Q4 2019 Earnings Call
At this time all participants are in listen only mode. After the speakers presentation. There will be a question answer session to ask a question. During this session you'll need to press star one on a telephone if you require any further assistance. Please press star zero I wouldn't know what Dan the conference over to Jennifer child's VP Investor Relations. Please go.
I had.
Thank you operator, good morning, and thank you for joining us on CNO financial group fourth quarter 20, Nike Inc. earnings Conference call. Today's presentation will include remarks from Gary <unk>, Chief Executive Officer, and Palmer, Ghana, Chief Financial Officer. Following the presentation. We will also have several other business leaders available.
Mr period.
During this conference call, we must be referring to information contained in yesterday's press release.
Handover lead by visiting the media section of our website I see I don't think dot com.
Good morning presentation is also available in the Investor section of our website and was filed in the form 8-K yesterday.
While our form 10-K and posted on our website on or before February 20 pounds.
Let me remind you that any forward looking statements. We make today are subject to a number of factors, which could cause actual results could be materially different than it was contemplated by the forward looking statement.
Today's presentation contain a number of non-GAAP measures, we should not be considered a substitute for the most directly comparable GAAP measures.
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.
And we'll be referring to changes between fourth quarter 20 team.
Quarter 20 now.
Now I'll turn it over to Gary Thanks, Jennifer Good morning, everyone and thank you for joining US 29, staying with another productive year for Seattle operationally, we performed very well.
I can help sales were up 5% for full year, which included record sales in our worksite and direct to consumer businesses.
So what do you collected premiums were also up 12% for the full year or underwriting results remained stable.
With all health benefit ratios falling within or better than our provided guidance ranges.
Revenue was up 76%.
Other key accomplishments in 2019 include our acquisition of what benefits design in April.
Upgrades from two rating agencies, so that our debt is now rated investment grade by all four rating agencies.
And the strategic technology partnership we announced in November.
In 2019, we launched several new products, including Medicare supplement plan B M living insurance.
We also piloted Humana Medicare advantage and our own manufactured Medicare supplement products through our direct to consumer channel.
Results from the pilots are preliminary but illustrate the range m. types of opportunities, we expect to leverage with our industry, leading direct to consumer capabilities.
Right now see it always organize around three operating businesses bankers life, Washington National and colonial Penn.
Last month, we announced a corporate transformation that will consolidate our business segments into two divisions that are aligned with the consumers we serve the consumer division and the Worksite Division.
Changing consumer behaviors and expectations are driving this change we're transforming our operating model for me consumers, how and where they want to do business.
Each one of our three businesses has distinct distracts from characteristics.
Bankers life as a top five captive agency force with deep and established customer relationships.
Even distribution of this size and quality is difficult to replicate.
Colonial Penn is a top five direct to consumer insurance business with significant brand awareness and a highly leverageable platform.
Washington National as a fast growing worksite business and its niche.
Consumer organization as breadth and depth to our agency force capabilities.
Today these segments operate primarily in silos.
Brought together the opportunity is enormous.
I'm very excited about this transformation in our business and our go to market strategy.
I will talk in greater detail about this at our upcoming Investor day in two weeks.
Moving on to the fourth quarter results on slide five.
Oh fourth quarter performance was strong despite a challenging interest rate environment.
Net investment impacts continue to provide significant earnings headwind, reducing operating income by eight cents share.
This reduced income is attributable to both the lower.
Chairman and the up and quality portfolio reallocation, we completed in the first quarter of 2019.
Despite these headwinds we grew our operating earnings per share by 4% excluding significant items in both periods.
Our life and health production was strong with sales up 9%.
Total insurance policy income was up 1% and all health benefit ratios were within or better than provided guidance.
Fourth quarter annuity collected premiums were down 9%, which was attributable to two items.
First we're up against a difficult comp up 30% growth in the fourth quarter 2018.
Second we took action during the quarter to proactively manage the participation rates on our annuities in order to balance sales growth and profitability in the current low interest rate environment.
As a result about pricing discipline, we will accept lower sales when market conditions warrant to ensure that we're putting business on our books that meets our return threshold.
We are comfortable with this trade off.
Do you what again similar circumstances.
We also implemented a new tax planning strategy in the fourth quarter that will allow us to use all of our annual wells that we're set to expire in 2023 without being utilized.
Our effective management of this assay translates to an incremental $194 million or $1.28 per share benefit to the company.
