Apr 26, 2013
Executives
Erik Helding - Senior Vice President, IR Ed Bonach - Chief Executive Officer Scott Perry - Chief Business Officer and President, Bankers Life Fred Crawford - Chief Financial Officer Eric Johnson - Chief Investment Officer
Analysts
Chris Giovanni - Goldman Sachs Randy Binner - FBR Capital Markets Humphrey Lee - UBS Sean Dargan - Macquarie
Operator
Good morning. My name is Amanda, and I will be your conference operator today.
At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers remarks there will be a question-and-answer session. (Operator Instructions) Thank you.
I would now like to turn the call over to Mr. Erik Helding, Senior Vice President, Investor Relations.
Sir, you may begin your conference.
Erik Helding
Thank you, Operator. Good morning.
And thank you for joining us on CNO Financial Group’s first quarter 2013 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 will be referring to information contained in yesterday’s press release.
You can obtain the release by visiting the media section of our website at www.cnoinc.com. This morning’s presentation is also available in Investors section of our website and was filed in a Form 8-K this morning.
We expect to file our first quarter 2013 Form 10-Q and post it on our website by April 29th. Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements.
Today’s presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You’ll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout this presentation, we will be making performance comparisons and other -- unless otherwise specified, any comparisons made will be referring to changes between first quarter 2012 and first quarter 2013. And with that, I’ll turn the call over to Ed.
Ed Bonach
Thanks, Erik, and good morning, everyone. The first quarter was another solid quarter of operating performance for CNO.
Our business has continued to perform well and we achieved another significant increase in operating earnings per share. We had continued strength in statutory earnings and ended the quarter with RBC of 366%, leverage of 19.5% and $244 million at the holding company.
This capital strength is even more impressive given the recently completed tender offer for our outstanding convertible debentures. We continue to invest in our businesses by increasing marketing, expanding our geographic reach and launching several new products.
These initiatives are producing results. For the quarter, consolidated sales and collected premiums increased by 2%.
Scott Perry will go into more detail on this later in the presentation. We continued to deliver shareholder value through operating earnings and effective capital deployment, driving appreciable increases in per share results.
Operating earnings per share were $0.21, up 40% over the prior year. Excluding significant items, operating EPS was $0.23, an increase of 28%, continued growth in our core business segments, normalized earnings drivers performing as expected and continued success in deploying excess capital are all resulting in significant accretive earnings growth.
Turning now to slide seven, in addition to deploying excess capital into stock buybacks, debt reduction and dividends, we are also continuing to invest in our businesses. We are making investments in initiatives that are increasing the productivity and size of our agent force, enhancing agent recruiting and retention, while staying focused on profitable growth.
We are increasing direct marketing, adding new sales locations to expand our presence in under penetrated marketplaces, along with developing and launching new products that will meet the needs of our fast growing target market. In support of our growth, we’re also investing in our back office to drive operating efficiencies, aligning the organization to leverage resources and enhancing the customer experience.
These investments are paying out. Consolidated sales and collected premiums increased by 2% over the prior year in spite of annuity sales and collected premium declines 10%, due to the continued low interest rate environment.
Let me now turn it over to Scott to discuss our core segment results in more detail. Scott?
Scott Perry
Thanks, Ed. Bankers overall sales and distribution results were positive for the quarter.
Our agent force grew by 4%, largely due to increased productivity and retention, and total sales were up 3%, primarily due to an 11% increase in life insurance sales products. We achieved this increase despite weakness in annuities and long-term care as we continue to exercise strict pricing discipline in this slow interest rate environment.
Sales of our new critical illness product continue to gain momentum and we generated nearly $3 million in sales in Q1, that’s more than half the sales generated in all of 2012. We expect this positive trajectory to continue as we roll this product out to several large states, including California and New York over the remainder of the year.
The product has been well-received and agent interest continues to grow. During the quarter we saw a 28% increase in the number of agents selling critical illness compared to Q4.
Medicare Advantage sales activity related to the annual enrollment period was robust. As we discussed last quarter, Bankers partners with leading providers to sell Medicare Advantage and PDP.
We currently have relationships with Humana, United Healthcare, Aetna, and Coventry. We had a very successful annual open enrollment period for Medicare Advantage and new policies issued were up 36% over last year.
These Medicare Advantage sales are important as they allow us to reach, serve and retain both new and existing customers, as well as providing fee income for the company. Turning to Washington National, first quarter sales of our core supplemental health and life products were up 5% over prior year, with supplemental health sales up 9%.
We’re seeing momentum build in this segment and we’re pleased to see that our Washington National partner channel increased voluntary worksite supplemental health sales significantly in the quarter. In addition, our PMA channel continued to gain traction with its geographic expansion initiative.
