Q3 2019 Earnings Call
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The conference over to Jennifer child, VP of Investor Relations. Please go ahead.
Thank you Denise good morning, and thank you for joining us on CNO financial group's third quarter 2019 earnings Conference call. Today's presentation will include remarks from Gary Bush <unk>, Chief Executive Officer, It's all Mcdonald Chief Financial Officer.
In the presentation. We will also have several other business leaders available for the question and answer period.
During this conference call, we'll be referring to information contained in yesterday's press release, you can obtain the release by visiting the media section of our website <unk>.
<unk> Dot com. This mornings presentation is also available in the investors section of our website and was filed in a form 8-K yesterday, we expect to file or Form 10-Q and posted on our website honor before November seven.
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 there was contemplated by the forward looking statement.
Today's presentation contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures, you'll find a reconciliation of non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout the presentation, we will be making performance comparisons and unless otherwise specified any comparisons made we'll be referring to changes between third quarter 20 team and third quarter 20, Nike and with that I'll turn it over to Gary.
Thanks, Jennifer good morning, everyone and thank you for joining us.
Turning to slide five I'm very pleased with the progress we're making on our efforts to drive sales growth.
For the fifth consecutive quarter, all five of our girls scorecard metrics.
We delivered solid growth across all of our product lines of business segments.
We continue to execute well against our strategic priorities specifically.
Growing the franchise profitably.
Launching new products and services, including a new Medicare advantage pilot with Humana in our direct to consumer channel.
[noise] expanding to the right to slightly younger wealthier consumers within the middle income market.
And deploying excess capital to its highest and best use.
Third quarter results were impacted by higher advertising spend the colonial Penn, which lowered our operating income by one cents.
And lower investment income, which will reduce our operating income per share like eight.
This lower investment income is attributable to both the lower interest rate environment and the up in quality portfolio reallocation, we completed in the first quarter this year.
We continue to believe that the repositioning makes sense in the context of the Kurds credit cycle.
Well, we are feeling pressure from the difficult macroeconomic conditions, we are taking decisive action in our operating areas to mitigate the impact.
For example, Seattle recently entered into a new strategic technology partnership with cognizant and H.C.L. technologies.
It is expected to generate savings of $20 million over the next five years.
Not only will the partnership drive efficiencies, but we also expect it to help transform how we deliver technology services.
We will pursue additional actions to reduce our cost and enhance our earnings profile as we navigate through the low interest rate environment.
These measures will also improve our competitive position while laying the foundation for continued long term success.
Paul will provide more detail in the partnership and just a few moments.
Turning to slide six for review of the growth scorecard.
Third quarter production remains strong.
Annuity collected premiums grew 20% and health Nap grew 5%.
Total collected premiums within our operating segments increased 8% in the quarter and first your collected premiums were up by healthy 16%.
This was the fifth consecutive quarter of topline growth and as I mentioned, all five of our girls scorecard metrics world.
Turning to bankers life.
We continue to make progress against our strategic initiatives, namely to reinvigorate growth.
Expand to the right.
To reshape the agent force.
The optimize productivity.
Our strategy to recruit fewer but more productive agents continues to deliver results.
On a lower base of new agent recruits, we generated a 2% increase not producing agent though.
This is our fifth consecutive quarter of growth, which points to the underlying success of our recruiting and retention levels.
Not only are we seeing success with first your agent retention, but we're also beginning to see more agents stay with us into their second year.
[noise] agent retention translates to stronger overall sales, which is reflected in our 17% increase in first year collected premiums.
Or expand to the right strategy also continues to advance.
Annuity sales, which tend to have higher premiums and are typically sold to wealthier consumer were up 20% in the quarter.
This increase is on top of 14% growth in the third quarter of 2018.
The average collected premium per policy was up 2% and the account value of our annuity is now stands at $8.9 billion.
Although the low interest rate environment can be a headwind to sales. It is worth noting that our career agency model and focus on middle income consumer generally make sales our sales results less sensitive to these pressures.
Currently 14% one in seven of our bankers life agents are duly licenses financial advisors and insurance agents.
As I've shared before this is important since financial advisors drive approximately 50% of our annuity sales and the policies they sell averaged 20% higher Facebook.
A broker dealer and registered investment advisor businesses also continue to grow nicely.
Client assets increased 16% over the prior period to approximately $1.4 billion.