Paul will cover this in more detail.
Turning to slide six for a review of the growth scorecard.
The fourth quarter, both total collected premiums and annuity collected premiums faced tough fourth quarter 2018, comparable is up 10% and 30% growth respectively.
You'll note that we circle the Fourq you annuity collected premium and total collected premium declines in yellow.
We did this to reiterate that these results were expected and by design.
That said both were up nicely for the full year.
Our scorecard now reflects six consecutive quarters of growth in life and health sales.
And client assets in our broker dealer and fee revenue.
Turning to bankers life on slide seven.
Despite meaningful net investment income headwind, our bankers life adjusted EBIT, excluding significant items was up 2% year over year.
We continue to make progress against our strategic initiatives, namely reinvigorate growth to expand to the right.
To reshape the agent force and to optimize productivity.
As I mentioned earlier, the fourth quarter was a strong quarter for fee revenue, which was up 123% at bankers like year over year to $24 million.
This reflected growth in our Medicare advantage enrollment and changes in the assumptions we used to estimate the revenues on these sales.
Well I'm sure they'll the bankers life were down 2% year over year.
We want and expect to see life insurance sales growth I appreciate the improvement as compared to some quarters.
We also continue to see a general shift in sales from larger life insurance cases to annuities.
Health Nap was flat.
Growth in long term care and supplemental health was offset by a decrease in Medicare supplement [laughter].
As mentioned our annuity collected premiums were down this quarter, but up 12% for the year, which helped drive the account value of our annuities up 5%, which now stands at $9.1 billion.
Our average annuity sales now $90000 up 3% from last year.
Our broker dealer and registered investment advisor businesses also continue to grow nicely.
Wind assets increased 37% over the prior period to $1.5 billion.
The sustained growth is significant for our agent force as well as our overall business.
Consumer relationships tend to be stronger when we can provide income and retirement solutions as well as insurance products.
Our ability to serve the income retirement and insurance needs of our middle income consumers is proving to be a key differentiator as evidenced by the growth in our agent retention and productivity metrics.
We generated a 6% increase not producing agent count, which marks our sixth consecutive quarter of year over year growth.
This growth is on top of a very strong 4% growth in Fourq, you 18, and this is especially impressive given that unemployment rates our historic lows.
This also demonstrates that our strategy to recruit fewer but more productive agents continues to deliver positive results.
We increased our advisor caused by 7% in the quarter. So that now nearly one in seven of our agents are registered to sell securities.
Registered agents partner with our Nonregistered agents to provide financial advice to their clients.
These efforts result in deeper more meaningful client relationships and our enabling our producers to be more productive.
Not only are we seeing success with first your agent retention, but we're also beginning to see more agent stay with us into their second and third years.
Agent growth and as an important leading indicator for sales growth and these trends suggest that our future remains bright.
Moving on to Washington National on Slide eight.
Sales were up 32%, a new quarterly record for Washington National that is on top of last year's record fourth quarter.
These results reflect our efforts to diversify the product mix.
Our geographic expansion.
Yeah, the strong growth in Worksite consumer markets.
Worksite sales were up 7% on top of record growth of 38% in the fourth quarter 2018.
This was fueled by 14% increase in Worksite, producing agent count as well as an 11% increase in life sales.
The consumer business saw a marked improvement this quarter with sales up 57% year over year, which compares to double digit declines in recent quarters.
This was led in large part by the independent partner channel, which is shown steady and consistent improvement throughout 2019.
The combination of increased agent growth.
Along with a strong open enrollment season for supplemental health sales were key factors this past quarter.
What benefit design delivered strong results this quarter with double digit growth in both employer clients uncovered employees.
Both revenue and operating income also showed solid growth and were consistent with our expectations.
Integration process WBB continues to run smoothly with back office consolidation activities proceeding on schedule.
Our focus in 2020 will turn to realizing revenue synergies.
As I mentioned earlier as part of our corporate transformation will orban organize our operating model into a consumer and Worksite Division.
Creating a separate division for Worksite will bring a sharpen management focus to this fast growing business.
We expect these actions to accelerate the growth profile of our Worksite business, which already exceeds the growth rate of our peers and the overall industry.
Turning to colonial Penn on slide nine.
Colonial Penn our direct to consumer business delivered record full year sales, which were up 7% year over year.
This is attributable to our cost effective marketing spend that we accelerated during the first nine months of the year when television advertising rates were more attractive.
