Q4 2020 CNO Financial Group Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the CMO Financial group fourth quarter 'twenty 'twenty earnings call at.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to your Speaker today, Jennifer Childe, Vice President of Investor Relations. Thank you. Please go ahead.
Thank you operator, good morning, and thank you for joining us on C. N O financial group's fourth quarter 2020 earnings Conference call. Today's presentation will include remarks from Gary Botswana, Chief Executive Officer, and Paul Mcdonough, Chief Financial Officer. Following the presentation. We will also have other business leaders available for the <unk>.
And answer period. During this conference call, we will be referring to information contained in Yesterdays press release, you can obtain release by visiting the media section of our web site at C. N O Inc. Dot com. This mornings 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-K and posted on our website on or before February 26.
Let me remind you that any forward looking statements. We make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward looking statements today's presentations contain a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures.
You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout the presentations, we will be making performance comparisons and unless otherwise specified any comparisons made will be referring to changes between fourth quarter 2019, and fourth quarter 2020, and with that I'll turn the call over to Gary.
Thanks, Jennifer and good morning, everyone and thank you for joining us.
I'm going to start with a discussion of the direct path acquisition, we announced last night.
I will then provide brief commentary on our fourth quarter and on your performance before turning it over to Paul to discuss our financial results and outlook in more detail on.
I'll finish with a few closing remarks before opening it up to your questions.
Turning to slide four.
We are very excited about this transaction and the enhanced worksite capabilities it brings to Seattle.
The transformation that we announced last year created a worksite division dedicated to this market growing our Worksite business is the next step in our strategy. We are significantly expanding on worksite business to position <unk> as a full service provider of Worksite solutions.
Direct path as a leading national provider of employee benefits management services to employers and employees. It brings three primary new revenue sources to see an all employee education services, Inc.
Ploy advocates advocacy and transparency services and employee or benefits communications and compliance services.
Direct path operates directly nationwide to approximately 7000 benefit broker partners. It serves 400 employers of all sizes from small businesses to fortune 100 companies, which reflects a covered employee base of more than 2.5 million individuals.
Prior to Covid worksite with one of the fastest growing higher multiple businesses for us and in the industry.
We expect that dynamic to resume over the next year or so.
Direct path builds out our capabilities and gets us deeper into the employer value chain.
It will also create extensive cross selling and referral opportunities for us.
Through its free based structure direct path will diversify our worksite revenue base.
It adds to our existing high return fee based businesses that will help drive expansion in our overall Roe.
The purchase price of $50 million was funded out of holding company cash.
There is an additional earn out if certain financial targets are achieved.
The transaction is expected to add a penny per share to our earnings beginning in 2022.
This transaction aligns well with the M&A playbook, we've been executing against and is reflective of the types of opportunities. We may consider again in the future.
Turning to slide five and our full year performance.
We reported operating earnings per share growth of 37 per cent for the full year $387 million on free cash flow of 107% of our operating income and we returned $330 million to shareholders in the form of buybacks and dividends, which reflects 12% of our market cap at the beginning of 2020.
And our results underscore the continued strength and resiliency of our diverse product portfolio and distribution channels.
Despite the Covid backdrop, we achieved many important operational accomplishments during 2020.
Within the consumer Division, we've continued to build upon success with our direct to consumer life business and cross channel collaboration efforts.
Integrating these channels has led to significant improvements in overall lead conversion rates and per customer acquisition cost.
[noise] leads generated from our D to C business have become an increasingly important source of new business for our exclusive field agent force.
In 2020. These leads drove two thirds of the increase in life sales generated by our exclusive field agents.
This year, we recognize the opportunity to create a similar multichannel sales and service experience for the Medicare market.
We launched our new digital health insurance marketplace, My health policy Dot com.
Our objective is to take the strength of our face to face distribution.
Coupled with our growing online strength and use our unique offerings to become a significant player in the online health insurance market.
This is a competitive space the depth and strength of our agent force is the key differentiator Justice, we successfully scaled and became a top five provider of direct to consumer life insurance, we intend to profitably grow the direct to consumer health care business.
Within the Worksite division. Despite COVID-19, we saw modest growth on our employer client base.
Of course, we face significant restrictions accessing workplaces to complete employee enrollments.
In response, we focused extensively on building out our virtual and online enrollment capabilities.
For the full year virtual sales comprised 23% of total production.
Continued premium persistency was another key driver of our Worksite business this year.
Persistency was actually up modestly over historical levels, reflecting the critical value of our our consumers a tribute to our protection products and the mix of stable industries, we serve.
While we intentionally slowed our agent recruiting efforts in 2020 to align with softer demand for on site enrollment due to Covid. We retained our core managers, who are critical to rebuilding our sales force and driving our ultimate recovery.
As I've shared in previous quarters in 2020, we made significant investments in supporting the safety wellness and financial well being of our associates customers and agents in response to the pandemic.
