Logo of jester cap with thought bubble.

Image source The Motley Fool.

CNO Financial Group Inc  (NYSE:CNO)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Emily, and I will be your conference operator today. At this time, I would like to welcome everyone to the CNO Financial Group Fourth Quarter 2018 Earnings Results. (Operator Instructions) Thank you.

Jennifer Childe, Vice President of Investor Relations. Please go ahead.

Jennifer Childe -- Vice President of Investor Relations

Thank you, Emily. Good afternoon, and thank you for joining us on CNO Financial Group's Fourth Quarter 2018 Earnings Conference Call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Erik Helding, Chief Financial Officer.

Following the presentation, we will also have several other business leaders available for the question-and-answer period. During this conference call, we will be referring to the information contained in yesterday's press release. You can obtain the release by visiting the Media section of our website at cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K earlier today. We expect to file our Form 10-K and posted on our website on or before February 25th.

Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentations contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.

Throughout the presentation, we will be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2017 and fourth quarter 2018.

And with that, I'll turn the call over to Gary.

Gary C. Bhojwani -- Chief Executive Officer

Thank you, Jennifer. Good morning, and thank you for joining us. 2018 was another successful year for CNO. We executed well against our strategy and delivered strong operational and financial performance, which accelerated in the second half of the year. Growth initiatives implemented over the past few years drove strong production across the board. Despite market volatility in the fourth quarter, which created a $0.09 per share headwind, we increased our operating earnings per share by 5% in 2018 and returned $166 million to shareholders in the form of dividends and share repurchases, including $57 million in the fourth quarter alone.

I'm especially pleased with the long-term care reinsurance transaction in which we ceded $2.7 billion of reserves to Wilton Re. By ceding the most problematic portion of our LTC block, we fundamentally changed the risk profile of our company. The fact that we were the only company to complete a significant reinsurance transaction in 2018 should provide considerable comfort that the remainder of our block has a very different profile from the other long-term care blocks in the marketplace that have captured negative headlines as of late.

Moody's was the first to recognize this fundamental change upgrading CNO to investment grade this past October. We remain on the path to investment grade with both S&P and Fitch. The LTC policies we currently sell are shorter benefit duration products that offer benefit periods of less than three years. We've seen strong demand for this product as it provides an affordable, high quality insurance option designed with the needs of our middle-income consumers in mind. We remain very comfortable with the design and risk profile of the product.

During the year, we made solid progress against our strategic priorities, growing the franchise, launching new products and services, expanding to the right and deploying excess capital to its highest and best use. In 2018, this included share repurchases, common stock dividends and funding the LTC reinsurance transaction.

Turning to Slide 6 for a review of the growth scorecard. Our 2018 production was strong. After a slow start in the first part of the year, life and health NAP growth accelerated in the second half of the year to grow by 5% in both the third and fourth quarters. Collected premiums that are operating segments increased 10% in the quarter and 4% for the full year. Annuity collected premiums increased 30% for the quarter and 13% for 2018, overall.

In 2018, we launched new products and product enhancements at a faster pace than ever before. We expect this pace to continue into 2019. We also invested in technology, a large scale initiative to improve agent productivity was introduced at Bankers Life at the end of 2018. Colonial Penn improved sales and advertising results due in part to agent and web technology enhancements to improve the customer experience and increase lead productivity.

Turning to Slide 7. Within Bankers Life, ongoing investments in agent recruiting and retention initiatives continue to generate positive results and helped drive a 4% increase in our producing agent count as well as a significant improvement in first-year retention. Our expand to the right strategy to reach slightly younger wealthier consumers within the middle market is also gaining traction. The average annuity face amount increased by 10% over the prior year and is up more than 40% over the past three years.

Annuity collected premiums were up 30% in the fourth quarter and increased 13% for the full year. 13% or one in eight of our Bankers Life agents are now duly licensed as financial advisors. Over time, we believe we can improve this to 20% or one in five agents. This is an important metric as financial advisors were responsible for more than 51% of our annuity sales this quarter.

Our broker dealer registered investment advisor businesses also continue to grow. Client assets were more than $1.1 billion and growth of our fee income remains robust. Importantly, consumer relationships tend to be much stronger when we provide not just protection products, but also income and retirement solutions. We remain well positioned to serve the needs of our middle-income consumers.

Life NAP was down 10% for the quarter and 6% for the full year. This decline was primarily driven by an increase in denied applications as a result of recent improvements we made to our underwriting processes. In the long run, these underwriting changes will further enhance the profitability of our life insurance business. Health NAP was up 1% overall, but sales of third-party Medicare Advantage products, which are not included in NAP were up 34% in the quarter. We continue to see a shift in sales from our manufactured Medicare supplement policies to third-party Medicare Advantage policies. We are comfortable with this shift because sales and Medicare Advantage require less capital and allow us to utilize our non-life NOLs. Most importantly, we are serving our customers in the manner that best suits their needs.