Supplemental health collected premiums increased by 7% and PMA total producing agent count rose 5% over the prior year. Turning now to Colonial Penn, first quarter sales were down 3% year-over-year consistent with a modest decline in advertising spend during the quarter.
This was driven by an outsized increase in TV advertising rates, due to higher demand in the quarter as advertisers that deferred spending in the fourth quarter because of the presidential election and ongoing worries about the potential fiscal cliff returned to the market. On the plus side, continued productivity gains helped to partially offset the lower advertising spend.
Collected premium growth was robust with year-over-year premium collections increasing by 6%. As we have discussed in the past, Colonial Penn sales results and earnings exhibit significant seasonality and results in the quarter were consistent with those historical trends.
We finished 2012 strong and are off to a good start in 2013 with all three segments building momentum. 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 well-positioned to meet these important 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 on track. Bankers will continue to increase the number of locations and expand the manager trainee program both of which will enable us to grow our agent force.
Consistent with 2012 results, we expect to add 25 new locations in 2013, which will bring us to 300 locations by year end. Also, we are driving initiatives in 2013 to increase cross-selling activity and build on our success in life insurance with a focus on increasing premium per policy.
Lastly, we expect positive momentum to carry-forward as the new locations we opened in the last two years ramp up to full productivity. At Washington National, we expect strong results to continue at PMA as we expand the recruiting team, focus on sales leader development and increase PMA’s presence in the underserved states.
We are expanding our state product portfolio offering and expect that our recently launched critical illness product, ActiveCare will be available in 33 states by May 1st. We also expect increased focus and positive momentum in the voluntary worksite market.
At Colonial Penn, we will continue to invest in new lead generation based on our disciplined approach to ad spend. We expect further improvements in sales productivity through the implementation of additional features of our new customer relationship system.
We will be launching additional new products, as well as continuing our efforts to reach the Hispanic segment of our target market. And with that, I’ll hand it over to Fred who will discuss CNO’s financial and investment results.
Fred?
Fred Crawford
Thanks, Scott. CNO recorded another strong quarter on the earnings and capital front.
Our earnings benefited from relative strength in investment income and spreads with normalized benefit ratios and mortality margins performing as expected. If you adjust for the significant item in the quarter we posted $0.23 per share, a considerable increase over prior year’s results recognizing capital actions.
The significant item was recorded in our Bankers segment which I’ll touch on in a moment. Capital ratios and our holding company liquidity position remain strong, even after funding our successful tender offer.
Impacting net income was the loss on extinguishment of our convertible securities and a reduction in our deferred tax valuation allowance, as we continue to realize investment gains in excess of losses. Turning to normalized segment results, Bankers, Washington National and Colonial Penn collectively were up 28% over the prior year’s quarter.
We noted last quarter the seasonal impact at Bankers related to the Medicare Advantage open enrollment period. We did experience the seasonal drop in persistency, although modestly favorable to our expectations which benefited earnings.
Bankers reported earnings included an out of period adjustment on reserves for certain policies subject to recent rate increases along with an associated adjustment to intangibles. We recorded the cumulative impact in the quarter and there was no impact to statutory results.
Washington National posted a solid quarter supported by strong collected premium growth as our investment in distribution takes hold. Colonial Penn’s results reflect the seasonal marketing spend we signaled last quarter, earnings improved over last year, a result of efficient lead conversion combined with disciplined approach to ad spend.
We hold to our guidance for the year of a loss of $5 million to $10 million pretax. We have effectively reset the earnings run rate in our OCB segment, reflecting the preliminary legal settlement which impacts mortality margins.
We estimate the 2013 impact of roughly $4 million a quarter, which was factored into our December guidance of earnings before interest and taxes in the $5 million to $20 million range for 2013. Drilling deeper into our underwriting margins, collected premium continues to grow in both our Bankers Medicare supplement and Washington National supplemental help lines.
Long-term care premium reducing as sales slow and our mix shifts to lower premium per policy offerings. Bankers’ Medicare supplement benefit ratios were moderately favorable at roughly 69% but within our expected range.
When you exclude the out of period adjustment, our normalized LTC benefit ratio was roughly 76% and consistent with our expectations. Washington National supplemental health benefit ratios were 53%, slightly higher than what we have experienced in recent quarters but not outside our expectations and somewhat consistent with the year ago quarter.
Turning to investment results, in the first quarter our portfolio earned yields held steady, an accomplishment given the new money rate environment. We put new money to work at rates slightly higher than our full year expectations of 4.75%.
