Q3 2020 CNO Financial Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to todays CNO Financial group third quarter 2020 earnings call.
After the speakers remarks, there will be a question and answer session to ask a question. During this time simply press Star then the number one on your telephone keypad. If you require any further assistance during the call. Please start Sheryl I would now like to turn the call over to your speaker today.
Jennifer child VP of Investor Relations. Please go ahead.
Thank you operator, good morning, and thank you for joining us on CNO financial groups third quarter 2020 earnings Conference call. Today's presentation will include remarks from Gary Bertone, Chief Executive Officer, and Paul Mcdonough, Chief Financial Officer. Following the presentation. We will also have several other business leaders available for the question and answer.
Puria during this conference call, we will be referring to information contained in Yesterdays press release, you can obtain the release by visiting the media section of our website at <unk> Dot Com. This morning's presentation is also available in the investors section of our website and was filed in a form 8-K yesterday.
We expect to file our form 10-Q and posted on our website on or before November six.
Let me remind you that any forward looking statements. We make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward looking statements today's presentations contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures you'll find it.
Reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout the presentation, we will be making performance comparisons and unless otherwise specified any comparisons made will be referring to changes between third quarter 2019, and third quarter 2020, and with that I'll turn the call over to Gary.
Thanks, Jennifer good morning, everyone and thank you for joining us.
I'm very pleased with our record third quarter financial performance.
These results underscore the continued strength of our model and the resiliency of our business during these unprecedented times.
When I look back at what we've accomplished over the past 10 months I'm extremely proud of our associates agents and leadership team.
In January we announced our enterprise transformation and began the process realigning our three segments into two divisions.
Even before Colbert changing consumer behaviors and expectations drove this decision.
As part of our long term plan.
We knew we needed to adjust our model to enable us to better reach consumers, how and where they want to do business.
Seattle has a unique set of capabilities and our 5000 agent strong exclusive distribution force and our top five direct to consumer business.
Its the combination of these businesses that allows us to pursue our current strategy.
COVID-19 accelerated the shift in consumer buying behavior that was already underway on spark other changes that we could not have predicted.
Many of these changes may prove to be permanent.
The pandemic also accelerated our transformation.
In March we deployed enhanced technology tools and training to enable our agents to continue to serve customers through virtual consultations and digital insurance applications.
In response to new customer and Worksite employer needs, we began to advancing our own strategic plans and technology investments.
By fast tracking various digital direct to consumer and cross channel collaboration programs. We accomplished in about six weeks what was originally expected to take more than six months.
Throughout this unprecedented year, our teams have pulled together to support our agent force rebuilt sales and drive productivity and efficiency gains.
Oh, well, serving our customers with minimal disruption.
I'd like to take a moment to thank the customers that put their trust in US every day and our agents and associates that works so tirelessly to deliver on our promises.
This quarter see at all with certified as a great place to work in a first year participating in the survey.
We are very proud of this recognition.
Our people truly makes you know a great place to work.
Turning to slide four.
We continue to operate from a position of strength.
Operating earnings were up 63% and operating earnings per share were up 76%.
We're seeing continued sequential improvement in nearly all of our key metrics and premium collections continue unabated across both divisions.
The overall product margin in the quarter was robust due primarily to fewer health claims as consumers deferred medical care.
Even excluding these and other factors, which we believe are largely temporary or insurance product margin remained strong at $3 million or 1%.
Discretionary spending was strictly controlled in our capital and liquidity positions remain solid.
We ended the quarter with an RBC ratio of 428% in $236 million in cash at the holding company.
These levels are after returning $67 million to shareholders, including 50 million and stock buybacks.
Turning to our growth scorecard on slide five.
Three of our five metrics were up year over year.
Life sales were up a solid 19% fueled by both continued strong direct to consumer growth and exclusive field agents sales.
Health sales showed significant sequential improvement, but remained down 16% over the prior year.
Overall life and health sales were essentially flat this quarter relative to the prior year period.
Which reflects a marked improvement over last quarter sales.