Moving on to Slide 8, Washington National. Sales were up 11% in the fourth quarter, an all-time quarterly record and 3% for the year. A significant portion of the increase is attributable to growth initiatives launched in the past two years. Examples include portfolio diversification and the successful 14 stage geographic expansion program. Since we only recently entered these new states, our market penetration still remains low leaving significant future opportunities for growth. We're also pleased with the cross-sell initiatives and efforts to diversify the product mix. Strong momentum in life sales continued with fourth quarter sales up 78%. Life insurance now comprises 10% of our overall sales mix. Short-term care sales remain very encouraging and were up 25%, sequentially.

We also launched a new hospital indemnity product , which was very well received by both consumers and our distribution force. We see tremendous potential to expand cross-sell efforts to our existing supplemental health consumers and to establish new household relationships in expansion territories. Worksite performance was particularly noteworthy setting new records for the fourth quarter and full year. Worksite sales were up 38% in the quarter and 18% for the full year. Worksite now represents more than 40% of total Washington National sales.

Turning to Slide 9 on Colonial Penn. Colonial Penn also had a strong fourth quarter. Sales were up 17% in the quarter and 5% for the full year, driven largely by growth initiatives. Growth initiatives included investments to expand and diversify lead generation sources and technology innovations to improve agent productivity and enhance the online user experience. We also increased our marketing investment which drove higher sales while still remaining price disciplined. We continue to see success in our key initiatives to expand web and digital sales capabilities. We generated a 28% increase in web and digital sales in the quarter and web digital now accounts for 16% of 2018 sales.

We have also seen meaningful improvements in overall lead conversion, which furthers our ability to cost effectively invest in marketing spend. I'm very pleased with the progress we're making at Colonial Penn and look forward to the new products we will pilot in 2019.

Now on to Slide 10. Before I turn it over to Erik, I'd like to say a few words about our capital deployment strategy. We are committed to deploying 100% of our excess capital to its highest and best use. Our goal remains unchanged to maximize return on invested capital over the long run. We will continue to weigh our options accordingly. While we have expressed a bias toward growing the business, when our shares are trading at a significant discount to book value, we've recognized that we will be hard-pressed to find an acquisition or internal investments that could generate a similar or better risk adjusted return.

As I mentioned, we took advantage of market volatility and the depressed stock price to deploy $40 million into buybacks in the fourth quarter. That said, we may consider other uses of capital that could generate similar or higher risk adjusted returns. We intend to remain flexible and opportunistic with these decisions, as well as responsive to changing market conditions. Given our robust free cash flow generation, we believe that share repurchases, common stock dividends, organic investments and M&A need not be mutually exclusive in any given year.

I'd also like to provide a little color on what an attractive acquisition might look like. To be clear, we will not stray from our core business of serving middle-income consumers and we remain committed to maintaining investment grade financial metrics. Our risk appetite is inversely related to the size of any transaction. We have a bias toward manufacturing assets that can leverage our diversified distribution channels, enhance our digital technology capabilities or help scale our Washington National and Colonial Penn businesses. Finally, any transaction would ideally be accretive to earnings within 24 months.

With that, I'll turn it over to Erik to discuss the financials. Erik?

Erik Helding -- Chief Financial Officer

Thanks, Gary. CNO reported net income per diluted share of $0.17 in the quarter, which compares to a loss of $0.42 in the prior year. We reported operating earnings per share of $0.36, down 29% from the prior year. Excluding the significant items noted in our press release, operating earnings per share were $0.45, down slightly from the prior year. Operating return on equity, excluding significant items was 10.3% compared to 8.8% in the prior year. Holding company cash and investments were $220 million, up from $166 million at the end of the third quarter. Equity market volatility in the quarter had a significant impact on our stock price, and we opportunistically bought back $40 million worth of stock.

CNO's estimated consolidated risk-based capital ratio was 393%, down from the third quarter. Roughly half of the decline in the RBC ratio was related to recent changes made to the required capital calculation by the NAIC, primarily to reflect lower corporate tax rates. The other half of the decline was largely related to the significant capital market volatility that impacted equity values and our fixed index annuity reserves. While 393% is below our stated RBC target of 425%. This is still a very strong level of capital and we expect this to increase based upon the recovery we have seen in the market so far this year.

Turning to Slide 12 in segment earnings. Bankers Life earnings reflect lower than expected Medicare supplement margins due to continued higher levels of incurred claims. Washington National's earnings in the period reflect higher supplemental health margins, as we continue to experience lower levels of incurred claims. Colonial Penn's earnings were down versus the prior year, due primarily to higher levels of cost affected advertising spend, which resulted in increased sales. We expect Colonial Penn's EBIT to be in the $12 million to $20 million range for 2019 and due to the seasonality of television advertising spend, we expect a loss of $1 million to $3 million in the first quarter. LTC in run-off earnings were in line with expectations. Lastly, Corporate segment results were down versus the prior year due to unfavorable investment results.

