, but as we build out the web and the digital and the product offerings and other things, I wouldn’t want to take this quarter and extrapolate it out for six or eight. If you want to extrapolate it out for one or two based on this level of TV advertising cost perhaps, but I wouldn’t go further beyond that, because I expect us to get traction in those other things we’re doing to offset the television advertising efforts.

Ryan Krueger

All right, great. Thanks a lot for the answers.

Operator

Your next question comes from Dan Bergman with Citi.

Daniel Bergman

Hi, good morning. Life insurance sales have — seem like they are the main driver of the NAP decline at Bankers, and given that, that product is seeing falling sales for the past year or two, I was hoping, you can elaborate on what you are seeing in the product line and kind of the outlook going forward?

Gary Bhojwani

Sure. Let me start with the conclusion. We were not satisfied with the level of our life insurance premiums. We think we should have done better. So let’s just start there, and we have a number of efforts going on internally to stem that tide. We have seen a decline, but we believe it’s bottoming out.

Now against that, I would make a few other comments. Remember, that a core part of our strategy is to serve the middle market and really to be product agnostic. If they want to buy life insurance from us or if they want to buy annuities from us or if they want to buy Med Supp from us, we’re happy to sell them any of those. We prefer to sell all of them, but we’re happy to sell any of them, and our goal is really to serve the market and not push one particular product over the other. I personally am not surprised to see a growing trend. And again, if you remember, we’re focused on the middle market.

These are folks, the vast majority have a net worth below $0.25 million. The biggest concern these folks has — have, particularly, those that are approaching or in retirement age, is not a mortality concern, rather they have an accumulation in income and a longevity concern. So I would expect to continue to see accelerated sales on things like annuities, on things like Med Supp, on things like our short-term care products. Those are completely consistent with our strategy. They’re completely consistent with the needs of our marketplace. I want to emphasize again, we expect our field force to do better than they have done with the life insurance. There are a number of different initiatives we have underway to deal with that.

But I’m not surprised at a higher level, simply because the consumer demographics are changing. And I would also then come back to where I — one of the first comments I made, we really like the idea of longer-term having Washington, having Colonial Penn have access to these other product as well, so that we can deploy them through those channels.

Daniel Bergman

Great. That’s very helpful. Maybe just shifting gears. I believe you mentioned earlier, how the board was sensitive to CNO stock price in terms of the pace of share repurchases. Just given the buybacks have been really the main source of capital deployment in recent years, if the stock price remains high going forward, what types of alternatives should we be thinking about in terms of your capital deployment mix? Is M&A a possibility? Really any thoughts on how you guys are thinking about, that would be much appreciated.

Ed Bonach

Yes, Dan, this is Ed. I’ll start out. I mean, certainly, M&A continues to be an option for capital deployment. In that, we’ve talked about it previously, it’s unchanged, that there are certain things that screen higher in that, such as distribution opportunities or entities as well as asset management kinds of properties that can also leverage our capabilities or bring additional products potentially to our broker-dealer and RIA. That’s not to say that we don’t and won’t look at other things, but those are highest on the M&A front. There are certainly other potential uses, and I’ll let Erik comment on those.

Erik Helding

Yes, I mean, Dan, I think, the way we kind of think about the buyback program is, to the extent the stock trades closer to or above book value, then we tend to buy back less, and under a situation like that, relative to our 2017 repurchase guidance, I would expect to probably come in towards the low end of the range. Not to the extent that we traded on a more significant discount to book value, then I’d expect to come in at the high-end of the range. So that’s generally the way we think about it, and frankly, that’s really the way — that we manage to program on a daily basis.

Ed Bonach

Yes Dan, sorry. Anyway, the other thing tying back considerations relative to reducing our relative long term care exposure, there is a potential to need to deploy some capital in a risk-reducing transaction. So that’s another consideration on capital deployment.

Daniel Bergman

Great. Thank you.

Operator

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

Humphrey Lee

Good morning and thank you for taking my question. Just a follow-up question on the Bankers agents. I heard you saying, some of the products that you are working on and some of the underlying shift in terms of how you’re focusing on the more experienced agents. But when you think about the current size of your agent flows and looking at your medium-term business plan, do you feel like your current size of the agent force would be insufficient to achieve those medium-term goals? Or is there any number that you have to get to be more successful in terms of your top line production?

Gary Bhojwani

Humphrey, thanks for the question. This is Gary. I’ll share with you at a high-level the way I think about the top line production and then I’ll just point to a couple of data points. So at Bankers, I feel like the current agent count we have and the agent count we believe we’ll end the year with, in other words, when we extrapolate out, I think, it’s more than adequate to meet our goals for this year at a top line level.