Insurance collected premium growth accelerated to 3.3% driven by continued strong persistency in cumulative sales growth over the past year and like Dunhill.
Turning to our consumer division on slide six.
The cold at 19 crisis continues to draw attention to the critical need for insurance products, among our consumer base.
Sales of life insurance remains strong in the third quarter, well supplemental health and long term care rebounded nicely.
Medicare supplement sales remain challenged.
Life insurance sales were up 25% for the quarter and up 19% year to date.
Direct to consumer life sales were up 23%, which comprised just over half of our total life sales.
Life sales generated by our exclusive field agents were up 29% the highest growth rate we've experienced in several years.
As you know our consumer channels have been managed in a single division since February.
Our third quarter results demonstrate the strength of this unified distribution model and the synergies that are being unlocked.
Direct to consumer leads are being shared with field agents earlier in the sales cycles.
Customers are now choosing whether to transact with us online over the phone in person with a local agent for more personalized service or some combination of the three.
Integrated blend of digital and local agent service allows us to build deeper more meaningful relationships with our clients and establish a level of trust that is difficult to replicate.
As a result, a growing portion of our field sales are coming from consumers, who contacted us for a direct purchase.
Did not buy a policy upon initial contact but later opted to purchase a plan from one of our exclusive agents in their community.
This ability to flex our resources has translated to higher lead conversion rates and lower marketing cost per application written.
The same dynamic applies to our health business.
We are implementing various initiatives on the health side to provide consumers with a similar unified multichannel sales and service experience.
One example is our recently launched online health insurance marketplace.
My Health policy Dotcom.
Focus on helping Medicare beneficiaries enrolled in Medicare advantage and prescription drug plans.
For the past few years senior preferences have been shifting from Medicare supplement to Medicare advantage products.
While we have been selling third party I made products for some time, our new program leap frogs, our previous efforts.
Our new product platform Leverages, our direct to consumer experience with the strength of our local exclusive agent force.
During this year's Medicare annual enrollment period consumers can purchase Medicare products from us online or from one of our 2800 tele sales and local exclusive field agents, who are certified to sell Medicare plans are.
Our agents now have the ability to sell our own Medicare supplement plans and third party Medicare advantage and prescription prescription drug plans.
We believe we have the largest exclusive agent force certified for EMEA sales.
We've seen steady sequential improvement in our producing agent count since the start of the Panda.
During the second quarter at the height of the pandemic arpus producing agent count was down as much as 26%.
It has since rebounded nicely up 9% sequentially, driven by higher retention and an uptick in new agent recruiting.
Turning to slide seven and our Worksite Division.
Collected premiums remain strong as the profile of our existing employer groups is translated to continued healthy levels of employee persistency.
We saw significant sequential improvement in our Worksite sales in the third quarter with sales up 48% over the second quarter.
Relative to the year ago period, However, sales were down 56%.
Given recent increases in colon infection rates across the country. We continue to expect a steeper path to recovery in the Worksite business.
As workplace dynamics have changed.
We we've been focused on helping our existing clients navigate through call. It.
We have made significant progress enhancing our digital capabilities to offer enrollment by telephone.
Video conference or online.
These virtual programs drove almost 30% of our sales in the quarter.
What benefits design continues to play a key role in accelerating these initiatives.
We recently launched several pilots to deliver more holistic employer solutions, including leveraging third party products and targeted marketing to specific sectors.
We're also accelerating the training of our veteran Worksite agents on W.P.D. technology to enable them to sell benefits technology and enrollment services.
This cross selling activity provides a more complete solution to our employer clients and provides additional scale to WBB.
While still early we are encouraged by the initial reception to the pilots.
Similar to our consumer business as various initiatives move from pilot to scale, we will provide additional updates.
Turning to slide eight.
We returned $67 million to shareholders in the third quarter, including $50 million in share buybacks.
Year to date, we have deployed 100.
<unk> dollars on buybacks.
With our higher cost cash balance and RBC ratio, we have the capacity to repurchase significantly more shares during the quarter.
