Feb 12, 2013
Executives
Erik Helding – Senior Vice President, Treasury & Investor Relations Edward Bonach – Chief Executive Officer Scott Perry – Chief Business Officer, CNO Financial President, Bankers Life and Casualty Frederick Crawford – Executive Vice President and Chief Financial Officer Eric Johnson - Chief Investment Officer
Analysts
Randy Binner - Friedman, Billings, Ramsey Chris Giovanni - Goldman Sachs Paul Sarran - Evercore Partners Sean Dargan – Macquarie Humphrey Lee - UBS Securities LLC Ryan Krueger – Dowling & Partners Securities, LLC
Operator
Good morning, my name is Shantay [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the fourth quarter and your end result 2012 conference call.
(Operator Instructions). Thank you.
I would now like to turn the call over to Mr. Erik Helding, sir, you may begin your call.
Erik Helding
Good morning and thank you for joining us on CNO Financial Group’s fourth quarter 2012 earnings conference call. Today’s presentation will include remarks from Ed Bonach, Chief Executive Officer; Scott Perry, Chief Business Officer and President of Bankers Life; and Fred Crawford, Chief Financial Officer.
Following the presentation, we will also have several other business leaders including Eric Johnson, our Chief Investment Officer 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 at www.cnoinc.com. This morning’s presentation is also available on the Investors section of our website, and was filed in a Form 8-K this morning.
We expect to file our fourth quarter 2012 Form 10-K and post it on our website on February 19, 2013. Let me remind you that any forward-looking statements that we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements.
Today’s presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You’ll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout this presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to the changes between 4Q 2011 and 4Q 2012. And with that, I’d like to turn the call over to Ed.
Edward Bonach
Thanks, Erik and good morning everyone. The fourth quarter was another solid quarter of operating performance for CNO, topping off a very good year.
Our businesses continue to perform well with consolidated sales excluding annuities up 7% and operating earnings per share increasing by 39%. We continue to deploy excess capital during the quarter and returned $85 million to shareholders, via stock repurchases and dividends, while also paying down $32 million of debt.
During the quarter we increased our securities repurchase authorization by $300 million and as of December 31 had $350 million of capacity. We also continue to reinvest in our businesses by increasing marketing, adding new location, expanding our geographic reach and launching several new products.
Scott will go into more details on these initiatives later in the presentation. Turning to the full year, 2012 was a year of accomplishment.
We achieved solid year-over-year sales growth, grew our agency force and expanded our product portfolio. We greatly improved our financial strength and earnings profile of the company.
We also were able to proactively address several legacy litigation issues during the year which should lead to less volatility and enhanced flexibility as we move forward. The completion of the recapitalization further enhanced our financial flexibility.
These efforts did not go unnoticed. We saw positive rating actions by all of our major rating agencies including three upgrades.
We returned a significant amount of capital to shareholders, nearly $550 million when giving effect for the third quarter convertible debenture repurchase. We enhanced the talent of our management team, hiring seasoned executives from outside the company while also promoting several internal executives as well.
Lastly, CNO achieved a total return of 49% during the year far outperforming the S&P insurance index as well as our peer average. Turning now to Slide 7, in addition to deploying excess capital in the stock buyback, debt reduction and dividends we are also continuing to invest in our businesses.
We are making investment and initiatives that are increasing the productivity and size of our agent force, while staying focused on profitable growth. We are increasing direct marketing, adding new sales locations to expand our presence in underpenetrated market places along with developing and launching new products that will meet the needs of our fast growing target markets.
These investments are paying off. Consolidated core sales excluding annuities grew at an 8% compound annual rate since 2010 and we are up 12% for the full year 2012.
Turning to Slide 8, during the quarter we produced operating earnings per share of $0.25 an increase of 39% over 4Q ’11 this meaningful increase is driven by the combined impact of increased operating earnings and a reduction in weighted average diluted shares outstanding. As we mentioned in previous calls, the low interest rate environment continues to be a headwind to earnings growth.
Fred will discuss these items in more detail later in the presentation. Let me now turn it over to Scott Perry, to discuss our core segment results in more detail.
Scott?
Scott Perry
Thanks Ed. I’d like to spend a few minutes talking about the significant accomplishments we’ve made across all three of our core operating segments in 2012.
At Bankers, we grew our agent force by 6% primarily due to increased productivity and retention. We added 25 new locations bringing the total number of branches and satellites to 276.
We introduced a new critical illness product in the first quarter and it is now available for sale in 46 states. The launch has proven successful with over $5 million of sales during the year.
All of these achievements led to improved results with NAP excluding annuities up 9%. At Washington National, core product sales increased by 13%.
We achieved record high supplemental health sales and record high sales at our PMA and worksite channels. Our worksite sales growth for this year is far in excess of overall market growth rates.
At Colonial Penn, 2012 sales increased by 20% fueled by our ongoing investment in direct advertising and enhancements that we’ve made to marketing materials. We launched a new term life product and the rollout of our new customer relationship management system is resulting in significant productivity gains.