Consumer relationships tend to be stronger when we can provide income and retirement solutions as well as insurance products.
Our ability to serve the income retirement and insurance needs of our middle income consumers remains a key differentiator.
Life insurance sales at bankers life were down 3% for the quarter.
However, this reflects steady recovery over the past three quarters.
We also continue to see a general shift in sales from larger life insurance cases to annuities.
This shift is consistent with the demographics of our target market and faced real possibility about living their retirement savings in our increasingly looking for retirement income solutions.
We're comfortable with the straight off because annuities had been a significant contributor contributor to earnings and growth and cash flow.
[noise] health Nap was up 2% driven by 2% increase in Medicare supplement sales.
That's up growth reflects the positive consumer response to our new Medicare supplement plan B product that we launched during the second quarter.
At the same time sales of our third party Medicare advantage policies grew 56% in the core.
As a reminder, Medicare advantage sales are recorded as fee income and not included in that.
Moving on to Washington National.
Sales were up 9%, which was a third quarter record for Washington National.
These results reflect our cross sell initiatives.
Efforts to diversify the product mix and geographic expansion.
Product diversification generated 10% of this quarters total production and 10% year to date.
This included three primary drivers one.
Sales of our hospital is sure product, which we launched in the fourth quarter of 2018.
To our continued focus on growing life insurance sales.
And three the sale of the bankers life short term care products.
Our geographic expansion initiatives have also been successful comprising 5% of both third quarter and year to date now.
Worksite sales were up 19%, marking the sixth consecutive quarter of double digit growth.
Worksite now comprises roughly 50% of Washington National sales.
This business has also benefited from strong recruiting over the past several quarters, including a 16% increase in the Worksite agent count this quarter.
The individual business saw a marked improvement in the third quarter with sales essentially flat year over year.
This compares to double digit declines in recent quarters.
We are encouraged by the progress made in the third quarter.
However, we still anticipate sales pressure for the foreseeable future as farm and rural communities continue to face challenges.
Finally, the integration process at what benefits design continues to run smoothly with all back office consolidation activity tracking as planned.
Recall that WBB, the Worksite technology platform that we acquired at the end of April .
While still very early in the process, we're starting to see initial success in our cross selling efforts, we will probably provide more detail on future calls.
Turning to colonial Penn.
Colonial Penn our direct to consumer channel delivered record setting third quarter sales.
Now it was up 1% on top of 19% growth in the third quarter of 2018.
This strong sales growth in recent quarters, coupled with solid persistency drove a 11% growth in first year collected premiums and 4% growth in total collected premiums in the quarter.
During the quarter, we expanded the rollout of our living insurance products and it is now available in 47 states and the district of Columbia.
As a reminder, living insurance combined simplified issue life insurance products with optional accelerated health benefit riders.
This product addresses a key need in the middle market and is consistent with our expanded the right strategy.
Colonial Penn is piloting third party direct to consumer Medicare advantage sales with Humana Telesales force.
We're excited about this product expansion opportunity that augments, our ability to serve the needs of middle market seniors and other Medicare eligible coast customer.
And as an example of how we're leveraging our strong consumer brand invaluable direct to consumer distribution channel to sell both manufactured and third party products.
Colonial Penn handles approximately 1.5 million customer phone calls and more than 2 million unique visitors to our colonial Penn Dotcom website each year.
We're also completing 5000 web chat sessions per month was perspective customers.
The combination of these consumer touch points it makes us a top five direct to consumer licensure.
We intend to make further investments in a weapon digital platforms to enhance the coast customer experience.
[noise] improve retention and expanded capabilities.
We expect our direct to consumer channel to play an increasingly important role in our future as we evolve to offer a multichannel customer experience.
Ultimately, we envision consumers moving seamlessly through the buying experience across all of our distribution channels.
This cross brand collaboration has been underway for sometime.
We generated by colonial Penn had been an important and growing source of new business for bankers life stages.
Recently, we also began providing colonial Penn call center support to WBB to both leverage our expertise and generate excess expense efficiencies.
We intend to drive more collaboration and generate additional synergies between all of our insurance brands in the future.
Moving to slide 10.
Before I turn it over to Paul I'd like to remind you of our capital allocation strategy.
We are committed to deploying 100% of our excess capital to its highest and best use overtime.
Our goal remains unchanged to maximize return on invested capital over the long run.
