Q1 2020 Earnings Call
The speakers presentation, there will be a question an intersection ask a question during the session you'll need to press star one on your telephone.
People are any further systems. Please press star zero.
The conference over to your first speaker today and for child, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you operator, good afternoon, and thank you for joining us on CNO financial group's first quarter 2020 earnings Conference call. Today's presentation will include remarks from Karen <unk>, Chief Executive Officer, and call Mcdonald Chief Financial Officer. Following the presentation. We will also have several other business leaders available for the question.
To answer period.
During this conference call, we won't be for French information contained in yesterday's press release.
Can obtain or at least by visiting the media section of our website at <unk> Dot com.
Afternoon presentation is also available any investor section of our website and was filed in a form 8-K yesterday.
We expect to file our form 10-Q and post on our website on or before me 11.
Let me remind you that any forward looking statements. We may make today are subject to a number of factors, which may cause actual results to be materially different than there was contemplated by the forward looking statements.
Today's presentation contains a number on non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures to find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout the presentations, we won't be making performance comparisons and unless otherwise specified any comparisons made we'll be referring to changes between first quarter 2019 in first quarter 2020.
With that I'll turn the call over to Gary.
Good afternoon, everyone and thank you for joining us today's call is going to run a little differently from our usual format.
I'll begin with comments on the current environment.
Actions, we're taking to address the pandemic and provide a brief overview of our first quarter business performance.
Then Paul will provide more detail on our first quarter results.
Balance sheet and our outlook.
I'd like to start with some remarks on the coldest 19 crisis first and foremost I hope that you win yours are keeping safe and healthy.
Second every one of US. It's you know would like to extend our gratitude to the health care professionals first responders and many others, who are providing essential services the keep our country Ronnie.
We also extend our deepest sympathies to the families with lost the loved one to the virus or our ill and recovery or thoughts and prayers are with you.
I'd also like to take a moment to thank our many associates, who literally works at night and day to mobilize our remote work capabilities and keep our infrastructure running smoothly.
I'm incredibly proud to power associates and agents have responded and adapted to these challenges.
They had been working tirelessly to support our customers during this difficult period.
Most states consider our business to be essential under the stay at home orders.
The critical protection products that we provide.
Never before we've been so forcefully reminded of the important.
The service provided by a company in industry.
We could pay claims when our customers are in need.
We protect what people who spent a lifetime building.
And we hope people live their lives with a little less worry and a little more financial diminish.
Every business is navigating unprecedented economic falloff from pulled in Nigeria.
Some economists are forecasting unemployment and GDP estimates that signal a recession unseen since the 19 thirties.
We are truly in uncharted territory.
But we will get through this.
Thankfully CNO was operating from a position of strength.
There are five key takeaways I highlight for you.
First our capital and liquidity remained strong.
Even older or severe stress scenario, we expect to maintain our dividend and have the capacity to resume share repurchases should that makes sense as conditions evolve.
Second our investment portfolio is solid.
In earlier periods, we benefited significantly from investment earnings and favorable credit environments.
Early in 2019, we proactively reduced the risk profile of our portfolio positioning it and eventual change and the credit cycle with a bias towards steady and predictable results.
This portfolio repositioning decreased our short term profits and 29 team.
But more importantly, it allows us to exit 2019 more conservatively position.
The recent events suggests that the decision to trade near term returns in 2019 for safety and 2020 was a prudent decision.
Sure.
Though the pandemic will pressure sales in the near term or growth engine remains intact.
In fact man for some of our products, especially our direct to consumer life insurance has increased meaningfully.
We believe our performance during the crisis will demonstrate the strength of our business model and the value proposition of our broad suite of products.
For the business transformation, we announced in January positions us well for an increasingly digital world.
Across all industries, the cold and crisis is accelerating the transition of more services to a digital and virtual format.
Our transformation was developed to capitalize on changing customer expectations.
The groundwork laid by our transformation enables us to now accelerate virtual selling.
Digital service and lead sharing between channels to support consumers in response to the crisis.
[laughter].
We delivered record operating earnings per share in the first quarter, but generated a non operating loss largely due to the GAAP mark to market treatment of various assets and liabilities.
The majority of the loss reflects noncash impacts Paul will discuss this in further detail on few moments.
It's you know we take the Longview.
Over the past several years, we put in the work to strengthen our financial foundation and earn our investment grade ratings.
Our recent transformation puts us on the right path to respond more quickly and effectively to the changing needs of our customers.
As an outcome of the crisis, we are further reexamining the way, we do business and intend to accelerate our strategic plans in certain areas.
In doing so we're balancing expense discipline with investments targeted at technology.
The innovation.
Distribution enhancements and improvements to the way, we prospect and reach customers.
Turning to slide four.
I'd like to address what Seattle has done to navigate through this challenging environment.
First and foremost we're focused on the health and safety of our associates and agents and the continuity of service to our policyholders.
I sure approach by our three constituencies our associates and agents.
Our consumers and our communities.
Starting with our associates an agency in mid March we instituted a work from home mandate in both our corporate and sales offices.
Within 10 days, we successfully transition 70% of our associates to remote working arrangements.
For those business critical is critical associates, whose role do not allow them to work remotely we've taken significant steps to safeguard their health and safety at the office.
Many customers prefer to meet with our agents in the face to face setting.
To assist we deployed enhanced technology tools and training for exclusive agents to allow them to serve consumers to virtual consultations and digital insurance applications.