We made a conscious and well consider decision to take a measured approach.
We expect to have the continued capacity to repurchase shares in the fourth quarter and will remain prudent as we carefully monitor the evolving circumstances.
And with that I'll turn it over to Paul.
Thanks, Gary and good morning, everyone.
I'll begin by providing a bit more detail on our third quarter results and then share our outlook for the balance of the year.
Turning to the financial highlights on slide nine.
As Gary mentioned operating earnings per share were up 76% benefiting from favorable health margin due to customer deferral of care strong net investment income and strict expense control.
Earnings were also favorably impacted by our continued strong free cash flow funding share repurchases that reduced our share count by 9% year over year.
Allocated an unallocated expenses decreased by 4% in the aggregate.
I didn't buy general expense discipline, as well as decreased travel and marketing related expenses.
Fee income declined by 2.2 million compared to the prior year quarter.
Driven by 3.3 million of expenses related to our my health policy Dotcom online marketing initiative.
Operating return on equity excluding significant items, what do you have 1.9% through September 32020, which compares to 10.6% in the prior year period, both on a trailing 12 month basis.
Turning to slide 10, and our product level results.
Our margin in the third quarter included a net favorable impact of 42 million related to coated.
The annuity margin reflects an unfavorable impact of approximately 7 million from higher persistency related to coated.
Drove volatility in the accounting for the embedded derivative reserves in our fixed index annuities.
The health margin included approximately 58 million favorable impacts related to coated driven by the release of prior period claim reserve redundancies due to claim levels continuing to trend below pre corporate levels.
And our life margin in the third quarter included approximately 9 million of unfavorable impacts related to coated.
Insurance product margin, excluding all covert impacts was up $3 million or 1%, which reflects the strength of our underlying business and the benefits from our diverse product suite.
Turning to slide 11, and our investment results.
Investment income allocated to products was essentially flat as the impact of the 4% increase in net insurance liabilities and related investments was largely offset by an 18 basis point year over year decline in the average yield on those investments to 4.8%.
Sequentially, the average yield declined four basis points consistent with our prior guidance.
Investment income not allocated to products increased 9 million year over year to 43.7 million driven by strong alternative investment performance.
Our new money rate of 4.08% was down 58 basis points year over year and down 41 basis points sequentially there.
This reflects $582 million in funds invested in assets with an average rating of a minus an average duration of 12 years.
Turning to slide 12, and an overview of our investment portfolio.
At quarter end, our invested assets were $26 billion up 6% year over year as you can see from the slide approximately 96% or fixed maturity portfolio is investment grade with an average rating of single way there.
The triple B allocation comprised 41% of our investment grade holdings consistent with the prior quarter.
As you can see on page 24 of our earnings presentation, we remain under invested in most sectors generally considered to be high risk in the context of the pandemic, including energy Airlines gaming hotels, non essential retail and restaurants.
Turning to slide 13.
We continued to generate strong free cash flow to the holding company in the third quarter with excess cash flow of $95 million or 84% of operating income this quarter and $280 million or 79% of operating income on a trailing 12 month basis. That's.
As Gary mentioned, we returned $65.7 million to shareholders in the quarter, including dividends of 17 million in share repurchases 50 million.
Turning to slide 14.
At quarter end, our consolidated RBC ratio was 428% up from 405% at June Thirtyth, reflecting the very strong operating results in the quarter.
This represented approximately $140 million excess capital relative to the high end of our targeted range of 375 to 400.
Our holdco liquidity at quarter end was 236 million, which represents $86 million of excess capital relative to our target minimum holdco liquidity of 150 million.
We have intentionally maintained a more conservative posture in the context of the ongoing uncertainty, particularly as new cobot cases continue to increase sharply across the country.
Turning to slide 15, and our outlook for the remainder of the year.
We most recently updated our forecast in October applying basin adverse scenarios that are generally aligned with certain rating agency assumptions regarding COVID-19 infection rates and death rates and related economic impacts.