Turning to Slide 13 in our key health benefit ratios. Bankers Life Medicare supplement benefit ratio was 76%, higher than expectations as a result of higher incurred claims due in part to elevated costs related to physician prescribed treatments under Medicare Part D plans. As this is the second consecutive quarter of experiencing higher claims, in 2019 premium rates are already locked in. We expect the Medicare supplement benefit ratio will be in the 73% to 77% range for 2019.

Looking ahead, should claim levels remain elevated. We will file for a higher level of rate increases that will be effective in 2020 and will allow for a normalization of the benefit ratio to a lower level. Bankers Life long-term care interest adjusted benefit ratio for the retained block of business was 74.7%, improved from the third quarter of 2018 due to favorable claims experience. We expect the interest adjusted benefit ratio for this block to be in the 74% to 79% range for 2019.

Washington National supplemental health interest adjusted benefit ratio was 53.8%, better than expectations due to continued favorable claims experience. We expect the interest adjusted benefit ratio to be in the 55% to 58% range for 2019.

Let me take a moment to reiterate a few key characteristics of our Bankers Life retained LTC business. As we have said in the past, our LTC business is materially different than the rest of the industry and that was reinforced by our ability to reinsure our legacy block of business. We are comfortable with the retained block of business for several reasons. First, our average benefit duration is significantly shorter than the rest of the industry. Our retained business has 55% of policies with benefits of less than one-year, 94% of policies with benefit durations of less than four years and only 2% of policies with lifetime benefits. This greatly reduces the tail risk associated with potential adverse deviations and experience.

We are comfortable with our current product offerings as a significant portion of our sales are either our short-term care product or our long-term care fundamental product that offers benefit periods of up to two years. Currently, approximately 98% of new sales have benefit durations of two years or less. In addition, we have reinsured a portion of our new business since 2008. We set reserve assumptions based upon significant incredible historical experience. We assume no mortality or morbidity improvement, limited benefit from future rate increases. And as part of year-end 2018 loss recognition testing, we lowered our ultimate new money rate assumption from 6.5% to 6%. Our retain business has a favorable economic profile. As of year-end 2018, GAAP loss recognition testing margins were $235 million or 13% of net GAAP liabilities, despite the reduction in the ultimate new money rate.

Statutory reserves, which tend to be more conservative than GAAP are approximately $40 million higher than GAAP. Total LTC reserves are now just 13% of overall CNO reserves. And lastly, but perhaps most importantly, tail risk associated with potential severe stress in claims and rates has been significantly reduced as a result of our recent reinsurance transaction.

Turning to Slide 15 in our investment results for the quarter. We put money to work at just about 5% in the quarter. We achieved this level, while continuing to emphasize up in quality in order to take a more defensive position in the portfolio. Should there be a turn in the credit cycle. Overall, investment income results continue to be strong with income benefiting from good performance in our alternatives and a higher level of call prepayment income. Impairments continue to be low, but equity market volatility in the quarter resulted in a $27.5 million negative mark-to-market adjustment on our GAAP income statement. Statutory results were impacted by a $74 million increase in unrealized losses, which negatively impacted RBC by 11 points.

Important to note that based upon performance in January 2019. We have seen a significant amount of recovery in these values. Before turning it back over to Gary, it is worth mentioning that we are aware of investor concerns regarding a potential turn in the credit cycle and life insurance companies exposures to certain assets and asset classes. We have added a couple of pages in the appendix of this presentation that specifically discuss CNO's exposure to BBB rated bonds.

In short, we are comfortable with our allocation to BBB's, and expectations for risk adjusted returns and performance across the credit cycle.

And with that, I'll turn it back over to Gary.

Gary C. Bhojwani -- Chief Executive Officer

Thanks, Erik. 2018 was a pivotal year for us and we made significant investments in the business and closed the fix and focus chapter of the CNO story. We have now turned our attention squarely to growing the franchise. As we look to 2019, our strategic priorities remain unchanged. We will continue to serve the middle-income market through our diverse distribution and continue to address their needs with our unique combination of both health and wealth product offerings and insurance and security solutions.

We entered 2019 with good momentum and the groundwork has been laid for continued strong performance. Many of the initiatives, I spoke about earlier, have just started to gain traction leaving significant runway for growth. We are building a stronger more competitive company and I'm very optimistic about our long-term prospects.

I would like to thank our Board of Directors, our leadership team and our associates for their steadfast dedication to serving consumers and their ongoing commitment to our success.

With that, let's open it up for questions. Operator?

Questions and Answers:

Operator

(Operator Instructions). And our first question comes from the line of Randy Binner from B Riley FBR. Your line is open.

