Ladies and gentlemen, thank you for standing by and welcome to the CNO Financial Third Quarter Earnings Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Jennifer Childe VP of Investor Relations. Please go ahead..

Thank you, Denise. Good morning and thank you for joining us on CNO Financial Group's Third Quarter 2019 Earnings Conference Call. Today's presentation will include remarks from Gary Bhojwani Chief Executive Officer; and Paul McDonough Chief Financial Officer.

Following the presentation we will also have several other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting the Media section of our website at cnoinc.com.

This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K yesterday. We expect to file our Form 10-Q and post it on our website on or before November 7.

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 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 financial 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 third quarter 2018 and third quarter 2019. And with that I'll turn it over to Gary..

One sales of our hospital insurance product which we launched in the fourth quarter of 2018; two our continued focus on growing life insurance sales; and three the sale of the Bankers Life short-term care products. Our geographic expansion initiatives have also been successful comprising 5% of both third quarter and year-to-date NAP.

Worksite sales were up 19% marking the sixth consecutive quarter of double-digit growth. Worksite now comprises roughly 50% of Washington National sales. This business is also benefited from strong recruiting over the past several quarters including a 16% increase in the worksite agent count this quarter.

The individual business saw a marked improvement in the third quarter with sales essentially flat year-over-year. This compares to double-digit declines in recent quarters. We are encouraged by the progress made in the third quarter.

However we still anticipate sales pressure for the foreseeable future as farm and rural communities continue to face challenges. Finally the integration process at a Web Benefits Design continues to run smoothly with all back office consolidation activities tracking as planned.

Recall that WBD is the worksite technology platform that we acquired at the end of April. While still very early in the process we are starting to see initial success in our cross-selling efforts. We will provide more detail on future calls. Turning to Colonial Penn.

Colonial Penn our direct-to-consumer channel delivered record-setting third quarter sales. NAP was up 1% on top of 19% growth in the third quarter of 2018. The strong sales growth in recent quarters coupled with solid persistency drove 11% growth in first year collected premium and 4% growth in total collected premiums in the quarter.

During the quarter we expanded the rollout of our Living Insurance product and it is now available in 47 states and the District of Columbia. As a reminder Living Insurance combines simplified issue life insurance products with optional accelerated health benefit riders.

This product addresses a key need of the middle market and is consistent with our expand to the right strategy. Colonial Penn is piloting third-party direct-to-consumer Medicare Advantage sales with Humana through our telesales force.

We are excited about this product expansion opportunity that augments our ability to serve the needs of middle market seniors and other Medicare eligible customers. It is an example of how we are leveraging our strong consumer brand and valuable direct-to-consumer distribution channel to sell both manufactured and third-party products.

Colonial Penn handles approximately 1.5 million customer phone calls and more than 2 million unique visitors to our colonialpenn.com website each year. We are also completing 5000 web chat sessions per month with prospective customers. The combination of these consumer touch points makes us a top 5 direct-to-consumer life insurer.

We intend to make further investments in our web and digital platforms to enhance the customer experience improve retention and expand capabilities. We expect our direct-to-consumer channel to play an increasingly important role in our future as we evolve to offer a multichannel customer experience.

Ultimately we envision customers moving seamlessly through the buying experience across all of our distribution channels. This cross-brand collaboration has been underway for some time. Leads generated by Colonial Penn have been an important and growing source of new business for Bankers Life agents.

Recently we also began providing Colonial Penn's call center support to WBD to both leverage our expertise and generate expense efficiencies. We intend to drive more collaboration and generate additional synergies between all of our insurance brands in the future. Moving to slide 10.

Before I turn it over to Paul I'd like to remind you of our capital allocation strategy. We are committed to deploying 100% of our excess capital to its highest and best use over time. Our goal remains unchanged to maximize return on invested capital over the long run. We will continue to weigh our options accordingly.

Our capital position remains strong. With our shares trading at an average discount to book value of approximately 20% during the quarter we accelerated our buyback activity repurchasing $75 million in the third quarter. It's been more than three years since CNO has deployed this level of capital on share repurchases in a single quarter.