From a topline perspective in our base case, we expect a continuation of the positive momentum we demonstrated in the third quarter as additional data points through the third week in October 1st direct to consumer sales were up 3%.
While this reflects a deceleration relative to recent sales levels. It is due almost entirely to a planned reduction in advertising spending because of higher AD cost close to the election.
Our approach to marketing spending has always been to put our foot on the gas when pricing is opportunistic.
And to pull back when pricing is less attractive.
Second consumer life and health sales in total were up 20%.
Third annuity collected premiums were up 9% and fourth Worksite life and health sales in total were down 47%.
From an earnings perspective in the fourth quarter of 2020, we.
We expect that could impact on insurance margin to be net favorable though to a lesser extent compare to the impact in the third quarter. That's health care claims are exhibiting a trend toward more normal levels.
Our base case scenario assumes that a COVID-19 vaccine will be available in the middle part of next year and that infections will persist through the early part of 2022.
We have revised our estimated kobin mortality impact across all of our products, both life and health to $68000 per 1000, you asked us down from $130000 per thousand U.S. stocks in our prior forecast.
The difference reflects refinements to our model we shifted from a per policy focus to a focus on the face amount per life business.
He also apply to factor to our life blocks to adjust for certain underwriting characteristics.
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Expenses in total are expected to be up in the fourth quarter compared to the prior year period, driven by an acceleration of various digital and technology investments to better position the company for the future.
Consistent with our prior guidance. This will result in total expenses for the second half of 2020 flat to 2019 adjusting for the sickening significant items in the fourth quarter of 2019.
From a capital and liquidity perspective, even in the adverse case we.
We expect to maintain our capital and liquidity targets maintained our quarterly dividend to shareholders and have the capacity to continue share repurchases.
We'll provide more color on our outlook for 2021 on our fourth quarter earnings call as their outlook today remains cloudy due to lack of visibility in a number of areas.
And with that I'll turn it back over to Gary.
Thanks, Paul.
I'm very pleased with the steady operating improvement we delivered at the solid execution of our strategic priorities and what continues to be a very challenging environment.
When we announced our strategic transformation in January we could not have predicted what would follow over the subsequent 10 months.
[noise] unifying our channels continues to unlock value for CNO and strengthens our position to navigate the pandemic.
When coupled with the steps we have taken in recent years to reduce our long term care exposure de risk our investment portfolio and diversify our product suite.
You know as well prepared for the economic challenges that lie ahead.
I'm confident that we're on the right path to successfully grow our business help secure the future of Middle income America and drive further enhancements to shareholder value.
I can't conclude our call today without acknowledging that it's election day.
Over the last three months, we have encouraged our associates exercise of civic right to vote.
I extend that encouragement to everyone on the call as well.
I hope you'll both today, if you haven't done so already.
Please continue to stay healthy and safe.
Thank you for your interest in and support of CNO Financial Group, We will now open it up for questions operator.
At this time if anybody has a question. Please press star one on your telephone keypad pick I'd now like P. Star one on your telephone keypad. Your first question comes from Humphrey Lee.
Selling and partners your line is open.
Good morning, and thank you for taking my questions I'm, just looking at the house sales kind of year to date.
Growth and then also intuity enrollment period for the fourth quarter like how should we think about the sales. So look for a supplemental health and Medicare supplement and also kinda by extension like given the weakness in sales year to date is there going into <unk> are we going to see some headwinds in terms of topline and maybe bottom line impact for 2021.
[noise] Yeah Humphrey. This is Gary so first of all thanks for thanks for joining us and thanks for the question before I continue I just want to make sure you can hear me okay. Yes.
Yes, loud and clear okay, great alright, good so.
So first of all as you know are the biggest factors in our health sales really have to do with our Medicare supplement.
We have seen a shift in recent years in terms of consumer preferences, where they really start to prefer not start but have been prefer in Medicare advantage over Medicare supplement so we've seen that trend continue.
And it's it as best we can tell is going to continue for the foreseeable future and that's part of the reason we launched our my health policy Dotcom platform. So we expect to see some good results in terms of our Medicare advantage products because of those efforts and because of what we see happening with consumers the than the.