Now there are a few different components that go into that, that cause me to have that optimistic view. First is, if we take a look at the product mix and the collected premium levels that are coming in. If you take a look at it, as an example, at our annuities sales or if you take a look at the success we’ve had on our Med Supp programs. If you take a look at what’s happening there, you can see that despite the fact that the average number of agents over the last 12 months has gone down slightly, it’s basically flat but gone down slightly.

Even though, that’s the case, the collected premiums have gone up. We are seeing these agents, if we just measure productivity strictly by the total premiums that are brought in, we’re seeing that go up. Now that has a fair bit to do with the shift in the product mix, because an annuity premium, as an example, if we’re bringing in on average $100,000, that’s going to drive a lot more than one average life insurance policy.

So in the aggregate, to meet our top line goals, I feel comfortable with the number of agents we presently have and we believe we’ll end the year with. There is one other dimension that we intentionally have not yet gone into detail, and that is the plans relative to our broker-dealer and RIA.

Remember, that part of our strategy is, again, focusing on that middle market, having more of our life insurance agents become securities license, and thereby putting us in a position to meet even more of their needs. And that would in theory — well more than in theory, I think in actuality, also increase the average productivity for producer. So we feel good about where we are at the moment. We’d like the number to grow, but we also feel it’s attainable when we think about our goals for the balance of the year.

Humphrey Lee

Okay. And then maybe shifting gear to your earlier comment about kind of widening the product mix across the three different platforms and especially on Colonial Penn. When I think about the direct channel, you need to kind of very simple value proposition that is well understood by consumers to generate these type of direct sales. So looking across the product line out there, what do you think is — that would fit into that category that is easily understood — well understood by consumers in terms of value proposition that you can sell directly?

Gary Bhojwani

Humphrey, that’s a very good question. Here is what I will share with you on that. We ran a small-scale pilot at the end of 2016. We were testing out particular product, and again, for competitive reasons, I don’t want to go into all the details. We tested out one particular product and discovered, that you know what? This consumer base — the type of consumer base that it’s attracted to our brand where we have the market credibility, they weren’t really going to buy that particular product. So we shut that pilot off after trying for roughly three to four months.

We’re in a funny place right now with the evolution of this demographic, because there is quite a few consumers that do want to deal direct, that want to respond directly and work directly, but we have it and I think it’s fair to say, the industry hasn’t figured out precisely which products fit that mix. There are certain types of products that I believe will always be a little bit too complex or rely too much on an adviser to be able to fit that. So the short answer Humphrey is that, we’re continuing to experiment. We have a couple of other proposals that we’ll actually be discussing with the management team at Colonial Penn.

They will be making proposal to us, in fact, next week about the next pilot that they want to try for the next type of product. So what I’m saying Humphrey is, I don’t want to disclose precisely which products we’re trying. I do want to tell you that we’re experimenting, and we’re continuing to try and find which type of product will work best with this demographic on a direct basis.

Humphrey Lee

So basically we’re probably looking at something that would probably rolled out nationwide maybe next year the earliest?

Gary Bhojwani

No, no. All of the pilots we’ve done for this type of an experiment, would be initially very small scale proof-of-concept, this type of thing. The pilot that I was referring to that we ran in late 2016, was I believe in just three or four states. So this is something I want to do in a very disciplined, methodical way. And we’ve got a business at Colonial Penn that’s running, I believe, quite nicely. I don’t want to screw that up, I want to do this in a very slow, disciplined way, and initial pilots will definitely be on a geographically-focused basis.

Humphrey Lee

Okay. Thank you for the color.

Operator

Your next question comes from Yaron Kinar with Deutsche Bank.

Yaron Kinar

Good morning everybody and thanks for taking my questions. I want to start off with the Colonial Penn. So could you maybe remind us what’s the ratio of segment leads generated through TV is? And then also maybe touch on what’s the cost to sales ratio is for TV versus the other channels?

Gary Bhojwani

Right now television leads represent roughly two thirds of the total number that come in.

Yaron Kinar

Okay. And what’s the — can you talk about the cost to sales ratio for TV versus the digital platform or other platform?

Gary Bhojwani

I believe, historically, we’ve not disclosed that. I can tell you that, we’ve got a very robust process internally, and you can see that in our television advertising. Buying, when it goes above those measures, we don’t continue. And when it comes below, we get back in. But we prefer not to disclose that.

Yaron Kinar

Can you say whether the cost to sales ratio is relatively similar for TV versus the other platforms, or —

Ed Bonach

Yes, Yaron, this is Ed. I would say, short answer, yes. If you want to say an economic basis, when you get to GAAP reporting, they’re very different because the non-TV ad spend is largely deferrable.