Year-to-date we have returned $228 million to shareholders including $177 million in share repurchases. As long as our stock remains highly undervalued and trades at a significant discount to book value we intend to use these -- to use share repurchases as our primary vehicle for excess capital deployment.

With that, I'll now turn it over to Paul to discuss the financials.

Paul?.

Thanks, Gary and good morning, everyone. Turning to the financial highlights on Slide 11. Operating income per diluted share adjusting for the long-term care transaction in Q3 '18 was down $0.07 or 13% year-over-year.

The impact of lower market yields on investment income and spreads including the impact of our first quarter '19 up in quality trade was approximately $0.08 per diluted share in third quarter '19 compared to third quarter '18. Year-to-date our operating earnings per share were down 3.6%.

The decline in interest rates had an adverse effect on non-operating earnings in the quarter with a favorable impact on AOCI. Operating return on equity excluding significant items was 10.6% in the trailing 12 months ended September 30 2019 compared to 10% in the prior year period and 10.9% at June 30 2019.

Holding company cash and investments were $260 million essentially flat with levels at the end of the second quarter. As Gary stated we repurchased $75 million of stock in the third quarter. For the past 12 months we've repurchased $218 million reducing our weighted average share count by 6%.

CNO's estimated consolidated risk-based capital ratio is 405% down slightly from 409% at the end of the second quarter but within our targeted range. Statutory earnings and capital were $44 million and $1.7 billion respectively.

As I've mentioned in previous quarters we are reviewing our capital and liquidity targets in the context of our peers rating agency views and from our own enterprise risk management perspectives.

I expect we'll complete that work during the fourth quarter of this year and we'll be prepared to share our conclusions on the fourth quarter earnings call early next year.

Until then our targets remain unchanged specifically RBC in the 400% to 425% range; minimum holding company liquidity of $150 million and debt to total capital excluding AOCI between 22% and 25%. Turning to Slide 12 and segment earnings. The decline in investment income in the quarter impacted each of our operating segments.

Bankers Life earnings in the third quarter were down $15.5 million or 16% year-over-year. Earnings benefited from an increase in fee revenue and other income which was more than offset by lower investment income and an increase in operating expenses driven by technology investments and other growth initiatives.

Fee income in the quarter reflects growth in Medicare Advantage sales and growth in our broker dealer. Sequentially expenses declined in Q3 from Q2 2019 as expected. We continue to expect Bankers operating expenses for the remainder of the year to be essentially flat with second quarter levels.

Washington Nationals earnings in the period were down $3.5 million or 12% as increased policy income and favorable claims experience were offset by lower investment income and higher operating expenses including those associated with recent growth initiatives. Colonial Penn's earnings were down $2.4 million due to increased marketing expense.

As a reminder a majority of Colonial Penn's advertising spend is not capitalized and deferred which impact short-term earnings. In-force earnings which excludes the impact from the advertising spend grew 2% over the prior year to $19.1 million.

We now expect Colonial's Penn -- Colonial Penn's full year EBIT to be in the range of $12 million to $16 million narrowed from the previous guidance range of $12 million to $20 million as a result of higher year-to-date cost effective marketing spend supporting 12% year-to-date sales growth.

Earnings from long-term care in run-off was $3.6 million up from $2.1 million in the prior period. We continue to expect this segment to report normalized earnings of roughly breakeven but quarterly results can be volatile. Turning to slide 13 and our key health benefit ratios. Bankers Life Medicare Supplement benefit ratio was 74.9%.

This is consistent with the seasonally higher patterns we typically experience in the third and fourth quarters and in line with our guidance of 73% to 77%. Bankers Life long-term care interest-adjusted benefit ratio for the retained block of business was 78.7% essentially flat to last year and in line with our expected range of 74% to 79%.

As a reminder due to the smaller size of the block in the wake of the long-term care transaction last year a 100 basis point move in the benefit ratio translates to just $600000 pretax. We also expect more variation in the benefit ratio from quarter-to-quarter as a result of the smaller base while remaining within our expected range.