New money rates reflect our investment view during the period that credit compression will likely -- was likely meaning high yield with outperform investment grade, so we modestly weighted our investments to that direction. We added $200 million to our FHLB institutional spread business.
We now have roughly $1.9 billion in overall balances spread across 25 transactions and in multiple legal entities. We are disciplined in our business, staggering maturities, a mix of floating and fixed rate funding, and adhering to our ALM and credit standards.
40|86 also closed on a fourth CLO transaction. We have a successful track record in this business, which leverages our credit research and administrative skills.
We benefit from both investing in structures and generating investment advisory income for attractive returns on our capital. As we have previously stated, we are not chasing yield.
Overall, we are defending our earnings through disciplined ALM, slowing turnover, growing assets and managing spreads. As noted earlier, realized gains once again outpaced losses and impairments resulting in a release of our valuation allowance.
We have reduced portfolio turnover rates in order to defend yields and as a result, overall gain loss activity has slowed. Credit performance continues to be strong with no impairments in the quarter near zero delinquencies in our mortgage portfolio and no material upgrade or downgrade activity.
We ended the quarter with RBC ratio of 366%. This is particularly strong, recognizing we sent $89 million in statutory dividends up to the holding company, larger than normal in order to assure we had ample liquidity for the tender.
Leverage settled in at 19.5% and we expect this ratio to continue downward as we amortize debt and start back into stock repurchase with associated sweep provisions. We ended the quarter with $244 million of liquidity and investments at the holding company, this after deploying $125 million to fund our tender offer.
Statutory earnings were strong at approximately $113 million and followed along with our solid GAAP results. Capital generation defined as statutory earnings prior to surplus note interest and contractual payments made to the holding company came in at $122 million.
Recognize there are minor timing issues when looking at a single quarter but we’re off to a good start and remain on track to generate capital consistent with last year’s performance. We provided a snapshot of sources and uses of excess capital and free cash flow in the quarter.
We funded the tender offer through a combination of cash flow and excess holding company liquidity. There was no debt sweep associated with the convertible tender.
We expect stable capital generation as we move through 2013 and would size our deployable capital of the holding company at around $100 million. We have resumed share repurchases in the second quarter.
We’ve been tactical in our approach to returning capital to shareholders. We retired over 26% of our diluted shares in the past two years through a mix of share and convertible repurchases.
On the convertible securities, we executed through a privately negotiated transaction on a meaningful portion at a discount and tendered for the remaining securities at a modest premium. In the process, we have significantly lowered our cost of capital while maintaining strength in our core credit ratios, achieving upgrades from all four agencies.
We initiated a dividend last year with a longer-term goal of delivering payout ratios more consistent with our dividend-paying peers. On a cumulative basis, we have invested nearly $0.75 billion in CNO stock and stock equivalents at a meaningful discount to book value, thus driving attractive returns for our shareholders.
Our outlook is essentially unchanged from our comments at year-end. We continue to hold to our guidance on key earnings drivers, which include normalized core benefit ratios, stable net investment and spreads.
The first quarter also tracked well to our full-year EBIT guidance for Colonial Penn and OCB segment. Recognizing we are early in 2013, there is no change in our expected insurance company dividend payments to the holding company of $250 million to $300 million and our securities repurchase guidance for 2013.
In terms of the remaining convertible securities outstanding, we would expect to force conversion in the third quarter, recognizing the 7% coupon and associated cash flow and capital benefits. With that, I’ll turn it back to Ed for closing comments.
Ed Bonach
Thanks, Fred. Our first quarter results have us solidly on track to continue to deliver increasing shareholder value and execute on our 2013 priorities.
Our organic growth initiatives are leading to increases in sales, premium income, distribution size and reach, along with expanding our product portfolio to continue to meet the needs of our fast-growing, underserved, middle income target markets. In support of growing our business and returns, we are investing in operational efficiencies and organizing the leverage expertise even more broadly across the enterprise.
Investments in our business will not end with 2013, as we are expecting to invest $80 million to $85 million in strategic business initiatives over the next three years. We continue to stay close to the reinsurance and capital markets to evaluate alternatives to reduce the influence of our closed blocks in OCB and to add to our ROE progression.
ROE expansion will continue to be primarily driven by earnings growth and the effective deployment of capital. Our credit metrics are also continuing on a positive trajectory, which we believe should lead to further ratings upgrades.
We expect strong business fundamentals, coupled with solid earnings and cash flow generation to continue to power shareholder value. I believe these attributes are what are driving continued total shareholder returns so far this year on top of a 49% return in 2012.
And with that, we’ll now open it up for your questions. Operator?
Operator
(Operator Instructions) And your first question comes from the line of Chris Giovanni with Goldman Sachs.