Randy Binner -- FBR & Co. -- Analyst

Good morning. Thank you. So I have a question about the Medicare supplement line. So there's two pieces to it. One, I just wanted to confirm that the kind of the subject matter risk here is the continuation of the third quarter where there's physician administered drugs that I think are easier to take that are being prescribed more. So I want to know if that continues to be the case? Or if there's any kind of new development in the somewhat higher benefit ratio? And then the follow-up is, how -- can you explain and kind of detail how a repricing, like a rate refiling and then repricing effort on this product would work as we roll through 2019, assuming that the losses stayed elevated? When would you be able to file implement the rates, how would that roll out to the market et cetera?

Erik Helding -- Chief Financial Officer

Yes, Randy. This is Erik. Thanks for the question. So to answer the first part of your question. Yes, what we saw in the fourth quarter was largely a continuation of what we saw in the third quarter. So if you recall, in the third quarter, that was somewhat of a new level of experience and we needed to see another quarters worth of experts to determine if that was going to be a trend or if it was just a flip. And so with two quarters, it's unlikely that this is going to be a trend and that was the reason for increasing the guidance on the benefit ratio for 2019. To answer the second part of your question. So the process is, we will monitor experience here in the first quarter of 2019, the early part of the second quarter and then prepare rate filings which would go to the various states in the May's or June timeframe, with the idea that those would be effective on 1-1-2020. So to the extent this elevated level of claim experience that we saw in the second half of the year to extend that continues. That would get factored into repricing for 2020 and it's our expectations that we would sort of catch up to where we're behind, which is a couple of points in the benefit ratio right now.

Randy Binner -- FBR & Co. -- Analyst

Okay. But I guess the follow-up there is if it's effective 1-1-20, do these -- are these products sold kind of ratably throughout the year or there are times of the year where you sell more?

Erik Helding -- Chief Financial Officer

The products are sold ratably throughout the year, but pricing for any given year is set once a year.

Gary C. Bhojwani -- Chief Executive Officer

Yes, they are available throughout the year, but the bulk of the volume will come during the annual enrollment period in terms of your new sales, which comes in the latter portion of the year.

Randy Binner -- FBR & Co. -- Analyst

Yes. So people still kind of make these decisions, when everyone else makes their decisions kind of in November-December. So that will -- if you do need new prices, but those prices being affect for that next open enrollment period?

Gary C. Bhojwani -- Chief Executive Officer

Yes.

Randy Binner -- FBR & Co. -- Analyst

Yes. Okay, thank you.

Operator

Our next question comes from the line of Ryan Krueger from KBW. Your line is open.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Hi, thanks. Good morning. Could you give a sense of how much the RBC ratio has rebounded as you mentioned from market moves and then in January? And then also, how are you thinking about the right RBC target following tax reform?

Erik Helding -- Chief Financial Officer

Yes, Ryan. This is Erik. Thank for the question. So roughly recovery is about 10 points give or take a point or two. So I would expect that as we roll through the first quarter everything else equal that we would report benefit ratio that would be in the low 400s. In terms of the go forward, I'd say, at all the times, I think we're going to target -- excuse me, an RBC target that's going to be no lower than 400%. Practically speaking though as we, from a longer-term perspective, we're going to want to operate with some buffer against that 400%, And so we've talked about a 425% target, which is after giving effect for the tax reform changes that were just recently rolled through. So I would expect us to be managing to somewhere between 400% and 425% over the longer term.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Got it, thanks. And then on the investment portfolio. Could you just provide a bit more detail on the ABS portfolio, the types of collateral within that portfolio and as well as the ratings profile?

Eric R. Johnson -- Chief Investment Officer and President

Yes. Hi, good morning. This is Eric Johnson. ABS portfolio is quite diversified. For example, we have a fairly significant amount of what we call esoteric ABS, which would be things like whole business securitization, cellphone premiums securitizations and other types of esoteric. We don't do a whole lot of the more around less tested products like we don't do solar or other types of ABS. We also have a limited amount of airline lease ABS, it's a fairly small portfolio. We have something SFR securities and it's quite a diverse portfolio , with no single allocation that is substantial as a percent of overall invested assets. Within that you might there are -- you could characterize also a portfolio of, there's some consumer loan on ABS, which tend to be a very highly rated and not new entrants into the market. And then lastly, there's a certain amount of legacy well seasoned subprime securities as well. So within the overall allocation that's it's probably roughly 45% of invested assets, it's got a quite diversified footprint.

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Okay, great. Thank you.

Eric R. Johnson -- Chief Investment Officer and President

You're welcome.

Operator

Our next question comes from the line of Humphrey Lee from Dowling & Partners. Your line is open.

Humphrey Lee -- Dowling & Partners -- Analyst

Good morning, and thank you for taking my questions. Just to follow on Randy's question related to the Medicare supplement. Just looking at the benefit ratio of 73% to 77% for 2019, it looks like there, you are expecting some deterioration from 2018 level just because I think 2018 you had the crossover activities driving the benefit ratio higher and I assume that's being repriced in 2018. So it looks like you are expecting further deterioration. If that's the case maybe I was just wondering if you can provide some additional color in terms of like why that would be your expectation?

