Ladies and gentlemen, thank you for standing by, and welcome to the CNO Financial Group Fourth Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to Jennifer Childe, VP, Investor Relations. Please go ahead.

Thank you, Operator. Good morning and thank you for joining us on CNO Financial Group's fourth quarter 2019 earnings conference call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Paul McDonough, 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 cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K yesterday. We expect to file our Form 10-K and post it on our website on or before February 25. 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 presentations 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 the 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 will be referring to changes between the fourth quarter 2018 and fourth quarter 2019. And with that, I'll turn it over to Gary.

Thanks Jennifer. Good morning, everyone and thank you for joining us. 2019 was another productive year for CNO. Operationally, we performed very well. Life and Health sales were up 5% for the full-year, which included record sales in our work site and direct-to-consumer businesses. Annuity collected premiums were also up 12% for the full-year. Our underwriting results remain stable with all health benefit ratios falling within or better than our provided guidance ranges. Fee revenue was up 76%. Other key accomplishments in 2019 include our acquisition of Web 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 D and 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 illustrates the range and types of opportunities we expect to leverage with our industry-leading direct-to-consumer capabilities. Right now CNO is organized 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 to meet consumers how and where they want to do business. Each one of our three businesses has distinctive strengths and characteristics. Bankers Life has a top five captive agency force with deep and established customer relationships, agent 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…

Thanks, Gary, and good morning, everyone. Turning to the financial highlights on Slide 11. Operating income per diluted share was up 44% to $0.52 in the fourth quarter. Excluding significant items in both periods, operating income per diluted share was up 4% from $0.45 to $0.47, despite a decline in net investment income of $0.08. 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 $0.03 to $1.80 despite net investment income declining $0.24 per share. The headwind from lower net earned rates was mostly offset by a higher level of invested assets, improved margins, and higher fee income. Earnings per share for both quarter and the year benefited from reduced share count due to share repurchases. The comprehensive annual actuarial review of assumptions had a fairly modest $10 million unfavorable impact on pre-tax operating earnings driven by a reduction in earned investment rates reflecting our up in quality trade in Q1 2019 and lower interest rates generally. It compares to a $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 earned 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 we recorded a $14 million charge, related to our previously announced corporate transformation and strategic IT partnership. This was comprised of both severance and costs associated with our…

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 Web Benefits Design to invest in 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 to transform our 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 pre-registration is required. We issued a press release a few weeks ago with registration instructions. If you have any questions, please email Jennifer at ir@cnoinc.com. Thank you for your interest in CNO Financial Group. We will now open it up for questions. Operator?

[Operator Instructions]. 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 tax improvement 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 that recovery of the valuation allowance?

Sure. Hey, Randy, it’s Paul. So we're changing a tax method of accounting, which allows us to allocate certain indirect costs of overhead to improvements that we make on our buildings and facilities. And so essentially, we allocate those costs, we then capitalize those costs which increases our taxable income in the period 2020 to 2023 and allows us to utilize NOLs that we previously thought would expire unused in 2023. And therefore reverse the valuation allowance that we had against those roughly $900 million or so of NOLs we thought would expire unused we had a valuation allowance against it with this tax strategy we're able to reverse that allowance.

And is that strategy is that -- was that -- was the use of that something that changed with the tax change, tax law changes a few years ago?

No, it's not a function of those changes. So the tax strategy would have been available to us and others at other times. But our facts that didn't really align with it until now, which is the reason that we're adopting it now as opposed to some previous period.

Okay, great. And then just to make sure we have the numbers right, so on Slide 25 of your presentation so that now shows $532 million of NOLs, is that -- is there any more valuation allowance or is it just this $532 million of NOLs now?

That's exactly right. So $532 million of DCA is related to $2.5 billion of NOLs and no valuation now against any of those NOLs.

Your next question comes from Erik Bass with Autonomous Research. Your line is open.

Hi, thank you. Given the acceleration and business growth the actions you're taking on expenses and the fact that we're now close to anniversarying the up in quality trade. Do you think we're at the point where you would expect the EBIT for the operating businesses to show consistent year-on-year growth ex-disclosed items?

Sure. So Erik very high-level, I said a couple of things. Number one, we will continue to face an earnings headwind from net investment income through 2020 driven by the combination of the impact of the up in quality and continued low rates and tighter spreads,. So that that dynamic will persist not as pronounced in 2019, but will nevertheless persist. Our intention and you've seen some of this already is to offset that through expense management.

I think one other thing I would add to that, Erik, we'll 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 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, I certainly agree with what Paul shared.

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 Erik, what I'd say is that relative to revisiting our target capital levels I think we're landing in a good place there. And again, we'll give you some specifics on the Investor Day. What that means for share repurchase, I think I prefer to pump that to Investor Day as well, when we start to give sort of more wholesome guidance broadly with respect to capital as well as across the business.

Got it, okay. Now, 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 so you said are generating pretty material free cash flow?

Yes, that's certainly fair.