Washington National supplemental health interest-adjusted benefit ratio was 55.4% down 150 basis points year-over-year due to favorable claims experience and in line with our guidance of 55% to 58%. Turning to slide 14 and our investment results for the quarter.

Adjusting for the long-term care transaction in Q3 '18 our net investment income is down year-over-year in spite of an increase in average invested assets. This is attributable to a decline in earned yield which reflects the up in quality repositioning the portfolio in Q1 of this year together with lower rates and tighter spreads.

Recall that during Q1 of this year we reduced our allocation to BBB corporate bonds by roughly $1 billion to 39% of our fixed income portfolio and cut our equity investment in CLO equity tranche investment substantially. We did not undertake any significant additional repositioning of the overall portfolio in the second or third quarters.

Sequentially our third quarter earned yield was also impacted by lower prepayment activity which declined from $5.4 million in the second quarter to $3 million in the third quarter. Before turning it over I'd like to make a few comments about the technology partnership Gary mentioned.

Partnership is expected to deliver $20 million in savings in years 2021 through 2024 but no material savings in 2020. The agreement and associated restructuring costs resulted in approximately $2 million charge to non-operating earnings in the third quarter. And with that, I'll turn it back over to Gary..

Thanks, Paul. For the past five quarters we've been talking with you about growth. We are clearly delivering on that objective from a topline perspective. Now while maintaining that performance we intend to turn more of our attention to enterprise efficiency and dropping more of that growth to the bottom line.

Last quarter I shared with you that we're taking a hard look at how we manage the business as well as our overall cost structure. This is especially important given the interest rate headwinds that the industry is facing.

One immediate example of the technology partnership we announced today which will generate $20 million of cost savings while making our IT delivery more effective. This is just one step in our efforts to aggressively manage costs. We continue to assess other opportunities to streamline the business and drive efficiencies.

These actions allow us to redirect resources to better serve the middle-income market while improving our financial results and driving sustainable value for our stakeholders. We will have more to say on this in the next several quarters.

Before we open it up for questions I want to make you aware of the Analyst Day we have scheduled for February 26 2020 in New York. We will share more details with you over the next several weeks. Thank you for your interest in CNO Financial group. We will now open it up for questions.

Operator?.

Thank you,.

[Operator Instructions] Your first question comes from Dan Bergman with Citi. Your line is open..

Thanks.

Good morning, I guess to start I just wanted to see if there's any color you can provide on the outlook for net investment income any -- absent any changes in the rate backdrop or other factors is the 5 basis point sequential decline we saw in the third quarter in the book yield the reasonable expectation for what we should we expect going forward?.

Yes, sure. Good morning. This is Eric Johnson speaking. Last quarter I think I mentioned that it would -- kind of be reasonable to expect a single-digit handful erosion on a quarterly basis of book yield and current market conditions.

I see no reason to change that kind of rule of thumb right now because I don't think we are in the midst of any changes in investment strategy that would lead to a different result.

Yes the number was 5 basis points in the third quarter it was 7 in the second quarter and I think it will be less than the second quarter in the context of my earlier comments. Yes. As regarding variable income the word variable implies that it is what it is.

We've had a really good run in variable income over the last couple of years with the fourth quarter of last year being more difficult than this year year-to-date being pretty reasonable although with some noise.

And I think circumstances as I see right now suggest unless something falls off the table in Washington or somewhere else that we ought to be kind of have a decent fourth quarter as well although there's -- that's not a certainty..

It's very helpful. And that maybe a related more kind of high-level question.

How should we be thinking about the tools that you have at your disposal to offset the pressure earlier that we're seeing across the industry from lower interest rates? Is it mainly cost savings? Are there other levers we should be thinking of? Just any thoughts on kind of those factors and how much of the rate pressure you think we -- you can offset over time? And how much of a lag we might expect before any actions can have a material effect?.

I'll speak maybe to it generally and then if Eric wants to add anything further in the investment area I'll let him do that. I think at a high level I would say that we're always looking for ways to optimize our business and drive shareholder value. We feel like our first priority was to really get consistent topline growth.

We've done that for several quarters now. And now I think we need to pivot to maintaining that topline growth but get laser-focused on driving efficiencies. So that's really the next step for us. And the fact that we've got this challenging investment environment makes that even more critical.