Erik Helding -- Chief Financial Officer

Yes, Humphrey, I think -- this is Erik. Thanks for the question. So you may recall, at the end of 2017, we announced fourth quarter results, we actually increased the guidance for the Med supp benefit ratio from 70% to 73% to 71% to 74% and that was the reflect the expectation that we would have slightly higher low dollar claims related to crossover. And so we did see that come through. I would say we probably saw a little bit more than we were expecting. And so -- but that wasn't sort of a material factor in the benefit ratio performance for 2018. I think the real impact came from what we saw really in the second half of the year, which was the uptick in claims specifically related to some of these physician administered drug treatments. And so I think that's where the real divergence came from. If you look at full year results, it was about 74.5% and so we're pretty comfortable that the 73% to 77% range for 2019 should be pretty well dialed in.

Humphrey Lee -- Dowling & Partners -- Analyst

Okay. Shifting gears, looking at corporate the COLI return has been a source of earnings volatility for that segment and my understanding is that the COLI assets are invested in mutual funds. But I was just wondering if you can provide some detail in terms of the split between equity versus fixed income funds and how should we think about this sensitivity going forward?

Erik Helding -- Chief Financial Officer

Yes, Humphrey, This is Erik again. So the split -- the asset allocation currently is 55% equities, 45% fixed income and over the equities, I believe about 40% to 45% of that is domestic equities and the rest is international equities. So that's a pretty good allocation for us. We're pretty comfortable with it. Yes, you're right, there is some volatility, it's certainly manifest itself in our earnings and more so when there's a big movement in markets like we had in the fourth quarter and so. What we saw over the balance of 2018 was in some ways, just a mirror image of what we saw in 2017. So the result in 2017 were positive by almost about the same amount that they were negative in 2018. But we like this asset, it's attractive because it gives us exposure to alternatives and equities that we otherwise wouldn't be able to without in a very sort of capital-friendly way and it's also tax-advantaged as well.

Humphrey Lee -- Dowling & Partners -- Analyst

Can you provide an update in terms of the size of the COLI assets? I believe at the end of 2017, it was roughly kind of $160 million to $180 million. Is that kind of still the -- in the right ballpark, obviously, there is the market decline in '18, but how should we think about the size of that portfolio?

Erik Helding -- Chief Financial Officer

Yes, so net of the market decline, it's about $160 million.

Humphrey Lee -- Dowling & Partners -- Analyst

Okay, got it. Thank you.

Operator

Our next question comes from the line of Erik Bass from Autonomous Research. Your line is open.

Erik Bass -- Autonomous Research -- Analyst

Hi, thank you. I was hoping you could provide a bit more granular detail at the agent count at Bankers? And where we've seen the improvement in retention and recruiting? And in terms of the productivity improvement, is it broad-based or being driven primarily by the dual licensed agents?

Gary C. Bhojwani -- Chief Executive Officer

Hi, Erik, this is Gary. Thanks for joining us. So first of all, in terms of the Bankers productivity, just a a simple way to think about it, the total count of producing agents has gone up by 4%, but we've seen a significantly higher number of new sales specifically first-year premiums going up 24%. So just to give you a rough way to think about productivity, just the difference in those two, I'll give you a feel for that. In terms of where we've seen the greatest lift, I would have to say it's definitely with the dually licensed agents. Recall that they by themselves accounted for 51% of our annuity sales. It's only 13% of the agent population, but they accounted for 51% of the annuity sales and you saw how strongly the annuity sales are up. So clearly their productivity is the highest. Beyond that, I would tell you that we've talked about four or maybe six quarters or maybe even more about wanting to move to a model where we were in absolute terms, recruiting fewer folks having a higher yield, meaning, which will ultimately lead to a higher agent count and higher productivity. So we feel very good that the various pilots we put in place over the last four to six quarters are yielding those results.

Erik Bass -- Autonomous Research -- Analyst

Thank you. And you mentioned that you believe dual licensed agents can reach 20% over time. Why is this the right number and could it potentially go higher?

Gary C. Bhojwani -- Chief Executive Officer

Yes, it could potentially go higher. I mean -- one has to remember, we've never crossed this bridge before, this is new for us. We've built this broker-dealer two years ago, 2016 and we are just building it out. So could it conceivably go higher? Yes. We think 20% is a good range to guide people to. I would also point out that remember, in an ideal setting the agents that we bring in -- the new agents that we bring in, they long term see this as a career and long-term they want to get that dual licensure, but that's not the case for everybody. So we're trying to be somewhat conservative in terms of what we're guiding to, but I think, yes, it absolutely could go higher.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Tom Gallagher from Evercore. Your line is open.

Thomas Gallagher -- Evercore ISI -- Analyst

Good morning. Question for Erik. I just want to go through the cash flow and RBC, and make sure I'm thinking about this the right way. So this $350 million a year of free cash flow that you guys have highlighted, is it fair to say that given where your RBC is starting and if your target is 425%, that you would probably want to retain a $100 million or so of your free cash flow for 2019 to build RBC which would leave $250 million a year for common dividends and share repo. Is that a -- is that the right way to be thinking about it? Or would you make any adjustments to that?