Although we cannot predict what the long term holds it was important to reaffirm our commitment to our workforce.
Last month, we communicated that there would be no associate reductions due to cope with 19 or at least the balance of this year.
We also introduced financial support programs for our exclusive agents, we've seen their businesses disrupted and their livelihood challenge.
In response to covert 19, numerous health and wellbeing resources were made available to eligible associates, which you can see on this line.
Our exclusive agents financial advisors and customer care centers remain fully engaged and available for more than 1.3 million policyholders.
We're also working with consumers who may be experiencing financial difficulties.
We provide an extended period of time to make premium payments without the risk of losing their benefits during these difficult times.
It is precisely in situations like these that are exceptional client service is so important.
Four communities Seattle committed to maintaining our 2020 budgeted donations for corporate philanthropic partners.
Associates are participating in virtual volunteering opportunities offered through our team CNO volunteer program.
See an old senior leaders also donate a $300000 to two financial assistance funds to support agents and associates within the CNO family that had been impacted by cobot 19, or other personal financial hardships.
The actions, we're taking to respond to the pandemic are consistent with our core values in our commitment to social responsibility.
We realize that our long term success is tied to the collective wellbeing of our customers.
Our associates our agents in our communities.
It is our privilege and duty to support these constituents.
We embrace this role.
I'd like to now dig more deeply into the our businesses and the impact from the pandemic.
I was very pleased with our first quarter operating progress and record results.
We successfully implemented our business continuity plan with minimal disruption and no significant loss of operational capacity.
Today, all key operational functions are running smoothly. This includes our call centers.
Underwriting claims processing and other shared services.
Our service levels remained strong.
We also implemented additional cyber security precautions to ensure that associates working remotely have systems that meet our rigorous security standards.
Turning to slide five.
The first quarter was divided into two distinct periods. Our sales performance through early March was solid and then slowed meaningfully in the last two to three weeks of the quarter States and consumers responded to the pandemic.
As a result, our first quarter sales reflect a blend of those two periods from an operating earnings perspective, we felt very little impact of the crisis in the first quarter.
Operating earnings were up 28% and operating earnings per share were up 41% to a record 58 cents.
Even if we exclude the outperformance from our non allocated investment income and the benefits from a slightly lower tax rate our operating earnings per share, we're still up a strong 20%.
This was due to growth in fee income.
Reduction in our corporate expenses.
And the lower share count due to our share repurchase activity.
Paul will cover all of this in more detail during his prepared remarks.
Both insurance policy income and insurance product margins were up year over year, reflecting both the diversification of our business and its resiliency in the face of continued interest rate headwinds.
I'd also like to note that our expenses decreased by $4 million or 2% year over year as we capture efficiencies in certain areas, while continuing to invest in growth.
Turning to our growth scorecard on slide six.
Despite the cobot 19 impact on our sales in the second half of March our topline results were still strong for the quarter.
We had growth in four of our five score card metrics.
Life and health sales were up 7% our seventh consecutive increase.
Annuity account balances were up 8% as expected in the context of continued low interest rates and resulting pricing actions annuity sales were down 7%.
Turning to our consumer business on slide seven.
For the full quarter life and health sales were up 8%.
Our consumer business entered the quarter with good momentum.
Life and health sales were up 14% in February.
Towards the end of the quarter as many parts of the country started to shelter in place and face to face meeting slowed we saw a steep decline in sales.
As a result, a previous investments in technology, such as electronic applications and CRM tools, we were able to quickly transition both our field and telesales agents to work remotely.
Agents are conducting virtual sales presentations and using digital and voice signatures.
This has allowed our exclusive agents to regain sales traction, albeit at lower levels.
Direct to consumer life sales are surgeon.
And this channel serves as a key lead source to our exclusive agents.
We are encouraged by the demographic makeup of our enforce book.
A disproportionate number of our life health and annuity policyholders are over age 65.
For those that are retired they may not be as impacted by the economic disruption.
At the same time, the crisis underscores the crucial crucial need for insurance and financial protection products.
And the peace of mind, our suite of products products provides.
[noise] annuity sales as I mentioned were down 7% in the first quarter as compared to 25% growth in the comparable 2019 period.
Knowing that our sales would be affected we took additional pricing action during the quarter.
We continuously managed to participation rates on our annuities in order to balance sales growth and profitability in the current low interest rate environment.
As has been the case in prior periods, we will accept lower sales when market conditions warrant.
This ensures that we are putting business on the books that meet our return threshold.
We remain comfortable with this trade off and we'll continue to employ the same discipline in similar circumstances.
[noise] agent recruiting and retention continues to be strong are producing agent count was up 2% in the first quarter on top of 3% growth in the same period last year.
Initially after the shutdown began our efforts to license new agents were stymied by the closure of state insurance testing centers.
More recently, many states have agreed to issue temporary licenses and in some areas testing centers are reopening.
Consistent with our experience in prior periods of job disruption, we expect the current environment to create a tailwind for our new agent recruiting efforts.
Through our National network of offices, we have the ability to create new insurance agent jobs in communities across the country.
Would stay at home orders in place across much of the country. During Q1, the health crisis is hastening the movement to digital purchasing a more products and services, including insurance.
Since physical distancing guidelines went into effect, we have seen a significant increase in our website traffic and digital sales.