Offset to that or the other side of that is that that will continue to put pressure on our Medicare supplement sales now I frankly would prefer that we sell more Medicare supplement because as you know we manufacture med supp, whereas the med advantage, we only distributor and by virtue of being a manufacturer we would get both the margin from the underwriting as well as the distribution.
In med advantage, we only get the distribution and however.
[noise] Medicare products in general are a very important part of us getting into the household. So the next best thing is for us to sell the Medicare advantage and we're comfortable with the progress we see on that so so when you boil all that together you should see us continue to do reasonably well on health sales in the aggregate you should continue to see if.
Back some pressure on the Medicare supplement sales now right now where we are on med Supp, we're always trading price profit market share I'm comfortable with the current level, but after we get a look at how the my health policy Dotcom offering does and how well our Medicare advantage sales do we may want to come back and revisit that but at the moment I remain comfortable on that.
So you'll see continue to see some pressure there, but you should see offsets with the with the med advantage Humphreys I answer your question.
Yeah, but I guess, when we think about the running so look given the continued pressure on myself.
We see any kind of potential headwinds to premium at least 2021.
On the Mets up yes, you will see had headwinds to med sup premiums for 2021 now.
I do want to emphasize one thing we're literally in the middle of the annual enrollment period right now.
So we will have much more visibility in about six to eight weeks because we're right in the pick of it right now to see how all of these things do but we're anticipating more topline pressure on med supp and rent dissipating more progress we need more sales on metal advantage.
That's helpful.
And then my follow up question is looking at the the strong underwriting result, and I think in Paul's prepared remark you talked about Theres. Some prior period reserve releases can you size the impact of kind of de de out show a deferral of care. So good kind of claims experienced in the quarter as opposed to reserve releases that came through in the quarter.
Sure Humphrey its Paul the vast majority of the favorability in our health care products in the quarter were driven by the release of a redundant claim reserves.
Okay got it thank you.
Yep.
And your next question will come from John Barnidge from Piper Sandler Your line is open.
Thanks, how should we be thinking about continuation and claim utilization favorable tailwinds I know, it's the view is it's temporary in nature, but do you see any signs emerging that it could be permitted from people that go to the doctor for most social aspect just not doing that anymore.
Yeah, John I I would reiterate that its Paul that the outlook is really pretty cloudy.
We can argue this on on either side as to which direction. It will go on.
So so were declining to project out beyond the end of this year.
In the fourth quarter as I mentioned, we expect that there will be still some net favorable impact from coated.
So more and more favorable in health care than unfavorable.
In life.
But beyond that I think we need to see how things evolve before we have a clear view as to you know how this will play out beyond the end of this year and into next year and beyond.
Yeah, Hey, John This is Gary I would I would agree with Paul the one thing I would add in our chief Actuary Karen to talk election made this point when we were talking about trying to think about how to how to anticipate what people's behavior is going to be in the future.
One indicator is the relatively strong persistency of our policies our long term care policies in our health insurance policies people are continuing to pay the premiums and if they really thought they werent going to at some point in time to get back to using those they.
They would probably stop paying the premiums, but the fact, they haven't would suggest that maybe the behavior reverse now whether it reverts and 21 or 22 or when.
Well your guess is as good as mine, but but you know.
I I I think the main thing I would say is I really agree with all his point, we are having real trouble with visibility.
But there are some other common sense indicators that would suggest that eventually behavior reverts to normal.
Well what used to be normal I'm not sure that it's in the future.
That's helpful. A follow up question there have been a lot of block transaction and annuity industry in recent weeks, given the low rate environment or have you.
Have you thought about pursuing maybe a risk transfer transaction.
So so I'll I'll answer that.
I guess it real simple way, we are open to anything thats going to maximize shareholder value.
We have not pursued anything.
Aggressively at the moment, so we haven't gone after that we're certainly open to it all that said I would tell you that I remain really skeptical that such a transaction could be offered to us that would make sense and the reason I have that skepticism.