Erik Helding -- Chief Financial Officer

Yes, Tom. This is Erik. Thanks for the questions. So I think in absolute terms, that's the correct math. I think the way that I think about it is we're going to manage on minimum of 400% which, again, I think we're going to get back to you here in the first quarter just by the lift in the equity markets that we've seen. And so I don't feel an immediate need to build back up to 425%. So I wouldn't -- I don't think of it in terms of, we have an immediate cash call of $100 million that's going to come out of free cash flow generation. I think we can build up capital slowly over time and the implication of that is that we don't have to slow down or stop anything from sort of an excess capital deployment perspective. Does that makes sense?

Thomas Gallagher -- Evercore ISI -- Analyst

That does and Gary, just following on your earlier comments about priorities with capital deployment. The -- I hear you on the evaluation of looking at the opportunities at a given moment. What's your view right now? Would it be heavily in favor of share repurchase over other alternatives? Or is it just really take each opportunity as it presents itself?

Gary C. Bhojwani -- Chief Executive Officer

Tom, thanks for the question. Look, right now, I think our stock represents a compelling opportunity and we're considering that and we think that we've got an opportunity here. We're also regularly looking at external opportunities, and we just have to assess each one on a risk adjusted basis case by case. I'm sorry, I can't give you more color than that.

Thomas Gallagher -- Evercore ISI -- Analyst

No, I hear you on that. I guess final question, just on the Medicare supplement repricing, can you talk a bit about what level of rate will you be repricing for? Does that put you in a competitive disadvantage at all, if you think about competition? And the reason I ask, I just want to understand whether there is risk of lapse is going up, based on the level of rate, you're getting and maybe a bit of a -- any comments you have or thoughts on the revenue side whether you think retention will remain OK or whether you think there's some risk there?

Erik Helding -- Chief Financial Officer

Yes. Tom, this is Erik. So to answer your question, I'm not going to speak specifically to what rate we're going to file for or what benefit ratio we're going to target and that's obvious for obvious sort of competitive reasons I think. The point that you make is a fair one. So as we contemplate rate increases that we will file for, we have to keep in mind a couple of things, one is, those rates translate into what rates will be charged for new business, but the inforce as well. And so the inforce dynamic there is what is the implication going to be to persistency. And so we look back at historical experience in terms of rate increases that we've taken at various levels and what impact that had on persistency. And then we look at sort of external factors and then bring that all together to assess, what's the best potential outcome for the company based on all those factors. So sort of multivariate analysis, but all of that goes into our factors into determining rate increases for the upcoming year.

Gary C. Bhojwani -- Chief Executive Officer

Hey, Tom -- this is Gary. I want to jump in here. I've had a chance this morning to skim some of the write-ups I've seen from different analysts and there is a dimension here that even and listening to this line of questioning that I want to, I guess, I want to offer a slightly different perspective, because I feel like the focus on our Med supp is missing a key issue. Would we have preferred not to have had the benefit ratio come in where it wasn't had, prefer to have had a closer to our initial expectations? Of course, OK. So we would have like that, but something else has happened at the same time that has been in my opinion at least a very material benefit in the other direction. There has been a shift in consumer preferences away from Med supp to Med Advantage. There's a lot of reasons for that, we can talk about that if you're interested, but the consumers have shifted and we've been in a position to capitalize on that shift. You saw the extremely strong growth in our Medicare Advantage. Now the reason that's important and the reason I want to draw your attention on that, remember that the Medicare supplement of the Medicare Advantage that's very often, frankly the majority of the time how are Bankers' agents first get into a household. So the importance of the Med supp of the Med Advantage is getting into that household, opening up the relationship and then positioning us to sell life for long-term care, or annuities, or pick the product. And in all of this focus on the Med supp which trust us, we're on top of we need to fix pricing, we will get this right, but in all of our focus on that, I want to make sure we haven't lost sight of the fact that the Med Advantage sales were up very strongly. We are up very significantly in opening up new households which positions us very well for the future in all of the other products. So I want to make sure, again, I don't want to shy away from the Med supp benefit ratio, but I want to make sure we don't lose sight of what's happening with the bigger picture and getting into households with these Medicare-related products. Tom, does that makes sense?

Thomas Gallagher -- Evercore ISI -- Analyst

That does. Thanks, Gary. And just a quick follow-up on that, if -- is there a way you can dimension based on the momentum you're seeing on the Med Advantage versus the issues that you're having, just on the repricing Med supp when you balance them out from earnings and a margin standpoint if you look out over the next couple of years. Would you say, the growth you're seeing in Med Advantage could offset some of the near-term margin pressure from an earnings contribution? Or is it -- would you -- is it enough to offset that, that kind of one-year transition I guess is my question?