During 2019, we also benefited from strong increases in our sales productivity and our ongoing lead and sale diversification efforts.
Fourth quarter sales were down 8% it was attributable to two items.
First we were up against a difficult comp of 17% growth in the fourth quarter of 2018.
Second we faced a challenging television advertising environment and pulled back on our marketing spend which dampened growth.
We have a price disciplined and thoughtful approach to growing the business when market conditions warrant we will accept lower sales to ensure we are putting business on our books that meets our return hurdles. We are comfortable with a trade off and we would do it again similar circumstances.
One of the most attractive features of this business as its predictability, we can increase or decrease our marketing spend and predict our sales results within a narrow range.
Due to GAAP accounting treatment dialing back our advertising spend in the fourth quarter had the effect of boosting our earnings.
The strength of our industry, leading direct to consumer business is a core capability that we will invest and advancing our new operating model.
This year alone. This business had 2.4 million unique visitors to the colonial Penn Dot Com website.
Carried out 1.2 million telesales interactions and completed 34000 web chat sessions since may or roughly 5000 per month.
Ultimately, we intend to enhance our customer experience on the consumers can seamlessly move between our brand and sales channels to buyer product, how and when they wish to purchase them.
Direct to consumer as a key component of this experience.
Moving on to capital deployment on slide 10.
I'd like to remind you of our capital allocation strategy.
We are committed to deploying 100% of our excess capital to its highest and best use overtime.
Our goal remains unchanged to maximize return on invested capital over the long we will continue to weigh our options accordingly.
Our capital position remained strong with our shares trading at an average discount to book value approximately 18% during the quarter, we maintained our accelerated pace of buybacks.
We repurchased $75 million in the fourth quarter on top of 75 million in the third quarter. This brings our full year capital returned $219 million, including 252 million spent on share repurchases.
This was nearly double the amount we spent on buybacks in 2018.
And it's most we've deployed on share repurchases since 2015.
As long as our stock remains highly undervalued and trades at a significant discount to book value, we intend to use share repurchases as our primary vehicle for excess capital deployment.
Before turning it over to Paul I would like to make a final point.
While interest rate movements are outside of our control we are not being complacent.
We will continue to take proactive and decisive action to mitigate the impact.
The technology partnership we announced in November as expected to deliver $20 million and savings over five years, ultimately leading to run rate savings of 8 million per year in 2024.
Transformation, we recently announced which will consolidate our three business segments to two divisions is expected to reduce gross annual run rate spending by approximately $22 million by the end of 2020 before investing approximately 11 million of that savings is various technology and growth initiatives.
Together these savings initiatives will dampen the impact from the challenging rate environment, while providing a solid base for our future.
We are laser focused on generating stronger operating leverage and we'll continue to seek other opportunities to reduce our structural cost and minimize our expenses.
With that I'll now turn it over to Paul to discuss the financials.
Thanks, Gary and good morning, everyone.
Turning to the financial highlights on slide 11.
Operating income per diluted share was up 44% to 52 cents in the fourth quarter.
Excluding significant items in both periods operating income per diluted share was up 4% from 45 cents to 47 cents. Despite a decline is net investment income of eight cents.
Contributing to the increase in earnings per share in the quarter were improved underwriting margins and increased fee income.
For the full year, excluding significant items operating earnings per diluted share declined 2% or three cents to $1.80. Despite net investment income declining 24 cents per share.
The headwind from lower net earned rates was mostly offset that higher level of invested assets improved margins and higher fee income.
Earnings per share for both the quarter end the year benefited from reduced share count due to share repurchases.
The comprehensive annual actuarial review of assumptions at a fairly modest $10 million unfavorable impact on pretax operating earnings driven by a reduction in earned investment grades.
Acting are up in quality trade in Q1, 19, and lower interest rates channel.
You compares to $1 million unfavorable impact in the prior year period consistent with past practice. We've included these as significant items.
Our long term care business continued to perform as expected.
Margin increased modestly as new business gains outpaced earn rate reductions.
There were no material long term care assumption changes as experience continues to align very well with expectations.
We did reduce our ultimate new money rate assumption now targeting an ultimate 10 year treasury rate of 4%, which is down 25 basis points from the assumption last year.
Within non operating income and recorded a $14 million charge related to our previously announced corporate transformation and strategic partnership.
This was comprised of both severance and costs associated with our outsourcing arrangement.