Turning now to sales results at Bankers, as I mentioned earlier our average agent force grew during the year, largely due to increased productivity and retention. Our unique distribution and marketing focus allowed us to pivot quickly during the prolonged low interest rate environment which has been a drag on annuity sales.
Sales excluding annuities for the quarter were $58.4 million up 5% over the prior year. Much of the increase in sales was due to robust life sales which were up 26% in the quarter.
Sales of our new critical illness product were strong with nearly half of the previously mentioned $5 million in sales taking place during the fourth quarter. Medicare Advantage sales activity related to the annual election period was robust.
As we have discussed in the past, Bankers partnered with leading providers to sell Medicare Advantage and PDP. We currently have relationships with Humana, United HealthCare, Aetna and Coventry.
We are also continuing our partnership, selling of Humana Preferred Prescription Plan in the Walmart locations across the country. We had a very successful annual open enrollment period for Medicare Advantage and sales results, although not considered NAP, we’re up 32% over 2011.
These MA sales are important as they allow us to reach, serve and retain both new and existing customers. Turning now to Washington National, sales results for the quarter were strong.
Sales of our core supplemental health and life products increased by 10%, this was primarily driven by continued gains in our voluntary and worksite distribution channel. The investments we are making to expand our life product offering are gaining traction.
For the year, life sales totaled $6.7 million, an increase of 56% over 2011. We are also pleased with our recruiting and retention efforts.
New agents at PMA were up 35% and in our partner channel, new partners increased by 19%. Slide 12 shows the sales results for Colonial Penn.
2012 sales growth at Colonial Penn continued in the fourth quarter with sales up 11% year-over-year. The increase in sales is due to continued investments we are making in television and direct mail advertising.
Ongoing enhancements to direct mail kits, policy fulfillment packages as well as the cut over to our new customer relationship management system continue to generate productivity gains for the segment. Although sales were down sequentially in the quarter, this is consistent with historical patterns.
We also anticipate higher advertising spend in Q1 in line with seasonal expectations. We finished 2012 strong and are optimistic looking forward.
Our strategy is focused on the rapidly growing pre- and post-retiree middle markets that are being fueled by the aging of the boomer generation. This market needs the simple, straightforward products that we offer to address the things they are most concerned with, healthcare expenses, outliving their retirement, and providing a legacy for their families.
Our segments are all well-positioned to meet these basic needs, whether through career agents, independent agents at the worksite or direct. In all three businesses, the capital deployment initiatives we identified to accelerate organic growth are progressing and ongoing.
Bankers will continue to increase the number of locations and implement the Manager Trainee Program, both of which will enable us to grow our agent force. Consistent with 2012 results, we expect to open an additional 25 new locations in 2013.
While sales of annuities continue to be a challenge in this low interest rate environment, we are encouraged by overall agent force growth, and our agents ability to pivot within the portfolio as discussed earlier. We are driving initiatives in 2013 to increase cross selling activity and build on our success in the life insurance area, with a focus on increasing premium per policy.
Lastly, we expect this positive momentum to carry-forward as our expansion location that we’ve opened in the last two years, ramp up to full productivity. At Washington National, we recently launched an innovative new critical illness product called Activecare, which has been well received by the field.
We expect to increase focus and positive momentum in the voluntary worksite market to continue for both PMA and our independent partner channels. As the additional resources we’ve deployed, fully ramp up, we expect a strong recruiting results to continue in both channels, and we expect that we will see additional recruiting gains in 2013.
Finally, we recently teamed up with Olympic Gold Medalist Shannon Miller. This partnership will be positioned to help drive awareness of Washington National’s presence in the supplemental health in worksite market place.
At Colonial Penn, we will continue to invest in new lead generation and expect at advertising spend in the first quarter will be higher sequentially than in Q4. We expect further improvements in sales productivity through the implementation of additional features of our new CRM system.
We will be launching additional new products, as well as continue in our efforts targeting the Hispanic segment of our target market. Finally, last week Colonial Penn announced partnership of the AARP foundation housing solution centre to bring better understanding of the senior housing issues.
This effort further reinforces our commitment to the over 50 middle market. And with that, I’ll hand it over to Fred, who will discuss CNO’s financial and investment results, Fred?
Frederick Crawford
Thanks Scott. CNO recorded another strong quarter that capped up a year significant management actions and accomplishment.
We recorded solid performance across all segments with net favorable results in core earnings drivers including benefit ratios, investment income and mortality margins. We enter 2013 in a strong overall capital liquidity position supporting our announced tender offer for our remaining outstanding convertibles securities.
In fact, in net income was another reduction in our deferred tax evaluation allowance. We had guided to a $12 million release in the fourth quarter, however continued realized gains and excess of losses and a review of our state tax annuals increased the total reduction and evaluation allowance to $28.5 million.
Continued profitability and a consistent general account performance is allowing us to utilize these valuable tax assets. When looking at normalized segment results, our underlying fundamentals continue to support growth in core earnings, while recognizing this was a quarter of strong net favorable performance in virtually all key earnings drivers.