Gary C. Bhojwani -- Chief Executive Officer

We don't have a specific number for you, but let me just give you a perspective on that. When the Med supp is performing as expected, of course, we like it better, because we make an underwriting margin on it as well as the distribution margin. But our second best alternative is to sell the Med Advantage, which remember, the Med Advantage has a couple of other benefits to it. First it gets us in the household. We talked a little bit about that. Second, it allows us to use our NOLs because it's non-life income. Third, it's very helpful to our ROE because frankly there is no E tied up in this, this is strictly a distribution product. Now we could probably back into the math as to how much Med Advantage we've got to sell to be roughly equivalent to Med supp. But I think that misses the point, the broader point is, it's important for us to continue to get to the household because long term, where the money is and where the relationship is, is where all those other products are, that's the place we can be the greatest service to these middle-income consumers and we're still doing that albeit with Med Advantage as the entree as opposed to Med supp.

Thomas Gallagher -- Evercore ISI -- Analyst

Got you. Thank you.

Operator

Our next question comes from the line of Dan Bergman from Citi. Your line is open.

Daniel Bergman -- Citi -- Analyst

Thanks. Good morning. To start, it sounded like the long-term care reserve margin was largely unchanged, despite a reduction in the assumed new money rates. So just wanted to see if you could provide some more color overall, just on the assumption review for long-term care and what were some of the main moving pieces there any changes in assumptions we should be aware of?

Erik Helding -- Chief Financial Officer

Yes. Dan, this is Erik. Just in aggregate across all of our businesses year-end loss recognition testing results came in pretty strong. Our net GAAP -- margins as a percent of net GAAP liability are still about 22% and that was unchanged from last year. So pleased with the results there. For LTC, the retained block LTC specifically we were expecting about $235 million of margin or 13% of net GAAP liabilities as part of the announcing of the LTC reinsurance transaction that was sort of the pro forma amount that we were expecting and that did come in. We did lower the ultimate new money rate by 50 basis points. This is something that we have done periodically in the past and five, six years ago that was roughly 7.5% and we feel the 6% now is a good estimate based on where rates are and where the yield curve is. So that contributed to probably about $30 million or $40 million decline in the margin, but the experience across all of our other assumptions. So mortality, morbidity, persistency and expenses basically netted that out and there was not really one big bucket that sort of stood out among those.

Daniel Bergman -- Citi -- Analyst

Got it. thanks. And then maybe just shifting gears, it look like there is a pretty big jump in the annuity collected premiums in the fourth quarter to the -- the highest quarterly level is what I can remember. So just wanted to see if you could provide some more color on what drove the strength in that line item in the quarter and any thoughts you had around whether the current sales were sustainable and just how we should think about that going forward?

Gary C. Bhojwani -- Chief Executive Officer

Yes, thanks for the question. This is Gary. I think there's a number of things going on. The first is, remember that we have an emphasis to take our existing insurance agents and continue to have the appropriately qualified and interested folks of become dually licensed. And so when they start talking to folks about their overall financial needs, naturally they're able to talk about products like annuities. So as we get more and more agents to become licensed financial professionals, they're able to talk about a multitude of products, so that's going to drive some demand. You have a macro economic tailwind as far as annuities go, conventional wisdom says that fixed index annuities do better when there's a lot of stock market volatility because consumers are looking for safety. So clearly over the last quarter, that's been a tailwind for us. We can look also at the overall industry and see what the sales have been, there have been some mixed results with by and large, at least the reports that I have read. Many of our competitors are offering or posting good annuity results. And what that means. Besides the macro factors, that also means that consumers may be hearing about fixed index annuities from their friends or acquaintances or what have you. So there's a number of different tailwinds that are helping us out here. We think we're doing a good job with this and we believe this is really a significant opportunity in the future for us.

Daniel Bergman -- Citi -- Analyst

Great. Thanks so much.

Operator

Our next question comes from the line of Alex Scott from Goldman Sachs. Your line is open.

Alex Scott -- Goldman Sachs -- Analyst

Hi, good morning. The first question I had was just follow-up on the fixed index annuities. I guess, I'd just be interested to hear about sort of the spread levels you're achieving there the targeted IRRs. Some of the things that we don't have quite as much disclosure on in the supplement, just to understand the kind of pricing you're achieving with this kind of growth?

Erik Helding -- Chief Financial Officer

Yes. Hi, Alex, this is Erik. Thanks for the question. So I'm just going to speak in general terms the spreads that we're achieving in both our fixed interest and fixed indexed annuities are in line with pricing or slightly better. So we're very satisfied with where we stand there.

Alex Scott -- Goldman Sachs -- Analyst

And I mean the new money yields assumed in your pricing, I mean is that consistent with sort of the new money yields you're showing overall?

Erik Helding -- Chief Financial Officer

We typically assume a slightly lower new money yield that goes into the pricing of the product than what sort of the overall CNO corporate number is.