Chris Giovanni - Goldman Sachs
Thanks so much. Good morning.
I guess the first question is just around the statutory earnings generation of the quarter, which certainly was very strong. I mean, any commentary in terms of, are we seeing another step up here in terms of the ongoing capital generation of the enterprise and how we should be thinking about that moving forward?
Fred Crawford
Sure. Thanks, Chris.
Good morning. Yeah, statutory earnings, as I mentioned earlier were very strong.
But as you kind of run your finger across the last several quarters and look at it, even in the first quarter of last year you’ll notice that they absolutely ticked up and the vast majority of the driver of the outperformance and statutory earnings simply follow-on with the same themes that we have running through the GAAP results. But there is, in fact, one exception to take note of and that is, because we’re in the indexed annuity business, you will have a dynamic that takes place that will cause a level of volatility from time to time, quarter-to-quarter in your statutory earnings.
Namely what this is, is some modest differences in the way in which the asset side of the options are marked for statutory purposes versus how the liability side is marked for reserving. So for example, in a quarter where you have outsized performance in the equity markets and a drop in volatility, very low volatility, you’ll see some relative overperformance in statutory earnings.
And we would estimate that overperformance in the period to be in the range of $10 million pre-tax, for example. And so what’s important to note is even if you pull that off and we would expect you to not view that as necessarily run rate earnings.
It will fluctuate from period-to-period. But obviously, even if you pull that off, you’re still talking about a better than $100 million debt earnings quarter, which was very strong and simply followed onto the GAAP results.
Chris Giovanni - Goldman Sachs
Okay. In terms of -- I guess capital management I think it was clear short on the repurchase side.
You made the comment around the dividend sort of following on the Investor Day presentation in terms of trying to get closer to peers. And I think post-1Q last year was when you initiated that dividend, so presumably you are kind of reviewing that with the Board now.
I mean, how quickly do you think you’d be approaching kind of peer dividend yields? Is that something out to 2016, or is that something that could be possibly sooner than that?
Ed Bonach
Chris, this is Ed. From the standpoint of when we would get there, the context that we gave that 20% payout ratio was over the next three years, so we would expect by 2015.
Chris Giovanni - Goldman Sachs
Okay. And then just, one last quick one in terms of the expenses.
I guess across the enterprise we’re held in check pretty well and I know that was one of the levers you guys laid out in December as well, in terms of maybe another ROE stair step. Can you point us to -- I mean, maybe early reads for opportunities that you’re seeing on the expense side, or how you’re able to kind of control the cost here in the near term?
Fred Crawford
Yeah. I mean, I think a couple of things I would mention and that is, not surprisingly for a period of time when we look at opportunities to adjust our efficiency, our platforms, our middle and back office, there’ll be the natural spend that gives way to benefits later, the natural CBA dynamic.
And so when we’re in a period of time where we’re looking hard at the middle and back office, looking for where we can create efficiencies, looking for where we can leverage platforms across all three of our major businesses, you should anticipate there being a level of spend with a return to follow. In other words, not the near-term benefits if you will, to expenses that you might find sort of out of the gate.
There’s not that kind of low hanging fruit. These are really broad-based efficiency measures that we’re looking at.
Now, something I would say is this, we’re not just stepping into it right now, right? We have been doing a level of this all along.
In fact, I’ve mentioned before, I have one of the largest such projects, actually, in my department, in finance, where we’ve been spending in the neighborhood over the last couple years, approaching $7 million to $11 million a year as we’ve gone through a finance transformation, or overhaul of our general ledger system, related actuarial systems and data. And so we -- and that’s all expected to yield efficiencies and benefits as we roll forward as a finance department and more broadly across the company.
And so we have been at this for a little while, so you will see a mix of projects that are now starting to yield benefits and projects that are coming on stream as we address it. So I think our goal at the moment is to try to manage things in a more stable expense environment as we move forward.
Chris Giovanni - Goldman Sachs
Okay. Thanks.
I will get back in the queue.
Operator
And your next question comes from the line of Randy Binner with FBR Capital Markets.
Randy Binner - FBR Capital Markets
Thank you very much. I guess I would like to ask some questions about sales.
The sales figure for the organization, I think, ex annuities is like 4% positive in the quarter. And so -- I’d say it’s a pretty good result given kind of some of the headwinds out there that you spoke about in the prepared comments.
But if I kind of think back to six months ago, it seemed like there was more like an 8% to 12% goal and let’s say that 8% to 12% goal is ex annuities, given what’s going on there. I guess the first question is, is that attainable and if so if you could review for us what would drive it?
I think there’s branch expansion. There’s training and recruiting efforts and a focus on life products.