We will continue to weigh our options accordingly.
Our capital position remains strong.
With our shares trading at an average discount to book value of approximately 20% during the quarter, we accelerated our buyback activity repurchasing $75 million in the third quarter.
It's been more than three years in Seattle has deployed this level of capital on share repurchases in a single quarter.
Year to date, we've returned $228 million to shareholders, including $177 million and share repurchases.
As long as our stock remains highly undervalued and trades at a significant discount to book value. We intend to use. These two you share repurchases as our primary vehicle for excess capital deployment.
With that I'll now turn it over to Paul to discuss the financials Paul.
Thanks, Gary and good morning, everyone.
Turning to the financial highlights on slide 11.
Operating income per diluted share adjusting for the long term care transaction in Q3, 18 was down seven cents was 13% year over year.
Pack of lower market yields on investment income in spreads, including the impact of our first COVID-19 up and quality trade was approximately eight cents per diluted share in third COVID-19, compared to third quarter 18.
Year to date or operating earnings per share were down 3.6%.
The decline in interest rates had an adverse effect on non operating earnings in the quarter, but a favorable impact on AOCI.
Operating return on equity excluding significant items was 10.6% in the trailing 12 months ended Septemberthirty 2019, compared to 10% in the prior year period and 10.9% at June 30, 29 team.
Holding company cash investments for 260 million essentially flat with levels at the end of the second quarter.
As Gary stated, we repurchased 75 million of stock in the third quarter.
For the past 12 months, we've repurchased 218 million, reducing our weighted average share count by 6%.
Cnos estimated consolidated risk based capital ratio was 405% down slightly from 409% at the end of the second quarter, but within our targeted range.
Statutory earnings and capital were 44 million and 1.7 billion respectively.
As I've mentioned in previous quarters, we are reviewing or capital and liquidity targets in the context of our peers rating agency views and from our own enterprise risk management perspective.
I expect we'll complete that work during the fourth quarter of this year and we'll be prepared to share our conclusions on the fourth quarter earnings call early next year.
Until then or targets remain unchanged, specifically RBC in the 400, 425% range minimum holding company liquidity at 150 million.
Debt to total capital, excluding AOCI between 20% to 25%.
[laughter].
Turning to slide 12 and segment earnings.
The decline in investment income in the quarter impacted each of our operating segments.
Bankers life earnings in the third quarter were down 15, and a half million or 16% year over year.
Earnings benefited from an increase in fee revenue and other income, which which which was more than offset by lower investment income and an increase in operating expenses driven by technology investments and other growth initiatives.
The income in the quarter reflects growth in Medicare advantage sales and growth in our broker dealer.
Sequentially expenses declined in Q3 from Q2 2019 as expected.
We continue to expect bankers operating expenses for the remainder of the year to be essentially flat second quarter levels.
Washington Nationals earnings in the period were down three and a half million or 12% as increased policy income.
Trouble claims experience were offset by lower investment income and higher operating expenses, including those associated with recent growth initiatives.
Colonial Penns earnings were down 2.4 million due to increased marketing spend.
As a reminder, a majority of colonial penns advertising spend is not capitalized in deferred which impact short term earnings in force earnings, which excludes the impact from the advertising spend grew 2% over the prior year to 19.1 million.
We now expect colonial Penn colonial Penns full year EBIT to be in the range of 12 to 16 million narrowed from the previous guidance range 12 to 20 million as a result of prior year to date cost effective marketing spend supporting 12% year to date sales for us.
[laughter] earnings from long term care in run off were 3.6 million up from 2.1 million in the prior period. We continue to expect this segment reported normalized earnings, but roughly breakeven quarterly results can be volatile.
Turning to slide 13, and our key health benefit ratios.
Bankers life Medicare supplement benefit ratio is 74.9%.
This is consistent with the seasonally higher patterns, we typically experience in the third and fourth quarters and inline with our guidance is 70, 377%.
Bankers life long term care interest adjusted benefit ratio for the retained block of business, 78.7% essentially flat to last year and in line with are expected range of 74% to 79%.
As a reminder, due to the smaller size of the block in the wake of the long term care transaction last year, a 100 basis point move in the benefit ratio translates to just $600000 pretax. We also expect more variation in the benefit ratio from quarter to quarter as a result of the smaller base, while remaining within our expected.
Range.
