Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2015 earnings results call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Adam Auvil, you may begin your conference.
Good morning. Thank you for joining us on CNO Financial Group's third quarter 2015 earnings conference call. Today's presentation will include remarks from Ed Bonach, Chief Executive Officer, Scott Perry, Chief Business Officer, and Erik Helding, Treasurer and Head of Investor Relations. 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 www.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-Q and post it on our website by November 3rd.
Let me remind you that any forward-looking statements we make today are subject to a number of factors which may cause actual results to be materially different than those contemplated by the forward-looking statements. Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix. Throughout this presentation, we'll be making performance comparisons, unless otherwise specified, any comparisons made will be referring to changes between third quarter 2014 and third quarter 2015. With that, I'll turn the call over to Ed.
Thanks, Adam. Good morning, everyone. CNO had another good quarter as we continued to expand our customer reach and recorded growth in several key measures. NAP was up 1% on a consolidated basis, while sales of third-party products, which are not included in NAP, were up 10%. On a policies issued basis, sales were up 3%, and our overall policies in force grew by 1%. Collected premium growth was robust, up 7%, driven by a rebound in annuity sales, which also drove a 2% increase in annuity account values. Growing the franchise not only through sales but also retaining satisfied customers. Operating earnings per share excluding significant items were $0.33, up 3% over the prior year. We continue to experience strong margins in most of our businesses, and our supplemental health results stabilized.
It's important to note that earnings in the third quarter of 2014 were particularly strong as we experienced outsized favorability in both mortality and morbidity. We continue our solid track record of returning capital to shareholders. During the quarter, we bought back $124 million of common stock and paid $13 million in common stock dividends. Lastly, we reached another significant milestone on the ratings front in achieving an AM Best A-minus financial strength rating. We expect this to favorably impact our businesses, especially our Washington National work site business. I'll now turn it over to Scott to discuss our segment results.
Thanks, Ed. Beginning with Bankers Life, production in the quarter was mixed. NAP of $59.9 million was down 3%, primarily due to lower life insurance sales. While the number of new life insurance policies issued has grown this year, average issued premium has been lower, resulting in lower NAP for the product line. We experienced strong growth in annuity sales driven by higher demand of our fixed indexed annuity products. These contracts resonate well with those at or near retirement as they blend protection of principal with the potential for account growth. Sales of third-party products, primarily Medicare Advantage plans, continues to experience strong consumer demand. Policies sold were up 10%. Fee income generated by these sales on a trailing four-quarter basis was $16.6 million, up 16% over last year. This is important non-life income and enables us to more fully utilize our valuable NOLs.
Average producing agents was down slightly, driven by a recruiting shortfall. After three consecutive quarters of recruiting gains, our July results were particularly weak, this resulted in a 19% decline in the number of new contracts. On a year-to-date basis, recruiting is down just slightly over the prior year. We recently rolled out a new applicant tracking system, recruiting activity has increased from July levels. Given our year-to-date results, we currently expect Bankers Life's full-year NAP to come in at the low end of our guidance range of flat to down 3%. Lastly, collected premiums were up 6%, primarily driven by the increase in annuity sales. Turning to Washington National, sales were up 1% in the quarter. Worksite sales were up 10%, with strong growth in supplemental health and life insurance in the worksite market driven by PMA, our wholly owned marketing organization.
Individual market sales were down 3%. This compared to an especially strong quarter of performance in the prior year. Average producing agents at PMA remains robust and was up 7%. We anticipate Washington National sales growth to be near the low end of our previous guidance of 3%-5% in 2015, with momentum in worksite sales offset by slower individual market sales growth. Lastly, sales growth and strong persistency contributed to a 9% increase in Washington National supplemental health collected premium. As we look beyond 2015, we expect continued progress in the worksite marketplace, assisted by the AM Best upgrade Ed mentioned earlier. The upgrade allows us to now compete for business opportunities that have historically been more rating sensitive. Moving to slide eight, Colonial Penn posted 15% sales growth and is up 18% on a year-to-date basis.