We expanded our commitment to diversity equity and inclusion and named our senior director to support our ongoing initiatives to develop and embed eni practices across our organization.
We also made progress on our ESG efforts the principles of which are central to our overall business strategy C. N. O is now a signatory to the United Nations principles for responsible investment, which commits us to incorporating ESG principles in our investment analysis and reporting framework.
We expect to formally adopt the FASB and Tcf day reporting frameworks. This year when we publish our updated corporate social responsibility report.
Turning to slide six and our results for the quarter.
Our fourth quarter results benefited from the ongoing deferral of medical care, which drove continued strong health margins. Our performance was also boosted by a particularly robust alternative investment earnings.
Operating earnings per share were up 17% our book value per diluted share excluding a OCI was up 8%.
During the quarter.
We saw continued improvement in several key metrics. However, the wave of Covid late in the fourth quarter created a headwind to certain sales and agent metrics.
Premium collections remained strong across both divisions, but reflect the impact.
From weaker health sales in recent periods.
Expenses were higher in the quarter and higher than we signaled on previous calls driven primarily by the acceleration of spending on growth initiatives.
This was a conscious decision.
The strength of our business and cash flow in 2020 enabled us to capitalize on opportunities to support the continued growth of our franchise beyond the pandemic.
We saw this as an opportunity to build capabilities for future growth and differentiation.
Paul will provide more details.
Fee income was down reflecting solid growth in fee revenue offset by spending related to the development and marketing of my health policy Dot com.
Our capital and liquidity positions remain solid we issued $150 million in subordinated debt in November and ended the quarter with an RBC ratio of 411% with $388 million on cash at the holding company.
Turning to our growth scorecard on slide seven.
Three of our five metrics were up year over year.
<unk> sales were up 6% for the quarter and 12% for the full year fueled by both continued strong direct to consumer growth and a sharp increase in sales from our exclusive field agents.
Collected life premiums were up 3%, reflecting solid growth in nap in recent quarters and the continued strong persistency of our customer base.
Collective health premiums were down four 7% largely resulting from the impact of softer in person health sales in recent quarters on.
What he collected premiums were up 6% per the quarter reversing the trend in recent quarters.
Client assets under management grew 18% to nearly $1 $8 billion.
Of this growth approximately half was driven by new client assets.
Fee revenue was up a healthy 19% to $36 million, reflecting growth in third party sales and growth within our broker dealer and registered investment advisor health.
Health sales remain challenged down 22% over the prior year driven by a 29% decline in Medicare supplement sales.
As we've discussed previously we're in the midst of a secular shift away from Medicare supplement towards Medicare advantage.
Helping customers navigate the complex Medicare landscape has been a core strength of our exclusive field agents.
Our approach to the shift in consumer preferences as to leverage the strength of both our field agents and our new digital health marketplace to capture incremental Medicare advantage sales.
At the same time, we will continue to maintain a strong presence in the Medicare supplement market, which consistently delivers a compelling loss ratio and provides a meaningful contribution to our health margins. It's also a key differentiator very few peer companies manufacture and sell Medicare plans.
As a reminder, Medicare supplement sales are reflected in the new annualized premium while Medicare advantage sales are reflected in the fee revenue.
Turning to our consumer division on slide eight.
Sales of life insurance remains strong up 17% for the quarter on up 19% for the full year direct to consumer life sales, which comprise about half of our total life sales were up 10%.
Life sales generated by our exclusive field agents were up 26% supported by leads.
Shared from our direct to consumer channel. This cross channel dynamic has resulted in improved productivity metrics such as lead conversion rates on customer acquisition costs.
Again this underscores the value of our unified distribution model is growth in one channel is able to feed growth in the other.
As I mentioned earlier on we were working to create the same dynamic on the health side of our consumer business.
During this year's Medicare annual enrollment period consumers.
Consumers were able to purchase Medicare products from us online or from one of 2800, telesales and local exclusive field agents certified to sell Medicare plans.
With the launch of my Health policy Dot Com marketplace, we created pathways for our tele agents to refer consumers to local agents and for field agents to refer consumers to a tele agents or the platform itself.
As a result, our Medicare advantage policies sold in the fourth quarter increased 3% over the prior year and total third party third party policies were up 5%.
My Health policy Dot com accounted for 14% of our third party health sales in the quarter.
Our producing agent count was down, 3%, which makes our sales momentum and productivity even more impressive.
Due to the resurgence of the pandemic COVID-19 related corn teams kept a number of our exclusive field agents and clients from engaging in face to face appointments.
Covid restrictions also remain more stringent in the areas of the country, where our agents are more concentrated.
As a reminder to be counted as producing our agents need to sell at least one policy each month.
Our total exclusive agent count, which includes our field and telesales agents was actually up 3% per the full year.
We continue to grow the number of securities licensed financial Representatives, which is core to how we are evolving our field force and changing the relationship with our clients.
Turning to slide nine in our Worksite Division.