Washington National supplemental health interest adjusted benefit ratio was 55.4% down 150 basis points year over year due to favorable claims experience and in line with our guidance of 55% to 58%.
Turning to slide 14, and our investment results for the quarter.
Adjusting for the long term care transaction in Q3, 18 or net investment income is down year over year. In spite of an increase in average invested assets. This is attributable to decline in earned yield which reflects the up in quality repositioning the portfolio in Q1 of this year together with lower rates and tighter spreads.
Recall that during Q1 of this year, we reduced our allocation to triple B corporate bonds.
Roughly $1 billion to 39% of are fixed income portfolio and cut or equity investments in CLL equity tranche investments substantially.
We did not undertake any significant additional repositioning of the overall portfolio in the second or third quarters.
[laughter].
Sequentially, our third quarter earned yield was also impacted by lower prepayment activity, which declined from 5.4 million in the second quarter 3 million in the third quarter.
Before turning it over I'd like to make a few comments about the technology partnership Gary mentioned, the partnership is expected to deliver $20 million and savings in years 2021 through 2024 with no material savings in 2020.
The agreement and associated restructuring costs resulted in approximately $2 million charge to non operating earnings in the third quarter and with that I'll turn it back over to Gary.
Thanks, Paul.
For the past five quarters, we've been talking with you about growth.
We are clearly delivering on that objective from a topline perspective.
Now, while maintaining that performance, we intend to turn more of our attention to enterprise efficiency and dropping more of that growth for the bottom line.
Last quarter I shared with you that we're taking a hard look at how we manage the business as well as our overall cost structure.
This is especially important given the interest rate headwinds that the industry is facing.
One immediate example, as a technology partnership we announced today, which will generate $20 million of cost savings, while making our IP delivery more effective.
This is just one step in our efforts to aggressively manage costs.
We continue to assess other opportunities to streamline the business and drive efficiencies.
These actions allow us to redirect resources to better serve the middle income market, while improving our financial results and driving sustainable value for our stakeholders.
We will have more to say on this in the next several quarters.
Before we open it up for questions I want to make you aware of the analyst day, we have scheduled for February 26, 2020 in New York.
We will share more details with you over the next several weeks.
Thank you for your interest in CNO Financial group, we will now open it up for questions operator.
Ladies and gentlemen, Tosca question. Please press Star then the number one on your telephone keypad.
Your first question comes from Dan Bergman with Citi. Your line is open.
Thanks, Good morning, I guess the start just wanted to see if there's any color you can provide on the outlook for net investment income.
Absent any changes in the rate backdrop or other factors is.
Five basis point sequential decline, we saw in the third quarter in the book yield at reasonable expectation for we should expect going forward.
Yes, sure a good morning, Derrick Johnson speaking.
Last quarter, I think I mentioned.
That you would tend to be reasonable to expect.
You know a single digit handful erosion on a quarterly basis of a book yield.
Current market conditions I see no reason to change that.
That that kind of rule of thumb right now.
Because.
I don't think we are.
In the midst of any changes in investment strategy that would that would lead to a different.
Result.
It was five basis points in the.
In the third quarter with seven in the second quarter.
And.
I think.
We'll be left in the second quarter and.
You know in the context them.
My earlier comment.
Yes.
Yes.
As regarding variable income the world for word variable implies.
What it is we've had a really good run in variable income over the last couple of years.
With the fourth quarter of last year being more difficult.
This year year to date being pretty reasonable, although with them with some some noise and I think.
Circumstances as I see right now suggest almost.
Something falls off the table and in Washington, or or somewhere else.
That.
You know we ought to be.
Kind of in a have a decent fourth quarter as well, although there are there this is not a certainty.
That's very helpful. Thanks, and then maybe a related mark high level question.
How should we be thinking about the tools that you have your disposal to offset.
The pressure, you're not really interesting across the industry from low interest rates is it mainly cost savings are there other levers we should be thinking of.
Any thoughts on kind of those factors and how much of the rate pressure. You think we can do you can offset overtime and how much of a lag we might expect before any actions can have a material effect.
All speak maybe to two it generally and then if Eric wants to add anything further in the investment area I'll, let them do that.
I think.
At a high level I would say that we're always looking for ways to optimize our business and drive shareholder value.
We feel like our first priority was to really get consistent top line growth, we've done that for several quarters now.