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

Yes, thank you for taking my questions. Paul, you mentioned that you continue to see net investment income headwinds in throughout 2020 because of the environment and also the repositioning that you've done, should we anticipate that kind of similar five to six basis point kind of quarterly decline in your book yield as kind of as a run rate assuming kind of the environment state you're seeing?

Yes, good morning, Humphrey. This is not Paul, this is Eric Johnson. And let me if you don't mind, I'll answer that for you. I want to answer it on a couple of levels. I mean, one is kind of give you a rule of thumb so you can think about your model and then the other being perhaps a little more specific, or relating to the quarter which just passed. 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 a quarter of 10-year treasuries plus 200 maybe 225 basis points. So it's something you can externally keep an eye on. And so, for example, last quarter, if you had an average tenure of roughly 1.80 and the new money rate landed at around 4.08, 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'll also probably then ask me well, the prior quarter the money rate was much higher. It was roughly 55 basis points higher in the third quarter. But what happened if you fall off a cliff or something? No, we didn't fall off a cliff. It is a measure that's highly sensitive to a fairly small number of events. We had one investments in the third quarter not replicated in the fourth quarter that generated a tariff at very high book yield, and it generated roughly 45 basis points of that 58 basis points difference 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 rule of thumb 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 that question.

Eric, we've in the past talked about what the Street should expect in terms of overall book yield. You want to share that again as well too please.

Yes, happy to do that. I said now this will be the third quarter in a row. I've said that you should all think of book yield in the current environment, trading at a rate somewhere between three and eight basis points a quarter. This quarter was I think roughly six. I'll take it down a level. At 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 new money coming through the system in Bankers and it has a little more LIBOR floating rate exposure, floating rates came down a little bit in the quarter so a little higher delta in the quarter. But you should expect applying the rule of thumb I gave you on new money rate that that would produce roughly something between three and five basis points erosion in today's market in book yield plus whatever noise factors that will emerge from as I just described. So interestingly enough, when you factor all that into core income meaning repeatable book yield and earnings, core income for the quarter, investment income was quite stable. It was down maybe $4 million or $5 million at Bankers and basically down about $0.5 million at Washington National. Most of the noise in the quarter really came from prepayments being down $6 million and alternative being down year-over-year, down about $8 million, although up a little bit quarter-over-quarter. And so when you have one-timers come-off like prepayments being down $6 million that $6 million change in prepayments affected earned yield for the quarter by 12 basis points. The earned yield for the quarter was down 14 basis points. So 12 of the 14 came from the reduction in prepayments. Core income was 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 rules of thumb to understand and I think we'll be able to do some of that at Investor Day, so you can see through that noise. And Gary can send the earnings call talking about sales and efficiencies and all the good things happening with the company.

That's very helpful.

Thanks, Eric. Humphrey do you have a follow-up. You could.

Yes, I have a second question. So looking at your fee income as you pointed out is very good. Obviously there's some corresponding expenses related to those fee business, given the growth that you have in these fee businesses like how should we think about the margin for the business as we are modeling the top-line and the expenses going forward?

Humphrey, it's Paul. I will 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 in line with expectations. I guess the only thing I call out is 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 ASC-606, I'm sure you're familiar with that, which was effective in January 1, 2018, and requires that we estimate the life time of revenue and expenses or net revenue for that business. We didn't feel that we had sufficient data to make that estimate until the fourth quarter of this year. And now that we have sufficient data, we booked an estimate for that life time net revenue. And that increased both our revenue and our expenses in the quarter. The net impact of that was about $6.5 million. Away from that, I'd say that our margins were consistent with our expectation in stable relative to recent period.

Okay. So maybe I will follow up off-line but thanks for that.

Sure.

Your next question comes from Thomas Gallagher with Evercore ISI. Your line is open.

Good morning. Paul, just a follow-up to the Humphrey's question, you just answered this $6.5 million net impact. Would that have been a pre-tax earnings benefit for Bankers and would you expect some of that or none of that to occur as you head into 1Q?

Sure. So it’s pre-tax and as you said, it's all in Bankers and so on Page 7 of our supplement, you will see 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 to see both the revenue and the expense in 2020 to mirror very much the timing in 2019 because much of it gets booked in the fourth quarter.

Got it. So we should see a similar $6.5 million pre-tax earnings uplift but it should be more of a 4Q 2020 event, is that a fair way to think about it?

Yes.

Okay. But not and will the much higher level of fee income you had at Bankers in 4Q, will that also come down just from a revenue standpoint as we roll into 1Q because I think seasonally 1Q in 2019 was also high. So I was just curious how we should think about seasonality for fee, fee income or fee revenue?

You're right. So 1Q 2019 was high. I'd expect to see something very comparable in 1Q in 2020 and the same for Q2 and Q3 and then Q4, the dynamic you saw in Q4 2019 should be repeated in Q4 2020.