Alex Scott -- Goldman Sachs -- Analyst

Okay. And then maybe one more on life. That was a place for sales growth kind of continues to drag a bit. Would just be interested in your view on sort of the direction of life sales. If you think some of this Medicare Advantage is going to help turn that around and -- or if we're just going to see a bigger mix shift toward fixed index annuities over the life insurance overtime?

Gary C. Bhojwani -- Chief Executive Officer

So, Alex, there's a couple of ways that I'd answer this. So first of all, in looking at what happened at life insurance bankers, it's a little bit of a mixed bag and let me elaborate on that. We implemented a number of underwriting corrections or enhancements I guess that we believe will have a material impact in the future. We believe our life insurance book will continue to get more profitable, but the net effect of that was more declinations in the near term. Now the reason I say, it's a mixed bag, when you look specifically at the number of applications that came in from our field, particularly in the second half of the year, they actually went up. So our field is still out there talking to consumers about if they are satisfy, the need of the applications went up, but in the case of Bankers Life at least, we actually just had more declinations because of an underwriting change that long term we think will be very good. And as you know from our results, our life book is already performing quite well. But we felt that this was an important thing to do. Now if I pivot over to Colonial Penn, obviously, we are seeing growth there, that's life insurance growth. And then if you look at Washington National, we've seen very substantial growth where we've had controlled captive distribution that has been historically focused strictly on supplemental health. We finally been able to break through and have that distribution start working on more life sales and you recall some of the life cross selling numbers that I shared with you. So we see an opportunity to grow life. Now all of that said, all of that said, my personal belief is that the middle-income consumer longer term there -- they have more needs for income, accumulation and longevity as opposed to mortality and morbidity. So I think there's this constant push simply because of what their needs are and how they need to plan for retirement toward products like annuities, or short-term care or combo products similar things like that. So I think there is a consumer force that's going to come in. But in terms of what I'm seeing with our distribution force and how they're reacting and what they're out there talking to consumers about, I feel very good about what those numbers are.

Alex Scott -- Goldman Sachs -- Analyst

All right, thanks very much.

Operator

Our last question comes from the line of Jeff Schmitt from William Blair. Your line is open.

Jeff Schmitt -- William Blair & Company LLC -- Analyst

Hi, good morning, everyone. Looking at fee revenue in Bankers Life, which I think is that distribution income of the Medicare Advantage product. Why is that down 5% where Medicare Advantage issuing policies were up I think 34%. What's that drives the difference there?

Erik Helding -- Chief Financial Officer

Hey, Jeff, this is Erik. Thanks for that question. I believe the bulk of the difference actually has to do with -- at the beginning of this year, we implemented new revenue recognition rules related to fee income. And so in the prior year, we were basically recognizing revenue sort of on a quarterly basis in equal installments. And this year 2018 and going forward now that'll all get recognized sort of at the point of sale. And so in the first quarter, that tends to be related to open enrollment obviously that's where a lot of the activity is and so that's where a lot of the fee that we collect and the commission that we pay gets recognized.

Jeff Schmitt -- William Blair & Company LLC -- Analyst

Got it, OK. So more of a timing issue.

Erik Helding -- Chief Financial Officer

Yes.

Jeff Schmitt -- William Blair & Company LLC -- Analyst

And then looking at the agent levels in Washington National up a fair amount I think 6% the quarterly average. Can you maybe talk about your efforts there?

Erik Helding -- Chief Financial Officer

Yes. In the case of Washington National, I would break it up into a few different buckets. So first of all, we had within our PMA channel our work sites distribution force was up quite strongly. They were up very, very significantly, and performed very, very well. Our consumer focused area within PMA did not perform as well. So the two netted each other out for a slight positive in the aggregate. And then finally, with our independent agents, we saw a bit of an increase there. So that's the composition of it. In terms of going forward, I believe we have an opportunity in all three categories, meeting the independent agents at Washington, given some of the enhancements we've put in place as well as PMA. We've recently made some leadership changes and so on, and I'm very hopeful for what we will be delivering there in terms of agent counts.

Jeff Schmitt -- William Blair & Company LLC -- Analyst

Okay. Thank you.

Operator

And there are no further questions at this time. I will turn the call back over to Jennifer Childe for closing remarks.

Jennifer Childe -- Vice President of Investor Relations

Thanks everyone for your interest in CNO and we look forward to speaking with you again soon.

Operator

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

Duration: 52 minutes

Call participants:

Jennifer Childe -- Vice President of Investor Relations

Gary C. Bhojwani -- Chief Executive Officer

Erik Helding -- Chief Financial Officer

Randy Binner -- FBR & Co. -- Analyst

Ryan Krueger -- Keefe, Bruyette & Woods -- Analyst

Eric R. Johnson -- Chief Investment Officer and President

Humphrey Lee -- Dowling & Partners -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Thomas Gallagher -- Evercore ISI -- Analyst

Daniel Bergman -- Citi -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

Jeff Schmitt -- William Blair & Company LLC -- Analyst

More CNO analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.