And now I think we need to pivot to maintaining that topline growth, but get laser focused on driving efficiencies. So thats really the next step for us.
And the fact that we've got this challenging investment environment makes that even more critical.
We don't have anything else to share today in terms of the specific tools that we want to use or the levers we want to pull up but I would point you to the ITC change we announced today as an example of the different types of things were considering that were clearly foreshadowing that we recognize how important this is and we've got other things that we're working on that but thats. All we can say at the moment.
Dan It's Paul I would just add that in addition to.
Managing expenses and getting more efficient and therefore.
Driving earnings growth on the margin.
There are obvious big tool that we have is on capital management.
Certainly, we'll we'll continue to be thoughtful about how we're deploying our excess capital.
Largely through share repurchase on the margin of course, we accelerated that a bit in Q3 of this year in the context of where our stock was trading.
The other thing were doing as I've mentioned on the last two calls is.
Looking at whether it may be appropriate to reduce our target capital. Obviously, we have to get comfortable with that ourselves that analysis is ongoing we'd also need to make sure that the rating agencies agree with any conclusion, we may arrive at there but to the extent that there is room there.
On the margin would free up capital and drive higher ROI.
You know what Paul and there's one other thing this is Gary again, I'd like to add I should have said this earlier.
Theres a lot of focus appropriately on the macroeconomic environment and the pressure that investment results in interest rates and so on are exerting.
That's all very fair for people to be concerned about but I want to make sure in the midst of talking about those things we don't lose sight of the fact that that Eric and his team and our investment area have done a pretty darn good job.
As much as it pains me to give them complements when you sitting next to me.
I think we've got to acknowledge that the result of the new money rate and so on.
The team there does a pretty good job as compared to other players or just about any reasonable benchmark you want to look at so I want to make sure that doesn't get lost in our zeal to pursue all the areas we want to make better.
Very helpful. Thank you.
Your next question comes from Randy Binner with B. Riley FBR. Your line is open.
Hey, good morning, Thanks, I guess just to follow up on the 20 million dollar cost saving initiatives are five years. It. So that is primarily in hi, QE program and understanding Gary you said you might want to wait to share.
More details, but just just kind of level thats. So thats just an IP initiative can you run through what processes might be streamline there and then I you know to the extent you can kind of give examples of how that could expand over time to be helpful. Just to understand what the full impact might be of further cost saving initiatives.
Sure Hi, Randy.
This is Gary so I'll talk about it at a high level and then Paul can supplement with any more data if he wants to.
The first thing I would say is it's correct that it's strictly about ITC. There are number of other areas within the organization, where I think we can continue to improve our efficiencies, but this is strictly in the key area for now.
And it's important to remember a few things. The first is this is another step in all righty evolution.
We began this process about five years ago with cognizant and that contract was coming up for renewal in early 2020, So I want to make sure I signal. This correctly. This isn't something entirely new this is the next step in the evolution that we began sometime ago. We went through a pretty extensive evaluation and ended up choosing to partners Cogs.
Ascent and Hcl cognizant had been with us for five years and they'll continue to provide the delivery application development maintenance and testing Hcl on the other hand has been added there are new partner this relationships and they will be helping us with infrastructure operations and select cyber security services. If you think about just for a moment how much cyber.
Security has evolved just in the last few years, you can understand that the emphasis that and the cost that those types of things are placing on the so at a high level. The way you should think about it we've undertaken this change or this evolution to enhance our speed to market.
To help enhance our customer experience and to drive down cost improvement in that cost improvement comes in two ways really some of it it is driving down cost and the other is cost avoidance because there are new technologies that needs to be brought to bear as an example, with cyber security.
We're just not in a position to spend that kind of money to do so we'd rather Parker with Hcl and cognizant to do that so that's a high level description Paul I'll pass it off to you. If you want to pull any numbers in that are sure. So I think we've given you the numbers Randy but I would just.
Sort of clarify were four point out that the savings are simply a reflection of the pricing that's embedded in the contracts with with our partners as well as concurrently we.
We reorganized.
Our own he.
Department.
And that that translated to some savings as well.
Okay, and then just one on.
On the coming to open enrollment period can you.
Can you update us on any specific preparations you've made for this open enrollment period and.
Expectations, particularly around.
Medicare advantage of Medicare sub sales that seem to Medicare seems to be.