Collected premiums remained strong as the profile of our existing employer groups is translated to continued healthy levels of employee persistency we.
We saw continued sequential improvement in our Worksite sales in the fourth quarter with sales up 61% over the third quarter.
Relative to the year ago period, However, sales were down 41 per cent.
Given recent increases in COVID-19 infection rates across the country and workplaces opening up more slowly we continue to expect a steeper recovery path in the Worksite business.
We launched a new group product in the fourth quarter called monthly income protection group term life.
This is a unique group life products that are designed to replace monthly income rather than paying a lump sum debt benefit.
Web benefits design delivered solid results in <unk>, including a 3% increase on the average per employee per month charge W. B D cross selling activities drove 5% of overall nap in the quarter.
As I mentioned at the beginning on my prepared remarks, we are excited to bring direct path into a worksite organization. The division will be co managed by current Worksite President Mike heard by direct path Chairman and CEO, Mike buyers. Both will report to me and Mike buyers will join our executive leadership team.
Turning to slide 10.
We returned $117 million a share holders in the fourth quarter, including $100 million on share buybacks.
For the full year, we deployed $263 million on buybacks at an average price of $18.17.
Our capital allocation strategy remains consistent we intend to deploy 100 per cent of our excess capital to its highest and best use over time, while share repurchases form a critical component of our strategy organic and inorganic investments also play an important role.
It's worth noting that most of our organic investments in the fourth quarter flow through our income statement as operating expenses rather than capital expenditures.
These investments remain mission critical to our future success, Paul will provide more color on his remarks.
Turning to slide 11.
Over the past few years, we've also been making minority investments in various insure tech and Fintech companies.
Through C N O ventures, we seek to generate attractive returns.
Develop relationships.
Source on track opportunities and ultimately invest in various companies that are disrupting the insurance and financial space.
We fully expect these investments to stand on their own merits and deliver attractive returns there.
They also serve as important vehicles for us to collaborate and innovate.
We seek out companies that are strategically relevant, particularly those we can partner with to help us improve our digital engagement with consumers.
<unk>, our speed to market with new products and services and or enhance our technology.
To date, we have invested a total of $21 million five companies, including health care Dot com human API and Tinder we.
We expect to complete a few similar transactions per year.
The portfolio will remains small relative to our total invested assets, but impactful on in other ways.
And with that I'll turn it over to Paul Paul.
Thanks, Gary and good morning, everyone.
Turning to the financial highlights on slide 12.
Operating earnings per share were up 17% from the fourth quarter and up 21%, excluding significant items benefiting from favorable health insurance product margins driven by continued customer deferral of care related to Covid and by strong net investment income, resulting from significant outperformance of our alternative.
Investments.
Earnings per share also benefited from our share repurchases, which reduced our fourth quarter weighted average share count by 7%.
We deployed $100 million of excess capital on share repurchases in the fourth quarter and $263 million for the full year.
Partially offsetting the increase in insurance product margin and investment income in the quarter.
As an increase in expenses and a decrease in fee income both driven by our decision to fast track spending on growth initiatives in the second half of 2020 in the context of accelerating trends relating to all things virtual and digital and supported by strong earnings in the period.
These initiatives included spending related to my health policy Dot com, which flows through as an expense in our fee income line as it relates to activities supporting our fee revenue.
Other examples of growth initiatives in the period include spending on virtual sales and service capabilities market access data analytics and various initiatives designed to improve our policyholder customer experience.
All of these investments flow through our income statement on the expenses allocated to products line.
In the 12 months ended December 31, 2020, we generated operating return on equity excluding significant items of 12%, which compares to 10, 4% in the prior year period.
As referenced in our earnings press release, we completed our annual GAAP actuarial assumption review in the fourth quarter, which had a net favorable impact of 11 8 million in operating earnings, which we called out as a significant item in the quarter.
The favorable impact was driven by our lower initial portfolio rates, which manifested from asset turnover in the annuity portfolio in the third quarter of 2020.
Those lower rates drove a favorable adjustment to the embedded derivative reserve related to our fixed index annuities.
<unk> as part of the assumption update we lowered the new money rate assumption to three and a half in 'twenty 'twenty, one and 375% from 2022, but that did not create material unlocking impacts.
Turning to slide 13, and our product level results.
Our overall margin in the fourth quarter was up $30 million or 15%.
Excluding significant items, it was up $9 million or 4%.
This included a net favorable COVID-19 impact of $18 million driven by the deferral of care in our health care products and reflects modest spread compression in our annuity product and generally stable results in our life and health products ex Covid.
Turning to slide 14, and our investment results.
Investment income allocated to products was essentially flat in the period as the favorable impact on the 4% increase in net insurance liabilities was largely offset by a 19 basis point year over year decline in the average yield on those investments to 483%.
<unk> the average yield declined five basis points consistent with our prior guidance.
Investment income not allocated to products increased $32 million year over year to $58 million driven by strong alternative investment performance.