We don't have anything else to share today in terms of the specific tools that we want to use or the levers we want to pull. But I would point you to the IT change we announced today as an example of the different types of things we're considering.

And we're clearly foreshadowing that we recognize how important this is and we've got other things that we're working on. But that's all we can say at the moment..

Dan, it's Paul. I would just add that in addition to managing expenses and getting more efficient and therefore driving earnings growth on the margin. The other obvious big tool that we have is on capital management. Certainly we'll continue to be thoughtful about how we're deploying our excess capital largely through share repurchase on the margin.

Of course we accelerated that a bit in Q3 of this year in the context of where our stock is trading. The other thing we're doing as I'd mentioned on the last 2 calls is looking at whether it may be appropriate to reduce our target capital. Obviously we have to get comfortable with that ourselves that analysis is ongoing.

We'd also need to make sure that the rating agencies agree with any conclusion we may arrive at there. But to the extent that there is room there that on the margin would free up capital and drive a higher ROE..

Yes. You know what Paul and Dan, there is one another thing -- this is Gary. Again I'd like to add I should have said this earlier. There's a lot of focus appropriately on the macroeconomic environment and the pressure that investment results and interest rates and so on are exerting. I think that's all very fair for people to be concerned about.

But I want to make sure in the midst of talking about those things we don't lose sight of the fact that Eric and his team and our investment area have done a pretty darn good job.

As much as it pains me to give him compliments when he's sitting next to me I think we've got to acknowledge that the result of a new money rate and so on the team there does a pretty job as compared to other players or just about any reasonable benchmark you want to look at.

So I want to make sure that doesn't get lost in our zeal to pursue all the areas we want to make better..

Very helpful. Thank you,.

Your next question comes from Randy Binner with B. Riley FBR. Your line is open..

Good morning. Thanks. I guess just to follow up on the $20 million cost-save initiatives over five years.

It -- so that is primarily an IT program and understanding Gary you said you might want to wait to share more details but just to kind of level set that so that's just an IT initiative; can you run through what processes might be streamlined there? And then to the extent you could kind of give examples of how that could expand over time would be helpful just to understand what the full impact might be of further cost-save initiatives..

Sure. Randy, this is Gary. So I'll talk about it at a high level and then Paul can supplement with any more data if he wants to. The first thing I would say is it's correct that it's strictly about IT. There are number of other areas within the organization where I think we can continue to improve our efficiencies.

But this is strictly in the IT area for now. And it's important to remember a few things. The first thing this is another step in our IT evolution. We began this process about five years ago with Cognizant. And that contract was coming up for renewal in early 2020. So I want to make sure I signal this correctly.

This isn't something entirely new this is the next step in the evolution that we began some time ago. We went through a pretty extensive evaluation and ended up choosing two partners Cognizant and HCL. Cognizant had been with us for five years. And they'll continue to provide delivery application development maintenance and testing.

HCL on the other hand has been at it. They're a new partner in this relationship and they'll be helping us with IT infrastructure operations and select cybersecurity services.

If you think about just for a moment how much cybersecurity has evolved just in the last few years you can understand the emphasis that -- and the cost that those types of things are placing on us.

So at a high level the way you should think about it we've undertaken this change or this evolution to enhance our speed to market to help enhance our customer experience and to drive down costs improvement and that cost improvement comes in 2 ways really some of it is just driving down cost and the other is cost avoidance because there are new technologies that need to be brought to bear as an example with cybersecurity that we're just not in a position to spend that kind of money to do.

So we'd rather partner with HCL and Cognizant to do that. So that's a high-level description Paul I'll pass it off to you if you want to throw any numbers in that or ....

Sure. I think we've given you the numbers Randy but I would just clarify or point out that the savings are simply a reflection of the pricing that's embedded in the contracts with our partners as well as concurrently we organized our own IT department and that translated into some savings as well..

Okay. And then just one on the coming open enrollment period.

Can you update us on any specific preparations you made for this open enrollment period? And expectations particularly around Medicare Advantage or Medicare Supp sales? That seemed -- Medicare seems to be a popular area for a lot of companies to focus on and you all have been doing it for a long time.