Recall that in January we announced our business transformation that consolidated our three segments into two divisions consumer and Worksite to enable cross channel efficiencies and better serve our customers.
I'm pleased with the initial progress we've made to reduce the barriers between our businesses.
For example in late March when our exclusive agents were increasingly unable to meet with prospects face to face, we ramped up our direct to consumer advertising spend and accelerated the lead sharing with our exclusive agent force.
This translate into higher lead conversion rates and higher premiums for sale this ability to flex resources across channels demonstrates the value we can unlock under our new structure.
We have a number of other cross channel collaboration programs underway.
Turning to slide eight in our Worksite business.
Our Worksite business also began the year very strong.
Through the bulk of the first quarter, we were on track for a now they are double digit quarter worksite producing agent growth was up a healthy 13% in the first quarter.
Sales were up 12% through mid March.
In the back half of March sales decreased sharply.
Responding to the pandemic employers diverted their attention to crisis response limited office visitation and in most cases close their offices altogether.
We ended the quarter with total Worksite sales down 1%.
Web benefits designer WBB, our benefits administration technology platform performed well with fee revenue up 8%.
The integration of WBB remains on track and we're seeing solid progress in our cross selling efforts.
Approximately 6% of Worksite insurance sales this quarter were attributable attributable to WBB related relationships in the quarter.
We expect a steeper path to recovery within the Worksite business, then and consumer business.
Given its greater reliance on face to face sales at work site locations.
That said, we have armed our agents with virtual sales tools and they are actively engaging with current customers and existing employer clients to drive sales.
The demographic breakdown of our employer groups is also encouraging.
More than 70% of our covered employee base are employed by state and local governments.
Primary and secondary schools utilities, and other public service oriented organizations less likely to be impacted by the pandemic.
Turning to slide nine.
We returned $99 million to shareholders in the first quarter, including $83 million in the form of share repurchases.
In mid March as financial markets began to deteriorate due to the uncertainty surrounding the ultimate severity and duration of the pandemic, we suspended our share repurchase activity.
Paul will provide more detail in a few moments.
Before I turn it over to Paul I'd like to make a few comments on our outlook.
From where we sit today it is too soon to predict when the country would return to normalcy and what that path will look like.
But you can be assured that we remain laser focused on delivering value to our customers.
Communities and our shareholders as we navigate through these unprecedented times.
Despite these significant short term challenges our franchise remains healthy and our strategies and priorities remain consistent.
We are benefiting today from the actions we've taken over the last several years to diversify our business.
Strengthen our balance sheet and manage risk in our investment portfolio.
In the tragedy and economic crisis brought on by Cobot 19, we recognize and embrace our duty to help those the count on us.
Nothing is more important than ensuring our ability to keep the promises we make with every product we sell.
We know the responsibility that rest with us and we take it very seriously.
We are well positioned to whether what is ahead of us and I'm confident that we will exit this crisis as a stronger and more resilient company.
And with that I'll now turn it over to Paul.
Thanks, Gary and good afternoon, everyone.
I'll begin by providing a bit more detail on our first quarter results and then share our outlook for the balance of the year.
Turning to the financial highlights on slide 10.
As referenced at our Investor Day in February we have adopted a new reporting framework this quarter, which we think provides a better transparency and also better illustrates the value drivers of our business.
As Gary mentioned, the pandemic had no material impact on our first quarter operating earnings.
Which were up 28% in the prior year period.
This was driven primarily by significant outperformance in variable investment income.
It also reflected growth in insurance product margin in fee income and a decrease in expenses.
As Gary mentioned on a per share basis operating earnings were up 41% benefiting from our strong free cash flow, which funded share repurchase reducing our share count by 4% sequentially and 10% year over year.
The pandemic related investment climate at quarter end with its lower treasury rates wider credit spreads lower equity valuations and higher equity volatility did have a significant impact on our non operating earnings resulting in a net loss for the quarter 21 million.
This was driven by mark to market changes to certain investments and on the embedded derivative in our fixed index annuity reserves.
The change in the allowance for credit losses required under a new accounting standard also contributed.
It's worth noting that over half of the credit allowance on our balance sheet as of March 31 relates to the securities held by variable interest entities that we consolidate under GAAP, but for which we have limited economic exposure.
Our results for the quarter included a 34 million dollar tax benefit related to a provision in the carriers Act, which I'll touch on in further detail in a moment.
Operating return on equity excluding significant items was 11.1% in the first quarter 2020.
Parotid tenant a half percent the prior year period, both on a trailing 12 month basis.
Given the challenging operating environment, we're keeping a close eye on our overall level of discretionary spend.
Allocated expenses increased by less than a million roughly half of 1% due to increased expense on mandatory spending.
Expenses not allocated products decreased by 4.3 million driven by declines and legal and other corporate expenses.
As we think about transitioning from the current environment.
We are already reconsidering, both how and where we work.
And at previous levels of business travel still makes sense.
Ultimately this could have significant rent ramifications for our physical footprint and fixed cost base opening up opportunities for incremental expense reduction.
Turning to slide 11.
As reflected on this slide we benefit from a diverse product offering with each product contributing meaningfully to earnings.
In the first quarter total insurance margin was up modestly over the prior year period with growth in the annuity long term care and life margin offset by a decrease in the health margins.
This reflects growth in the reserves and related that invested assets offset by a decline in the yield on those investments.
[laughter].
Turning to slide 12, and our investment results.