I mean, I think that that’s the answer but just wondering if that still is an attainable goal and kind of what the main drivers would be to help the company get there?
Scott Perry
Yeah. Randy, this is Scott.
Absolutely believe that 8% to 10% goal is still attainable. We have driven across all three segments.
At Bankers, it’s going to be through expansion and we expect Bankers is going to be at the lower end of that number and closer to the 6% to 8% range. Especially, this year as our new locations ramp-up and the manager trainee program begins to produce potential managers to fuel expansion in the future years.
I think another big -- I touched on the new product, critical illness, that’s been received extremely well. We also are doing a lot at Bankers around cross-sell, improving cross-selling activity and some of that is benefiting at critical illness.
It’s also benefiting life insurance. So I think it continuos.
We expect continued strong results at Bankers through locations, life insurance expansion, cross-selling and the introduction and expansion of the new product. At Washington National, our PMA segment is also expanding through product availability.
And we expect the new ActiveCare to drive growth for Washington National that will be closer to that 10% number, 10% to 12%, frankly. We also see a tremendous opportunity evolving with worksite.
Both through our PMA and our partner channel, we see strong indications that the worksite market is picking up and we especially are enthusiastic about some of the dynamics around healthcare reform that may create even more opportunity within that market. At Colonial Penn, as I mentioned in my comments, this was a quarter where we were disciplined around our ad buying.
And I would expect that as the market softens, that we are absolutely expecting to get on track and growing that business again in that 6% to 8% to 10% range. And one thing I didn’t elaborate on but I think I talked about at the Investor Conference.
We do have new products that are being rolled out at Colonial Penn. Those products are kind of in their early stage but we expect them to contribute more significantly to our growth in the second half of this year.
Randy Binner - FBR Capital Markets
All right. That’s helpful.
And just a couple of follow-ups, one is -- which is on the Medicare Advantage sales being up 36%, that seems high I guess relative to other stuff we’ve seen in that space, other comps so far this earnings season. CMS, I think, is limiting more and more the payouts on Advantage products.
So was there anything unusually successful about your renewal period or your product or something that we might not be seeing with the others? Because I like I said that seemed like a really good topline result.
Fred Crawford
Yeah. No.
You’re right. And the industry was up about 9%, so we significantly outperformed the industry as a whole.
I think it was somewhat unique to us and our execution around getting our agent force better trained and prepared earlier on, leading up to the annual election period than we did the previous year. I think it’s mostly just around our improvement in execution year-over-year.
Randy Binner - FBR Capital Markets
Okay. I’m good on the sales questions.
That’s all helpful and thanks for affirming the goal. Sorry.
The other thing, on annuities, we should assume that annuities are still significantly deemphasized at CNO given the low rate environment and given the pivot strategy to less capital-intensive products. Everything you just mentioned has less capital intensity, I think, so we should think of annuities as being less of a focus going forward, particularly traditional fixed?
Is that correct?
Fred Crawford
Not really. I would say that we’ve not made a specific decision to deemphasize.
We’ve exercised discipline around our pricing. We still think that there’s traditional fixed and fixed index annuities meet the need of our target market.
So we will continue to offer those but we want to make sure we’re offering them in a responsible way. And we do see, especially given kind of where the market is today and where we think it’s going to be over the next couple of years that we will likely see stable and maybe even some small improvement in results in the fixed index space.
Randy Binner - FBR Capital Markets
All right. Got you.
Thank you.
Operator
And your next question comes from the line of Humphrey Lee with UBS.
Humphrey Lee - UBS
Good morning, everybody.
Ed Bonach
Good morning.
Humphrey Lee - UBS
Just a question about the Bankers expansion. So I think Scott mentioned earlier, with the new locations opening up over the past two years, so expecting them to ramp-up.
Just want to see how the progress to date and also kind of in terms of economics, how that would kind of flow through to the income statement? And then also any updates on the year-to-date expansion for the new 25 locations?
Scott Perry
Sure. I’ll take that question, Humphrey.
This is Scott. It takes about three years for a new location to get up to full productivity.
So what we’re seeing this year are some of the benefits of what we started in 2010 and we expect that will and as you can see, we did report a 4% increase in our average agent count. A lot of that is being driven by the new locations.
So we will start -- that’ll be the first place that you’ll see the impact of these locations ramping up and getting up to productivity is we’ll drive our average agent force count. And turning to the manager trainee program, as you alluded, that program will continue to fuel talent to be able to continue to fuel our expansion.
As I mentioned in my prepared remarks, we’ll expect to be up to about 300 by the end of this year. I’m sorry.
You had a second half to your question.
Humphrey Lee - UBS
Yeah. So for --
Scott Perry
Where are we so kind of year-to-date?