So I'm just kind of curious how you think this open enrollment period setting up for you and the Medicare products in general?.

Well, we're -- I think we're very pleased it's the first thing I would say. We've shared that at Bankers Life as an example the Med Advantage policies issued were up 56%. And that's before getting into the throes of the open enrollment period. So we think that that bodes very well.

And I would remind everybody that on average for every 3 Med Supp policies we sell at least 1 of those results in some type of a cross-sell. So we feel very good about the doors that are getting open and what that means for us. What's new this time around is the addition of Med Advantage on our Colonial Penn platform.

Now at the beginning that's relatively modest it's only 6 states. But if we have the kind of success that we anticipate I think it will build a really good foundation for us. Frankly I think that the 2019 results at Colonial Penn will be relatively modest because it's our go at it and we're learning how to position that on a direct-to-consumer basis.

But I think it will position us very well for 2020. So the short answer I would give you Randy is that we feel really good about the Med Supp and the Med Advantage results in Q3. And we see no reason why that shouldn't position us well for Q4..

Alright, thank you..

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

Hi, thank you. First, maybe a bigger picture question on kind of the interest rate drag.

And just wondering if you could quantify how much kind of an impact if rates remain at current levels it would have on quarterly earnings going forward assuming no offsets? And I know Eric has talked about the impact on book yields but I imagine some of the reason those are coming down is you're bringing on new assets and annuities and investing them at target spreads so that isn't necessarily a direct hit to earnings.

So if you could put it in an earnings lens that would be helpful..

Sure. So Eric, it's Paul. I -- So I guess I'd just first of all reiterate what Eric said relative to kind of trend line of our book yield and then the contribution of a variable investment income that translates to earned yield. And then obviously you can run that math through your models.

In terms of the impact of lower rates on spreads certainly we've had some modest spread compression I don't think I'll try to quantify that for you. But we have had some of that.

I guess I would emphasize there that notwithstanding some modest spread compression the returns on our spread business continues to be very favorable relative to our target returns..

Got it. And then maybe on Colonial Penn. It seems like a good story emerging there with volumes. Obviously it affects the GAAP earnings in the short run but I mean anything you can talk about how you see the in-force building given the sales volumes and kind of any outlook for expenses would be helpful there..

Yes, I'll comment at a high level and then Paul can share some numbers perhaps. I'm very pleased with the way the Colonial Penn business is evolving.

And if you take a look at a high level this quarter the recap is that we miss consensus by $0.02 but half of that delta $0.01 was due to the Colonial Penn advertising expense that drove really good volumes. We're very pleased with that. Again we showed growth on top of a very tough comp from a year ago and we were still able to show growth.

And when I look at the persistency the in-force profit virtually any metric you want to think about in managing a business like this I'm extremely pleased. And frankly I would take that trade all day long again. I'd be happy to miss consensus again next quarter if a big chunk of it is due to building that Colonial Penn business.

We really like what's happening with the franchise. We like the way the direct-to-consumer response is working. We like what our telesales agents are doing. We like the increased chat online the 5000 chat sessions that we're doing a month. We really like the way the consumers are responding. So we want to keep building that out.

We think there's something there that's building very well. And again the persistency the in-force all of it is good and I'd make this trade all day long. I think it was money well spent and we'd do it again..

Got it. I wasn't sure if Paul had a follow-up or a comment..

No. I was just going to say I've got nothing to add to that..

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

Good morning, and thanks for taking my questions. In Gary's prepared remarks you talked about that you're seeing some early signs of success in terms of cross-selling through WBD.

I know it's still far too early to tell but can you elaborate on some of the success that you have seen and how we should think about it?.

Yes. Sure, Humphrey, this is Gary. Again, I'll just comment at a high level. It really goes back to the thesis that we had when we acquired Web Benefits.

We think the world of their technology we think that they've done a really good job building small nimble technology to serve firms that in some cases are multinational firms they've really built a fantastic tool there. And when I think about the potential for cross-sell and this is exactly what we're seeing happen.