A popular area for a lot of companies to focus on and you all have been doing that for long time. So I'm just kind of curious how you think this open enrollment period.
Setting up for for you and and the Medicare products in general.
Well, we're I think we're very pleased as the first thing I would say we've shared that at bankers life. As an example to med advantage policies issued were up 56%.
Thats before getting into the throws of the open enrollment period. So we think that that bodes very well and I would remind everybody that on average for every three med supp policies, we sell at least one of those results in some type of across cells. So we feel very good about the doors that are getting opened and what that means for us what's new.
This time around is the addition of med advantage on our colonial Penn platform now at the beginning Thats relatively modest it's only six states, but if we have the kind of success that we anticipate I think it'll build a really good foundation for US frankly, I think the 2019 results at colonial Penn will be relatively modest because.
That's our first go at it and we're learning how to position that on the direct to consumer basis, but I think it will position us very well for 2020 so.
The short answer I would give you Randy is that we feel really good about the med supp in the med advantage results in Q3.
And we see no reason why that shouldn't position us well for Q4.
Alright, thank you.
Your next question comes from Eric Fastweb.
Yes research your line is open.
Hi, Thank you first maybe bigger picture question on kind of the interest rate Dragon just wondering if you could quantify how much.
Kind of an impact if rates remain at current levels that would have on quarterly earnings going forward, assuming no offsets and May know Eric's talked about the impact on book yields, but I imagine some of the reason those are coming down as you're bringing on new assets in annuities and investing them at target spreads so that isn't necessarily [laughter].
A direct hit to earnings so if you could put it at an earnings buttons that would be helpful.
Sure So Eric it's Paul.
So I guess it just first of all reiterate what Eric said relative to kind of the trend line of our our book yield.
And then the the contribution of variable.
Investment income that translates to earned yield.
And then obviously you can run that math through your models.
In terms of.
The impact of lower rates on.
Spreads.
Certainly we've had some modest spread compression.
I don't think I'll try to quantify that for you.
We have we have had some of that.
I guess I would emphasize there that.
Notwithstanding some modest spread compression.
Returns on our spread business continues to be.
Very favorable relative to our target returns.
Got it. Thank you and then maybe on colonial Penn It seems like good story emerging there with volumes obviously it affects the GAAP earnings in the short broadening but.
Anything you can talk about how you see the in force building given the sales volumes and.
Got it any outlook for expenses would be helpful. There.
Yeah, I'll comment at a high level in the bulk insurers some numbers perhaps.
I'm really pleased with the way the colonial Penn business is is evolving and if you take a look at a high level this quarter.
To recap is that we missed consensus by two cents.
But half of that Delta one cents was due to the colonial Penn advertising expense.
That drove really good volumes that were very pleased with that again, we showed growth on top of a very tough comp.
From a year ago, we were still able to show growth and when I look at the persistency enforced profit virtually any metric you want to think about in managing a business like this I'm extremely pleased and frankly I would take that trade all day long again I'd be happy to missed consensus again next quarter. If it's a big chunk of it is due to building that colonial Penn busy.
Yes, we really like what's happening with the franchise, we like the way the direct to consumer response is working we like what our telesales agents are doing we like the increased of the chat and online. The 5000 chat sessions that we're doing a month.
We really like the way to consumers are responding so we want to keep building that out we think theres something there that's building very well and again the persistency. The in force all of it is good and I'd I'd make this trade all day long I think it was money well spent we'd do it again.
Got it thank you.
Your next Oh, sorry go ahead.
Oh, sorry, I wasn't sure Paul at a follow up or a comment.
Just going to say I've got nothing to add to that.
Okay. Thanks.
Your next question comes from Humphrey Lee with Dowling and partners. Your line is open.
Good morning, and thanks for taking my questions.
Sure.
Gary's prepared remarks, if you talked about they're seeing some early signs of success in terms of cross selling through W.P.D. I know steel probably too early to tell but can you elaborate on some of these the the this assessed as you've seen and how we should think about it.
Yeah sure Humphrey This is Gary again, I'll comment at a high level.
It really goes back to the thesis that we had when we acquired a web benefits. We think the world of their technology, we think that they've done a really good job building small nimble technology to serve.
Firms that in some cases are multinational firms that really built a fantastic tool there and when I think about the potential for cross sell them. This is exactly what we're seeing happen, we're seeing some of our existing worksite agents and remember our worksite business has been growing double digits for six quarters now we're seeing some of those worksite agents and get into accounts that thing.
