Q1 2021 CNO Financial Group Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and you walk up to the C and <unk> financial group first quarter, 2021 and 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 didn't answer session to ask a question and during this session you will need to press star one on your telephone keypad.
If you require any further assistance please press star zero.
I'll now turn the conference over to Jennifer Childe, Vice President of Investor Relations and sustainability. Please go ahead.
Thank you operator, good morning, and thank you for joining us and see you know financial group's first quarter 2021 earnings Conference call. Today's presentation will include remarks from Gary Botswana, Chief Executive Officer, and Paul Mcdonough, Chief Financial Officer.
Dentation, we will also have other business leaders available for the question and answer period. 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 web site at C. N O Inc. Dot com.
Presentation is also available and the investors section of our website and was filed in a form 8-K yesterday and we expect to file our form 10-Q and posted on our website on or before may 7th.
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 and 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 first quarter, 2020 and first quarter 2021.
And with that I'll turn the call over to Gary.
Yeah.
Good morning, everyone and thank you for joining us.
Turning to slide four.
<unk> is off to a strong start in 2021.
We reported operating earnings per share of 55 cents or 59 cents, excluding significant items, which compared to 58 in the prior period, there were no significant items and the prior period.
Our book value per diluted share, excluding OCI grew by 13%.
Our results benefited from ongoing deferral of medical care, which boosted our health margins.
Solid investment performance and continued share repurchase activity.
Premium collections remained strong across both divisions.
Expenses were slightly higher than the year ago period in line with our expectations.
Our capital and liquidity remain conservatively positioned.
We ended the quarter with an RBC ratio of 407 per cent and $324 million and cash at the holding company, while also returning $116 million to shareholders and.
Funding the direct path acquisition.
A M best recently revised our outlook to positive from stable recognizing the strength of our balance sheet.
Our high quality investment portfolio.
And our favorable operating trends.
Sales activity and our core businesses continues to gain momentum and we are nearing or exceeding pre pandemic levels and a number of metrics.
We continue to execute well against our strategic priorities specifically.
Successfully implementing our strategic transformation that was initiated in January of 2020.
Growing the business profitably.
Launching new products and services, including our new guaranteed lifetime income annuity.
Expanding to the right to slightly younger wealthier consumers within the middle income market.
And deploying excess capital to its highest and best use.
Turning to slide five and our growth scorecard.
All five of our scorecard metrics were up year over year, which brings us back to the growth momentum we generated pre COVID-19.
Life sales were up a record 29 per cent for the quarter fueled by record direct to consumer sales and a significant increase in production from our exclusive field agents.
Health sales remain challenged down 19% over the prior year.
And as discussed in previous quarters, our market is experiencing a secular shift away from Medicare supplement towards Medicare advantage.
As a reminder, when we sell third party Medicare advantage policies, we record fee income.
All of our manufactured Medicare supplement policies are recorded as net.
We continue to target household penetration and this important door opening business.
And the aggregate collected life and health premiums were up 4%, reflecting solid growth and life Nap and recent quarters and the continued strong persistency of our customer base.
Annuity collected premiums were up 11% the second consecutive quarterly increase.
Client assets and brokerage and advisory group, 38% year over year to $2 4 billion.
Fueled by new accounts, which were up 7%.
Net client asset inflows.
And market value appreciation.
Sequentially client assets grew 6%.
Fee revenue was up 12% year over year to $32 million, reflecting growth within our broker dealer and registered investment advisor.
Growth and W. B D fees.
And the inclusion of drugs pet's results.
Turning to our consumer division on slide six.
As we mark the anniversary of our transformation launch we continue to see success, leveraging our cross channel sales program or.
Our hybrid sales and service model, which blends and virtual engagement with our local exclusive field agents and led to significant improvements and lead conversion rates.
Customer acquisition costs and sales productivity.
This was evident in our lifestyle and life insurance business, where sales climbed 34%.
For the quarter to a record $51 $8 million.
Direct to consumer life sales grew 38%.
To a record $31 million and comprised nearly two thirds of total life sales within the division.
Supported by leads generated from our direct to consumer business life sales completed by our exclusive field agents were up 29%.
$21 million.
As I mentioned annuity collected premiums were up 11% as compared to the prior year our portfolio of index annuity products continues to be well received by middle market consumers in or approaching retirement.