This translates to an annualized return on our alternative investments and 24%.
As compared to a mean expectation of between seven and 8%, reflecting outperformance driven by private equity realizations and strong private equity excuse me private credit results.
Our new money rate of three 5% to 8% was down 50 basis points, both year over year and sequentially.
With a sequential change driven primarily by tighter credit spreads.
This reflects $888 million of the new money invested in assets with an average rating of Triple B, plus and an average duration of 12 years as summarized in more detail on page 26 of the earnings presentation.
Turning to slide 15.
At quarter end, our invested assets were 27 billion up 9% year over year.
Approximately 95% of our fixed maturity portfolio is investment grade rated with an average rating of single a.
The triple B allocation comprised 42% of our investment grade holdings up slightly from the prior quarter.
As you can see on page 27 of our earnings presentation as of year end, we remained underinvested in 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 16.
We continue to generate strong free cash flow to the holding company in the fourth quarter with excess cash flow of 122 million per 142% of operating income this quarter and $387 million or 107% of operating income on a trailing 12 month basis.
Turning to slide 17 at quarter end, our consolidated RBC ratio was 411% down from $4 28 at September 30th.
This represents approximately $55 million of excess capital relative to the high end of our targeted range of $3 75 to 400 per cent.
Our holdco liquidity at quarter end was 388 million, which represents $238 million of excess capital relative to our target minimum holdco liquidity of $150 million or approximately $185 million of excess net of the capital deployed this quarter on the direct path Trans.
Action.
We had intentionally maintained a more conservative posture in the context of ongoing COVID-19 related uncertainty.
Turning to slide 18, and our outlook for the remainder of the year.
We continue to run base and adverse case scenarios that are generally aligned with certain rating agency assumptions regarding COVID-19 infection rates death rates and related economic impacts.
From a top line perspective in our base case, we expect the continuation of the positive momentum that we experienced in the second half of 2020.
From an earnings perspective, we expect two sets of headwinds from 'twenty, one relative to 2020.
The first relates to Covid, where we expect a trend toward more normal claims experience in our health care products as consumers and health care providers continue to become more accustomed to COVID-19 related protocols and or as the benefits of vaccines take hold.
And our base case, we expect this will translate to net mortality and morbidity impacts that are modestly favorable in the first half modestly unfavorable in the second half and neutral for the full year.
It's also worth noting that the decline in sales in 2020 due to Covid will reduce insurance product margin in 2021 and beyond all else equal.
The second set of earnings headwinds in 2021 relate to investment income, particularly our potential for reduced income from alternative investments and from opportunistic trading as compared to significant outperformance in 2020.
Lastly continued pressure from low interest rates generally which has lately been coupled with tighter spreads will continue to pressure earnings. We expect this will translate to flat net investment income allocated to products within our insurance product margin as growth in the asset base will likely go to offset.
By a decline in the yield on those assets.
These headwinds notwithstanding we expect a modest offset from a slight decline in expenses, mostly in the second half of the year as we continued to drive operational efficiencies, while also continuing to invest in growth initiatives.
Regarding free cash flow and excess capital, we exhausted our life Nols in 2020, which will put modest pressure on our free cash flow conversion rate from 2021.
Nevertheless, still healthy levels of free cash flow generation and our base case scenario on top of our excess capital position at year end 2020 should result in share repurchase capacity exceeding our actual share repurchase activity in 2020.
Importantly, even in our adverse case, which is intended to capture scenarios for out in the tail, we expect to be able to manage RBC holdco liquidity and debt leverage within our targeted levels pay our dividends to shareholders and still have a modest amount of share repurchase capacity.
Albeit at much reduced levels compared to our base case.
And with that I'll turn it back over to Gary.
Thanks, Paul turning to Slide 22, Slide 19, 2020 was an incredibly challenging year on many fronts.
Our pandemic response on financial results demonstrated the resilience of our organization and proved that we can emerge from the crisis, even stronger while continuing to support our associates agents customers and communities.
There's no question the difficult and uncertain conditions remain.
In many respects, we have less visibility into 2021 than we had in 2020.
The lack of short term clarity should not detract from the long term view of our prospects.
Our franchise remains strong and our financial position is robust.
Longer term I couldn't be more optimistic about the future of this company and our ability to capitalize on the opportunities before us.
Please continue to stay healthy and safe.
You for your interest in and support of <unk> Financial Group, We will now open it up for questions operator.
Thank you at this time, if he would like to ask a question. Please press star one on your telephone keypad.
Our first question comes from Ryan Krueger with K B W. Your line is now open hi.
Hey, Thanks, good morning.
Couple of questions first can you just provide.
Provide more quantification on the impact to free cash flow from fully utilizing the life NOL.
Sure, Hey, Hey, Ryan it's Paul Thanks for the question.
What I would say to you is that.
Having exhausted the life Nols last year.
We are now.
<unk> to the non life, Nols, which will continue to offset 35% of our life income and.