Also within non operating income, we recorded a $194 million tax benefit in the quarter.
As we mentioned we initiated a tax planning strategies, which allows us to utilize over $900 million net operating losses that would have otherwise expired on used in 2023.
As a result, we reversed the related valuation allowance.
This added $1.29 to year end book value per share and contributed to a 13% increase for the full year.
Operating return on equity excluding significant items was 10.4% in the 12 month ended December 31, 2019 compared to 10.3% in the prior year period.
[laughter].
For the full year, we generated about 330 million free cash flow for capital retained to fund organic growth.
None of this capital strain free cash flow was about 290 million.
This compares to operating income excluding significant items of 282 million, which reflects free cash flow conversion of 116% of for capital strain or slightly above 100% after.
As Gary stated, we returned 319 million to shareholders during the year.
Which reflects more than 10% of our market cap as at the beginning of 2019.
We also reduced our share count by 9%.
At year end statutory capital is 1.7 billion.
Our estimated consolidated risk based capital ratio was 408% and holding company cash in investments were 187 million.
As I've mentioned in previous quarters, we have been reviewing our capital and liquidity targets and intend to share our conclusions during our Investor day on February 26.
Turning to slide 12 and segment earnings.
The decline in investment income in the quarter impacted each of our operating segments.
In addition to that some things worth noting.
And our bankers life segment earnings reflect improved underwriting an increase in fee revenue and other income and an increase in operating expenses driven largely by continued spending on growth initiatives.
The revenues in the quarter more than doubled the 24 million, which reflects growth in our Medicare advantage enrollments and includes changes in the assumptions, we used to estimate revenue on new sales.
Washington Nationals earnings reflect favorable interest sensitive life results in the prior year period.
The slightly higher interest adjusted benefit ratio this quarter.
Colonial Penns earnings were up 1.4 million or 29%.
6.2 million due to growth in the block and lower marketing spend.
As a reminder, a majority of colonial penns advertising.
Noncapitalized, which impact short term earnings.
Enforced earnings, which excludes the impact from the AD spend grew 6% over the prior year 18.8 million.
[music].
Full year EBIT was 14.3 million slightly above the mid.
Down 3% year over year, reflecting increased marketing spend.
Notably full year enforce the EBIT was up 7% to 72 million.
Turning to slide 13 in our key health benefit ratios.
Bankers life, Medicare supplement benefit ratio of 74.2%.
76% in the prior period and inline with our 2019 guidance is 73 to 77.
Bankers life long term care interest adjusted benefit ratio for the retained block of business was 75% generally in line with the same period last year and within our 2019 guided ranges 70 479.
Washington National supplemental health interest adjusted benefit ratio is 54.2%.
So generally in line with the same period last year and slightly better than our 2019 guidance.
58.
Turning to slide 14, and our investment results for the quarter.
Net investment income in the fourth quarter was down 18.4 million or 6% year over year. Despite a 3.5% increase in average invested assets.
This is attributable to the following number one.
A decline in that book and earn yields which reflects the up and quality repositioning the portfolio in the first quarter 2019, as well as lower rates and tighter spreads generally.
Number two reduced prepayment income, which declined $6.3 million year over year, and third an increase in impairments, which remain well within an expected range.
The new money rate of 4.28%, which was down 58 basis points sequentially.
Our next lack of new investments and alternatives in the fourth quarter.
Relative to treasury rates and investment grade spreads the 4.08, new money rate.
Certainly.
Reflects a healthy outcome.
We do not undertake any significant additional repositioning of the overall portfolio in the fourth quarter.
Before turning it over I'd like to mentioned that we will be rolling out new reporting structure at our Investor Day on February 26.
And we'll be providing the revised presentation of our historical financial information.
And with that I'll turn it back to Gary.
Thanks, Paul.
I'm proud of the progress we made in 2019.
We executed well against our playbook, posting solid operational and financial results.
We allocated capital prudently returning $319 million to shareholders in the same year, we completed the acquisition of what benefits designed to invest our fast growing worksite business.
Growth initiatives that we implemented over the past few years and our ongoing investments in technology are paying off.
We took a hard look at our cost structure and identified significant savings opportunities that will dampen the impact from the low interest rate environment and strengthen our ability to execute on our strategy.
The organizational changes, we recently announced transformer business are also expected to generate meaningful revenue synergies and boost our growth rate.
As we enter 2020, we expect to build on our momentum and deliver another year of profitable growth.