We continue to maintain strict pricing discipline on our annuities in order to balanced sales growth and profitability and the current low interest rate environment.
In addition to growing the business and optimizing distribution and we've been focused on expanding our consumer access.
Half of the consumers consumer divisions life and health sales during the quarter were completed virtually.
In other words, 50% were not sold and person, which is a profound change and how we connect with our consumers.
We're also focused on household penetration.
Client assets and brokerage and advisory grew to $2 $4 billion and the first quarter.
Combined with our annuity account values clients know and trust us with more than $12 billion of their assets.
Recall that this is consistent with our strategy to fundamentally deepen the relationship with our middle income clients.
We continue to reap the benefits of the shift and agent recruiting strategy, we implemented several years ago.
We now rely more heavily on personal referrals and other targeted recruiting approaches.
And this has resulted in fewer new agent recruits but.
But the agents, we do a point or more likely to succeed and stay with us overtime.
Overall, our agent force continues to remain stable.
The number the number of securities licensed registered agents was up 6%.
These dual licensed agents as they start policyholders with financial planning and are responsible for a majority of our annuity sales.
This means that on average we have one registered agents supporting every six insurance agents.
Turning to slide seven and our Worksite Division.
We continue to see signs of recovery and our Worksite business as vaccination rates increased and restrictions started to relax we had more face to face access to workplaces during the first quarter.
Relative to the year ago period, Worksite sales were down 30%, but this reflects steady sequential improvement over recent quarters for the month of March Worksite sales were down only 11% year over year is.
And there's more workplaces reopen we expect our Worksite division to maintain sequential growth and return to year over year growth.
Ongoing pilots and programs to target new groups offer new services and capture new business are progressing nicely.
We also have been investing and online lead generation and BW resources to target small businesses and HR representatives.
Retention of our existing customers remained strong with continued healthy levels of employee persistency.
While we largely slowed the recruiting of new Worksite agents during the pandemic due to workplace restrictions the retention of our veteran agents remains solid.
Veteran agents have been instrumental in driving the recent sales momentum and will prove critical to rebuilding our agent force and the near future.
W. B D delivered solid results and the quarter with fee revenue up 5%.
This was driven by steadily improving employee counts.
We've also seen early success, gaining access to new employee groups through W. B These employer benefits Super sites.
We closed the acquisition of direct path and on February 9th.
All key direct path employees have joined US you know and we have retained all clients.
The new business pipeline has started to grow as our sales teams have identified cross sell and referral opportunities across their customer basis.
We are excited about the truly unique combination of products and services. We can now bring to the market. We expect to integrate all of these offerings and we will speak more about this in future quarters.
Turning to slide eight.
Our robust free cash flow enabled us to return $116 million to shareholders, and the first quarter, including $100 million and share buybacks.
Our capital allocation strategy remains unchanged, 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.
We invested $50 million during the first quarter and the acquisition of growth path.
Turning to slide nine.
Before I turn it over to Paul I'll provide an update on our ESG efforts.
Our 2020 corporate social responsibility report will be available on our website CMO, Inc. Dot Com next week and.
And in the report we outlined our recent accomplishments, including performing our first greenhouse gas emissions inventory.
Establishing and emissions reduction targets.
Earmarking $100 million and impact investments.
Advancing our diversity equity and inclusion programs.
Including the Eni objectives, and our 2021 executive compensation program, and creating a responsible investment policy and vendor code of conduct.
While there is much left to do.
<unk> remains committed to doing our parks.
And with that I'll turn it over to Paul.
Thanks, Gary and good morning, everyone.
Turning to the financial highlights on slide 10.
Excluding significant items operating earnings per share were up 2% and.
And return on equity improved 60 basis points compared to the prior year period.
The results reflect stable underlying insurance margins net favorable COVID-19 related impacts strong investment performance and continued disciplined capital management.
Expenses increased modestly year over year in line with our expectations.
Turning to slide 11 and.
Insurance product margin and the first quarter was up $19 million or 10% driven by a net favorable COVID-19 impact of $22 million and otherwise generally stable margins across the product portfolio.
The net favorable COVID-19 impact reflects favorable claims experience and our health care products, particularly impacting long term care due primarily to continued deferral and care.