Investment income allocated to products increased by 2.3 million or 1%.
Looking at 4.9% increase in net insurance liabilities, partially offset by a 19 basis point year over year decline.
The average yield on those investments to 4.97%.
Sequentially, you average yield declined five basis points.
Investment income not allocated to products increased year over year by $14.1 million driven by an increase in income from alternative investments.
All in prepay income and trading income offset by lower coli performance.
Recall that we record our alternative investment result in one quarter lag.
Our new money rate of 4.46% was up eight basis points year over year, and 38 basis points sequentially, reflecting opportunistic investments in high quality securities during the market dislocation in March.
Turning to slide 13, and an overview of our investment portfolio.
Our up in quality trade last year positioned our portfolio to perform well through this new phase and the credit cycle.
In early 2019, we significantly reduced our exposure to higher risk sectors, including Triple B is equities and high yield bonds.
For the quarter average invested assets were $22.6 billion at March 31, 86% with fixed maturity.
Approximate approximately 91% of our fixed maturity portfolio is investment grade rated with an average rating of single play.
Below investment grade corporate bonds were 2.7% compared to 3.3% year ago.
We are under invested in sectors generally considered to be high risk in the context to the pandemic.
Including energy airline gaming hotels, non essential retail and restaurants.
On a consolidated basis, our investments in these sectors comprised 3.9% of our general account.
Approximately 6.7% of our assets are invested in commercial mortgage loans.
Underweight relative to most appears.
We are well diversified by product property type and geographic concentration.
100% of our investments are first mortgages.
97% or rated cm, one dash to the weighted average loan to value ratio was 51% and the weighted average debt service coverage ratio is 1.96 times.
Our loan portfolio is resilient with conservative stress test assumptions.
Approximately 9% of our assets are invested in residential mortgage backed securities.
99.9% of which are read it rated any IC one or two.
76% of which were purchased at discounts to par value.
Our RMBS portfolios loss remote using conservative stress test assumptions.
See yellows comprise 1.7% of our assets. This includes equity into Filos that we manufacture of 114 million and third party debt close at 400 million.
Our siloed debt portfolio is comprised entirely of AAA to single a rated assets with significant cushion against various stress scenarios.
According to our stress testing credit conditions would have to deteriorate well beyond those would be great financial crisis before any principal would be at risk.
You will find further detail on our investment portfolio in the appendix to our presentation.
Turning now to slide 14.
The cares act included a provision that allows any wells created after 2017 to be carried back.
And repeals, the 80% limitation for utilization of any wells created after 2017.
This lined up perfectly with our circumstances, we generated losses in 2018 related to our LTC transaction.
And we paid cash taxes in 2017 and a bit in 2016.
As a result, the provision to allows us to accelerate utilization of 480 million of life in a wells.
And restore is 165 million non life I know wells.
In addition, the tax rate differential between the current 21% raid and 35% rates than the carry back years.
Results in a $34 million permanent tax benefit that as I mentioned previously we recorded in our first quarter non operating earnings.
[laughter].
Turning to slide 15.
We continued to generate strong free cash flow to the holding company in the first quarter with excess cash flow 82 million or 98% operating income.
As Gary mentioned, we returned $99 million to shareholders in the quarter, including dividends of 16 million and share repurchases of 83 million.
Turning to slide 16.
At quarter end, our consolidated RBC ratio was 406%.
Down slightly from 408% at year end, 2019, and modestly above our targeted range of 375% to 400%.
This reflects adverse impacts than RBC as a result of the pandemic related investment climate.
Offset by favorable impacts related to that cares act tax provision and a change in reserving methodology for fixed index annuities.
Our leverage ratio at 23.8% remains within our targeted range of 22 to 25.
Our holdco liquidity of $168 million was above our target minimum of 150 million.
We also had $314 million operating company cash and cash equivalents at quarter end.
As a reminder, we have an undrawn 250 million dollar credit facility with the 100 million dollar accordion feature and we have no debt maturities prior to 2025.
Following a review of our capital and liquidity in the context of various pandemic related stresses.
Which recently affirmed our investment grade rating with a stable outlook.
Turning to slide 17, and our outlook for the remainder of 2020 and beyond.
[laughter].
Given the enormous amount of uncertainty surrounding how the coated 19 pandemic will play out and the continued economic impact it will have.
We are suspending the guidance we had previously provided regarding earnings per share growth and share repurchase capacity in 2020.
The potential impact of the pandemic on our results is largely driven by three things number one the impact of social distancing on our sales volumes.
Number two changes in mortality morbidity and persistency or lapse rates impacting insurance product margin.
A number three the resulting severe economic recession, driving lower eni through lower interest rates the impacted credit deterioration on invested assets capital.
And potential impacts to reserves and DAC, resulting from lower interest rates.
To develop a sense for the range of potential outcomes across these three dimensions, we've modeled it two scenarios, which I'll call our base case and all the kids. These scenarios were based on the H E model that the White House Corona virus Task Force. That's frequently cited in its press briefing.
Our base case assume social distancing practices continue through the end of June.
After which economic activity slowly, but surely picks up.
In this scenario, we assume 80000 deaths from the virus in the U.S.
In our Alts case, we assumed same as our base case initially, but then a second wave of the virus hits in late July resulting in an additional 40000 deaths in the third quarter and we resumed social distancing through the early part of next year.