Yaron Kinar

Right, right. Okay. And then turning back to Bankers Life for a second. So clearly you’re taking on some initiatives to change the composition of the agent force to be maybe more seasoned — a more seasoned force. Longer term though, do you have any thought or idea as to what is the headcount growth can be in the longer term trajectory?

Ed Bonach

Yes, we have an idea. No, we’re not giving you the number.

Yaron Kinar

Okay. Fair enough. Thank you.

Operator

Your next question comes from Tom Gallagher with Evercore ISI.

Tom Gallagher

Hi. Question for Erik. I think the — just want to understand, you came in with a favorable long-term care benefit ratio well below the guide you’ve given. You’re maintaining the guide. Is it — why not improve the guidance on that? It’s quite a bit ways below the range that you’ve provided. Just curious, is there something seasonal about 1Q that you’re seeing that you think is going to reverse in terms of the persistency in incurred claims that you’re highlighting?

Erik Helding

Yes, Tom. This is Erik. I mean, part of the reason I’m — we were hesitant to change the guide was, it’s only been one quarter and we saw two different things happen, which totaled about $3 million or $4 million in total, which isn’t a very big number. And you hit on it. It was slightly better-than-expected in current claims, which does move around and that could revert back in the second quarter. And it was slightly lower persistency, which did come in as a surprise to us.

And that also could revert in the second quarter. So our philosophy is, during the first quarter, we kind of evaluate the results. We do go through a process to determine if we think it’s going to recur in the future, but at this particular point in time, we don’t. We’ll go through the second quarter, and we’ll see what happens, and at that particular point in time, we may or may not adjust the guidance.

Tom Gallagher

Okay. And I assume on those two ratios that are kind of moving the needle you’ve seen a fair degree of quarterly fluctuation. Is that sort of what’s behind it?

Erik Helding

Certainly, on the claims side, you do see that tend to move up and down a little bit. Let’s say the non-rate increase related persistency tends to be a little bit more stable. So that one being a little bit lower in this quarter was a little bit of a surprise.

Tom Gallagher

Okay. And same question on the Medicare Supplement in terms of why — what you think drove the result? And why you still expect the result to be elevated in terms of the benefit ratio?

Erik Helding

Yes, I think it’s a very similar answer, Tom. Just on the first quarter here, we had expectations that the benefit ratio was going to be consistent with the levels that we saw in 2016. We happen to have a good quarter. I think what’s actually positive in the quarter which we don’t really talk about was, this is a year in which we actually did take bigger rate increases on that block. And so, we were actually expecting persistency to be a little bit lower, but actually it was pretty comparable to last year. And so that was a good thing and that’s good for the block overall.

Ed Bonach

Yes, and Tom, just a little bit on terminology. We wouldn’t say we expect loss ratios, benefit ratios to be elevated. We expect them to be in our guided ranges which are higher than what we experienced in the first quarter.

Tom Gallagher

Got it, Ed. And then just a question around the things you’re thinking about for the long-term care solutions. The — is third-party risk trends were still really viable? From everything that I’ve heard out there, more and more companies seem to be thinking that’s going to be much harder to do, at least based on current macroeconomic conditions. And we’ve heard more discussion around trying to isolate blocks. And so less third-party risk transfer, more potential movement to try and isolate and then eventually legally separate. I mean, is that something you’re also considering? Or is it really just third-party risk transfer is the place you’re focused?

Ed Bonach

Our considerations are broader than just third-party risk transfer reinsurance solutions.

Tom Gallagher

And if it’s broader, are you able to discuss like what else that might mean?

Ed Bonach

Yes. I think, that would be some of our intention as far as subject matter in the Investor Day on June 5.

Tom Gallagher

Okay. Got you. And then final question is, the Tennenbaum Capital commitments, I think you have last we checked, a $100 million left to invest there, can you give an update on timing of that?

Eric Johnson

Yes, this is Eric Johnson. That to some degree is a function of the rate at which they draw fund commitments for a couple of their particular investment strategies. One of which is a special situations, lending strategy.

The other, which is a — just a middle market direct lending strategy. As you all know, those are — have been very competitive markets. And better than get over the skies from an underwriting or risk management perspective. I think, they’ve been very sensible about taking what value comes, but not prioritizing getting money funded over having a good quality portfolio.

So I would think that, that probably is a year or more of time to elapse as it fully funds up. But very happy with the — their perspective on the markets and their good caution as to action.

Tom Gallagher

Understood. Thanks.

Operator

This does conclude the question-and-answer session. Please go ahead with closing remarks.

A – Ed Bonach

Thanks, Sarah. And thank you, everyone, for your interest in CNO, and hope to see you on June 5, at the New York Stock Exchange. That concludes the call.

Operator

This does concludes today’s conference call. You may now disconnect

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