We're seeing some of our existing worksite agents. And remember our worksite business has been growing double digits for 6 quarters now. We're seeing some of those worksite agents get into accounts that they couldn't get into before because they didn't have a technology solution.

So we're seeing them get into those accounts and being able to use WBD's platform. We're also seeing some of the agents that were existing with WBD that previously were quoting business that wasn't related to Washington National now actually putting Washington National into their mix.

It's way too early for us to really share a lot of numbers but I can tell you that we're very pleased. And the fundamental thesis of those 2 areas of cross-selling meaning our existing agents using their platform and their existing distribution points using our insurance company business or insurance products those 2 theses are holding up.

It's way too early yet but we're seeing early traction on those so I'm very pleased with that and look forward to being able -- I would guess within 2 to 4 quarters to have numbers that are sufficiently mature that it make sense to start sharing just as we did with the broker dealer where we waited roughly 4 quarters and then we started sharing more data..

Appreciate that color. And then a follow-up to kind of the enrollment period especially with Medicare Supplement.

Given some of the dynamics going through this year I was just wondering if you are looking in terms of pricing are you looking at any kind of rate increases kind of factoring into your pricing as you go into the enrollment period?.

We did the -- actually, I'll let Paul speak to that. He's got the data..

Good morning, Humphrey. We -- as I mentioned on the second quarter call we did file rate increases effective January of 2020 in the neighborhood of 7%. Obviously those are subject to regulatory approval. But fairly consistent with the prior period rate increases which were approved and so that's in place..

So the filing and the approval were largely in line with your expectation?.

Yes. So just to be clear we filed -- I think we filed back in June July time frame for rates effective January of 2020. I don't think those have been decided on by the regulators yet so that's subject to their approval. I guess what I'm signaling is I think by and large what we filed will ultimately we approved..

We're not seeing any reason why they shouldn't be. We don't think there was anything really out of the ordinary in terms of the requests. So we wouldn't expect there to be any problems..

Got it. So in terms -- if you were able to get the rate increase that you asked for.

Do you expect Medicare Supplement benefit ratio to be closer to a few years back kind of more 71% to 74% range as opposed to kind of the more recent elevated range?.

I'm pretty comfortable with the guidance we provide. And just to give you kind of the way I think about it we have a stated range of 73% to 77% so that's a 4% window. That is less than $8 million.

In any given quarter trying to predict that with more precision than that I think it's pretty tough too especially if you take the midpoint meaning it's plus or minus then you're talking about a $4 million swing on a book of this size in a given quarter I wouldn't want to try and refine that estimate I'm comfortable with that range..

Okay. All right. Thank you. Your next question comes from Alex Scott from Goldman Sachs..

Good morning. First one I had was just on the sales progress. And the growth numbers for some of these product lines are pretty big on sales.

I guess when I look at premiums and fees and kind of separate that from net investment income like how would I -- how should I expect that that net annualized premium that you're adding is going to earn in and comparing that with sort of the persistency what's rolling off? And what's the reasonable way to think about how all this is going to translate into like actual like premiums and fee growth? And I know that question is probably a little unfair too because the net investment income I know probably benefits from what you're doing on the fixed indexed annuity side as well.

Good morning, Alex. It's Paul. I think that's a clever way to ask us to provide guidance which is as you know we're not doing. I think I just have to ask you to run your own estimates through your model. We certainly think that the growth that we put up in the last 5 quarters has some sustainability to them.

And since we're not providing guidance I have to put it back on you to make your own projections..

Understood, and yes apologies. I guess, maybe -- let me try it this way.

Can you talk about persistency how that's been trending and what kind of drag did that piece of it would cause?.

Yes. So I won't quote specific numbers Alex. But I don't think that we're seeing anything that would cause recent trends to deviate meaningfully from where they've been,.

Got you, okay. And then the next lesson I had is just on the reallocation and the impact it's having on net investment income. I get what that's doing to net investment income and earnings right now. You guys talked a lot about that I guess.