In the quarter, net investment income benefitted all segments largely driven by prepayments, calls and makeover premiums. Bankers earnings reflect earned premium growth, stable benefit ratios, strong annuity persistency and higher net investment income.
Washington National posted another very strong quarter, driven by favorable benefit ratios in our supplemental health product line. Colonial Penn’s results benefited from lower seasonal marketing spend and modest productivity gains.
On a normalized basis, OCB outperformed, or our other CNO business outperformed our 2013 guidance range on earnings before interest and taxes of $5 million to $20 million, recognizing this is a more volatile segment as evidenced by the significant items running through this quarter. Favorable mortality and net investment income were the primary drivers of normalized outperformance.
If you normalize for significant items in the quarter, we posted $0.30 per share. We generally defined significant items as unusual and falling outside the natural performance of core earnings drivers.
In the fourth quarter, this was predominantly made up of an increase in legal reserves, both in Bankers and in our other CNO business segments. We continue to address largely legacy legal issues, in an attempt to focus our resources on growing our business without meaningful contingencies to manage.
Drilling deeper into our underwriting margins, Bankers’ Medicare supplement performed as expected, both in terms of premium growth and claims activity. Long-term care benefited from a spike in lapse-related reserve releases, largely the result of pricing actions on certain older blocks of policies that maintain higher reserves.
We included this as a significant item in the quarter recognizing, as pricing actions slow, this is not expected to repeat. Normalized long-term care interest-adjusted ratios of 72% came in modestly favorable, but within our guided range.
Finally, Washington National recorded another favorable quarter relative to our expectations with supplemental health benefit ratios at roughly 47%. We are particularly pleased with the steady growth in premium as a result of strong sales momentum throughout 2012.
In the fourth quarter, our portfolio-earned yields held steady, an accomplishment given the new money rate environment. As we have previously stated, we are not chasing yield.
We are however, exercising disciplined ALM in holding down portfolio turnover. We have also seen a welcome recovery in treasuries in recent weeks.
While lowering the risk profile surrounding our new money rate assumptions, much of what has been gained in treasuries has been offset by spread tightening. As a result, we obviously remained cautious on rates.
Note that prepayments calls in income were very favorable in the quarter, thus we noted this outperformance in our press release. Our expectation is to run more in the $2 million to $3 million a quarter range, recognizing refinancing activity and corporate actions are hard to forecast.
It’s always nice when you have little to say about realized gains, losses and impairments. Overall, a very good quarter, contributing to favorable statutory capital dynamics, and as I mentioned earlier, a tax valuation allowance release.
In short, credit performance of our portfolio continues to be favorable with low or no impairments across virtually all asset classes. We completed our year-end loss recognition in cash flow testing.
We thought it’s helpful to give you a high-level read on the results. Loss recognition testing margins on the GAAP side are strong overall, recognizing these margins benefitted from the adoption of the new DAC accounting, which effectively wrote down a meaningful portion of our intangibles.
From a testing perspective, the more aggressive expensing of new business acquisition costs results in a greater contribution to testing margins from new business production. Cash flow testing has a similar story.
With no material decline in overall margins year-over-year, recognizing the diversity of our product portfolio. All insurance entities passed the standard scenarios.
We did add a modest amount of reserves to OCB interest-sensitive life business in the quarter. Recognizing there was judgment involved, our pointed actuaries will often add modestly to reserves to preserve the margins on select product lines.
While a headwind to capital, this reduces the risk of a cliff-like capital event, should conditions deteriorate. Where are the pressure points?
They are straightforward and not unexpected. The Bankers’ long-term care and other CNO business interest-sensitive life blocks are pressured by low rates.
And in the case of interest-sensitive life, we have experienced GAAP and statutory charges in recent years. In terms of specific sensitivity in GAAP and statutory financial impact, we have recently shared the numbers that matter most, as they are embedded in our interest rate GAAP and statutory stress testing disclosures.
As you can see from this slide, there are several sensitivities and moving parts, but for CNO, it’s mostly about interest rate and thus our stress-testing disclosures. We ended the year with RBC ratio of 367%.
This is particularly strong, recognizing we sent $420 million up to the holding company during 2012 and absorbed approximately $65 million in charges related to legacy legal settlements. Leverage settled in a little under 21% and we expect this to gradually reduce some time as we naturally amortize debt.
We ended the quarter with nearly $300 million at the holding company, split fairly evenly between investments and ready liquidity. This after kicking up our common stock repurchase in the quarter and debt amortization with it.
As of year-end, we would size our deployable excess capital at around $150 million, and as a result, announced last night a tender offer for the remaining convertible securities on our balance sheet. We issued a separate press release with the details of the tender.
We are offering a modest premium, consistent with comparable tenders of this nature. We simply view this as a tool in accomplishing our guidance on securities repurchase.
The principal reason to tender for the convertible debentures is to accelerate ROE and EPS benefits by reducing diluted shares. Relative to repurchasing our common stock in the open market, the tender has certain advantages in terms of capital treatment with rating agencies and overall financial flexibility.