The continued positive results are driven by strong direct mail and web digital-generated activities, continued marketing cost effectiveness, and higher sales productivity. We are currently expecting Colonial Penn's full-year sales growth to be near the high end of the 12%-15% guidance range. Collected premiums were up 8% due to continued growth in the block. Third quarter EBIT was slightly positive and is currently running just below break even for the year. As we decrease advertising spend in the fourth quarter and project growth in in-force earnings, we continue to expect Colonial Penn's EBIT to be in the $3 million-$6 million range for the year. Before I turn it over to Erik, I'd like to make a few comments about the investments we are making in the businesses.
The strong growth results we are seeing at Colonial Penn over the last six quarters reflect the successful execution of investments made over the last three to four years. Some of these investments, like our CRM system, required lengthy implementation schedules, but are now paying off in significant productivity improvements of our telesales organization. During late 2014 and throughout 2015, we have been investing in growth and productivity initiatives at Bankers Life and Washington National. We expect most of the heavy lifting to be complete by the early part of next year, and sales and productivity improvements to follow. We are focused on moving quickly to begin to reap the benefit of these important investments that better position us for future growth. I'll now turn it over to Erik to discuss CNO's financial results.
Thanks, Scott. CNO posted another good quarter on the earnings and capital front. Adjusting for the one significant item in the period, we recorded operating earnings of $0.33 per share, an increase of 3% over last year. Normalized operating ROE was 8.7%, relatively flat compared to last year, but as Ed mentioned, third quarter 2014 results were unusually strong and marked by significant mortality and morbidity outperformance. Third quarter 2015 results were largely in line with expectations, although we did experience some volatility in our corporate segment results due to equity market performance. As Scott noted, results at Colonial Penn continue to be strong. While Colonial Penn's earnings in the period did not materially contribute to EPS or ROE, it's important to note that the continued growth in in-force at Colonial Penn is creating real long-term value for shareholders.
Our capital position remains strong, with estimated consolidated risk-based capital of 440%. Leverage was 20.2%, and holding company liquidity was $354 million. We repurchased $124 million of common stock in the quarter and $311 million on a year-to-date basis, well on our way to our repurchase guidance range of $350 million-$425 million for the year. We are tactical and opportunistic in our repurchases, so where we ultimately end up within the range will depend on share price performance over the remainder of the year. Turning to slide 10 and our normalized segment earnings. Bankers Life posted EBIT of $79.8 million in the quarter, down from the prior year, but as noted, this is largely due to significant mortality and morbidity outperformance in the prior year.
Current period results were largely in line with expectations, although we did experience moderately higher Medicare Supplement claims and lower levels of call prepayment income. Washington National reported earnings of $30.6 million, up slightly from the prior year. Benefit ratios in our supplemental health business stabilized in the quarter, a good result coming off a couple of quarters of volatility. Colonial Penn reported slightly positive earnings in line with seasonal expectations. Sales and earnings results continue to benefit from marketing productivity gains and lead generation diversification. Excluding the impact of equity market volatility, corporate segment earnings were generally in line with expectations. Turning to slide 11. As I mentioned, we experienced moderately elevated levels of claims in our Bankers Life Medicare Supplement block and recorded a benefit ratio of 71.5%.
Performance over the past several quarters has been particularly strong, as such, we don't view the current period results as unusual, more just a reversion to longer-term expectations. On a year-to-date basis, our Medicare Supplement benefit ratio is 69.2%. We continue to expect this benefit ratio to be in the 70% range for the fourth quarter. Our long-term care interest-adjusted benefit ratio came in just under 84% for the quarter, in line with expectations, and we expect continued stability in the fourth quarter. Washington National supplemental health interest-adjusted benefit ratio came in at 57.4%, in line with expectations. Incurred claims have stabilized, and we continue to expect this ratio to be in the 58% range for the fourth quarter. Turning to slide 12 in investment results. We continue our tactical approach to investing new money.
We put money to work at 5.21% for the quarter, slightly above the second quarter, as market volatility resulted in wider spreads for a period of time. After a couple of quarters of elevated call prepayment income, third quarter results moderated some. Overall credit conditions remain favorable, and net realized gains and losses continue to be low. Impairments in the quarter were slightly higher, but due primarily to select names in the energy sector in Puerto Rico. Before I turn the call back over to Ed, let me provide a brief update on our Bankers Life long-term care business. As discussed in our second quarter earnings call, we recently commenced a new round of rate increases. We continue to run ahead of expectations and expect to have all initial filings completed by the end of the first quarter of 2016.