We are creating a leaner more integrated and customer centric organization that positions us well for the long term success and shareholder value creation.
Before we open it up for questions I want to remind you that the CNO Investor Day is on February 26, 2020 in New York.
Please note that preregistration.
We issued a press release, a few weeks ago with registration instructions. If you have any questions. Please E mail Jennifer at IR.
CNO Inc. dot com.
Thank you for your interest in CNO Financial group, we will now open it up for questions operator.
Ladies and gentlemen to ask a question. Please press star So the number one on your telephone keypad.
So just a moment top acuity roster.
Your first question comes from Randy Binner with B. Riley FBR. Your line is open.
Hey, good morning, Thanks, I wanted to ask a few questions about the the tax improvement on on the valuation allowance so.
I guess first could you describe maybe in a little bit more detail the nature of the tax planning strategy that allowed you to have data recovery the valuation allowance.
Sure Hey ran default so we're changing a.
Tax method of accounting, which allows us to allocate certain indirect costs, so overhead to improvements that we make on our.
Buildings and facilities.
And so essentially we allocate those costs, we capitalize those costs.
Which increases our taxable income.
In the period 20 to 23.
And allows us to utilize and a wells as we previously thought would expire on used in 2023, and therefore reverse the valuation allowance that we had against those roughly 900 million or so about a wells we thought would expire on use we had a valuation allowance.
Against that.
With this tax strategy, we're able to reverse that allow us.
And is that is that strategy.
Is that or is that was the use of that something that changed with the with tax change tax law changes a few years ago.
No it did.
It's not a function of of those changes.
So the tax strategy would have been available to us and others and other times.
But our effects that didnt really aligned with the until now which is the reason that we're we're.
I think it now as opposed to some previous period.
Okay, Great and then the just to make sure.
We had their numbers right sign on slide 25 of your presentation. So that that now shows 532 million of an allowance is is that.
Is there any more valuation allowance.
Or is it just this 532 of animals now.
Thats exactly right. So 532 of DTA is.
Related to 2.5 billion of I don't wells.
No no no valuation now against any of those that oils.
Okay perfect. Thanks, a lot.
Yep.
Your next question comes from Aaron Asquith Whatnot and this research your line is open.
Hi, Thank you.
Given the acceleration in business growth the actions, you're taking on expenses and the fact that we're now close to anniversary ing the up in quality trade do you think we're at the point, where you would expect EBIT for the operating businesses to show consistent year on year growth ex disclosed items.
Okay.
Yes sure.
So Eric.
Very high level, I'd say, a couple things number one.
We'll continue to face.
An earnings headwind from net investment income.
Through 2020.
Driven by.
The combination of the impact of the quality and continued low.
Rates and tighter spreads so that dynamic will persist not as pronounced in 2019, but the whole Nevertheless persist.
Our our intention and you've seen some of this already has to.
Offset that through expense management.
I think one other thing I would add to that Eric will be talking more about this at investor day, but the type of visibility we provide.
I think will be greater in terms of the operating earnings well because of the reorganization. So we're using the reorganization as an opportunity to change the way we report Paul mentioned that.
So I think you'll get a greater sense of visibility.
And the rest of the comments Thats certainly true culture.
Got it thank you.
And then I know you also plan to give a more detailed update on capital at the Investor day, but is it reasonable to assume that you could sustain the level of capital deployment from the past two quarters on a near term basis, just based on your free cash flow and current excess capital.
Sure So Eric.
What I'd say is that.
Relative to revisiting our target capital levels I think we're we're.
Landing in a good place there and again, we'll give you specifics.
On the Investor day.
What that means for.
Share repurchase I think I'd I'd prefer to.
Punt that two investor day as well.
When we expect to give.
More fulsome guidance.
Broadly with respect to capital as well as.
Across the business.
Got it Okay. No. That's fair I guess I was just looking at even based on your existing targets. It looks like you still have excess capital and she said are generating pretty material free cash flow.
Yes, Thats certainly fair.
Okay.
Great. Thank you.
Your next question comes from Humphrey Lee with selling and partners. Your line is open.
Thank you for taking my questions.
Paul You mentioned that you continue to see.
And they Miss an income headwinds in throughout 2020, because of the environment and also the the repositioning that you've done.
We anticipate that kind of similar five to six basis points quarterly decline in you'll.
Book yield has come as a run rate I'm, assuming the environment since the to seeing.