In both cases, we assume certain levels of various macroeconomic variables, including GDP unemployment interest rates ratings migration among others in the old case, most of these metrics approximate level seen in the great financial crisis of 2008 2009.
Some metrics since such as unemployment levels are worse.
With respect to the impact on sales volumes, we expect our consolidated second quarter results to be challenged.
In April consumer Division life, and health Nap was down 24%.
And annuity collected premium premiums were down 19%.
As the economy continues to reopen and as our customers agents become more accustomed to for transactions, we'd expect to gradually return to our prior growth trajectory.
[laughter].
Direct to consumer channel inside of the consumer Division outperformed in April with life snap up 28%.
It was a record month and we expect this momentum to continue.
As Gary mentioned, we expect a path to the recovery within our worksite business to be more difficult.
In April Worksite life, and health Nap was down 75%.
We expect Worksite sales remain challenged through the third quarter.
And begin to stabilize in the fourth quarter in conjunction with open enrollment periods.
With respect to changes in mortality and morbidity we expect between.
Seems to have an adverse impact on our full year insurance product margin of approximately $20 million to $30 million across the two scenarios.
It's worth noting that our products, we create the natural.
While higher mortality claims unfavorably impact for life margins, they can benefit or health and long term care margins through the release of reserves.
With respect to persistency through April we did not see any material change in lapse rate.
Based on an experienced during the great financial crisis in a way to nine.
We do believe there as a possibility that high unemployment in the current crisis could translate to an increase in lapse rates in coming months.
If that does occur it would benefit current period earnings but heard out your earnings as the base case of invested assets with that of course be lower.
Regarding our investment portfolio, we have carefully evaluated a range of potential impacts from the pandemic.
Including it impacts on credit migration levels of defaults and AI and capital.
We used a range of assumptions, which are market consistent or in a down assumptions rating agencies.
Past financial crises.
We paid particularly close attention to covert 19 impacted sectors, such as real estate airlines retail hospitality and energy among others.
With respect to the collective impact on earnings.
We expect second quarter operating earnings to be meaningfully depressed relative to the prior year period.
This is driven by the likely impact of alternative investments, which again are reported on a one quarter lag.
And due to the impacted covert 19 claims on insurance product margin.
Earnings for the balance of the year will likely be pressured by lower interest rates and possible increased pressure on insurance product margin related to covert 19.
Depending on how that buyers plays out these unfavorable impacts could potentially.
And a favorable earnings impact of higher upgrade.
Greetings could also be impacted by just tend to reduce interest assumptions for preserving purposes.
We did not believe that was necessary and appropriate at March 30.
But it may be appropriate and subs nerds.
The impact Vern.
And it's upon the great assumptions used as an example, an immediate and permanent reduction in the new money rate to 3%.
Relative modest impact on earnings in the range of 16 to 20 million.
With respect to capital, we expect credit migration could reduce RBC levels by 20 to 30 points across our two scenarios.
Translates to a reduction of approximately 102 $150 million and associated capital.
All else equal.
But this is before the favorable impact on our capital from lower sales volumes, which will reduce capital strained and our in force book would continue to generate earnings and capital.
Even at the low end of our range of estimated outcomes, which assumes the least favorable assumptions across the two scenarios and incorporates additional stress impacts such as lower interest rate assumptions for reserve purposes.
We expect to be able to maintain our target RBC levels debt leverage and minimum holding company liquidity.
Maintain our quarterly dividend to shareholders not African raise capital and have the capacity to resume share repurchases showed that makes sense as conditions of all.
And with that I'll turn it back more to Gary.
Thanks, very much fall.
We are navigating through unprecedented times and profound challenges as a country. This crisis may last longer and be tougher than we expected.
I know, we will weather the storm together.
My confidence in the long term outlook for our company is steadfast our franchise remains strong and our financial position is robust we have a strong track record of execution and delivering on our promises.
Prior to 2017, we were in a de risking and turnaround mode.
Between 2017, and 2019, we pivoted to growth.
And going forward, we're focused on maintaining our growth momentum, while optimizing optimizing profitability as we transform our business to a more customer centric distribution model.
Turning to slide 19, we are differentiated by our exclusive focus on middle income consumers.
Our diverse distribution channels.
And the combination of health and wealth and insurance and security offerings.
Nearly 65% of our insurance earnings are generated from our life and health products and 90% of our revenue is generated from renewal business, we have ample capital liquidity and reserves, enabling us to absorb shocks, while still meeting our commitments.
Our cash flow yield and conversion rates continue to be among the highest in the industry and we remain disciplined in its deployment.
Our investment portfolio is well positioned for both the current cycle and a low for long interest rate environments.
Hi end by reiterating my gratitude to all of our associates agents and leaders.
They are doing an amazing job of supporting each other and serving our clients. During this very challenging time.
I couldn't be prouder of this organization and everyone in it.
Everyone on the call and to all of our shareholders. Please stay healthy and stay safe.
Thank you for your interest in and support of CNO Financial group.
We will now open it up for questions before I hand, it over to the operator I wanted to make this one side comment.
I know that one Paul was speaking there were times the audio broke up a little bit at least for me that may have been the case when I was speaking as well. So if you need us to restate something or if there was a number you didnt hear please of course feel free to ask as you can imagine we're all in separate locations right now trying to navigate this as best we can so with that I will turn it over to the offer.
Later.