100% of our non life income through at least 2023.
And on your model, you'll have to compare that to where we've been in the last few years, which is.
Available life, Nols offsetting 100% of our life income.
Do you know maybe what the life NOL benefit was in 2020 per perspective.
Well from a from a cash tax perspective.
Well, we exhausted our life Nols part partway through so that complicates the analysis of debt.
But from a cash tax perspective.
To keep it simple most of our life income in 2020.
Was offset by the Nols.
As compared to you know going forward, 35% of debt and in terms of the mix.
That gets a bit complicated, but roughly speaking.
75% to 80% or so.
Of our income.
Life versus non life.
Got it. Thank you and then a question on expenses.
He was with your comment that I know you've.
Come into that expenses would likely be down.
Some in the second half of 2021, what did I did you also say that you thought full year expenses for 2021 would be somewhat lower than 2020.
Yeah, so the the guidance and I recognize that this is a directional and I'm sure you'd prefer that we'd provide more specificity, but directionally. We are committed to full year 'twenty, one expenses lower than full year 'twenty.
With most of that coming in the second half, particularly in the fourth quarter.
And just to provide a little bit more context, Ryan the balance that we're trying to strike here is to be very disciplined.
In.
Capturing efficiencies and how we operate and we've had some.
Examples of that in the last <unk>.
12 to 15 months.
You are familiar with but I think it's probably worth.
Referencing them number one.
On the.
Technology partnership that we announced in November of 2019.
That will translate to roughly $20 million of expense save over a five year period and the transformation that we announced in January of 2020 that.
We didn't do for expense reasons, but translates to roughly $11 million of expense savings.
Another big opportunity that we have going forward is rethinking how we utilize office space.
On that won't translate to any material savings in 'twenty. One in fact might go the other way as we.
As we spend to sort of reposition.
Yeah, we had a little bit of that in 2020 also.
But longer term.
Our expectation is that we'll need roughly half the space that we used to need that will translate to some meaningful savings. We're also always looking for opportunities to tighten our belts and that's why we were able to reduce expenses in 2020 through the first three quarters versus 19.
<unk>.
While still.
Making growth investments in the fourth quarter of this year, obviously that tune changed a little bit as you know as we alluded to in our prepared remarks, we took the opportunity to accelerate a number of <unk>.
Growth.
Initiatives in order to.
Take advantage of it.
Accelerating trends and frankly to take advantage of a period, where our earnings.
Were exceptionally strong.
Driven by strong underlying fundamentals, but also by.
Net favorable impact from Covid and very strong performance on on.
On investments.
So sorry for the long winded answer, but just wanted to reinforce that we remain very focused on expense discipline and trying to balance that with.
You know appropriate investments to grow the franchise.
Thanks that was helpful. I appreciate it.
Our next question comes from the line of John Barnidge with Piper Sandler Your line is now open.
Thank you can you talk about the earn out associated with direct path.
What it is over what period and then maybe it's on the metrics.
Yeah, Hey, John This is Gary thanks for calling in and thanks for the question to be blunt, we're not providing a lot of detail on the earn out.
I'll tell you that.
It's not going to be significant and we would be thrilled debate.
The performance conditions are such that if they hit the earn out conditions, we would be very happy to pay it.
Okay No I appreciate your bluntness.
And then the follow up your fixed rate annuity blocks.
Essentially on a run off.
If I as clearly a growing business for you the market has been constructed to block transactions with fixed really being the low hanging fruit can you talk about maybe how much capital is associated with that and is there anything structurally.
Or from a distribution perspective that would really prevent you selling your fixed interest annuity block.
I'm going to make a couple of general comments on then I'll hand, it over to Paul to give you a little bit more detailed color.
So first of all we've obviously been watching in the marketplace.
Some of the transactions that have taken place and I would just offer a few general comments before Paul gives you a little bit more specifics first please recall that we don't sell and never have that variable annuities on some of the other products that have really been the most common subject of some of these transactions.
As respects fixed index annuities it's.
It's true we sell those and it is true there have been some block transactions on those however, when you dive deep into the structure of our products. We simply don't have the richness of guarantees and some of the other things and so maybe that's it.
A simple way of saying that.
They're very well performing financial products force, we like the way they work, we like the way they perform and I believe that our job is to remain open to anything that will maximize shareholder value. So if we got a compelling offer we would absolutely.
Consider it and look at it.
But I also want to be clear that I, just don't see that happening because of the nature of the products. We simply don't have some of those exposures that would make it worthwhile trade for.
For us and from the buyer, but we're wide open to it.
I don't know if you want to add any further color.
No nothing to add thanks.
Yeah.
Thank you for your answers.
Brian.
Our next question comes from Erik Bass with Autonomous Research. Your line is now open.
Hi, Thank you I was hoping you could elaborate a little bit on your outlook for health claims and margins over the next few quarters and am I interpreting interpreting your guidance correctly that you expect to still have some level of favorability for the full year in 2021 that will offset some elevated life mortality, but essentially you expect to be back to normal.
