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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Jennifer Childe, Vice President of Investor Relations, please go ahead.
Thank you, Emily. Good afternoon, 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, 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 post it 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 presentations, we will be making performance comparisons. Unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2017 and fourth quarter 2018. With that, I'll turn the call over to Gary.
Thank you, Jennifer. Good morning, 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 have 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 six 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 at our 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 agents and web technology enhancements to improve the customer experience and increase lead productivity. Turning to slide seven. Within Bankers Life, ongoing investments in agent recruiting and retention initiatives continue to generate positive results and help 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 and 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 of 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 eight in 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 a successful 14-state geographic expansion program. Since we only recently entered these new states, our market penetration still remains low, leaving significant future opportunities for growth. We are 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 nine in 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 towards growing the business, when our shares are trading at a significant discount to book value, we recognize that we would be hard-pressed to find an acquisition or internal investment that could generate a similar or better risk-adjusted return. As I mentioned, we took advantage of market volatility and a 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 towards 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?
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 indexed 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 markets 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-effective advertising spend, which resulted in increased sales. We expect Colonial Penn's EBIT to be in the $12 million-$20 million range for 2019, due to the seasonality of television advertising spend, we expect a loss of $1 million-$3 million in the first quarter. LTC and 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 and 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 B plans.
This is the second consecutive quarter of experiencing higher claims, and 2019 premium rates are already locked in, we expect the Medicare Supplement benefit ratio will be in the 73%-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%-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%-58% range for 2019. Let me take a moment to reiterate a few key characteristics of our Bankers Life retained LTC business. 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 in 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 and credible 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%-6%. Our retained 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. 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 and 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, 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 BBBs and expectations for risk-adjusted returns and performance across the credit cycle.
With that, I'll turn it back over to Gary.
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 enter 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 am 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?
At this time, if you would like to ask a question over the phone, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Randy Binner from B. Riley FBR. Your line is open.
Good morning. Thank you. I have a question about the Medicare Supplement line. There's two pieces to it. One, I just want to confirm that the kind of the subject matter risk here is a continuation of the third quarter, where there's physician-administered drugs that I think are easier to take, that are being prescribed more. 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. The follow-up is, can you explain in kind of detail how 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?
Yeah, Randy, this is Erik. Thanks for the question. 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. If you recall, in the third quarter, that was somewhat of a new level of experience, and we needed to see another quarter's worth of experience to determine if that was going to be a trend or if it was just a blip. With two quarters, it's likely 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, 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 or June timeframe, with the idea that those would be effective on 1/1/2020. To the extent this elevated level of claim experience that we saw in the second half of the year, to the extent that continues, that would get factored into repricing for 2020. It's our expectation that we would sort of catch up to where we're behind, which is a couple of points on the benefit ratio right now.
Okay. I guess the follow-up there is if it's effective 1/1/2020, are these products sold kind of ratably throughout the year, or are there times of the year where you sell more?
The products are sold ratably throughout the year, but pricing for any given year is set once a year.
Yeah. They're available throughout the year, but the bulk of the volume will come during the annual enrollment period in terms of.
Right
pure new sales, which comes in the latter portion of the year.
People still kind of make these decisions when everyone else makes their decisions kind of in November, December. If you do need new prices, would those prices be in effect for that next open enrollment period?
Yes.
Yeah. Okay. Thank you.
Our next question comes from the line of Ryan Krueger from KBW. Your line is open.
Hi. Thanks. Good morning. Could you give a sense of how much the RBC ratio has rebounded, as you mentioned, from market moves in January? Also, how are you thinking about the right RBC target following tax reform?
Yeah, Ryan, this is Erik. Thanks for the question. Roughly, recovery is about 10 points, give or take a point or two. 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 times, I think we're going to target an RBC target that's going to be no lower than 400%. Practically speaking, though, from a longer-term perspective, we're going to want to operate with some buffer against that 400%. We've talked about a 425% target which is after giving effect for the tax reform changes that were just recently rolled through. I would expect us to be managing to somewhere between 400 and 425% over the longer term.
