CNO Financial Group, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• General Performance: CNO delivered an excellent quarter with operating earnings per diluted share $1.11 (up 26%) and excluding significant items $0.94 (up 27%). Ninth consecutive quarter of strong sales momentum and seventh consecutive quarter of growth in producing agent count. Total new annualized premium up 1% across enterprise, excluding D2C up 7%.
• Financial Highlights: Expense ratio 18.8% in the quarter, 19.2% on a trailing 12-month basis. Deployed $90 million on share repurchases. Operating return on equity 11.7% reported, 10.5% excluding significant items. Took steps to reposition back office roles, reducing the workforce by 3% with $8.3 million pre-tax costs. Terminated a reinsurance agreement for long-term care new business, retaining 100% of new business going forward.
• Insurance Product Margin: Strong quarter with various products having mostly puts and some takes. Fixed indexed annuity margins impacted by higher amortization and spread compression, but continues to generate target returns. Other annuity margins benefited from reserve releases (not expected to repeat). Supplemental Health and long-term care margins benefited from growth and favorable morbidity. Traditional Life margins benefited from lower advertising expense. Annual actuarial review had a $27.3 million favorable impact.
• Investment Results: Net investment income strong, new money rate 6.5% (seventh consecutive quarter above 6%). Average yield on allocated investments 4.81% (up 12 basis points). Net investment income allocated to products up 5%. Investment income not allocated to products up 18%. Completed a $400 million five-year FABN offering. New investments in the quarter: ~$600 million assets, average rating single A, average duration ~6 years.

Segment Performance

• Consumer Division: Delivered eighth consecutive quarter of sales momentum. Total new annualized premium (NAP) up 1% for the quarter; NAP from field sales up 9%. Health NAP up 11%, with Medicare Supplement NAP up 15% and Medicare Advantage policies sold up 26%. Long-Term Care NAP up 31% for the fifth consecutive quarter of double-digit growth. Life production down due to lower direct-to-consumer (D2C) TV marketing spend, but non-television D2C channels now account for over 30% of sales. Annuity collected premiums up 25%, account values up 6%. Brokerage and advisory client assets up 35% to $3.9 billion, new accounts up 11%. Producing agent count up 5% (seventh consecutive quarter of growth).
• Worksite Division: Record third quarter insurance sales NAP up 4% (10th consecutive quarter of growth). Recruiting up 7%, producing agent count up 17% (10th consecutive quarter of growth). New products like hospital indemnity insurance up 66%, critical illness product up 9%. Geographic expansion initiative accounted for 11% of total worksite NAP growth. NAP from new group clients up 164%.

Guidance

• 2024 Guidance: Raising and narrowing operating earnings per share guidance to $3.50-$3.60 excluding significant items. Raising and narrowing excess cash flow guidance to $250 million-$275 million. Maintaining expense ratio range 19.0%-19.2%. Target leverage 25%-28%. Consolidated risk-based capital (RBC) ratio target 375% for US-based insurance companies, minimum holding company (Holdco) liquidity $150 million.
• Future Outlook: Entering the fourth quarter with momentum, expects to end the year strong.

Risks

• Advertising Risks: Competition for TV media space spikes during presidential election cycles, impacting D2C life production.
• Reinsurance Impact: Terminating reinsurance agreement for long-term care new business could have implications, but retains in-force.
• Investment Risks: Alternative investment results slightly below expectations in some quarters.

Question and Answer

Q: Talk about long-term care reinsurance announcement and Bermuda platform.

A: Paul McDonough discussed terminating reinsurance for long-term care new business to retain 100% going forward, and progress with Bermuda company infrastructure.

Q: Impact of organizational structure changes on direct expense ratio.

A: Paul McDonough said actions improve run rate expenses and contribute to return on equity (ROE) improvement, with full 2025 guidance to be provided in February.

Q: Free cash flow sustainability.

A: Paul McDonough said the business generates healthy free cash flow, with specifics to be provided in 2025 guidance.

Q: Short-term rate sensitivity.

A: Gary Bhojwani said most assets and liabilities are floating rate or matched, so short-term rate changes have muted impact.

Q: Expense cutting focus.

A: Paul McDonough said the company is always focused on cutting expenses to free up for business growth.

Q: Market opportunity for sales.

A: Gary Bhojwani said bullish on market due to demographics, health care costs, and middle market focus.

Q: VII expectations for fourth quarter.

A: Paul McDonough said VII is more of a planning assumption with downside risk but muted by other factors.

Q: ROE improvement levers.

A: Paul McDonough said most levers focus on numerator (earnings), but some on denominator (equity optimization).

Q: Advertising spend reacceleration.

A: Gary Bhojwani said TV ad spend will increase when rates drop post-election, with shift to non-television channels.

Q: Annuity margin run rate.

A: Paul McDonough said current period is fairly reflective of run rate, with fixed indexed annuity margins impacted by prior assumption changes.