Claims experienced for the first nine months of the year has been largely in line with expectations, as such, it's unlikely that we would see any material impact to testing margins related to this assumption. We continue to build our future loss reserve and increased our accrual in 2015. While this negatively impacts short-term earnings, the increased accrual contributes to testing margins and helps defend our balance sheet from potential future charges. Continued low interest rates are a challenge and could pressure margins. The amount of potential deterioration will depend on the assumed recovery of interest rates, as well as the projected ultimate rate. If you recall from our 2014 loss recognition testing results, we pushed out the rate of recovery by one year and also decreased the ultimate rate by 50 basis points. The combination of these changes resulted in a $50 million decrease to margin.
If we were to leave the ultimate rate assumption unchanged, the impact to margins from pushing out the recovery rate by one year would be closer to $15 million. While it is still early, and we need to go through the formal testing process and update all assumptions, based on current trends, we anticipate year-end 2015 loss recognition testing margins for our Bankers Life long-term care business to improve modestly. I'll now turn it back over to Ed for some closing comments.
Thanks, Erik. As Scott mentioned, we have been and continue to make investments to strengthen the foundation of our businesses. We are at different stages of these investments with initiatives that started several years ago at Colonial Penn yielding results today, initiatives currently underway at Bankers Life and Washington National expected to generate profitable sales growth in 2016 and beyond. We continue to explore options to reduce our long-term care exposure by roughly half on a relative basis over the next four to seven years. As previously discussed, this will occur through a combination of runoff of the older, more comprehensive policies, increased sales of other lines of business, reinsurance of LTC. The search for our new chief financial officer is progressing, we expect to be in a position to have a candidate selected by the time we report fourth quarter earnings.
Lastly, we expect to provide 2016 guidance on sales, key earnings drivers, and capital deployment as part of our fourth quarter earnings call. With that, we'll now open it up for questions. Operator? Jennifer? Operator?
At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Randy Binner with FBR Inc.
Morning. Thank you. I just wanted to kind of start at the end there with some of the long-term care comments. The first was for Erik. I think you're saying overall, the loss recognition testing margins should have a modest improvement that includes kind of understanding where yields are now. The reason I ask it that way is I think that you needed the new money yields to stay more in like the 550 or better range on basis points, and I think you just said you're at 521. Am I understanding your comments correctly that the good guys kind of in everything else are offsetting that continued bad guy with low reinvestment yields?
Hey, Randy Binner, it's Erik. Just to clarify, our new money rate assumption for the long-term care business that was set for 2014 loss recognition testing purposes was 550 for 2015, and then increased to 6% in 2016, and then 650, which was the ultimate rate.
Okay.
That's slightly different than the 521 that we talked about on the investment slide. That is the aggregate new money rate for the company. The 550 for this year is specific to long-term care. The comments with respect to margin and potential margin improvement for this year. Yes, they were meant to be all-inclusive and include potential deterioration related to long-term care. You'll note that we framed up sort of the potential for margin deterioration in terms of what happened last year, where we pushed out the rate of recovery by one year, and then also decreased the ultimate rate by 50 basis points. That resulted in $50 million of margin deterioration. That could happen again this year. Alternatively, we could leave the assumption unchanged, and that would obviously result in no margin deterioration.
A third scenario would be that we just push out the rate of recovery and leave the ultimate rate unchanged, and that was the $15 million deterioration that I talked about. Does that help?
Okay. No, it does.
Sorry, Randy, this is Ed. One thing I'll add to what Erik said, going back to the 521 new money rate that we've achieved here this year, that, as Erik said, was the aggregate for all lines of business with a positively sloping yield curve, which we've had, and long-term care being our longest duration liabilities. The new money yield on long-term care is higher than 521. We haven't disclosed specifically what it is, but it is higher than 521.
Got it. Okay. That is helpful. Then, I guess, just to kind of a more pointed question. Well, I mean, sorry, one more on long-term care. Ed, you mentioned that reinsurance continues to be a goal. There was a transaction that was notable in the kind of the riskier area of the life insurance market recently with Nassau Re and Phoenix. To me, that implies that a lot of things, I guess, are possible. How would you characterize the market as you talk to counterparties around a potential risk transfer?