This was partially offset by the unfavorable impact and elevated mortality in our life products.
Overall persistency remains solid across our business and is generally in line with pre pandemic levels.
Turning to slide 12.
Investment income allocated to products was essentially flat and the period of growth and the net liabilities and related assets was offset by a decline and yield.
Investment income not allocated to products, which is where the variable components of investment income flow through declined $14 million year over year, notwithstanding the significant outperformance of our alternative investments.
And the prior year period of extreme market volatility translated to unusually favorable trading gains and the severe decline in interest rates led to favorable net coli and prepayment income.
Our new money rate of 357% for the quarter was flat sequentially, reflecting higher interest rates offset by our decision to invest and higher quality credits given more modest spread tightening and these securities.
Our new investments comprised $1.1 billion of assets with an average rating of AA minus and and average duration of 15 years.
This higher level of new investment reflected elevated proceeds from prepayments and our annuities as well as a reduced cash balance.
Our new investments are summarized in more detail on pages 23, and 24 of the earnings presentation.
Turning to slide 13.
At quarter, and our invested assets were $26 billion up 11% year over year.
Approximately 95% of our fixed maturity portfolio is investment grade rated with an average rating of single a.
This allocation to a rated holdings was up 160 basis points sequentially.
The triple B allocation comprised 41% of our investment grade holdings.
Down 100 basis points from year end 2020.
To the extent suitable and attractive opportunities develop we may over time and balance our recent up and quality bias with a modest increase and allocation to alternatives.
Turning to slide 14.
We continued to generate strong free cash flow to the holding company and the first quarter with excess cash flow of $101 million or 135% of operating income this quarter and $409 million or 116% of operating income on a trailing 12 month basis.
Turning to slide 15.
At quarter, and our consolidated RBC ratio was 407% day.
Slightly from year end.
This represents approximately $35 million of excess capital relative to the high end of our targeted range of 375% to 400%.
Our holdco liquidity at quarter end was $324 million, which represents $174 million of excess capital relative to our target minimum holdco liquidity of $150 million.
Since the onset of the pandemic and early 2020, we have intentionally maintained a conservative capital and liquidity posture relative to our target levels and the context of COVID-19 related uncertainty.
Turning to slide 16.
For the past year in the context of the uncertain trajectory the pandemic and its impact on our business.
We've been running base and adverse case scenarios to provide our outlook.
We continue to run both scenarios, although the adverse case appears increasingly unlikely as COVID-19 infection rates and death rates and vaccination rates in the United States are all trending favorably.
And as the economy appears to be an increasingly solid footing.
And our base case, which assumes herd immunity to COVID-19 in the U S. Later, this year and a healthy economy.
We expect a continuation of the sales momentum we've seen in the past three quarters.
We expect a modest net favorable COVID-19 related mortality and morbidity impact on our insurance product margin for the balance of 2021.
And a modest net unfavorable impact in 2020, two driven by unexpected Spike and health care claims post COVID-19 due to pent up demand during the pandemic.
I would emphasize that these are directional base case expectations. There remains a fair amount of uncertainty as to how this will play out.
Examples of uncertainty on the health side include how long deferral of care and will persist and nature and extent of pent up demand and potential implications of long COVID-19.
On the life side, there remains uncertainty about the extent and duration of COVID-19 mortality impacts, including whether COVID-19 will persist and an endemic state and the U S and to what extent future deaths were pulled forward by the pandemic.
We expect net investment income allocated to products to remain relatively flat.
As a growth and assets is offset by lower portfolio yields and reflective of both the lower interest rate environment and are up and quality shift and asset allocation.
In general we expect alternative investments to revert to a mean annualized return of 7% to 8%.
But the actual results will certainly be more variable with likely more upside potential and downside in the near term given the current economic outlook.
We expect fee income to be modestly favorable to the prior year as we grow our third party and MA distribution and improve the unit economics of that business.
Growth and web benefits design earnings and the inclusion of direct path will also contribute.
We expect the sum of our quarterly allocated and not allocated expenses for the balance of the year too.
To be generally consistent with levels reported in the first quarter of this year, allowing for some quarterly volatility and resulting in total expenses for the year roughly flat to the prior year, excluding significant items in both periods.
These expense trends reflect continued expense discipline driving for operational efficiency, while continuing to make targeted growth investments.