Is number one I think you've got to take a look at the transactions that have happened recently, they've all been around variable annuities we.
We don't manufacture variable annuities.
Second the transactions that have been announced have primarily I shouldn't say most of them were very limited second the transactions that have been announced were tended to be for older blocks of business.
RF I is relatively speaking are newer.
So we didnt have some of those product features that were added over the last decade, or so whether it was really an arms race going.
The next issue to remember if you look at our products are up by they've always been relatively modest because they reflect what the needs of our consumers out remember, we we serve a middle class consumer they never want it all those fancy bells, and whistles and all those things that really ramped up the risk.
So even though our products are newer the design also just didnt have all those fancy things on it.
For all of those reasons, we're very comfortable with the risk profile and I would remind you that as a company. We spent several years de risking the company, culminating in the long.
Long term care transaction, which resulted in us getting investment grade rating. So we're really comfortable with our risk profile and.
And the specific nature of our five book I think makes it highly unlikely that there would really be an economically attractive transaction offered to us all of that said we're open to it.
I just don't see it happen for those reasons.
John.
No you did and it was a good answer thank you.
Your next question will come from Erik bass from Autonomous Research. Your line is open.
Hi, Thank you just hoping you could talk about some of the dynamics that will affect med supp margins going into 2021, and certainly not looking for guidance, but just wanted to get an understanding of kind of what are the implications of the favorable experience. This year on pricing and then what happens if the kind of the level of utilization normalizes now.
Next year does that mean, you would be at sort of a normal margin or does the pricing reflect kind of favorable experience from this year continuing.
Eric It's Paul So I'd I'd I'd point out first that the rate increases have already been filed for 2021.
Are expected to be around 4% on a on average once we get all the regulatory approvals.
With respect to the claims experience. This year. The second thing the second point I'd make is that med supp is price utilizing lifetime loss ratio expectations. So while the favorable experience in 2020 does create downward pressure the lifetime loss ratios would not be materially impacted.
So you can you can sort of take that off the table and as to how things are.
Behave and perform next year it will obviously ultimately depend on the claims experience.
And as we've discussed just a minute ago.
The the Cove it impact on that I think it remains unclear and we'll see how things evolve over the next couple of months and as we get into next year, but.
But presuming that they get back to normal levels, Yes, we would expect to return to sort of normal levels of profitability in the book.
Got it. Thank you that's helpful and then on the life sales side I mean, we've seen a surge in demand for life insurance across the industry and you've certainly been well positioned to capitalize on that.
Do you have any sense from kind of your discussions with consumers and distributors, how long that tailwind of demand may continue.
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But I guess any perspective, there would just be interesting.
Yeah, [laughter] you know so Eric I guess the direct answer is we don't have a specific study we can point to where consumers have indicated how long.
Given us reason to believe how long this demand will will last I would point to a couple of interesting things that I think give us a lot of optimism.
First of all the.
The level of direct to consumer sales, we've seen specifically in our market segment, meaning the middle Middle Americans has been very very strong and that really represent a material evolution or progress in that behavior buying to see that much life insurance buying on a direct to consumer.
Basis, that's a pretty significant consumer shift.
The second thing I would point to is we had a growth and I believe the number was 29% Paul correct me, if I got it wrong, but 29% in our agent based life insurance sales. That's one of the strongest sales numbers, we've had in a long time, so even there their strike.
You look at both of those and the other thing that's that's really I think encouraging is the persistency.
Now the real test of that will be a couple of years from now because everyone is still really focused on the pandemic.
But in all of our lines of business in our Middle American consumers were seeing very strong persistency levels frankly to an extent in in some of our lines of business that surprised us was stronger than we expected it to be.
So I think some of these changes in behavior or that benefit our business.
It's hard for me to predict how long they are going to stay but when I look at things like persistency when I look at fundamental buying habits. When I look at the way technologies getting use when I look at the way, they're interacting with our agents and how many other products are also buying when they interact with our agents all of those lead me to a trend that is that is more sustainable than not in other words I don't think all of this is a flashing.