However, we are largely indifferent to the outcome, recognizing these securities are likely to become shares in 2013, and we have the capacity to repurchase our stock in the open market. We defined capital generation as statutory earnings prior to taxes, surplus note interest and contractual payments made to the holding company.
That number was $0.5 billion in 2012, and we expect a similar result in 2013. Capital generation and amounts moved up to the holding company are converging.
This is a result of no longer needing to build risk-based capital. So, any retained capital primarily supports business growth.
With strength in RBC and stability in statutory earnings, we reconfirmed our December statutory dividend guidance of $250 million to $300 million for 2013. Turning to our outlook, there is a few seasonal earnings patterns worth noting as we move into the first quarter.
At Bankers, the Medicare advantage open enrollment period results in Medicare supplement policy turnover, and with that, the effect of write-off of DAC on lapse policies. In addition, our PDP quota share tends to run at higher benefit ratios in the first quarter due to the timing of benefits given the payment of deductibles.
These seasonal factors are somewhat predictable and typically results in a 25% to 3-% negative swing in Bankers’ fourth quarter to first quarter sequential earnings. We have often discussed Colonial Penn’s seasonal marketing spend, which accelerates in the first quarter of each year.
We guided in December to a full-year loss range of $5 million to $10 million, recognizing that a majority of that loss tends to be recognized in the first quarter. Turning to capital, we have affirmed all the capital guidance provided at our December Investor Conference.
Again, note that the tender offer of our convertible securities is included in our guidance of $250 million to $300 million in securities repurchase for 2013. And with that, I will hand back to Ed for closing comments.
Edward Bonach
Thanks Fred. As I mentioned earlier, 2012 was a significant year of accomplishments.
These accomplishments further positions CNO to execute on strategic initiatives over the next several years that will continue to improve our value proposition. We expect to invest $80 million to $85 million in strategic business initiatives over the next three years as well as research non-organic strategies to accelerate the run-on of new business, while exploring options to reduce the influence of our closed lot.
We will enhance the customer experience and continue to achieve operational efficiency. All of these initiatives will help increase our ROE to a 9% run rate by the end of 2015.
We are focused, positioned and committed to continue to drive enhanced shareholder value. And now, we will open it up for your questions.
Operator?
Operator
(Operator Instructions) Your first question is from the line of Chris Giovanni.
Edward Bonach
Chris, are you there?
Operator
Hello, Chris. Your line is open.
Frederick Crawford
Why don’t we circle back to Chris and go on to the next question?
Operator
Okay. Your next question is from the line of Randy Binner.
Randy Binner - Friedman, Billings, Ramsey
Hi, thanks. Just a couple if I could, just on the tender.
It seems like the time in the tender expires right at the end of the first quarter. So, I guess, should we assume that kind of buybacks, given the blackout period around earnings, and then, having the tender out over the next kind of month-and-a-half, assuming that buyback is basically on hold until the tender moves forward or you assume there is kind of room in the $250 million to $300 million program for securities, is it possible that you would be able to do some, regularly buy back in the first quarter?
Frederick Crawford
Yes, Randy, really the answer to the question is we are holding off on open market stock repurchase, while the tender is working its way through and the reason is really just a couple of practical reasons. One practical reason is just the appropriate management of capital liquidity.
In other words, should the tender – we don’t have any way of predicting the actual outcome of the tender, but should it be for example, 100% successful, that results in a fairly large check to write, if you will, as it relates to just managing the liquidity position we have. Of course, we have ample liquidity to handle it, but it would be upwards of $180 million to handle or settle the fully successful covert.
So, as a result, we didn’t want to pressure the liquidity and capital of the company by also buying back stock on top of that. The other practical issue is that we would expect there to be some natural buying pressure on the shares as hedge funds who are short the stock, it’s part of owning the convertible, start to unwind those short positions.
So, we don’t want to further agitate it by also being in the market buying a – so we will come off this convert, we will assess the success of the take-up rate on it, and then we will move forward throughout the year. We fully anticipate irrespective of the take-up rate in the convert that we will accomplish our guidance range that we put out there.
Randy Binner - Friedman, Billings, Ramsey
Okay. Understood.
And just to kind of clarify that more though because I think people will kind of focus in on buyback amounts as the year goes on, assuming that it’s a 100% successful, the tender, then when would you need to kind of earn your way back to being able to buy back the stock? Meaning it is a big check to write, but there is ongoing free cash flow.
So any situation where the second quarter would be kind of the zero buyback, too, and we look to the back half to kind of round out the buyback effort?
Frederick Crawford
No, we are not – first, we are not really going to guide the second quarter specific repurchase, but we would expect to be back in the market naturally and working towards completing our guidance as soon as we are done with the convert and able to get back into the open market during the window period.
Randy Binner - Friedman, Billings, Ramsey
Okay. Great.
And I just wanted to ask one more unrelated, just to make sure it gets out there. With your run-off segment had an above average, above expected results this quarter, which is good.