I would summarize it as it is a viable market. There's a good mix of players, meaning traditional longstanding reinsurers, all the way to some newer entrants backed by private equity. There are players that have done transactions in the LTC space. With that, I think we continue to believe and experience that our long-term care business given the less duration than most books in the industry, given the stability of the business, the lower average benefits with less than 5% having any type of lifetime benefits, and the vast majority of our products having less than four years of benefits. It's a kind of book of business that the potential bid-ask is likely to be narrower. That would seem to indicate there's an opportunity to do a transaction or transactions, but we're obviously not at that point to have something in hand or announced.
Great. Yeah, just wanted to get one more in because it affects the model. I think I picked up somewhere the comment was that the Medicare sup benefit ratio in Bankers, you'd expect that to be higher through the fourth quarter this year, or just higher, like more like this kind of above 70% level going out for a while?
Hey, Randy, it's Erik again. For the fourth quarter, we expect the Medicare Supplement benefit ratio to be 70%.
70, and then kind of stabilizing around 70 going forward, because that would be the more normal.
As Ed mentioned, we are a little early in the process, and we'll be providing outlook for 2016 on our fourth quarter call.
Your next question comes from the line of Erik Bass with Citigroup.
Just wanted to touch on a couple of things for long-term care. You mentioned, obviously, some of the favorable items that could benefit the reserve margin when you do your fourth quarter review. Do you expect to recognize the full benefit of better rate experience in the claims management initiatives that you've undertaken in 2015? Or is that something where you'd see a partial benefit this year, and then there'd be potential for further benefit in 2016? Secondly, given the potential for the improvement in margins, would you contemplate any changes to the level of the future loss reserve accrual for 2016?
Hey, Erik, this is Erik. With respect to rate increase assumptions, obviously, as we progress through that process and make our way through year-end loss recognition testing assumptions, we will update our rate increase assumptions, including success factors. I'm not sure if the angle of your question was would we reflect 100% success factor or something more than 40%, which was in our current assumptions. The idea is if we continue to run favorable, it would be something more than 40% success factor. Second part of the question on claims management initiatives. We talked about earlier in the year a potential benefit of roughly $100 million contributing to margin. We don't expect to recognize all of that here for year-end 2015 testing purposes, more just a portion with potential benefits out in 2016 and 2017.
Your next question-
Does that answer your question?
Your next question comes from the line of Ryan Krueger with KBW.
My beginning cut off. I just wanted to follow up then on, I guess maybe on what Erik was just asking. Because the Future Loss Reserve is somewhat of a newer mechanism, at least than I'm used to. Is that something that, if claims experience was pretty consistent with your expectations in Long-Term Care, should we expect the benefit ratio to generally remain stable? Would that mechanic cause somewhat of an increase over time, just kind of naturally as that flows through?
Hey, Ryan, it's Erik again. Operator, if you could please check the logistics on your side. It appears that the analysts are being cut off. If we could avoid that going forward, that'd be much appreciated. I apologize for that, everybody on the phone. To answer your question, the build in the FLR, could that come down? Could that go up? It depends on what happens with respect to year-end loss recognition testing. It may change. If things break favorably and we build margin, that may reduce the Future Loss Reserve accrual on a go-forward basis. It may not, though. It depends. With respect to will the benefit ratio over time go down? Not likely.
What's going to happen is, as we make our way through the rate increase process, we will likely start to see elevated shock lapses, which would have the effect of reducing the benefit ratio in the near time. Over the long range, we expect the benefit ratio to be in this range, if not slightly increased over a longer period of time due to aging.
Yeah, the other thing, Ryan, I'll add to what Erik said is on the shock lapses, recall that we will not have all of the shock lapse reserve go into earnings. We will take half of that and put it into the FLR. That'll also, I'll say, impact the future FLR build. To what extent, again, is to be determined depending on what degree of shock lapses we have.
Okay. Just to make sure I understood correctly, you would accept potentially some modest increase over time in the benefit ratio just naturally as the book ages. Is that the right way to think about it?
Yes, that's correct.
Okay. Shifting to sales, can you give a little bit more perspective on, I guess, what exactly drove the big drop-off in Bankers Life recruiting and then kind of what you did to try to correct that going forward?