Humphrey Lee - UBS
Yeah.
Scott Perry
So for the first -- so in the first quarter, we only opened net one location. We did have a few that we closed and so we net opened one.
However, we have a number of them in the pipeline and so it’s more of just a timing issue around securing the location, securing the lease and actually, officially turning the lights on in a location. So we’re still sticking to our expectation of 25 locations during the year and most of that activity obviously is going to happen in the next three quarters.
Ed Bonach
Yeah. The other thing, Humphrey, I think you were trying to get at was how this flows through the income statement.
Because these offices are relatively modest in size, secondly, in more Class B office space and third leased, that there’s not a lot of additional expense you will see coming through and it’s not noticeable in the whole scheme of things at Bankers. And then, of course, our agents are paid on a commission basis.
So there’s not any financing ramp-up that goes with this either. So relatively modest investments that we need to make to do these expansions.
Humphrey Lee - UBS
So kind -- with this kind of three years to get to full productivity, so I think the first batch of locations was back in ‘11, so we should see some pick up. Because it seems like there is quite a bit of a lever that you can get from this expansion.
Ed Bonach
Yeah. No.
Definitely and that’s why we have talked about growth in the 6% to 8% range for this year. But then with these investments and others in the other segments as well, that we think we can move to an 8% to 10% annual sales growth rate.
Humphrey Lee - UBS
Okay. Got it.
And then, in terms of the debt-to-capital ratio, so 19.5% for this quarter and it appears to be on track to get below the 17.5% this year where kind of the cash sweep would go away. So how do you think the trade-off between no cash sweep requirement versus the capital efficiency, because I think you mentioned before the ideal debt-to-capital ratio would be somewhere around 20%.
So how should we think about that? And does that kind of offset what you’re going to decide to do with your capital structure for later this year?
Fred Crawford
Yeah. Right -- you’re thinking about it the right way in the sense of when we originally negotiated the loans with lenders and were able to negotiate a different sweep provision than we had been saddled with historically.
It was with the idea of allowing us greater degrees of freedom when we get our leverage down into a more efficient territory and that was deemed to be 17.5%. If you recall, I think the sweep was going all the way down to 12.5% prior to that, which was clearly too delevered as a company, not efficiently levered, if you will.
So we did work hard to negotiate that freedom. And as a result, that is and around -- that’s around the optimal level to be at, particularly, if you’re looking to move your ratings up.
And we are in a ratings upgrade mode as a company. And so not surprisingly, you want to be particularly careful with that leverage ratio.
Right now, we’re simply letting it flow through with the normal amortization of debt. And as you know, when we buy back stock, we move $0.33 over down on the debt.
And I don’t mind that discipline right now because it means as we watch credit conditions unfold positively or negatively, I’m delevering along the way. And it’s a good discipline to have particularly when you’re looking for upgrades.
So that’s the way we think about it. And if we were to drop below 17.5%, we simply wouldn’t have to sweep so much down on debt.
It gives you a modest amount of excess capital, if you will, to redeploy elsewhere. But I don’t think it’s really a big dial mover.
Humphrey Lee - UBS
Okay. All right.
Thank you.
Operator
(Operator Instructions) And your next question comes from the line of Sean Dargan with Macquarie.
Sean Dargan - Macquarie
I was hoping just to revisit the $9 million adjustment in Bankers Life long-term care. What exactly was that?
Fred Crawford
Sure. This is Fred.
So it was an out of period adjustment in our long-term care business. And what it was, was we have been actively engaging in rate increases, as you know, across our, particularly, our older long-term care blocks.
And this was an error. It was an operational glitch in picking up appropriately the rate increases on a certain select group of policies where rate increases were put into effect more recently.
And so this was -- what this wasn’t, was any sort of recalculation of the reserves or any sort of charge to reserves or reserving issue. It was simply an operational mistake that has since been corrected.
And what it really was related to was, when you put rate increases in place on policies, we need to capture those rate increases as it relates to the GAAP reserving that we set up on those policies. That’s been done for a while.
It’s a very well-articulated process in the company. But there are certain situations where there’s a graded rate increase that takes place because the regulator says I’m not going to allow you to have the rate increase all at once.
I want you to take it over a couple of tranches. And in this particular case, we picked up the initial rate increase properly as we have always done.
But on the second tranche, if you will or second step of the rate increase, it wasn’t picked up properly. We discovered the error.
It really simply went back to the last couple quarters in terms of its impact on loss ratio. We made the cumulative catch up here in the first quarter.
So for example, the loss ratio on long-term care last quarter, we reported in the 69% territory. That would have otherwise been a little north of 72%.