Thank you as a reminder to ask the question. Please press star followed by the number one on your telephone keypad, well pause for just a moment to compile the kuni roster.
Your first question comes from Ryan Krueger from KBW. Your line is open.
Hi, Thanks, good morning, or good afternoon, I guess at this point.
In regard to.
Buyback of gifting just give us it then.
Kind of what you'd want to see any external environment before you would you consider is doing it.
Yeah, I'm going to go ahead, and let Paul speak to that then I'll jump in if it's necessary.
Hi, Ryan I would say that we don't have a bright line what I would emphasize is that based on all the modeling, but I just described.
Low end of the range.
That comes out of that that modeling and ER stress testing that we have the capacity.
Bye.
And we'll decide whether and when do that has as things continue to evolve.
And would you had anything to that.
Yeah, I think the only perspective I'd give you know I think about buybacks and have this discussion with our board pretty regularly I think about it across three dimensions. First is do we have the capacity and we feel quite confident enough capacity. We're very pleased with how the businesses are performing.
We look at the valuation we think that the stock is very compelling valuation and the third and final factor or the external factors and I think we're at a time in a place right now where there's a lot more wisdom and trying to conserve cash and make sure.
Things develop as we expect so we think they'll come a time in a place, but we think right now it's smarter to to watch the situation unfolds.
Understood and then on.
Any I guess any changes on your expense expectations. If if we from the Investor day in the current environment.
Ryan It's Paul.
I'd say in general no.
We continue to be very focused on expenses are recall the the two actions that we took at the end of last year.
Beginning a part of this year one relating to outsourcing of.
He the other relating to our transformation, both translating to some meaningful expense reductions.
We continue to be disciplined but just in general.
Focused on.
Identifying ways to take out cost can be more efficient.
Some of which we expect to.
Flow through to earning some of which we would use to fund.
Our continued growth as we mentioned back in February at the Investor Day, we do expect that to translate to a reduction in expenses year over year.
The one thing that I would say is new is that.
And I mentioned this in my prepared remarks, as we think about by transitioning.
Back to.
Work not working from home.
We are beginning to Reimagine, what that May look like and certainly this is no being covered well in the media were not the only ones doing it but.
We think that that may very well translate to a lower.
Cost base, just in terms of our physical office footprint.
So I'd I'd point to just those two things right.
Great. Thank you very much.
<unk>.
Your next question comes from Randy Binner from B. Riley FBR. Your line is open.
Hey, thanks.
I guess I'd like to focus on the kind of the sensitivity.
And scenario.
Analysis, you laid out on slide 17, and Paul actually part of that explanation. When you went through RBC impacts.
That I was not able to hear that because of the phone connection. So could you first review the RBC part a of the scenario.
Walk you did and then on the on the claim side I just wanted to understand what I think you said was that.
It's more of a lapse rate assumption rather than mortality as being the cobot impact.
Okay, Hey, Randy.
So with respect to the impact of the current environment on investments.
We've modeled.
An RBC impact of 20 to 30 points across the two scenarios in addition to that.
We we have also model to meaningful earnings impact so lower Eni.
Some of which would flow through.
Allocated the products.
While lower assets because of the decline in sales on the margin.
And Ah and and potentially lower.
New money rates from lower interest rates.
With respect to.
Claims.
Again, our underlying assumption.
Is that there would be between 80 and 120000.
Thats in the U.S.
And then mortality impact of that across our products are primarily life with with a very modest offset.
In long term care and supplemental health.
Would result in an adverse earnings impact between 20 and $30 million across the scenarios, we do not expect.
Any.
Net impact from morbidity.
We expect that will have.
Some.
Corporate 19 morbidity.
Cases.
But that will be offset by.
The decline in services on long term care and health and so forth.
And.
Instinct that covers your questions Randy is that yes. It was a sudden lapse rates specifically are not I know I'm just trying to lapse rate. If mortality is what is driving the 20 to 30 million than what it what part of the 20 $30 million would be lapse true.
Yes so.
As I mentioned as we as we.
Thought about how to model potential lapse rates.
We went back to our experience in the 2008 2009 financial crisis.
Where we observed between zero and 3% increasing lapse rates depending on the product.
In this instance for modeling purposes, we assumed a bit higher than that across the two scenarios.
But importantly in building the low end of our range for earnings and free cash flow such capital.
We assumed no increase in lapse rates, because the impact to earnings and capital.
From a.
A shock lapse in the first year would actually be favorable.
Okay.
And then actually I'm, just going to do one more back to Ryan.
Ryan's question.
So.
Okay that in everything out.
You're going to have a smaller office footprint, but art.
I think I think you also mentioned year opening kind of thing you're accelerating some strategic initiatives, including including what I'd I thought I heard just to be I T spend so.
Kind of going back to the expense goal would win that wouldn't that accelerate expenses this year.
So so Randy this is Gary.
There are certain areas and we did some of it in Q1, if you take a look at as an example, we saw a really strong lift from accelerating the timeframe when we hand colonial Penn in Poland leads off bankers life agents.
So we actually spent more on advertising in the first quarter in order to ramp up that production because we saw that was really working quite well. So there are different categories of expense that we would look to accelerate and we're trying to constantly walk this balance between doing things like that and other investments that are really going to be important.
New World Order, we're walking that balanced against the operating.
So is it true that in certain categories will accelerate expenditures, yes, that's absolutely true is it true that there won't be anything else and that that out against.