I wouldn't get into before because they didnt have a technology solution. So we're seeing them get into those accounts and being able to use w. Bds platform. We're also seeing some of the agents that were existing with W. BD that previously were quoting business that wasn't related to Washington National now actually putting Washington national into their mix.
It's way too early for us to really share a lot of numbers, but I can tell you that we're very pleased and the fundamental thesis that those two areas of cross selling meaning already agents existing agents using their platform and their existing distribution points, using our insurance company business or insurance company, but those two.
These are holding up it's way too early yet, but we're seeing early traction on those very pleased with that.
And look forward to being able I would guess within two to four quarters to have numbers that are sufficiently mature that it makes sense to start sharing just as we did with the broker dealer, where we waited roughly four quarters. When we started sharing data.
Appreciate that color.
For two kind of the enrollment period, especially with Medicare supplement.
Given some of the D C.
Dynamics going through this year I was just wondering if you are looking in terms of pricing are you looking at any kind of.
Rate increases kind of factoring into your pricing as you go into the enrollment period.
We did.
And I'll, let Paul speak to that he's got the data. So good morning, Humphrey, we as I mentioned on the second quarter call we did.
Filed rate increases.
The effective January of 2020 in the neighborhood of 7%.
Obviously those are subject to regulatory approval.
Fairly consistent with prior period rate increases which were approved.
And.
So that's a that's in place.
So the the falling and the approval were largely in one of your expectation.
Yes, so just to be clear, we file I think we filed back in.
In June July timeframe.
For rates effective January of 2020.
I don't think doses of.
In.
Decided on by the regulators, yet so thats subject to their approval I guess, what I'm signaling as I think by and large what weve.
Well, we filed will ultimately be approved.
Turning any reason why they shouldn't be were we don't think there was anything really out of the ordinary in terms of the request. So we wouldn't expect there to be any problems got it. So so impressive you were able to get the the rate increase that you did you ask Paul do you expect Medicare supplement.
Ratio to be closer to a few years back kind of more 71% to 74% range as opposed to kind of the most recent elevated range.
You know I'm I'm pretty comfortable with the guidance, we provide and just to give you kind of the way I think about it we have a stated range of 73% to 77%, so thats a 4% window.
That is less than $8 million.
In any given quarter trying to predict that with more precision than that I think is pretty tough to especially if you take the midpoint, meaning it's plus or minus so you're talking about a $4 million swing on a book of this size in a given quarter I wouldn't want to try and refine that estimate I'm I'm comfortable with that range.
Okay alright, thank you.
Your next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hey, good morning, first when I had was just on the sales progress and the growth numbers for some of these product lines are pretty big on sales I guess, when when I look at premiums and fees.
And kind of separate that from net investment income how would how should I expect that yeah that net annualized premium that you're adding is going to earn and comparing that with sort of the persistency, what's rolling off yeah, what's a reasonable way to think about how all this is going to translate into like actually ward premiums and fees.
Growth and I know that that question is probably a little unfair to because the net investment income I know probably benefits from where you know one on the fixed indexed annuity side as well.
Morning, Elteks, Paul, but I think thats, a clever way to ask us to provide guidance [laughter].
[laughter], which as you know we're not doing I.
I think I just ask you to two.
You know.
Run your own estimates through your model.
We certainly think that the.
The growth that we've put up for the last five quarters.
Has has.
Some sustainability to to them.
And.
Since we're not providing guidance.
I have to.
Put it back on you to to make your own projections.
Understood and yeah, I apologies I I guess, maybe let me try it. This way can you can you talk about persistency, how that's been trending and what kind of drag that.
That piece of it would would cause.
Yeah.
Yes, so I I I won't quote specific numbers, Alex but I don't think that we're seeing anything that would cause recent trends deviate meaningfully from from where they've been.
Gotcha, Okay and then the next question I had its just on the reallocation and the impact is having on net investment income.
No I get what that's doing too.
Investment income and earnings right now as you guys talked a lot about that I guess can you talk about how that plays into the decisions you're making on RBC like does that play into where you think you can target RBC in.
I just want to make sure I'm not.
Dinging you for the net investment income or maybe.
Not giving me the benefits.
Associated with potentially freeing up capital from these actions and being able to buy back stock at a or deploy some some other means.