Good morning Humphrey. This is not Paul this is there.
And let me if you don't mind I'll answer that for you.
I want to answer it on a couple of levels and one is kind of give you a rule of thumb that you can think about your model and then the other.
Perhaps a little more specific.
Late into the.
Quarter, which just depends.
One kind of rule of thumb, you could think about at least in terms of.
New money rates would be something in the order in the quarter of 10 year Treasuries plus 200, maybe 225 basis point, that's something you can externally keep an eye on and so for example last quarter. If you had an average tenure of roughly.
180.
And the new money rate landed at around the four away that's pretty much in line with that rule of thumb, so that would be a way of thinking about it going forward now.
You also probably then ask me well the prior quarter to new money rate with much higher with roughly 55 basis points higher in the third quarter well what happens if you fall off a cliff or something no we didn't fall off a cliff.
A measure that highly sensitive fairly small number.
Of events.
We had one.
Investment in the third quarter not replicated in the fourth quarter that generated a carry the very high book yield.
And it generated roughly 45 basis points of that have that 58 basis point different one investment.
So we'd like to have one investment like that every quarter and we certainly look for them.
But what you should expect is something in line with the model with the Google form I gave you affected by from time to time specific individual opportunities that may drive that number upward in a given quarter.
I hope that helps you with with that question Eric we've in the past talked about what's the street should expect in terms of overall book yields you want to share that again as well too. Please.
Yes happy to do that I've said now this will be the third quarter and the role I've said that that you should all think of book yield in the current environment trading at a rate somewhere between three and eight.
Bases points the quarter. This quarter was I think roughly six.
Yes.
I'll take it down a level.
The Washington National the book yield was down two basis points.
Bankers life. It was down nine basis points bankers came off a little bit more because there's more more new money coming through the system in bankers and it has a little more LIBOR or floating rate exposure floating rates came down a little bit in the quarter, but a little higher delta in the quarter.
But you should expect applying the rule of thumb I gave you on new money rate, but that would produce roughly something between three and five.
Basis point erosion in today's market.
In book yield plus whatever noise factors that will emerge from from as I. Just described so interestingly enough.
When you factor all that into into core income, meaning you know repeatable.
Book yield and earnings core income for the quarter investment income was quite stable.
Down maybe four or 5 million at bankers and basically down about a half a million at Washington National most of the noise in the quarter really came from.
Prepayments being down 6 million.
Bugs.
And alternative to being down year over year down about $8 million.
Although up quarter over quarter.
And so when you have.
One timers come off like prepayments being down 6 million.
That 6 million change in prepayments effective earned yield for the quarter by 12 basis points.
The earn deal for the quarter was down 14 basis points. So 12 of the 14 came from the reduction in prepayment core income with quite stable. There's some noise around the edges that that we have to do a better job I think of articulating and giving you will get some to understand and I think we'll be able to do some.
That.
At Investor Day, So you can see through that noise and Garik Anthony earnings call talking about sale and efficiencies you know the good things happening the company.
That's very helpful. Thanks, Eric.
Humphrey did you want to follow up you. Good yeah. The second question. So looking at your fee income, let you pointed out is very good.
Obviously, there is some corresponding expenses related to those feed business.
Given the growth that you have in DC fee businesses like how should we think about the margin for the business as we kind of modeling detail the topline NDD expenses going forward.
[noise] Humphrey, it's Paul I'll take a crack at that.
In the context of trying to stay true to our principle of not providing guidance.
I guess I'd say number one that.
The margins were.
Quite stable inline with expectations I guess, the only thing I'd call out as sort of noise in the quarter relative to your modeling.
Relates to the change in assumptions that we made for the accounting of our.
Medicare advantage business. So this is.
At Sea six so six I'm sure you're familiar with that.
Which was.
Effective January one and 18.
And requires that we.
Estimate the lifetime revenue and expenses are net revenue.
For that business.
We.
Didnt feel that we had sufficient data.
To make that estimate.
Until the fourth quarter this year.
Now that we have sufficient data.
We booked.
Estimate for that lifetime revenue and that increased.
Both our revenue and our expenses in the quarter [laughter]. The net impact of that was about six and a half million dollars.
Away from that.
I'd say that our margins were.
Consistent with our expectation and stable relative to recent period.
Okay. So.
Follow up offline, but thanks for that.
Sure.
Your next question comes from Thomas Gallagher with Evercore ISI. Your line is open.