Got it. Thanks. On the investment portfolio, could you just provide a bit more detail on the ABS portfolio, kind of the types of collateral within that portfolio as well as the ratings profile?
Yeah. 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 securitizations, cell phone premium securitizations, other types of esoterics. We don't do a whole lot of the more less-tested products. 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 some SFR securities. It's quite a diverse portfolio with no single allocation that is substantial as a % of overall invested assets. Within that, you could characterize also a portfolio of, there's some consumer loan ABS, which tend to be very highly rated and not new entrants into the market. Lastly, there's a certain amount of legacy, well-seasoned, subprime securities as well.
Within the overall allocation that's probably roughly 4% to 5% of invested assets, it's got a quite diversified footprint.
Okay, great. Thank you.
You're welcome.
Our next question comes from the line of Humphrey Lee from Dowling & Partners. Your line is open.
Good morning. 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%-77% for 2019, it looks like 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 is being repriced in 2018. It looks like you are expecting further deterioration. If that is the case, maybe I was just wondering if you can provide some additional color in terms of why that would be your expectation.
Yeah, Humphrey. This is Erik. Thanks for the question. You may recall at the end of 2017, when we announced fourth quarter results, we actually increased the guidance for the Med Supp benefit ratio from 70%-73% to 71%-74%. That was to reflect the expectation that we would have slightly higher low dollar claims related to crossover. We did see that come through. I would say we probably saw a little bit more than we were expecting. That was not 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. I think that is where the real divergence came from.
If you look at full-year results, that was about 74.5%. We are pretty comfortable that the 73%-77% range for 2019 should be pretty well dialed in.
Okay. Shifting gears. Looking at corporate, the COLI return has been a source of earnings volatility for that segment. My understanding is that the COLI assets are invested in mutual funds. I was just wondering if you can provide some detail in terms of the splits between equity versus fixed income funds, and how should we think about this sensitivity going forward?
Humphrey, this is Eric again. The asset allocation currently is 55% equities, 45% fixed income. Of the equities, I believe about 40%-45% of that is domestic equities and the rest is international equities. That's a pretty good allocation for us. We're pretty comfortable with it. You're right, there is some volatility. It certainly manifests itself in our earnings, and more so when there's a big movement in markets like we had in the fourth quarter. What we saw over the balance of 2018 was in some ways just a mirror image of what we saw in 2017. The results in 2017 were positive by almost about the same amount that they were negative in 2018. 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 capital friendly way, and it's also tax advantaged as well.
Can you provide an update in terms of the size of the COLI asset? I believe at the end of 2017, it was roughly $160 million-$180 million. Is that kind of still in the right ballpark? Obviously, there's the market decline in 2018, how should we think about the size of that portfolio?
Net of the market decline, it's about $160 million.
Okay. Got it. Thank you.
Our next question comes from the line of Erik Bass from Autonomous Research. Your line is open.
Hi, thank you. I was hoping you could provide a bit more granular detail of the agent count at Bankers, and where have you 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?
Hi, Erik. This is Gary. Thanks for joining us. First of all, in terms of the Bankers productivity, just 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%. Just to give you a rough way to think about productivity, just the difference in those two will 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. Clearly their productivity is the highest.
Beyond that, I would tell you that we've talked about for maybe 6 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, which will ultimately lead to a higher agent count and higher productivity. We feel very good that the various pilots we've put in place over the last 4-6 quarters are yielding those results.
Thank you. You mentioned that you believe dual licensed agents can reach 20% over time. I guess, why is this the right number, and could it potentially go higher?
It could potentially go higher. One has to remember, we've never crossed this bridge before. This is new for us. We built this broker-dealer two years ago, in 2016, and we are just building it out. 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. That's not the case for everybody. We're trying to be somewhat conservative in terms of what we're guiding to, but I think, yes, it absolutely could go higher.