As it off.
Sure. So certainly our target capital is a function of our risk profile and part of our risk profile is.
The risk inherent in our.
Investment portfolio.
We we reallocated back in Q1.
That did free up some capital.
At that point in time, we don't expect to materially change the risk profile of the the investment portfolio from where we sit today.
So that should be fairly static.
But as we look you know more.
Oddly.
At our business.
And the risk profile of our business that will inform our view of what.
An appropriate target capital.
Should be and again, we'll once we reached that conclusion.
Need to socialize it with the rating agencies score, we do anything with any capital that's free to.
Alright, thank you for the responses.
Thank you.
I can't ask a question. Please press star one on your telephone Keypad. Your next question comes from Tom Gallagher with Evercore. Your line is open.
Thanks.
So if I look at the <expletive> carry the comments you made on on share repurchase and.
The way you're thinking about things here. This is obviously, a very high buyback quarter at 75 million.
Is this a reasonable level to sustain for a while here and the reason I asked that I was looking at your cash flow slide.
And if I just look at sources and uses your you're actually not really drawing down any any capital you're just using what you're generating.
At the current pace.
So curious how are you how we should think about that and then I guess the follow up would just be.
If you do decide to draw down on excess capital would that would that be incremental [noise].
I think about sizing of buybacks. Thanks.
I'll give you a high level response, and then and then Paul.
We do fall will correct me why screw it up.
So let me first say.
We're very comfortable with the level of buybacks that we engaged in this past quarter.
If the market conditions remain as they are in us and if you guys keep undervaluing our stock at some of the formal obviously is undervalued, but I think its undervalued.
If the stock stays at this current level, we will continue to use buybacks.
The primary tool to deploy that excess capital.
No I don't want to get ahead of the work that Paul and the rest of the team have to do to assess our capital levels and really make decisions about how much capital we're going to have freed up in future quarters. So I don't want to get into trying to project.
How long, it's sustainable for and how much capital will have in future quarters.
I do want to make the observation that if you just bring a simplistic perspective to this we know that with our LTC transaction were less risky company.
We know that with the moves that Eric Johnson has made relative to a triple B allocations were less risky company. It seems to me that we ought to be able to make a pretty straight forward argument to the rating agencies about not needing to hold as much capital and.
And it will be very smart about how we deploy it.
The stock has been incredibly compelling value for the last several quarters and weve.
We've reflected that with our actions are much more than our words and I think we'll continue to do that so.
So if it if it stays at these levels and market conditions remain as is you should expect.
For us to continue to take appropriate actions just like we've done for the last several quarters.
That.
That makes sense and then just to a numbers question, whether whether it's Eric or Paul.
If you can at least maybe not validate the question I'm asking but at least a told me directionally off the if I if I, if I listen to Eric's comments about his expectation, it's sort of sequential drag on anti.
I'm coming up with something like.
$3 million to $4 million a quarter.
And that's just applying that five basis point or so sequential negative impact and an annualized basis, but then if you translators to quarterly I get about three or 4 million.
I look at that earnings drag.
Which amounts to call it 2% Vps, and then I compare that to buy backs Gary if you continue to execute at this level that would give me a little over 3%.
So it would look like if you.
I'm doing that math correctly of the anti drag versus the buyback impact that it looks like you'd be coming out that positive on an EPS basis.
I don't know if someone can not.
Clarifier, probably quantify that thanks.
Yes, Tom it's Eric.
But you're entering into an area that is actually got a lot of knobs and.
And moving dials on it because I think you are.
In terms of.
You know rough approximate general sizing I think you're doing your math right with the exception that you're probably not including us.
How you think about a factor for for for you I'm growth.
And how that impacts that.
Is as you know which has to do with with sales with also has to do.
With retention.
In that site in sort of complexity and then you know you have the variable aspects of income as well.
Which are to a degree of market.
Actually very market sensitive so.
I think you're thinking about it correctly, but but over a very short period of time, that's a calculation that can have a pretty decent ranges of outcomes. Although if you look at over a year or so.
Pretty predictable, but in any given quarter.
What we call your effective yields can we put around quite a bit based on the things I just mentioned.
Okay. Thanks.
There are no further questions kind of at this time, a kind of call back over to the presenters.
Thank you for joining us today, we look forward to speaking with you again in the future.
This concludes today's conference call you may now disconnect.
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