Slightly elevated claims levels in the second half of the year.
Hey, Eric it's Paul.
For the question.
Yeah. So what I would say is that the health product margins ex COVID-19 have been.
Reasonably stable and we would expect that to continue.
With respect to Covid.
Yes, consistent with whats the outlook our expectation is that on.
The net impact of mortality and morbidity.
On the first half of the year will be modestly favorable so continuation of.
Favorable.
Covid impact in our health products and.
And in the back half of the here is that as that diminishes, we expect it will diminish.
Over the course of the year.
On at some point, we cross the line where.
There's not enough.
Health product morbidity offset.
To get to net positive and.
And we ended up net modestly.
Modestly negative in the back half of the year.
Got it but the health margins in isolation for the year would be.
In line or slightly favorable to your normal expectations.
I would say in line again, I think that they've been relatively stable.
In our actual results and our expectations that continues.
Got it. Thank you and then maybe just turning to buy.
Buybacks I think in the presentation you note having capacity to exceed the level of share repurchases done in 2020, if conditions permit.
So can you just talk about what you mean by this is that a comment on the stock valuation potential for other opportunities to deploy capital or something else or are you. I know you don't want to give a specific number but as.
Are you pointing at kind of.
2020 level being the base case or higher.
Yeah. Thanks for the question this is Gary.
As you know we've philosophically taken the view that we don't want to provide absolute guidance I would just make a couple a couple of comments.
So first in response to your questions. Yes, Youre correct. There are a number of different factors two of the very significant factors on where the stock is trading and what the alternatives are.
Now all of that said.
We recognize that we have we're fortunate to have a business that has a very strong cash flow on we've got to deploy that cash flow.
If you take a look at the incentives of the management team, but we don't have any incentive to hold on to the cash quite the contrary our incentive is to deploy it and the question is how to deploy it and deploy it smartly.
I'd also just point out this is my 13th quarter as CEO and if memory serves correctly in 12 of those 13, we have bought back shares.
And the only time we didn't.
It was when we were prepping for a reinsurance transaction. So so we recognize what our shareholders look for we recognize the opportunity that it presents.
We've stopped short of providing specific guidance, but we've been in a place for the last several quarters, where our stock's been a really compelling value. We continue to believe that the value of the company is beyond what's reflected in book value and we will factor all that in as we look at alternatives to deploy the cash.
Thank you I appreciate that.
Our next question comes from Humphrey Lee with Dowling and partners your line.
Line is now open.
Good morning, and thank you for taking my questions. My first question is related to kind of day to outlook, especially the comment about lower insurance margins in 2021, given the lower sales in 2020, how should we think about the level of earnings degradation.
Based on your on your.
Comment just now have margin likely to be stable. So like I would assume most of that is coming from from.
Lifestyle, but how should we think about that.
Okay.
Good morning, Humphrey, it's Paul So, we're just pointing out something that debt maybe.
Maybe it doesn't need to be pointed out because it's fairly.
But the simple.
Observation is that with the decline in sales in 2020 driven by Covid.
All else equal we're going to have.
Uh huh.
A few were in force policies in 'twenty, one and forward.
And we just simply want to call that out I don't want to put a number on it.
There's.
Obviously, there are a number of moving parts there.
But we just wanted to call that out Directionally as a.
Headwind again, all else equal.
Okay and on Humphrey. This is Gary just one thing I would add to it and I've had this conversation with other investors as well just to think about it the real simple way every policy that we sell we expect to derive future profit from it. So when we sell fewer policies. If we sold five instead of eight policies in a given year than in the future years, we would just have fewer policies delivering a <unk>.
And I think all we're trying to say is we saw fewer so we're gonna have less profit dollars.
On the immediate terms following.
Okay.
Regarding the direct path acquisition.
How should we think about the the platform and how does it fit into kind of your over offering and is there any kind of come from does it complement W. BD in any formal way and how should we think about kind of the debt to.
On a longer term aspiration in this area.
Okay. So so humphrey. Thanks for the question I'm really glad you asked it I I'd like to respond from two perspectives first.
I'd like to share on the perspective directly to the way you asked the question and then maybe you can give it a little broader perspective from an overall seeing all of you.
So first of all in terms of the way you asked the question directly and exactly how it is direct path fit.
If you think about our worksite offerings Theres really three overall dimensions to how we want to go to market. So when we sit down to talk to an employer, we want to first talk to them about the insurance products and we've been doing that for several years think of that as our Washington National piece.
Second we needed to talk to them about the administration technology platform, where those employers interface with their employees that was the rationale behind the web benefits acquisition, a little over a year ago.
The third piece that we've just added with direct that is being able to talk to our employer clients about benefits management services. So.
So if you think about it first insurance and technology and now services. So this direct path acquisition fills that services offering and within services, There's education there's advocacy.