Good morning, Paul Paul just a follow up to the Humphreys question you just answered this six and a half million.
Net impact.
Would that have been.
Pre tax earnings benefit for bankers and.
Would you expect some of that are noted that to recur as you head into one Q.
Sure so pretax.
And as you said, it's all in bankers and so on.
Page seven of our supplement you'll see it going through the revenue line.
And the.
Commission expense and distribution line.
As far as what it looks like next year.
Because of the seasonality of the business and the timing of booking the related revenue and expense.
I would expect that the.
The the both revenue and expense in 22.
To mirror very much.
The timing in 2019.
As much of it gets booked and in the fourth quarter.
Got it to you we should see a similar.
Six and a half million dollar pre tax earnings uplift, but it's what should be more about four to 20 event.
Because that is at a fair way to think about it.
Yes.
Okay, but not.
And we'll see the much higher level.
Fee income you had at bankers in Fourq, you well that also come down just from a revenue standpoint, as we roll into one Q because I think seasonally one Q in 19 was also high so I'm just curious how we should think about seasonality for fee.
See income or fee revenue.
Youre right so.
One Q 19 side I'd I'd expect to see some.
Something very calm comparable in one Q 20.
And the same for Q2 and three in them Q4. The dynamic you saw a Q4 19.
Should be.
Repeated.
In Q4 20.
Gotcha and then.
Just to kind of close the loop on your net investment income comment. The you know just taking your prepared remarks, the eight seven a share.
Interest rate related headwind.
I mean that 17% of earnings now why.
You clearly have produced.
Some other nice offsets against that but as we think about the actual earnings headwind related to interest rates, just taking eric's comments.
And.
Doing sit back at the envelope math I get something soon to significantly less than that.
From an ongoing earnings from an EPS headwind standpoint, I get something around.
6% to 8%.
Range of an EPS headwind does that sound about directionally right in terms of if when you quantify it and just.
Overlaid against EPS expectations.
Yeah, I don't think there's anything wrong with your math.
Only thing I would I would.
Going out is that.
[music].
You're always going to have some volatility from the variable components of about <unk>.
So I think I think the math you're doing relates to.
The headwind from just the sequential decline in our.
Book yield.
Then you have to factor in the plus or minus that may occur.
That in every quarter almost in a will occur you just don't know, whether it's going to be plus or minus from the variable components falls prepays.
Primarily.
Yes. Tom. This is this is Eric and maybe I can I gave you a rule of thumb around the new money rate, which I think it may be useful to you and I'll give you a rule of thumb also.
Which may be useful to you around alternative and prepays as well.
And I think.
Exactly correct to say, there's going to be variability in these two items that is more significant than in in new money in book yield.
And so the one thing is it that is certain is that the exact rule of thumb won't produce an exact result, but just as a frame of reference you know alternative investments we like alternatives that uses from pay rent that have a carry as opposed to that or market directional and pure.
Equity content.
And so the way I think about that portfolio at night I want to produce a carry of around between eight and 10%.
And.
So if you want to think about.
Let's say, let's use 8% as we look for kind of quarter on quarter.
Income from alternative I think that is reasonable recognizing that you know they were going to be quarters, where that the that is going to.
You know have a bell curve, that's going to start at minus five and go up the plus 20 into right.
Return based on market conditions.
And then when you look at prepayment.
I'm just looking back here, Tom and we've had prepayments on a quarterly bases everywhere from 2 million.
The 10 million in a given quarter.
Over the last three years.
That number is very very hard as you know if not a man number we can manage and it's very difficult to predict going into a corner, but if you want to kinds of kind of pick an average number of fixed.
I think that would be a rule of thumb that you could apply recognizing that it's going to actualize somewhere north or south of that depending on.
You know the given quarter going I think that now given you three rules of thumb you can apply that will help.
You understand how to think about investment income here, that's going to be the 21 million billion excuse me color portfolio and all kinds of moving parts and they're going to be $3 million item going this way in that way any given quarter and I don't think you're going to ever whether rates are high or low.
Not going to get around that having said that I think that this would be a way of producing a normalized over the term of thing view.
That's helpful. Thanks.
You're welcome.
Our next question comes from I'll, let Scott with Goldman Sachs. Your line is open.
Hi.
First question I had was.