I can't say that yet we're still working through how to balance these things.
All right I'll leave it there thank you.
Your next question comes from Eric Fast from Autonomous Research. Your line is open.
Hi, Thank you want to go back to your stress test comments on the investment portfolio and apologize if I missed this got the RBC impact, but did you talk about kind of what you're assuming for impairments or credit losses in the different scenarios.
Yes, so we haven't given those.
Specifics.
We obviously did make specific assumptions I would say generally speaking that the assumptions that we made.
Were in line with.
What that experience was broadly during the financial crisis.
Like I don't know if you want to provide any other.
Any additional color here.
No I two point about two points first point.
Some of.
Our assumptions you will see reflected to a degree in the allowance for losses, which was taken in the quarter.
Which was developed.
Pretty granular granular asset class level.
That.
So that's one reflection of it.
And.
Yes, I'll just have that one point.
Got it okay.
And then.
Kind of capital ratios overall, and then you've been in the process of sort of bringing down your targets a little bit for RBC and Holdco liquidity.
How are you thinking about that now and then assuming you're still keeping the same long term targets, but would you intend to run at a little bit higher buffer to that in the interim just given the uncertainty.
Sarah.
And changing our targets. So you know RBC Theresa.
400.
Anyone 50, as we ran our modeling we essentially sold for.
385 RBC so.
Our range.
Sure distributing capital off.
So incurred to that level RBC.
And you know pay dividends and and that that.
Good.
Generates the amount of free cash flow that's available. So it's it's in that context that we say at the low end of the range of our Aston and taking the.
At least favorable trend across the scenarios across the stress testing.
No we have share repurchase capacity, so we don't see a need to relax.
The requirements.
On that so that's how we see this playing out.
Got it thank you.
No.
Your next question comes from Alex Scott from Goldman Sachs. Your line is open.
Hi, good afternoon. So I guess the first one just wanted to get a fuel for you know when I think your colonial Penn and sort of the surge in interest there what you've seen so far in April.
For life and help life and health sales as this interested in if you could provide any kind of sensitivity. We should think about for just the premium.
Level and how that could trend when we kind of think about those different pieces in the lapses that you mentioned.
Sure Hey, Alex.
So as I mentioned in April.
Our direct to consumer what sales through through colonial Penn were up 28%.
We expect that momentum to continue.
Not sure theory would your would you offer any any additional color there.
No I like the results we've seen in April I would like us to continue those we think theres more opportunity.
As consumers themselves get more comfortable interacting online on the phone and so on for these types of products. So we like what we're seeing and we think there's reason to believe it will continue.
Got it and then maybe as a follow up on free cash flow generation I think.
Talked about 303 50 in the past before deployment.
Yeah, I would just be interested in when we when we kind of look through some of the impact to your expected around alternatives and koby 19, and so forth. When do you expect any kind of ongoing impact to those levels and is there any offset from new business strain that maybe helps offset some of the.
From a.
From from lower revenue growth and and some of the onetime impact.
Hey, Alex I'm Gonna have Paul answer that question and just a moment I just want to come back and add to that last response I gave you because I think that was part of it that maybe got glossed over.
In our explanation.
Weve for a long period of time, we've had lead sharing between colonial Penn and bankers life.
What was different after our transformation in January we started experimenting with sorting those leads in different ways and sharing them at an earlier point in time with bankers life quote unquote physical agents.
And we were really very pleasantly surprised by the pickup in sales. The average case size going off and that the sale was taking less time and turning quicker by making some tweaks to which types of leads we share from colonial Penn to bankers and the the.
Number of days that we lag and so on so so the point I want to emphasize there. In addition to just consumers being more responsive to that direct to consumer advertising and other things we're doing to drive demand. We're also seeing higher close rates higher average sale quicker turn and so on and that collaboration as we get better.
At sifting through the leads and figuring out which ones are more effective and how that works. We expect that to continue to accelerate so I don't want to give you. The impression. This is only about running more ads and getting consumers to be more responsive.
There are number of other things, we're doing to bring the collective ex expertise of our overall consumer channel together and that's what's got us excited and believing that there is really potential.
Invest and build new skills and really get more success.
I did a bad job answering that question on the first across I wanted to add to that now I'll turn it to fall to speak to the cash flow question you just asked.
Alex and on the on the free cash flow again.
That's essentially the output of all of our modeling it is.
When you.
Stress.
The statutory balance sheet and earnings.
How much.
Capital is available to dividend up to date the holdco.
And after you.
All your expenses and your your quarterly dividend how much.
Would remain.
And and and that's so that's net of certainly some.
Capital being freed up relative to our prior expectations on sales.
It's net of.
The the most adverse assumptions across this scenarios relative to more mortality.
And summit at RBC impacts on we did not as I mentioned before we did not include an assumption of of an increase in lapse rates for the purpose of.
Look rent rain.
Earnings and capital because higher lapse would actually have favorable impact too.
Earnings and capital in the current year.
So its net of all those things that we concluded that we have.
Free cash flow that translates to share repurchase capacity.
And again, whether and when we decide to do that.
We'll determine as things evolve.
Got it okay. Thank you.
Your next question comes from Humphrey Lee from Dabbling in partners. Your line is open.
Good afternoon, and thanks for taking my questions.