Sure, Ryan. This is Scott. First of all, as I pointed out in the call, my comments, we did have three consecutive strong quarters. We had a strong quarter the second quarter of this year. Some of that, we accelerated some activity that would normally have fallen into July. We didn't really have good visibility into that, and our pipeline was reducing, was getting a little soft. One of the things that we've done to avoid this, and it caused really a very soft July, as I mentioned, and we started to see some recovery in August and September. One of the things we've done in the quarter, we introduced a new applicant tracking system. This has been coming for a while, but it was fully implemented and up and running starting in the beginning of this quarter.
That system, besides doing a lot of other things, will give us good visibility into the pipeline so we can get in front of this sooner. It's just getting more recruits into the process and into the flow. That's what we did to mitigate this going forward, and then we can take action around that if we see either our schedules or our shows, which are people coming to our career briefings, slowing down. The main action we took was to fully implement and get everybody up and trained in the field utilizing the new applicant tracking system.
Okay. Thank you.
You have a follow-up from the line of Erik Bass with Citigroup.
Maybe to follow up on kind of the question Ryan was just asking. Is there anything in terms of the competition for recruits that has changed, or I guess now it's been a struggle a little bit to grow the Bankers agent count for the past year or so. You've mentioned some that the competitors being more competitive and kind of copying some of your recruiting tactics. Anything going on there? Just any thoughts around that?
Yeah. No, I don't think there's been any change. I'd say just kind of the consistent theme. I've also mentioned in the past that as the economy improves and the job market gets better, it further pressures recruiting into straight commission roles. I wouldn't say that we've seen any changes, but those factors continue to be headwinds. Recruiting is always and will continue to be a focus of the Bankers field, and we're certainly looking for ways to improve our results, both in the volume of candidates and the quality of those candidates. I think it's important to remember that the way we intend to grow the agency force is through a combination of new recruits
The retention of our base force. You retain your base force by driving productivity improvements, and we expect those two things combined. We're doing a number of things we've talked about in the past around Salesforce automation and lead generation tactics to support the productivity of the base force. We expect a combination of those things that'll allow us to grow our agency force. Certainly, the headwinds we're seeing in recruiting continue, and we'll need to continue to look for ways to improve our effectiveness.
Got it. Can you remind us what your plans are in terms of opening new branches or locations for Bankers, and how many of those have been opened year-to-date?
I don't have the year-to-date number in front of me. We're standing at about 315 locations, and we're pretty comfortable with that number. We don't have any purposeful plans. We'll be looking at more opportunistically, and as we open, we also close some, given dynamics that are going on in a particular local market. I think our strategy around that is more to digest the expansion that has taken place over the last three years, and then look opportunistically for new locations where we have the market opportunity and the talent to staff that office.
Got it. Is that a change from your approach previously when you had talked about, I thought it was sort of opening 10 to 20 branches, or not branches, but locations per year?
Yeah. It's not really a change. I think we've just come to the kind of end of that cycle.
Okay. Thank you.
Would we get back to opening? We're in every state. We have decent location penetration. Are there some opportunities? Yes, but I think it's going to be less of a purposeful effort, and more, as I mentioned earlier, kind of opportunistic where we have the talent lining up with the opportunity.
Got it. Thanks, Scott.
Your next question comes from line of Humphrey Lee with Dowling & Partners.
Good morning. Just a question on long-term care, especially on the rate increases. There's a recent article by Moody's, a report by Moody's talking about potentially maybe a little less accommodative regulation from the regulators. You talked about your success rates as being higher than your 40%, but do you see a change in terms of the sentiments from the regulators from a year ago versus where you are right now?
Thanks, Humphrey. This is Ed. I would say the short answer is yes, but that's why we factored in a 40% assumed success factor with this round of rate increases, where our prior round was just north of 60% success factor. We did expect that state insurance departments were being inundated with rate increase requests that was slowing down the process, and in certain places, making it more difficult to get full rate increases approved. All considered in our 40% assumption.
Okay, thank you. Then maybe a question for Scott. In terms of Bankers kind of selling third-party policies and getting a fee income in that regard, how much kind of potential in that particular type of activities, and can you potentially add more product lineups from third parties through your Bankers channel?
Yeah, Humphrey, that's a good question. The answer is we will continue to assess what the middle market consumer needs, and we'll then assess whether or not it makes sense for us to, as a manufacturer, to offer that product or to go source it through a third party. I think the short answer to your question is yes, there are likely other opportunities. However, we're careful because it is a matter of shelf space, it's a matter of making sure it's the right product that meets the consumer need, and it's also something that the agency force can fit into the portfolio. We look carefully at other opportunities. We do a little bit today with ACA plans. That might be an area of future expansion.