And it may go down or moderate a little bit.
But I think most of it is going to hold.
He asked me for detailed analytics, we don't have those but we're looking at these other factors I sure.
Got it and I appreciate the perspective, thank you.
Your next question comes from Ryan Krueger from KBW. Your line is open.
Hi, Good morning, I had a question on expenses.
They have been pretty favorable year to date I know your guidance implies some uptick in the fourth quarter from a.
Growth related investments I guess as you look beyond the fourth quarter will I guess does the fourth quarter capture a lot of those accelerated digital and other investment that you plan to make or should we expect some continuation of that into next year.
Hey, Ryan its Paul.
I don't want to give specific guidance about 21, but I will say directionally that we continue to be very focused on.
Being disciplined with our expenses.
Driving efficiency in our platform and so our goal is to certainly continue to drive a decline in our in our overall expenses.
Recognizing however that we're trying to strike that balance between.
Bad goal on the one hand, and making appropriate investments.
To position us for the future and.
Particularly in the context of the acceleration of all things digital and virtual.
So we'll continue to try to strike that balance and again as we said as we get into the early part of next year on our fourth quarter call.
We may provide more specific guidance.
Thanks, and then.
Yeah I don't think this is the case I just want to clarify.
So in certain health product companies have given some premium refunds.
You know I guess and also in auto insurance.
Does that I assume that that concept doesn't really exist in the Medicare supplement market.
Thank you our competitors would provide any sort of premium refund for the recent decline in and.
Claims.
Yeah. So the short answer Ryan is I don't think so and to provide some context.
Lifetime loss ratios for med sup foreign entity have to be greater than 75%.
For individual business for an insurance company so each of our our our operating insurance companies.
We don't expect to flirt with that threshold on a lifetime basis. So again, you know the experience of 2020, given the impact of coated.
Pressure on that but on a lifetime basis, or we don't think it will have a material impact and therefore not.
Introduce you know the the risk that I think you're referencing.
Okay, great. Thank you yep.
Yep.
Ryan one other thing we're certainly not in the auto insurance business, but we were reading recently that some of those auto insurers have actually had to pull back on those refunds because while it's true that the frequency claims have gone down the severity has gone up.
And I mentioned that again, not because were auto insurance experts, but only just to illustrate the.
The difficulty of really trying to project, what's going to happen in 2021, and how some of these trends continue to evolve.
Thank you.
Again, if anybody would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from John Gallagher from Evercore. Your line is open.
This is this is it rather Tom Gallagher I'm kidding, but.
But the [laughter].
Just just wanted to ask a follow up on on Med Supp here, just so I.
King brought my arms around what's going on here would you guys is it is the utilization on wellness visits by seniors that you think have dropped dramatically here or have you guys unpacked.
Why did the claims trends are so low and it also just related Lee if you're still seeing I would say the reduced claims trends.
I I presume, that's going to be sustained into at least the earlier part of next year.
And any thoughts on that.
Hey, Tom It's Paul.
You know so so we look for clues to whats driving the utilization in our claims data. We also look to outside research there's been some good research on this topic from Kaiser.
And it's really a combination of.
The the provider behavior, and the consumer behavior that seems to be evolving over time.
You know where it goes from here again, I think is anyone's guess it'll depend a lot on you know how the pandemic of all that so both provider in consumer behaviors evolve.
And.
Again, we think it contributes to a net favorable impact from coated.
For CNO in the fourth quarter.
And we'd like to revisit this on our fourth quarter call as respects 2021, because we just think that there's a lot of uncertainty.
And we will certainly have better information than than we have now.
Got it and then just on and I'm not asking for a specific number but when you mentioned that there could you are expecting some pressure on on earned premium in med supp.
Are we talking about a war a large reduction in a more modest reduction just any anything directionally would be helpful.
Yeah semi side I wouldn't want to put a number on it but you know it's just the simple math of the decline in sales in 2020, we'll put some earnings pressure on 2021, just by virtue of fewer fewer policies in force book generating a generating margin.