And then there's employer recommendations and education.
That's how it fits into it.
But there's a broader perspective I would ask our investors to think about when they're looking at what <unk> has done over these last several years and and what Ive got in my head is something that Buffett wrote in his I believe it was 2001 shareholder letter where he talked about the NOAA rule.
And basically I'm going to get the quote wrong, but it's roughly along the lines of predicting rain doesn't count building arcs does and what we've really tried to do here. If you take a look at the way we've diversified the company.
We last year formalize the division between consumer and Worksite.
And what I would say to you is given the pandemic I'm really happy we weren't 100% focused on worksite. Thank God, we had our consumer business.
That really helped us as we navigate the pandemic and then you think about we've had direct to consumer versus face to face again thinking about the pandemic. Thank God. We had this face to face presence with colonial Penn on online and so on and we weren't just reliant on our face to face agents.
And then we've really tried to build out the life on the health that diversification again looking at the pandemic. Thank God, we had the health business to really help offset some of the mortality claims and so on.
We're continuing to diversify beyond our underwriting businesses into fee businesses, So you're seeing us with the broker dealer with selling third party products and now with the direct at W. P. D. There.
Theres a variety of different things where it's.
At least from my standpoint, I'm I'm not so much trying to predict what the future is going to do but I'm trying to make sure. We've got bets on different sides of the table. So that wherever it goes we're in a position to be able to help our consumers and deliver a good result for our stakeholders. So there's this notion of really diversifying and I see building out the worksite business.
As very much of a diversification play against the consumer business and frankly, I think it's a really good time to do it because a fair number of the assets have just been beaten down because of Covid.
This particular asset would have been substantially more expensive just 12 months ago.
So it's the right time for us to build that back up as we know that particularly in certain industries think manufacturing restaurants, and so on they're going to have to come back to the work.
Workplace, they're going to have to come back to the factory flow or whatever it is and there's a huge opportunity for us to build this business out and now was the right time to invest in it against the broader context of diversifying it against the consumer business.
I know that was on much longer answer than you expected I hope it speaks to.
What you were asking.
I appreciate the color and I think that makes sense. Thank you.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Colin Johnson with B Riley Securities. Your line is now open.
Okay.
Colin.
Randy This is Randy binner from B Riley I think we got our name is mixed up on that can you all hear me.
Yes, Randy.
Hey.
Good morning, I guess, Gary I was interested in your the comment around kind of building a direct to consumer health business.
And yeah, I think it's definitely a logical extension of your distribution franchise. So just be curious kind of what what that will look like and you know if you can tie and kind of what.
Changes with the new administration.
On Medicare advantage.
They may bring into that I'd, just be curious kind of what your vision is there.
Okay.
Randy Thanks, Thanks for the question so first of all.
We've had a secular shift that we've been watching happen from med sub to med advantage and.
A way overs overly simplified explanation is think of med advantage like an HMO plan, where it's got specific conditions, but lower costs and med sup as Richard as Richard Health Insurance plan, and we've seen consumers migrate increasingly to this lower cost.
More efficient, but more restrictive structure and we can have lots of discussions about whether that's a good thing or a bad thing or whether its smart or not but the reality is that's what the consumer has been doing it's been a very compelling value for them. So we've watched that happen we've thought about it internally and we've come to the conclusion it doesn't make sense for us to try and build up the <unk>.
<unk> to manufacture on med advantage offer we're better off being a distributor. So we're going to continue to do that you've seen us do that and there's some side benefits in terms of accounting treatment and so on for fee income. So so we like doing that I would love to rather sell something that we manufacture and distribute because we get both pools of margin.
In this case, we only get one pool of margin, but that's still better than nothing and it does the most important thing which is get us into the household so that we can sell life in short term care in annuities and so on and so forth. So we're going to continue doing that now in terms of the online offering.
One of the things that I want to be really clear about.
We're not trying to compete with some of these online players that are out there theres a handful of them. Some of them are public they've got wonderful valuations I mean make no mistake I'd love to get their multiple but we're not trying to compete with them I really think that the long term success play in the Medicare space is to be able to meet the consumer initially where they want online telephone and face to face.
Whatever it is they want but the long term relationship on the way to hold at client and not subject ourselves to crazy amounts of churn and other things is to be able to supplement it with a face to face support now we made that move on the consumer side, specifically with our life products last year, when we reorganized and we brought colonial Penn and bankers.
Life together in a cross sharing leads frankly, the way that works blew me away.
But for Covid I can't imagine what those sales results would have been but if you look at those life results on how effectively that cross selling and the feeding between your online on the direct to consumer channel has worked with the face to face it far exceeded anything I would've expected.
On a non COVID-19 environment I think it will do even better so what we're what we're betting on betting is probably the wrong word what where we're preparing for in case. It goes this way if consumer preferences continue to have a move towards Medicare advantage and if consumer preferences continue to like online and direct to consumer we want to be able to solve.