We'll continue to keep an eye on those consumer needs and other opportunities for expanding third-party distribution or developing products on our own. Another good example of third-party activity that isn't factored into our results yet, but ultimately in our reporting, we will reflect this, and that's the activity of our financial advisors. Our financial advisors are, by definition, selling third-party products, and that's currently not reflected in our activity, but we expect to reflect it in the future.
Okay, thanks for that call. If I can maybe sneak one more in is, I know some Japanese life insurers talked about kind of buying nursing home or long-term care facility as part of the investment strategy. AIG talked about kind of investing into kind of nursing home facilities in the U.S. as well. Since you talked about finding ways to utilize your non-life NOLs, have you considered kind of looking into kind of buying certain nursing home facilities or investing in that area for one, as a natural hedge to your long-term care position, and second of all, to generate some non-life earnings.
Thanks for the question, Humphrey. I would say, sad about it, but in keeping with where do we have the right and ability to compete, we don't see that as being a place where we've got enough expertise to own and operate facilities like this. That would not be something that is in our current screen of M&A. On the margin, if there's an investment, a bond that is related to one of these types of properties, certainly it'd be considered, but more on its investment merits like other industries.
Okay. Thank you.
Your next question comes from line of Daniel Bergman with UBS.
Yeah. Good morning. Following up on some earlier questions, you mentioned an expected natural increase in the long-term care benefit ratio over time. Is there any additional sense you can provide on maybe the order of magnitude or pace of this expected increase? I guess I'm just trying to get a sense for how to think about the pieces for the expected GAAP earnings trajectory for the long-term care business, considering natural runoff, this change in the benefit ratio, and price increases. Any commentary would be helpful. Thanks.
Sure, Dan. This is Erik again. I would categorize it as sort of a slow process and a build to something which would probably be into the high 80s, low 90s over several years, perhaps 6 to 8 to 10 years. A little difficult to pinpoint exactly what that timeline's going to be, but that's sort of the order of magnitude. It's in keeping with sort of the rationale for why we're building a future loss reserve is because we have profits right now, and we'll have them for, again, the next 6 to 8 years, and those periods will be followed by losses. We build the FLR now and then reduce it once we get into that inflection period. Is that helpful?
Yeah, that's great. Thank you.
Yeah. Dan, I'll add to that, of course, that's I'll say status quo, that sales are not materially different than the levels we have now or the mix of the long-term care sales aren't materially different. It's also without any future rate increases or transactions.
Yeah. Great. Thank you. Maybe switching gears a little bit just onto the expenses you've been incurring related to investments for growth in the Bankers Life and Washington National units. I wanted to see if you could provide any additional color on the types of investments you're making and maybe any sense of the magnitude of these investments and how much they're suppressing near-term earnings. Then related to that, what type of payback you would expect from these investments down the road.
Sure, Dan. It's Eric again. We have been, as Scott mentioned in his remarks, Scott and Ed, been investing in growth and productivity initiatives for a longer period of time at Colonial Penn in more recent periods, specifically in Bankers Life and to some extent, Washington National. What's going on right now at Bankers Life is really a couple of things which is adding to our expenses. First is the rollout of Salesforce nationwide to our career agency force. That is essentially a CRM system that the field force will use to manage leads, manage clients, et cetera. That is being rolled out right now, and there will be an ongoing cost associated with that. The second thing that's going on right now is that we are building out and staffing up our broker-dealer, as Scott mentioned, our own in-house broker-dealer and registered investment advisor eventually.
That will add expense and has added expense and will continue in the future. Order of magnitude, we called out about $4 million of incremental expense. Not all of that was related to these growth and productivity initiatives. I'd say roughly half were. In terms of the payback, yes, we would expect those expenses to continue in the future. However, what you should see is increased agent productivity, which should lead to increased sales, then eventually increased income as we move the financial advisors that Scott spoke about over our own platform and generate incremental fee income.
Very helpful. Thank you.
Your next question comes from line of Thomas Gallagher with Credit Suisse.
Good morning. Ed, I was wondering if you could talk about a broader discussion on what you're considering with long-term care risk transfer. What are the opportunities out there as you see them? When you think about kind of the gamut of things that you might undertake, would most of them be capital consumers or have you set aside some level of capital in your overall risk management framework that would actually be released?