Got it. Thank you.
Our next question comes from the line of Tom Gallagher from Evercore. Your line is open.
Morning. A 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. The $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 $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 the right way to be thinking about it, or would you make any adjustments to that?
Yeah, Tom, this is Erik. Thanks for the question. 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 to a minimum of 400%, which again, I think we're going to get back to here in the first quarter just by the lift in the equity markets that we've seen. I don't feel an immediate need to build back up to 425%. 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. 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 make sense?
That does. Gary, just following on your earlier comments about priorities with capital deployment. I hear you on the evaluation and 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?
Tom, thanks for the question. Look, right now, I think our stock represents a compelling opportunity. We're considering that in. We think that we've got an opportunity here. We're also regularly looking at external opportunities. 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.
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? The reason I ask, I just want to understand whether there's risk of lapses going up based on the level of rate you're getting, and any comments you have or thoughts on the revenue side, whether you think retention will remain okay or whether you think there's some risk there.
Yeah, Tom, this is Erik. 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. That's for obvious competitive reasons, I think. The point that you make is a fair one. 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 in-force as well. The in-force dynamic there is what is the implication going to be to persistency? 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.
We look at external factors, and then we bring that all together to assess what's the best potential outcome for the company based on all those factors. Sort of multivariate analysis, but all of that goes into our factors into determining rate increases for that coming year.
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's a dimension here that even in listening to this line of questioning, that I guess I want to offer a slightly different perspective because I feel like the focus on our MedSup is missing a key issue. Would we have preferred not to have had the benefit ratio come in where it was and preferred to have had it closer to our initial expectations? Of course.
Okay, we would've liked that. 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's been a shift in consumer preferences away from MedSup to MedAdvantage. There's a lot of reasons for that, and we can talk about that if you're interested, but the consumers have shifted. We've been in a position to capitalize on that shift. You saw the extremely strong growth in our Medicare Advantage. The reason that's important and the reason I want to draw your attention to all that, remember that the Medicare Supplement or the Medicare Advantage, that's very often, frankly, the majority of the time, how our Bankers Life agents first get into a household.
The importance of the MedSup or the MedAdvantage is getting into that household, opening up the relationship, and then positioning us to sell life or long-term care or annuities or pick the product. In all of this focus on the MedSup, which trust us, we're on top of, we need to fix the 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 MedAdvantage sales are 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.
I want to make sure, again, I don't want to shy away from the MedSup 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 make sense?
That does. Thanks, Gary. Just a quick follow-up on that. Is there a way you can dimension based on the momentum you're seeing on the MedAdvantage versus the issues that you're having just on the repricing MedSup when you balance them out from an earnings and a margin standpoint, if you look out over the next couple of years, would you say the growth you're seeing in MedAdvantage could offset some of the near-term margin pressure from an earnings contribution? Or is it enough to offset that one-year transition, I guess is my question.
We don't have a specific number for you, but let me just give you a perspective on that. When the MedSup is performing as expected, of course, we like it better because we make an underwriting margin on it as well as a distribution margin. Our second-best alternative is to sell the MedAdvantage, which remember, the MedAdvantage 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's no E tied up in this. This is strictly a distribution product. We could probably back into the math as to how much MedAdvantage we've got to sell to be roughly equivalent to MedSup, but I think that misses the point.
The broader point is it's important for us to continue to get into the household because long term, where the money is and where the relationship 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 MedAdvantage as the entrée as opposed to MedSup.
Got you. Thank you.
Our next question comes from the line of Daniel Bergman from Citi. Your line is open.
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 rate. I 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 or any changes in assumptions we should be aware of?
Yeah, Dan, this is Erik. Just in aggregate across all of our businesses, year-end loss recognition testing results came in pretty strong. Our margins as a percent of net GAAP liability are still about 22%, and that was unchanged from last year. 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. 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.