Got you. And then just to kind of close the loop on your net investment income comment. Just taking your prepared remarks, the $0.08 a share interest rate related headwind, I mean that's 17% of earnings. Now, 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 some back of the envelope math, I get something 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 when you quantify it and just overlaid against the EPS expectations?

I don't think there's anything wrong with your math, Tom. The only thing I would point out is that you're always going to have some volatility from the variable components of NII. So 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 in every quarter almost 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 Eric and maybe I can, I gave you a rule of thumb around the new money rate, which I think may be useful to you and I'll give you a rule of thumb also which may be useful to you around alternatives and prepays as well. And I think Paul feedback was correct to say there's going to be variability in these two items that is more significant than in new money and book yields. And so the one thing is that is certain is that the exact rule of thumb won't produce an exact result. But just as a frame of reference, alternative investments, we like alternatives but I use the term pay rent that have a carry, as opposed to that are market directional and pure equity content. And so the way I think about that portfolio is I want to produce a carry of around between 8% and 10%. And so if you want to think about, let's say, let's use 8% as a rule of thumb for kind of quarter-on-quarter income from alternatives, I think that is reasonable recognizing that there are going to be quarters where that is going to have a bell curve, that's going to start at minus five and go up to plus 20 in return based on market conditions. And then when you look at prepayment, I'm just looking back here, Tom. And we had prepayments on a quarterly basis everywhere from $2 million to $10 million in the given quarter over the last three years that number is very, very hard to. As you know, it's not a number we can manage and it's very difficult to predict going into a quarter. But if you want to kind of pick an average number of six, 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 the given quarter. So and I think I've now given you three rules of thumb you can apply that will help you understand how to think about investment income here. There's going to be this $21 million -- billion excuse me, color portfolio and all kinds of moving parts and there's going to be $3 million items going this way and that way in a given quarter. And I don't think we're going to have, where the rates are high or low. We're 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 things view.

Your next question comes from Alex Scott with Goldman Sachs. Your line is open.

Hi. First question I had was on I guess just the growth that you're getting on new annualized premiums, fees, et cetera and how it's going to translate to top-line and earnings growth, if we kind of set aside the LTC and run-off and set aside the NII pressure that's been discussed, I guess. Yes, maybe even tell it another way like how much growth in NAV and the fee revenue do you need to sort of offset the run-off? Like what's the lapsed trend? How do I think about the dynamics there and how much growth you can actually get from the kind of sales growth that you're seeing?

Hey Alex, it’s Paul. 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 model just trending our historical data.

Okay. Maybe the follow-up on cash flow, I was just interested if you had any thoughts on one I think the last time you guys gave it as $300 million, $350 million or so, I was wondering if you could provide any color on that, I appreciate that the excess capital part of the conversation and whatever you're going to do on RBC ratio is maybe separate and you don't want to talk about that yet, but 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 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 was about $303 million net of the capital to support our organic growth, free cash flow of about $290 million. I think I'll point to the Investor Day to give forward-looking statements. But I would say now that given that the business is very stable you wouldn't expect that gross free cash flow number to change materially.

Got it. And so the impact of this DTA change in particular that that would have just a modest benefit from year-to-year, is that more front-end loaded the impact that it has?

You're talking about the tax strategy, what was that impact to free cash flow?

Yes, just like what if I should think about that it's just been like a level benefit over time or it's because of the years it impacted in the way it's been utilized? If it has a bigger impact on your term cash flow?

Yes, so the tax strategy actually has no impact on our cash taxes through 2023. During that period, we're simply recording higher taxable income strictly for tax purposes, not affecting our GAAP or stat books, but higher taxable income which allows us to utilize the NOLs. In 2024, we would expect to reverse the method of accounting that's allowing us to do this, which will actually create a new NOL that we would utilize in 2025 to 2029. So the cash benefit is really in the 2025 to 2029 period.

[Operator Instructions]. 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% 10-year Treasury yield as part of the annual review. I was just hoping little more color on that assumption. How long is the grade up period to that 4% level and I was just hoping you could remind us what is the sensitivity of the long-term care margin to any changes in that assumption?

Sure. Hey, Dan it's Paul. So yes we 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 in our Risk Factors. We provide four scenarios, interest rate scenarios and the impact that that has. So that I think gives you a context and obviously that's, that's a bit dated. Now, we'll be filing our 2019-K, 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 in real time this year, the impact of that assumption along with other changes and 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 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, I think at least the past six quarters or so. So I just want to see if there's any additional color you could give on what you're seeing in terms of how that block is developed, what's driven the strong recent results and whether we should continue to expect that to fall back down to break-even 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, as you know, from our disclosures, 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 hasn't been an issue.

Got it. But in terms of earnings, still kind of thinking about break-even as you move forward?

Yes, for modeling purposes, I think break-even is a bunch you should model.

There are no further questions queued up at this time. I will turn the call back over to Jennifer Childe.

Thanks very much for your interest in CNO. I look forward to seeing you at our Investor Day on February 26.

This concludes today's conference call. You may now disconnect.