Question for Paul maybe Larry Johnson, I'm looking at kind of interest rate right now and if this would be how would the did yields and spreads have developed since your investor day. This distinction in terms of kind of new money yield spread compare compression shrill. If you think the enterprise still kind of unchanged.
So how should we think about leasing in near term.
Yes.
Eric and what I would say is that.
The expectations that I came into the year with respect to new money rate.
Our not different today.
I think.
We did something on middle for forties in the first quarter, which was.
Ahead of that expectation.
Additionally, because not only have we been I think we've done a good job playing defense, but we also play offense.
And where there's opportunity to generate some excess spread and therefore margin for the for the for the products.
We're looking to do that to reflected in the first quarter I.
I think.
While the market opportunity isn't it.
A diverse and obvious says we're now in the second quarter, there's still opportunity to play the same.
A pattern of often.
And you know I would think that when you get it ended the year net net.
It's really uncertain, what conditions will be but I'm comfortable today that will achieve in.
2020, what we thought we would achieve going into the year and some slightly different ways.
But we have a lot of skills and tools here and we'll we'll pull out the ones that we need.
As conditions.
Warrant.
Just to follow on that so like I think previously you indicated that you have some appetite to take some of the cap. So and then like you said place them all sense any investing some of the to higher yielding assets.
Given kind of the key macro economic concern and all that has stood at the time change.
No not not at all I think one word I would insert into into year sentence was selectively we want we think we have a good quality portfolio, we want to keep it that way, but we all in on several if market conditions. There are times when you can buy good risks at good.
Yes.
And.
When people are throwing out baby with bathwater, well that the bathwater go we'll take the baby.
We can be patient.
And pick our spots and I think we did that very effectively in the first forward and we're going to continue to do that as conditions warrant through the rest of the year, we have a tremendous amount of expertise in certain fixed income credit market.
And you know the market, sometimes give it gives us the opportunity to use those those skill to understand and take risks that while the market at the moment isn't it.
Valuing them properly.
So we can.
And then things go pretty well for us down the line so.
Yeah, we have to play defense and have a good quality earnings stream for the company, but you know.
Yeah Theres no estimates, we play off and two we have to get keep those improper proportion.
I think we've been doing that will be disciplined when we have to witness what we did last year will be smart when we need to witness what we did in the first quarter of this year.
Got it thank you.
Your last question comes from Dan Bergman from Citi. Your line is open.
Thanks, Good afternoon, I know you touched on this in the prepared remarks, but it's going to see that anymore color you could provide on what portion of your sales typically involve.
Face to face interactions and how we should be thinking about.
Build in customers receptivity to transact digitally electronically just any kind of color on how that.
Breakdown across your products and segments of it.
Sure. Thanks, Dan This is Gary the short answer is the majority of our sales.
Involved some type of face to face connectivity and now we've seen a lot of that change here in recent years, we've been very pleased with how colonial Penn has work than we've been very pleased with what benefits brings and the ability to enroll consumers over the telephone we think that will accelerate and in the earlier longer response I give to Alan.
It's about.
Seeing some early success, where we accelerated the.
The AD spend and a little bit of technology spend with colonial Penn and then how did those leads off and then those quote unquote face to face agents. They were interfaces with consumers on a more personal basis, whether it was over the following her over local computer or what have you. So they weren't necessarily truly physically face to face, but they're in their community making contact.
And I think that's what's going to start to happen, meaning I continue to believe there's great value in the distribution footprint. We have an a local advice, we can give and I think we have the ability to leverage that so that we can provide that type of guidance and counsel and so on without having to be physically.
There are there will be come a time, when we're able to do that as well, but right. Now we think we can navigate the best of both will come back. Your question. The short answer is the vast majority of our sales involve some type of quote unquote face to face. We just think that the character that is going to continue to change.
Got it that's really helpful. And then maybe just quickly shifting gears I think one of your competitors recently announced a sizeable statutory long term care reserve build falling off a regulatory review I think given some ended changes to interest rates and some morbidity mortality assumptions I just wanted to see.
Is there any comparable reviews by the state regulators.
For your LTC books that are either in process now are expected just any thoughts would be great.
Okay, well the Baltic that one.
Sure So Dan we.
I think I think you probably noted that.
[noise] that charge by Unum came at the end of a a sort of typical three to five year financial exam.
We're at the tail end of ours, and we certainly not experienced anything like that.
And then I guess I would just emphasize the nature of our book I'd refer you to.
Slide 25 in our.
Earnings call Duck, you know, which just.
Besides the.
The the.
Very much lower risk profile of our of our LTC reserves.
And I think I'd leave it at that.
Yeah, I think the only thing I would add to that look at the track record we've had a relative.
To reserves and the absence of charges and then.
I try and remind everybody every chance I get the very fact that we were able to comp consummate a reinsurance deal with a reputable reinsurer suggest that the book was never as bad as everybody here, they were able to quantify it and measure the risk and so on and we feel that what's left is that some of the best parts of the book So we believe.
In a very different place than the vast majority books out there.
Got it I guess I'd add up another thing.
And I'd say, it's Paul again, I'd add one other thing and that's just a conservative nature of the assumptions that we use and setting our reserves. So for instance, we don't assume morbidity or mortality improvement.
Nor do we assume new rounds of future rate increases.
Got it thanks, so much.
We have no further questions I turn the call back over to the presenters for his closing remarks.
Okay, I want you can't really well.
Good job like to thank everyone for joining us today.
Speaking with you again.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
[music].