On I guess, just that the growth that you're getting on new annualized premiums fees et cetera, and how it's going to translate to topline and earnings growth of what kind of set aside though the LTC in run off and then set aside the then I pressure that's been discussed I guess, maybe even.
Said, another way or how much growth in the in nap and this fee revenue do you need to sorta offset the run off like what's the lapse trend how do I think about the dynamics there and how much growth you can actually get from from the kind of sales growth that you're seeing.
Hey, Alex at all.
So I guess.
Once again, it's hard for me to answer that question without giving you earnings guidance I think.
Those are assumptions you have to build into your into your model just trending are.
Our historical data.
Okay.
Maybe the follow up on.
On cash flow.
I was just interested if there's any thoughts on the what I think last time you guys gave it is 300 350 or so was wondering if you could provide any color on that and I appreciate the the excess capital part of the conversation.
Whatever you're going to do on RBC ratio is maybe separate and you don't want to talk about that yet, but just just maybe the ongoing business. If there's any color on how that's trending and how much you plan to use behind new business growth in 2020.
Sure.
So so Alex I'll first just kind of level set with respect to 2019 as I mentioned.
In the prepared remarks.
For the year our gross.
Free cash flow is about 340 million.
The capital to too.
Support our organic growth.
Free cash flow about 290 million.
And then go onto the Investor day to give forward looking statements, but I would say now that.
Given that the business is very stable.
I wouldn't expect that gross free cash flow number two to change materially.
Got it and so the the impact of this DTA change in particular that that would have just a modest benefit.
From year to year or is that more front end loaded the him back to us.
You're talking about the tax strategy, what was it that impact free cash flow.
Yep Yep, Yeah, just take whatever it if I should think about that is just being like a level benefit overtime or because of the years. It impacted in the way it's been utilized if it as a bigger impact on near term cash flow.
Yes for the tax strategy actually it has no impact on our cash taxes through 2023.
During that period were simply recording higher taxable income.
Strictly for tax purposes.
Acting or gap or stat books.
Higher taxable income, which allows us to utilize the I don't wells.
In 24, we would expect to reverse the method of accounting, thus, allowing us to do this.
Which will actually create new I don't allow that we would utilize and 25 to 29. So the cash benefit is really in the 25 to 29 period.
Got it okay. Thank you.
Yes.
Again to ask a question. Please press star one on your telephone Keypad. Your next question comes from Dan Bergman with Citi. Your line is open.
I believe you said you lowered the assumed long term new money rate by about 25 basis points to a 4% tenure treasury yield as part of the annual review I was just hoping you a little more color on that assumption. How long is the grade up period to that 4% level and was just hoping you could remind us what are the sensitivity of.
The long term care margin to any changes and that assumption.
Sure.
As Paul So, yes, we can be reduced the ultimate new money rate assumption by 25 basis points.
And.
The grade up to that is five years.
As far as the impact I think to give sort of a fulsome picture of that I would refer you to.
The disclosure in our 10-K and our risk factors.
Let me provide.
For scenarios.
Yes.
Interest rates scenarios and the impact that that has.
So that I think gives you a context and.
Hopefully that's that's a bit data now we'll be filing our 2019 Kay.
Right before Investor day, and so you'll have that updated context.
Our intention is to repeat the same type of disclosure.
But you also saw no real time this year.
The impact of that assumption along with other changes in assumptions on our long term care book.
And.
There was no.
Income statement impact from that.
And the margin of our long term care business actually improved slightly.
With the unfavorable impact from lower earned rates offset by the.
The margin created by the new business.
Got it thanks.
And then maybe moving just to the run off long term care block I think earnings on that businesses remain positive for I think at least the past six quarters.
So just wanted to see if there's any additional color you give on what you're seeing.
In terms of how that block has developed.
What's driven the strong recent results and whether we should continue to expect that to fall back down to breakeven going forward.
Sure. So our experience there has been very much in line with slightly better than expectations.
And.
I guess, that's the first point the second point is now as you know from our disclosures.
There's there's very little margin in the closed block and so there's a lot there's not much margin for error.
But the experience has been very good so that that hasn't been initiative.
Got it but in terms of earnings still kind of thinking about breakeven as we move forward.
For modeling purposes, I think breakeven is.
Once you should model.
Got it thanks, so much.
There are no further questions queued up at this time, it kind of call back over to Jennifer child.
Thanks, very much for your interest in CNO and look forward to seeing you at our Investor Day on February 26.
This concludes today's conference call you may now disconnect.
Okay.