And as I mentioned earlier in my remarks, the loss ratio we recorded in this quarter on a normalized basis would be more like 76%. So simple error, operational in tone, it’s been remedied and it’s behind us.
Sean Dargan - Macquarie
Okay. And so going forward, the interest adjusted loss ratio that we should think about is, I guess, consistent with what you’ve been talking about in recent quarters?
Fred Crawford
That’s right. It’s consistent with the guidance we’ve given.
Yeah.
Sean Dargan - Macquarie
Great. Thank you.
Operator
(Operator Instructions) There are no further questions at this time. Do you have any closing remarks.
I’m sorry, you have a follow-up question from Humphrey Lee.
Fred Crawford
Okay. Hey, Humphrey.
Humphrey Lee - UBS
Just a quick question on the Colonial Penn advertising spend. My understanding is that there will be a catch up in the remaining of 2013 but how should we think about that in terms of timing?
Are you going to spend more in your 3Q, which is typically your second-highest quarter or just kind of based on how things would shake out and maybe catch up sooner than later?
Fred Crawford
Yeah. So what I said in my remarks, of course, was that we maintain our guidance for Colonial Penn.
And so first and foremost, you should just note that while there may be movement from quarter to quarter going out. You would expect to find the normal pattern of those quarterly losses reducing as we move towards the end of the year to fall within guidance.
I think generally speaking, you may find a situation where what we did not spend in the first quarter gets more or less spread out as we go through the remainder of the year. Because this was really a tactical issue that impacted us in the first quarter as opposed to some sort of strategic issue, where we’ve adjusted our spend and our view of going at the market.
As you raise that, Humphrey, I do want to come back to a Chris Giovanni question on expenses and just make sure I add a little bit of color. Chris added a comment -- because it relates to your question, Humphrey.
Chris asked a question about expenses relative to our attempts to bring middle and back office efficiencies. And I answered that in a long-range way appropriately.
And I stick with that answer. We have projects that will come on and roll off and ultimately managing towards ROE improvement as we get into it.
If your question, however, is really the current issue of hey, I’m staring at your expenses this quarter, where do I see them going? There’s a few things to make note of when looking at our combined expenses.
One is what we just talked about, right? So we had pulled off about couple of $1 million worth of ad spend this quarter as a result of the dynamics we explained earlier.
You might also notice that we had a lighter than normal expense period in corporate and that was related to roughly a little over a $1 million adjustment related to just truing up our incentive comp accruals. And so we would expect those expenses to be up $1 million or $2 million on a run rate basis.
The other comment I would make is that it’s not unusual that we go through our planning process, we agree upon and prioritize and fund initiatives across the company. And those initiatives start to roll in as we go through the year.
And so typically, you will find projects starting to roll on, gain traction and make the investments and progress as you go through the year, i.e., you’ll see a little bit of lightness in expenses early in the year and it will layer in as you go on. Now I should note, all of these things taking in the aggregate and looking at our results shouldn’t cause you to adjust your views of where the earnings run rate are going to go going forward.
These are all very marginal things I’m mentioning but worthy of note when thinking adjustment -- when staring just at the expense line in the first quarter.
Humphrey Lee - UBS
All right. That’s helpful.
Thanks.
Operator
And you have a follow-up questions from the line of Randy Binner with FBR Capital Markets.
Randy Binner - FBR Capital Markets
Just on OCB, I wanted to dig into the commentary a little bit more that I don’t think this got covered by the other questioners, the OCB, the $4 million drag. Fred, I think you said that was in the result for the first quarter of ‘13 and that is something we can expect in each quarter for 2013.
And that’s consistent with the $5 million to $20 million guide. That’s all correct, right?
Fred Crawford
That’s correct. That would be our estimate of really installing, if you will, the preliminary settlement into the run rate results of the company.
Recognize that the mission we have with OCB is both earnings maximization as well as volatility mitigation, right. And so that’s the trade-off, if you will, as you look at the settlement.
So it does result in a lower run rate set of earnings as we go forward. But obviously, we’re working hard to go forward with OCB and that’s involved working through litigation matters.
Randy Binner - FBR Capital Markets
Okay. I actually have a few follow-ups there.
First, what is the dynamic exactly of installing that $4 million into the numbers? The second follow-up is would that be something that would sustain in 2014 and beyond?
I’ll leave it with those two.
Fred Crawford
Yeah. I mean the dynamic -- I’ll keep it very simple without getting into the complexity of the actuarial adoption.
But as you know from settlement disclosures that we’ve made, the settlement itself has to do with non-guaranteed elements. And as part of that settlement, there is a rolling back, if you will, of a portion of the non-guaranteed elements that has the effect of rolling back the associated revenues and that will have implications for your go-forward run rate.