That.
And then add to that the face to face and I really think that when you compare us to some of these strictly online offerings, where we're going to be able to differentiate us because we can provide that face to face service and provide other products. So so the short answer.
To your to your question. If you wanted short and what we did with the life, where we brought together direct to consumer and face to face. We're trying to do the same thing in health and we think that the secular trends support debt that was the crux of the investments. We made in late 2020, and we think that that debt consumer force is going to continue to push there and we like our odds.
We've got a real good chance of making that work.
Alright, well that's really helpful. So a couple of follow ups one on the on.
On the bankers and colonial Penn synergies I think at some point you were kind of quantifying.
Cross sell or other metric around that is that.
Can you remind us of that if it if there is an updated version or if that got messed up with Covid I'd just be curious like what the quantification wasn't the success of bankers and colonial Penn in that regard.
Yeah, I think we might have touched on on the script I'm Gonna look at Paul on Jennifer I'm not remembering the number I think we did disclose how much percentage wise was quote was cross sell.
Yeah. So the critical data points that I'd point, you to Randy or.
D to C life sales up 10% in the quarter.
Field life sales up 26% in the quarter and theirs.
I don't know that there's a.
Third sort of cross selling metric that we've shared but.
The important point is that.
We're sharing leads from D to C to the field and that's supporting field.
Sales were also referring from the field back to telesales agents <unk> to web digital so we're.
We're creating a business model that is optimizing across.
D to C and face to face and we're finding in our productivity metrics.
The debt.
In a more holistic approach drives much better productivity in terms of.
Lead conversion and just overall productivity.
Yeah, Paul and internally I know I've seen the data for how many of our face to face life sales emanated from that.
Good day to see lead sharing I can't remember, if we've disclosed that publicly or not.
But again, we are tracking it it's been a very impressive figure, which is why we're doubling down on it and building out similar capabilities on health.
On a dividend.
We aim to bring together this notion of face to face and direct to consumer and make it feels seamless.
Okay. That's perfect you Gotta covered my follow up on that explanation. So I'll leave it there. Thanks, Thanks a lot.
I tried to queue.
Our next question comes from John Barnidge with Piper Sandler Your line is now open.
Yes.
Thank you Worksite sales year over year on consistently improved since the second quarter.
January is now on the books can you talk about January from maybe a year over year perspective, just trying to get a sense to the degree to which that wall climate improvement as so far this.
This year.
So John it's Paul.
We obviously have the number we've decided not to share our January sales metrics.
Try to get back to our former cadence of just sharing quarterly we hadn't been selling.
Or sharing rather the initial months of the quarter the last two quarters in the context of.
Of Covid and its impact on on our sales dynamics, but I will tell you, though is that the January sales data helped inform our our overall sales outlook and it's certainly consistent with the outlook that we provided which is the momentum in the second.
Half of 2020 carrying into 2021.
Okay.
And then somewhat relatedly.
Super Bowl ratings were down a ton how does this changing dynamic.
And how people consume frankly entertainment.
Change, how youre thinking about advertising within colonial Penn for 'twenty one.
Yeah, John Thanks for the question I think it's a very astute observation.
For a long time, we've tracked but we've not disclosed publicly because we regard it as a competitive issue we've tracked on marketing cost to nap toward new annualized premium and and I've been amazed, even though I'm a 30 year career insurance person I've been amazed at how tightly that range can predict.
Our sales I've never been a part of the business before where when we move up marketing costs I can tell you within 5% to 10% on what the sales are going to be I mean, it's just such a tight indicate so we track it very religiously we've got a lot of systems and I think much will property in place to do that.
We're bringing that same discipline on those same set of skills to our online marketing efforts you're absolutely correct.
That the efficacy of television is changing simply because the viewership is changing and we are pushing continuously to have more and more of those leads generated from sources other than TV I will tell you one thing, though that we're still kind of watching and learning from because we've only been doing it for about four quarter.
Now.
Since we brought closer together.
On the face to face and the direct to consumer marketing, meaning colonial Penn at bankers life. Since we brought those closer together each dollar of marketing spend is yielding more which is to say we can afford.
To continue to spend a similar amount of dollars because the yield is higher meaning we have a better close rate. That's what we're learning. So we're continuing to modify that but but the salient point, you're making which is the TV.
It's becoming less and less fruitful, meaning the yield is lower because fewer people watch it so on that's absolutely correct.
On television advertising rates are changing and our yield is changing so it's not just a one variable thing, but because of all of that we're pushing more into online and we're bringing the same discipline into our online analysis and marketing spend.
Thank you very much.
There are no further questions in queue at this time I'll turn the call back over to the presenters for closing comments.
Thank you operator, I'd like to apologize for the technical difficulties experienced earlier in the call and the fact that Gary's earlier remarks earliest remarks, where neste a full recording of the call will be available on our website. This afternoon.
And thank you all for joining.
This concludes today's conference call you may now disconnect.
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