At your December Investor Day, you talked about maybe some optimism on being able to kind of free up capital in some portions of that, maybe annuity and the term life portion of it. So, any thoughts on progress there?
Since that December Day, there has been some significant activity on the private equity and reinsurance front, in the life insurance industry. Just wondering if there is kind of any update there or thoughts or commentary on what’s going on with private equity out there.
Edward Bonach
Yes, Randy, it’s Ed. You are right.
Certainly, private equity has been active in the marketplace with acquiring different properties. So, all in all, we see that as favorable, but we continue as have in the past with stabilizing the OCB business, improving cash flows, where and whenever we can in reducing volatility, and we think that continues to give us more flexibility.
But timing and the extent of any type of transaction we are not in a place to give anything more definitive right now.
Randy Binner - Friedman, Billings, Ramsey
Alright. Fair enough, thanks.
Operator
Your next question is from the line of Chris Giovanni.
Chris Giovanni - Goldman Sachs
Good morning. Yes, first just wanted to touch on the two litigation items in the quarter.
So the OCB charge of $5 million, it’s certainly well below the 20 plus or so we have seen in the previous quarters. So should we be thinking we are kind of nearing an end of that potential outcome?
And then, within the bankers, can you just comment what that specifically is related to?
Edward Bonach
Chris, I will start on the OCB. We continue to make progress on outstanding litigation.
We regularly then as part of that assess where we are in the process, what accruals are appropriate. I think the steady drumbeat of progress continues.
But it is still volatile, we cannot say with any type of certainty where future litigation or charges would go, but we do believe we are making progress on reducing volatility.
Frederick Crawford
On the bankers side, Chris, we did increase our reserves for the settlement of a couple of cases that relate to bankers, more specifically related to bankers. Two cases involving long term care policies.
I would really emphasize that there was a unique set of circumstances surrounding these cases, it is nothing that’s systemic in terms of either bankers, the business model, nor the long term care line of business, and so it was just sort of coincidently falling into the category of those policies. We simply felt that it was in our best interest to take action and move forward.
Chris Giovanni - Goldman Sachs
Okay. Within OCB it’s been – call it roughly $45 million for ’12.
When we move forward in ’13, ’14, should we be from a normalized standpoint thinking about adding that back in to the operating earnings?
Frederick Crawford
Yes. Let’s talk a little bit about OCB because this was certainly an unusual quarter, you had unusual negatives and positives rolling through.
As I noted in my comments, we had very positive mortality, for example, a little bit of outperformance on investment income. I think a couple of million dollars for example of prepaid make-whole premium running through that segment.
At our December conference we tried to bring greater transparency to OCB by busting down the various lines of business that make up the run off block. As you all know from focusing on OCB, the only thing these lines of businesses have in common is that they are in run off, otherwise, their earnings, drivers, and performance and the level of volatility around that is really different from line of business to line of business.
So, as a result, the progress we have made that Ed mentioned in terms of taking action on certain outstanding litigation items has brought a level of greater confidence in where we see the go forward OCB results, most notably that we expect them to be positive, and is slowly giving us resulting in reduced volatility. So, we felt like giving some transparency was a good idea.
However, it remains a volatile segment. As we work our way through the run off block that naturally has thinner margins in terms of their assumptions, you should expect the level of volatility as we go forward, but that volatility coming down.
So, we are making progress on it. We would not adjust our guidance of $5 million to $20 million.
In many respects, the reported number came in on guidance if one believes this noise factor will continue to some degree through OCB. So, right now it’s a little bit early for us to just say, hey, normalize and run with a new level of OCB earnings because we are still working through issues.
Edward Bonach
Chris, going back to the bankers’ question, something else to keep in mind is that there was a partial accrual for this, it just happened to be in our corporate segment that got reapportioned to the appropriate segment, meaning bankers. It also helps to explain somewhat of an outsized performance in corporate for the quarter.
Chris Giovanni - Goldman Sachs
Okay. And then, just lastly, a number of other financial firms continue to take on large cost savings programs to improve returns in the challenging macro environment.
You guys certainly haven’t announced anything, but did mention last year Investor Day that’s a potential kind of ROE in the future. So, curious, one, I guess why don’t you feel like you need to take one, is it just your growth opportunities may be are better than some other financial firms?
Or, just kind of an update on your latest thoughts around if there weren’t there could potentially a stair step in the future?
Edward Bonach
Yes, Chris, the reason primarily that we don’t have one of those headline announcements is we believe very much in improving on an ongoing basis, that’s management’s job. We think we have been doing that.
I think a prime example of that is we are over two-thirds of the way through a $35 million finance transformation. That investment to transform our financial systems, allowing us to close and report earnings sooner and do other analyses and things has gone unnoticed because we are doing a significant program and in essence doing that without the need for any type of announcement.
Are there savings from that? Obviously, there are because it’s not noticeable, but we have invested that much.
But, we really see it as ongoing management’s job to continually look for ways to improve efficiencies and enhance our financial flexibility.
Chris Giovanni - Goldman Sachs
Okay, it’s very helpful. Thanks for the thoughts.