Yeah. Tom, thanks. One way that we think of it and I describe it is we would expect a smorgasbord of options. What I mean by that is that from the different potential counterparties interested reinsurers, we definitely see transactions being reinsurance, co-insurance, or potentially a funds withheld type of arrangement. We are still very much committed to long-term care through Bankers Life career agents. It meets important needs in the middle market, and to serve them, we believe continuing to sell the product is important. With that, we would retain administration. The reinsurance construct is what we envision. In that, the reason I say a smorgasbord is that if you think about, first of all, one slice is the vintages of issue years. Some third parties are interested in the most seasoned business.
Those could be issues in the 1970s and 1980s with a much higher attained age. Pretty much the claim mortality lapse dynamics have been demonstrated over multiple years, and that provides certain counterparties something they are interested in. That said, those products or that cohort would have the lower durations or the least number of years of duration due to their high attained age. There are other parties that are looking for long durations, and the longest would be the more recent issues that way. Also, there is different types of coverages. We have comprehensive home health care, nursing home care. Again, different counterparties have different interests there, and then later on are still selling the business, selling new business. Some parties as RGA has been a new business reinsurer for us since 2008. They continue to be a reinsurer and are interested in new business.
As we look at that though, we understand to accomplish our objectives, we're going to have to have not just more new business or more recent business be the only part of any transactions. We're going to need to have some of the policies that are issued prior to 2000 in the mix because they have the highest average reserves. They are the ones that are having the accruals for future loss reserves on them. They will be in part in the equation. Hopefully that helps to give you some color there. Does that answer your question?
Yeah, no, that's helpful, Ed. When you think about overall capital planning framework, do you have a large budget in terms of your capital that you're setting aside to potential be able to reinsure some of the pre-2000 book? I assume there would be a cost associated with it.
Yeah, no, fair question. Sorry, I didn't answer that right away. First, our capital in the insurance companies with 440 RBC is above what we would expect to carry in a longer-term environment. We consciously did build Bankers Life RBC north of 400%, recognizing that's where the long-term care business is. We have been for some time carrying excess liquidity at the holding company. That said, what charge, if any, we have, and the magnitude of any charge or any cash outlay will depend quite a bit on what part of the smorgasbord we're picking from. Because a combination of different issue years, different policy types could have a mix of policies that are accruing a future loss reserve and those that aren't. That could help mitigate any potential cash outlay or charge.
Okay. That's helpful. My only other question is on, and I apologize if you referenced this earlier, but your energy portfolio. Are you comfortable with your exposure there considering, I think you might have trimmed some of it this quarter, but how are you thinking about that overall?
Yeah. Good morning. This is Eric Johnson. I just knew someone was going to ask about this today. Notwithstanding that I didn't write any notes down. Obviously management teams are expecting oil prices to stay lower for longer. A lot of folks out there on cutting costs, reducing capital spending, folks drilling programs on more profitable acreage. Looking very hard at 2016 CapEx announcements by producers going lower all the time. Rig market's under a lot of pressure. Certainly in this area, selectivity is critical. We, I think, are exhibiting a lot of that. This year, we've turned over probably about a quarter to 30% of our energy portfolio, and most of that's been in an up in quality direction. I feel we've made some good choices that will sustain themselves notwithstanding a lower for longer environment.
Our strategy is not to play for time and hope that the oil prices will go back up in three months or six months. It's to have strong hands over a sustained period and clip good income. Certainly the story's not over. We still have continued work to do. When you see spreads widen as much as they did, for example, during the third quarter, and volatility be as high as it was, we're going to have to deal with that. I'm not sounding an all clear, but what I am saying is that I think we're in a good position over the long term to do well in this area. And we're not-
Sorry, go ahead, Eric.
No, please, I'm done there.
Oh, okay. I just wanted to follow up the 25%-30% turnover. Did you do most of that in the last quarter or two, or have you been doing that for a longer period of time?
Oh, this is something we've been talking about and acting on pretty much throughout the whole year, pretty steadily. I think it probably continues through the fourth quarter because it's a volatile sector, and risks and opportunities unveil themselves over as we speak. I think this will continue. Certainly so yeah, it's reflected in the