Can you talk about how that plays into the decisions you're making on RBC like does that play into where you think you can target RBC? And I just want to make sure I'm not dinging you for the net investment income but maybe not giving the benefits and associated with potentially freeing up capital from these actions and being able to buy back stock at -- or deploy some other means as an offset,.

Sure. So certainly our target capital is a function of our risk profile and part of our risk profile is the risk inherent in our investment portfolio. We reallocated back in Q1 that did free up some capital at that point in time. We don't expect to materially change the risk profile of the investment portfolio from where we sit today.

So that should be fairly static. But as we look more broadly at our business and the risk profile of our business that will inform our view of what an appropriate target capital should be. And again we'll -- once we reach that conclusion need to socialize it with the rating agencies before we do anything with any capital that's freed up..

All right. Thank you for the responses..

Thank you,.

[Operator Instructions] Your next question comes from Tom Gallagher with Evercore. Your line is open..

Thanks. So if I look at the -- Gary the comments you made on share repurchase and the way you're thinking about things here. This is obviously a very high buyback quarter at $75 million.

Is this a reasonable level to sustain for a while here? And the reason I ask that I was looking at your cash flow slide and if I just look at sources and uses you're actually not really drawing down any capital you're just using what you're generating at the current pace.

So curious how I should think about that? And then I guess the follow-up would just be if you do decide to draw down on excess capital would that we incremental to think about sizing of buybacks?.

I'll give you high-level response and then Paul will correct me when I screw it up. So let me first say we're very comfortable with the level of buybacks that we engaged in this past quarter.

If the market conditions remain as they are and if you guys keep undervaluing our stock I don't know if I'm allowed to say it's undervalued but I think it's undervalued. If the stock stayed at this current level we will continue to use buybacks as the primary tool to deploy that excess capital.

Now I don't want to get ahead of the work that Paul and the rest of the team have to do to assess our capital levels and really make decisions about how much capital we're going to have freed up in future quarters. So I don't want to get in to trying to project how long it's sustainable for and how much capital we'll have in future quarters.

I do want to make the observation that if you just bring a simplistic perspective to this we know that with our LTC transaction we're a less risky company. We know that with the moves that Eric Johnson has made relative to our BBB allocations we're a less risky company.

It seems to me that we ought to be able to make a pretty straightforward argument to the rating agencies about not needing to hold as much capital and we'll be very smart about how we deploy it.

The stock has been an incredibly compelling value for the last several quarters and we've reflected that with our actions much more than our words and I think we'll continue to do that.

So if it stays at these levels and market conditions remain as it is you should expect to -- for us to continue to take the appropriate actions just like we've done for the last several quarters..

That make sense. And then just a numbers question whether it's Eric or Paul. If you can at least -- maybe not validated the question I'm asking but at least tell me if I'm directionally of. The -- if I listen to Eric's comments about his expectation of sort of sequential drag on NII I'm coming up with something like $3 million to $4 million a quarter.

And that's just applying that 5 basis point or so sequential negative impact on an annualized basis. But then if you translate it to quarterly I get about $3 million or $4 million. I look at that earnings drag which amounts to call it 2% of EPS.

And then I compare that to buybacks and Gary if you continue to execute at this level it would give me a little over 3%. So it would look like if you -- if I'm doing that math correctly of the NII drag versus the buyback impact it looks like you'd be coming out net positive on an EPS basis.

I don't know if someone can clarify or help me quantify that..

Yes Tom, it's Eric.

You're entering into an area that is actually got a lot of knobs and moving dials on it because I think you are in the terms of rough approximate general sizing I think you're doing your math right product with the exception that you're probably not including how you think about the factor for AUM growth and how that impacts that is -- which has to do with sales but also has to do with retention and that inserts complexity.

And then you have the variable aspects of income as well which are to a degree market -- actually very market sensitive. So I think you're thinking about it correctly but over a very short period of time that's the calculation that can have a pretty decent range of outcomes. Although if you look at it over a year or so it's pretty predictable.

But in a given quarter what we call your effective yield can leap around quite a bit based on the things I just mentioned..

Okay, thanks..

There are no further questions coming up at this time. I'll turn the call back over to the presenters..

Thank you for joining us all today. We look forward to speaking with you again in the future..

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