Operator
Your next question is from the line of Paul Sarran.
Paul Sarran - Evercore Partners
Hi, good morning, thanks. Was any portion of the litigation charge of bankers related to the U.
Nicho settlement, and if so, I think you said you had reached an agreement on a settlement in principal, did anything changed that drove an increase?
Frederick Crawford
Yes, nothing has changed in terms of the settlements, procedures on the U. Nicholas case.
That continues to proceed along as planned. The actual accrual in the quarter related to in fact continuing to review the accuracy and preciseness of both U.
Nicholas reserves, as well as reserves associated with a similar case that we have been disclosing on in our financials, but were the facts and circumstances are very different. So, it was in fact different but do keep in mind that we as a matter of course each quarter put our reserves under review for possible true-ups although we would expect them to be modest.
Edward Bonach
Paul, the U. Nicholas is not in bankers that is in the OCB segment.
Paul Sarran - Evercore Partners
Okay, I am sorry. Okay, on bankers, in the past co-insurance on private fee per service has been a decent earnings contributor.
Is there any potential to move to co-insurance relationship with your partners on that advantage?
Scott Perry
Hi, Paul. This is Scott.
Yes, there is and we are talking to multiple partners about that potential.
Paul Sarran - Evercore Partners
Okay, thanks.
Operator
Your next question is from the line of Sean Dargan.
Sean Dargan – Macquarie
Thank you. I have a question about the shock lapse and long term care and bankers.
As you implement these rate increases, is this the kind of things that we kind of expect to see in future quarters?
Frederick Crawford
Yes, it’s a very good question and I made reference to this during my comments. We have been talking now for a while including more recently at our investor conference and a couple of quarters that the rate activity, the rate increase activity here at CNO is expected to slow down.
This is not a bad thing, this is because we have been at the rate exercise for a long period of time, the better part of four plus years now. As you may know, several different rounds covering different blocks of business over the years.
So in many cases we have brought the level of rate increases up to a more reasonable level consistent with the experience we have in the blocks. So, we would generally expect that to slow down and with that you would have less pressure on lapse rates and therefore gradually higher persistency and that in fact has contributed to a gradual move up in the benefit ratios, I would characterize it as more normalizing of benefit ratios than what we have seen in the past.
This quarter was very isolated in the sense that it happened to be rate increases on policies that had generally longer benefit periods with inflation riders, older policies and all of that combining to be high reserves per policy, such that the lapse experience in this set of policies had a disproportionate impact on releasing reserves and a positive benefit through our earnings. So, it was a little bit more isolated and a little bit more about the characterization of the policies involved in the price increase than it was a broad-based rate increase dynamic.
And that’s why we included it in insignificant items and pulled it out of our results because we wouldn’t in fact expect that type of benefit to repeat.
Sean Dargan – Macquarie
Thanks. So, as we think about the interest adjusted benefit ratio going forward, it would be somewhat less favorable in this quarter?
Frederick Crawford
No. Actually, as you normalize for the roughly $4 million of lapse, shock lapse related benefit, our long term care interest adjusted benefit ratio came in around 72%.
Back at our investor conference in December, we guided to a range of 71% to 75%. If you look at our past couple of quarters with the results, we have been travelling more in that 75% range.
So, even normalizing for that benefit in the quarter, our benefit ratio for long term care came in a little favorable within the range. But we stick to the guidance of 71% to 75%.
Sean Dargan – Macquarie
Thank you, Fred.
Operator
(Operator Instructions) Your next question is from the line of Humphrey Lee.
Humphrey Lee - UBS Securities LLC
Just a question about the tender offer again. So, with the $180 million the tender offer assuming this will leave you about $70 million to $120 million of the $250 million to $300 million guided deployment for share buyback.
Given you have $350 million of authorization and $150 million of deployable capital right now before any subsidiary dividend in 2013, would you consider reassessing your capital plan for this year? And under what circumstances will management and board increase the (inaudible) target?
Frederick Crawford
At this point in time, Humphrey, we are sticking with our guidance. It’s early days as we enter into 2013 and watch company performance unfold.
Keep in mind that when you think about the sources and uses of free cash flow, in addition to securities repurchased, we have scheduled amortization of our debt that is a little bit north of $50 million annually. Remember that when buying back stock in the open market, not the convertibles, but in the open market we have a $0.30 per dollar suite provision that tends to contribute to debt amortization.
We also would expect to post tender offer be in a net capital and liquidity building mode if you hold all else equal. In other words, if there is no disruption as we make our way through 2013.
So, look, as a matter of routine, at least each quarter, but even throughout the quarter we continue to assess capital conditions and with that assess our guidance, but we are not at this point going to adjust our guidance for 2013 on securities repurchased.
Humphrey Lee - UBS Securities LLC
Going into bankers, so for bankers’ operating expense is thin, a little elevated this quarter, even excluding the (inaudible) litigation expense? I understand that some of that is because of the expenses for growth initiatives and incentive accruals per quarter.