That contributed to probably about a $30 or $40 million decline in the margin. The experience across all of our other assumptions, so mortality, morbidity, persistency, and expenses, basically netted that out. There was not really one big bucket that sort of stood out amongst those.
Got it. Thanks. Maybe just shifting gears, it looked like there was a pretty big jump in the annuity collected premiums in the fourth quarter to the highest quarterly level, at least that I can remember. I 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 level there are sustainable and just how we should think about that going forward.
Yeah. 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 become duly licensed. When they start talking to folks about their overall financial needs, naturally, they're able to talk about products like annuities. As we get more and more agents to become licensed financial professionals, they're able to talk about a multitude of products. That's going to drive some demand. You have a macroeconomic tailwind as far as annuities go. Conventional wisdom says that fixed indexed annuities do better when there's a lot of stock market volatility because consumers are looking for safety. 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, but by and large, at least the reports that I've read, many of our competitors are posting good annuity results. What that means, besides the macro factors, that also means that consumers may be hearing about fixed indexed annuities from their friends or acquaintances or what have you. 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.
Great. Thanks so much.
Our next question comes from the line of Alex Scott from Goldman Sachs. Your line is open.
Hi, good morning. First question I had was just a follow-up on the fixed indexed 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.
Yeah. Hi, Alex. This is Erik. Thanks for the question. 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. We're very satisfied with where we stand there.
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?
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.
Okay. Maybe one more on life. That was a place where 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, or if we're just going to see a bigger mix shift towards fixed indexed annuities over life insurance over time.
Alex, there's a couple of ways I'd answer this. First of all, in looking at what happened at life insurance at Bankers Life, 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. The net effect of that was more declinations in the near term. 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. Our field is still out there talking to consumers about it. They're satisfying a need. The applications went up.
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. 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. If I pivot over to Colonial Penn, obviously we are seeing growth there. That's life insurance growth. If you look at Washington National
We've seen very substantial growth where we've had a controlled or captive distribution that has been historically focused strictly on supplemental health. We've finally been able to break through and have that distribution start working on more life sales. You'll recall some of the life cross-selling numbers that I shared with you. We see an opportunity to grow life. All of that said, my personal belief is that the middle-income consumer, longer term, they have more needs for income accumulation and longevity as opposed to mortality and morbidity. I think there's this constant push, simply because of what their needs are and how they need to plan for retirement, towards products like annuities or short-term care or combo products, similar things like that.
I think there's 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.
All right. Thanks very much.
Our last question comes from the line of Jeff Schmitt from William Blair. Your line is open.
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 issued policies were up, I think, 34%? What drives the difference there?
Hey, Jeff. This is Erik. Thanks for the 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. In the prior year, we were basically recognizing revenue sort of on a quarterly basis in equal installments. This year, in 2018 and going forward now, that'll all get recognized sort of at the point of sale. In the first quarter, that tends to be related to open enrollment. Obviously, that's where a lot of the activity is, that's where a lot of the fee that we collect and the commission that we pay gets recognized.
Got it. Okay. More of a timing issue.
Yes.
Looking at agent levels in Washington National, up a fair amount, I think 6%, the quarterly average. Can you maybe talk about your efforts there?
Yeah. In the case of Washington National, I would break it up into a few different buckets. First of all, we had within our PMA channel, our worksite distribution force was up quite strongly. They were up very significantly and performed very well. Our consumer-focused area within PMA did not perform as well. The two netted each other out for a slight positive in the aggregate. Finally, with our independent agents, we saw a bit of an increase there. That's the composition of it. In terms of going forward, I believe we have an opportunity in all three categories, meaning 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. I'm very hopeful for what we will be delivering there in terms of agent counts.
Okay. Thank you.
There are no further questions at this time. I will turn the call back over to Jennifer Childe for closing remarks.
Thanks, everyone, for your interest in CNO, and we look forward to speaking with you again soon.
This concludes today's conference call. You may now disconnect.