And what you, of course, need to keep in mind is that there has still been actions to address non-guaranteed elements that have been additive to cash flows. And so it’s as important to focus in on what we’ve been able to install as a company as well as what is the output of these settlements.
Randy Binner - FBR Capital Markets
Okay. And then, does that drag, is that a permanent addition to the OCB dynamic or is that something that would not persist after 2013?
Ed Bonach
Randy, the business will naturally run off. So the impact will decrease over time as well as there was a reserve established upon the preliminary settlement and that will also get released and run off over time to help mitigate some of the bottom line financial impacts.
Randy Binner - FBR Capital Markets
Okay. But that’s pretty -- there’s not a lot upfront in it?
It’s pretty ratable over kind of the remainder of the block?
Ed Bonach
Yeah.
Randy Binner - FBR Capital Markets
Yeah. Okay.
And then finally there, I mean, is that -- I know it’s kind of hard to talk about. But I mean, is there -- I mean, that whole process seems to be on track for settlement and being able to move past these major pieces of litigation, kind of, middle part of this year?
Ed Bonach
I’ll say it’s on track. I will not comment on middle part of this year.
But there’s nothing that is off track with our expectations and with the laid out processes.
Randy Binner - FBR Capital Markets
Okay. Fair enough.
Thanks.
Fred Crawford
From an earnings perspective, Randy, the reason we gave some range bound guidance was two reasons, one, to help simplify what are the otherwise complexities of what’s running through OCB, runoff, settlement, et cetera. But also you’ll note that range is relatively wide.
In other words, there will be a level of volatility, naturally, in a runoff block as we go forward. But that’s what we mean by adhering to our guidance is that we’ve taken all these things into account when looking at what we think will go on or what we certainly intend to have go on in terms of EBIT going forward.
Randy Binner - FBR Capital Markets
Understood.
Operator
And your next question comes from the line of Chris Giovanni with Goldman Sachs.
Chris Giovanni - Goldman Sachs
Just wanted to follow up, Ed, one of the comments you made, I guys, in the prepared comments towards the end was continue to work with interested parties around the OCB block. Can you just give some insight into maybe some discussions that you’re having with those parties in terms of potential areas of interest?
Ed Bonach
We can’t give any specific insights. Certainly, I believe you’re aware as we are that -- there are transactions that have been happening.
There are some new players that aren’t just only the traditional reinsurance acquirers of books of business. We see that as favorable and as well as are working continuously on improving the economics and reducing the volatility in OCB, gives us more flexibility and optionality to consider various options with it.
So that’s a good thing in the market that’s happening. And we continue to do what we can control and that’s manage OCB as we have been.
Chris Giovanni - Goldman Sachs
Okay. And then I guess, just a quick one for Eric.
The yields are holding up much better than I think we were certainly looking for. Can you comment, so I’m just what are the asset classes that you’re investing in and really seeing opportunities to keep your yields certainly at decent levels here?
Eric Johnson
Yeah. I can do that.
Looking backward, you may remember on, we had Investor Day. I think, I mentioned a kind of certain view of the world that suggested that credit was going to be a pretty good do for the immediately foreseeable future.
And so based on that view, we took the view that you probably make money in the early part of the year to some degree by playing credit, meaning financial reads, leveraged loans, the quality end of corporate high-yield and other credit-driven, spread-driven, shorter duration factors. Whether that is still a view that pays I think is something one could -- I think it’s maybe less a bright light than it was in the November, December period and I think because of that, the selectivity quotient have to go up considerably.
You go from -- you get into more of an idiosyncratic world. So I think that was a good trade and it’s worked out well for us.
But whether it’s still a good trade is something we have continued to evaluate. In other words, can we do it all for the rest of the year?
I would suspect that, spoken broadly, market conditions, the economy, the yield curve and all the other stuff will have a hand in that and that’s something we’ll continue to think about. But -- and also I think Fred mentioned that we slowed the rate of turnover in the portfolio down pretty considerably.
So the amount of money that we invested in the first quarter of this year was perhaps less than we might have invested in the first quarter of last year or the year before. So it’s kind of putting that all in -- taking all of that into consideration.
I think we’ve done a good job to this point. But we’re going to have to continue to stay on our toes and think strategically and not just try to replicate last quarter.
Chris Giovanni - Goldman Sachs
Okay. Thanks so much.
Eric Johnson
You’re welcome.
Operator
There are no further questions at this time. Do you have any closing remarks?
Ed Bonach
We would like to thank everyone for their time and interest in CNO.
Operator
This concludes today’s conference call. You may now disconnect.