What would consider to be a more normalized rates for the expenses of bankers and how long do you expect these kind of growth related expenses to run through the income (inaudible)?
Frederick Crawford
For all the good reasons, I hope we expect some level of growth related expenses to continue to run through Bankers. So in isolation, that’s a good kind of problem to have, when looking at expenses, but setting that aside, you’re absolutely right.
In the quarter, we had litigation expenses, what had alluded to earlier is a little bit of geography in terms of taking down expense incorporate and putting up expense in bankers. This is really just a reallocation of what had been put reserved on for a settlement related issue.
Actually, we have a little of that in there, you also had with the strong performance of the company as well as the strong performance of the stock, which we noted earlier. You had a natural true up of incentive comp related accruals as we had year end of the first quarter and settle on that for our employees and professionals.
So, you had all of those dynamics coming together in pumping up, if you will the expense line item. To answer your question more specifically and realize this is a bit range bound, but I would suggest all those things taken in concert, probably elevated the expense line in the $10 million to $15 million range pretax.
Humphrey Lee - UBS Securities LLC
Okay, got it. This is helpful, and then, just one last one.
There is a $6 million of out of period adjustment at OCB, can you brush up on that a little bit (inaudible) or the averse adjustments?
Frederick Crawford
Yes, so as with any out of period adjustment, this was really the uncovering of an error but, very importantly was what drove and that is as you may recall and I’m not certain how actively we’ve talked about this, but we of course have talked a lot about finance transformation and the upgrade to our systems in our finance department, but we’ve talked less about the fact that that also has included substantial upgrades and conversions in our evaluation area, the core (inaudible) piece of our company that is such as reserves, as well as looking for areas where we can certainly improve data and the calculations using that data. And so, in the course of that activity, there was a particular feature related to universal life where we had been establishing a reserve on this feature relatively small block of policies and a relatively unique feature.
We have been establishing reserves but we had not really been grading those reserves and as accurately as we otherwise would like. And so upon further assessment and again with upgrades in systems and data, we went ahead and made that adjustment found it, uncovered it, it was an out of period of adjustment, corrected it and it amounted to roughly $6 million in the period.
So, that’s where the out of period adjustment came from, and we of course wouldn’t expect it to continue in the future.
Humphrey Lee - UBS Securities LLC
Given you, your using the upgraded evaluation model (inaudible) slightly higher, definitely not in the $6 million range of cost, there’ll be a little bit of pick up in terms of debts with block of reserve?
Frederick Crawford
Yes, realized that what is typically the case when you uncover these things or even just when you refine the accuracy of how you reserve which also happens from time to time, is a lot of these things tend to be catch up in nature, in the sense that there have been small, very small incremental amounts of reserve increase over a great number of periods and now your catching that up in affect. So, we wouldn’t expect that to be some sort of signal that there is a higher reserving dynamic necessarily and materially higher reserving dynamic going forward.
Humphrey Lee - UBS Securities LLC
Okay, got it thank you.
Operator
Your next question is from the line of Ryan Krueger.
Ryan Krueger – Dowling & Partners Securities, LLC
Not a segment we tend to talk about too much, but incorporate things like the investment income has been running better there probably because of some of the initiatives you’ve been making up holding company. Could you just talk a little bit about what you view as a good corporate run rate in for 2013?
Frederick Crawford
Yes, there is a number of different things that run through corporate as you know. But as we have been talking about here recently, the corporate segment has started to – more of into a real and investment strategy for the company.
And I might ask, Eric if he wants to add any color to this. But you have a number of line items running through that.
You have (inaudible) business that’s mark-to-market, you have hedge fund investments as part of our alternative portfolio, which again will be volatile. And you also have certain trading strategies as well as just increased assets because we’ve been holding more liquidity.
So, realized all of those things are coming together. They bring it a little bit more energy to corporate with some real strategy behind it.
Eric, I don’t know if you have more color you would like to add?
Eric Johnson
The only thing I would say is that in terms of thinking about it, if you look at them, I think we released last quarter and probably in the deck again, this quarter and model life allocation for the corporate sector. And I think that would give you a depiction of how we think about investing that money, predominantly core or core plus type strategy with some leverage, with a much smaller allocation to equities and hedge funds, CLO equity etcetera.
So, if you want to think about it in terms of model allocation and think about kind of a normalized set of return (inaudible) asset classes, obviously if you were into the latter part of last year, we were in a very good place and benefited significantly in that area from market trends, in spreads, and in base rates as well that may or may not be replicated in future periods in market where we really dictate that. Having said that, we think we have a model that will over a sustained period, produce good returns for the corporate sector as well as making available liquidity for other corporate initiatives as needed.
Frederick Crawford
As you know, we like this strategy for several reasons. One, it’s one of the weapons we have to sustained net investment income in the world of declining new money rates in a potentially squeezing spreads.
And so, it’s in part the strategy that’s helped us maintain relatively stable dollar base net investment income despite the current yield environment. We also, of course, tend to hold the majority of our excess capital of the holding company for financial flexibility purposes in this particular quarter, contributing to our announced tender, but also because it’s tax favored.