And that.
Just regard with regard to how strong your statutory or the increase in RBC was for the quarter was at all.
Driven by kind of underlying strength in health margins within the statutory financials or is there anything else that contributed to the strong increase.
So you know generally speaking it was driven by the the the operating earnings Stat operating earnings in the quarter, which certainly we're very much driven by the strong health results.
There was very little impact on RBC from investments roughly four points of favorable.
So that yes.
Yeah, I don't know if that answers your question, Tom but it's.
It's it's really the operating earnings driven by health certainly.
Gotcha, and just final one if I could sneak it in annuity earnings.
Came down a bit and I know part of that was Oh, a persistency related charge can you talk about where where you see that business trending I presume, there's going to be some pressure on spreads if interest rates remain where they are.
Yeah, any any any any thoughts on on where you see that business going.
Sure. So certainly there was some noise in the quarter related to persistency and how that impacts you accounting for the embedded or derivative.
Reserve in our fixed index annuities in terms of where we go from here I mean, it's it's a you know remains an important part of our product suite.
You know weve.
We've got some momentum.
And in the sales from Twoq into Threeq, you and I think that will continue.
Yes, Directionally, there's there's pressure on spread you know, we we manage that with adjusting the.
Participation rate, but nevertheless, you know with with interest rates, where they are at.
New money rates are where they are and perhaps where they're trending and that that will be a bit of a headwind.
Okay. Thanks.
Yeah.
Your next question will come from Dan Bergman from Citi. Your life line is open.
Thanks, Good morning, I guess to start with the increased pace of buybacks. This quarter is there any additional color you can provide on how you're thinking about your.
Your capital deployment priorities in the current environment.
Is there any potential appetite for acquisitions or should we expect you know share purchases to do them in form of capital deployment in the near or medium term.
[noise]. This is this is Gary as you know weve refrain from providing specific buyback guidance, we've been said referred back to providing.
Capacity and then ask people to judge us by our actions. So that's the first comment I'd make in terms of what you should expect and how we're thinking about it you know.
I guess I'll put it very plan that I think the markets had it wrong for quite some time I think that when I look at the attractiveness of our stock and where it trades relative to book and relative to the strong cash flow.
Our stock represents a very compelling value.
And you've seen that in our actions over the last several quarters.
So we continue.
The feel that way, we continue to look carefully I do think that this pandemic, we will present certain M&A type opportunities.
Personal fan of potentially some some bolt on type opportunities I think this market will present, those but anything that we look at like that has a pretty high hurdle rate.
In terms of competing with our own stock buyback so were very cautious about that.
We also and you've seen this in our RBC and our cash balance. We're also taking a very conservative approach right now just because of the lack of visibility so.
So I know you're not going to get that specific answer there that you want but but again I'd ask you to judge us by our actions. We continue to have strong cash flow. We continue to believe our stock is undervalued recent quarters continue to demonstrate that we're willing to put our money where our mouth is and.
And we will continue to take the same analysis, but if a if a if a good bolt on M&A opportunity presents itself, we're looking closely at that as well.
So we're constantly balancing those things.
Got it thanks, and then just shifting gears a little bit just building on the earlier question around the potential for a fixed annuity deal I just wanted to see if there's any update.
On the level of interest or activity from third parties for potential reinsurance solution for at least some of your remaining in for so long term care block just any updated thoughts on that market and how you're thinking about that possibility would be great.
[noise], we haven't had any further.
What I'll call substantive conversations we occasionally get inquiries with people expressing interest.
But nothing really of substance, we like the risk profile of the business, but but again just as I said before because it's our job if somebody comes in and makes US a really attractive offer we would of course consider it but we don't feel like we have any compelling need to pursue it and there are no substantive conversations that happened.
Got it thanks.
I have no further questions at this time I turn the call back over the presenters for closing remarks.
Thank you all for joining US today, we look forward to speaking with you again.
Yes.
Thank you everyone. This will conclude today's conference call you may now disconnect.