So, we are trying to drive non-life income for tax purposes. And so, what Eric is able to accomplish on the investment side of the holding company has that much more juice, if you will, for shareholders because of its tax-favored position.
Ryan Krueger – Dowling & Partners Securities, LLC
Got it. And maybe just one more quick follow-up on that.
Maybe for the fourth quarter, could you give some sense of the investment performance in relation to you guys with U.S. as more normal for the corporate segment?
Frederick Crawford
Yes, actually, both our COLI product that market-to-market as well as our hedge fund performance was actually flat and really the margin underperformed our expectations whereas some of the strategies that Eric referred to really outperformed. And so, it was a bit of a mixed bag.
Some of the trading strategies really outperformed relative to recent quarters. So, I would say on balance, not far off what our expectation would be.
Recognize however, that I am going to use a fair amount of that holding company capital as part of exercising our tender offer, and that could have implications for the general – you know overall investment income that we produce as we go forward. Any other thoughts on that, Eric, but that would be my read on it.
Eric Johnson
I think quite as by expectations, but I think we had a good quarter the last quarter, but it’s directionally where we should be going, but there maybe a little more erroneous than I would put in the spread sheet.
Ryan Krueger – Dowling & Partners Securities, LLC
All right. And then, I just had a –
Frederick Crawford
I am not ready to give in, I am not ready to give in on that.
Ryan Krueger – Dowling & Partners Securities, LLC
In OCB, the $5 million to $20 million EBIT guidance for ’13, does that include a baseline level of expected litigation cost, or is that kind of excluding litigation?
Frederick Crawford
Yes, what I would do is, I would separate litigation cost, that is the cost associated with continuing to actively manage and defend and work through our various positions there from settlement activity where you have perhaps one-off either reserve issue or outright settlement adjustment. We would exclude the more one-time settlement type elements, but we would absolutely include in the guidance a level of just pure litigation expense that comes with the territory.
Edward Bonach
Yes, and Ryan in that, your with the settlements for those that are in process, we hopefully are appropriately reserved so, when and if a settlement is reached, any deviation from the run rate should hopefully be minimal as a result.
Ryan Krueger – Dowling & Partners Securities, LLC
Okay, very helpful. Thanks a lot guys.
Operator
Your next question is from the line of Chris Giovanni.
Chris Giovanni – Goldman Sachs
One clarification for Fred and then a question for Scott. The comment you made around the LTC interest adjusted benefit ratio, you talked about an expected range of 71 to 75.
I think the outlook for ‘13 from the Investor Day was 75. So just, if you clarify, are you feeling a little bit better about that expected 75 or is it just things are going to be devoured on liquidity quarter-to-quarter basis.
But I guess, even then the range we’re still getting at is kind of the top end, so how should we be thinking about that just in ’13?
Frederick Crawford
Yes, I would -- if you go to the Investor Conference and I don’t mean to call out specific slides, but if you go to slide 64 of our Investor Conference deck, Chris, we actually -- your right. We called historical normalized benefit ratios as being between 71% to 75%, and then, we guided to 75%.
And so, let me correct my statement in that. I think it’s really appropriate for us to expect benefit ratios to be more on our guidance of 75%, if course can fluctuate and has 72%, it is falling in line with what our past experience has been these last couple of years, but we would expect it to tick up.
So, we’ve been using the term favorable to describe the 72% to sort of signal to you that we believed it to be better than what we would expect. So, I appreciate the question because that is worth clarifying, we did guide to 75% range and it was more 71% to 75% that we’ve had as a historical range.
Chris Giovanni – Goldman Sachs
Okay, thank you. And then for Scott, you talked about the expectations for the additional location rollouts, it certainly should help the growth.
We are curious if you can comment from around, what you’re seeking from agency productivity and if you have whether it’s cross sale targets, or anything to help us get comfortable with kind of the productivity we’re seeing from the agents specifically at Bankers.
Scott Perry
Sure Chris. We have seen improvements in productivity and that’s been a result of some of the cross sell initiatives that we put in place last year, and we’re kind of ramping up this year.
So, given the headwinds and fixed index to annuity markets, we’ve seen our agency force pivot successfully. I think a lot of the success we’ve seen in life sales and also in with the introduction of the new critical illness product has been a result of cross selling into either our Medicare supplement, Medicare Advantage prospect their customer base.
So, we’d expect more of that to have productivity, tends to lead to improved retention which given, even kind of consistent recruiting results that we’ve seen over the last couple of years will help drive our agency force in average agency growth size, which is absolutely what we saw. So, we attribute the growth in our agency force to productivity gains, which is driven, improve retention, and that those productivity gains have been largely as a result of cross selling activity.
Chris Giovanni – Goldman Sachs
Okay, thanks so much.
Operator
At this time, we have no further questions, do you have any closing remarks?
Edward Bonach
No, thank you operator, and thanks to everyone on the call for their interest and support to the CNO financial group.
Operator
[ph]Today’s conference call, you may now disconnect.