The trends also reflect expected higher travel and agency management related expenses later this year compared to the prior year period.
As COVID-19 related social distancing protocols are relaxed.
And finally and the base case, that's COVID-19 related uncertainty continues to decline, we expect to manage our capital and liquidity closer to target levels, reducing our excess capital gradually over time.
And our.
Our adverse case, we assume that new variants emerge for which the current vaccines are less effective or ineffective and the pandemic continues and the U S into 2022, and 'twenty, three and the economy and financial markets suffer accordingly.
And though this scenario seems very unlikely from where we sit today, we certainly cannot rule it out entirely.
The good news from our perspective is that in the adverse scenario consistent with our prior analysis over the past year, we expect that we would be able to maintain our target capital and liquidity levels and maintain our dividends to shareholders and still have a modest amount of share repurchase capacity.
And with that I'll turn it back to Gary.
Thank you Paul we're off to a very strong start this year.
Our consumer Division has largely returned to pre pandemic performance and we expect our Worksite division to return to year over year growth and the second quarter.
Accelerating vaccine distribution and economic recovery, we will continue to support our growth momentum.
While risks and uncertainties still lie ahead, we will continue to successfully navigate through these unprecedented times and supported by our dedicated associates and agents.
Our very strong balance sheet.
Our defensively positioned investment portfolio, and our robust cash flow generation.
We remain committed to serving our customers and communities both through the pandemic and on the other side.
Please continue to stay healthy and safe.
Thank you for your interest in and support of <unk> Financial Group, We will now open it up for questions operator.
At this time I would like to remind everyone and all that.
To ask a question press star and the number one on <unk>.
Telephone keypad.
And also just a moment to compile the Q&A roster.
Okay.
And your first question comes from Humphrey Lee with Dowling and partners.
Good morning, and thank you for taking my questions. My first question is related to the to your long term care claims experience and my understanding is that the strong performance in the quarter came from IBM and our reserve releases.
If so can you quantify the benefits in the quarter.
Sure and good morning Humphrey. Thanks for the question, so the $25 million of favorable COVID-19 impact and long term care in the quarter reflects about $9 million and benefit reserve releases due to higher mortality from COVID-19 deaths, and then about $16 million and reduced pain.
Wanes and reduced increase and claim reserves due primarily to new claimants well below normal expectations.
Okay. So.
And in a sense it seems like because he has for the past several quarters you have been assume you and not taking full advantage of the lower incidents by booking IV and our reserves and youre starting to see some of that coming through.
Do you still have a decent.
Decent level of IV and a reserve sitting on your books right now and SD differ.
People continue to defer care or defer and utilization of learning and home could you see additional reserve releases to come through over the next several quarters.
Yes, Humphrey, it's really less about our building IV and are and more about the continued reduced.
New claimants relative to normal expectations.
Okay. Alright, My second question is related to the updated guidance for underwriting. So you talked about the favorable net favorable mortality and morbidity impacts and the balance of 2020, one, but net unfavorable and the first half of next year. I was wondering if you can elaborate a little bit in terms of your expectations.
By product lines.
Sure.
So.
As you alluded to unfree the.
And our outlook three months ago was that the net impact of COVID-19, and 2021 would be neutral and favorable and the first half unfavorable and the second half.
And.
Three months later.
From where we sit today, we had a.
More favorable COVID-19 impact and the first quarter than we anticipated and now we're expecting and net favorable COVID-19 impact for the balance of the year and what's changed is primarily a persistence and the deferral of care.
Across the health product portfolio.
It's also.
Collective the refinement and our view of.
How things will evolve as.
Hum.
And conditions lead to a return to.
The higher utilization of health care and.
So as we think about that across the product portfolio and med Sup, we believe and we're already seeing a return to more normal claim patterns.
And in addition, we.
Expect we'll see an increase above normal claim patterns due to some pent up demand.
And of health care and.
And so you'll have a and <unk>.
Adverse impact from COVID-19 due to that dynamic and net stuff.
In the critical illness policies, and our Sop health products and we'll see.
See a similar dynamic, but it'll take longer for that to play out and we expect.
Modest net favorable COVID-19 impact from stockpile through the balance of this year and an unfavorable impact and the early part of next year and normalizing.
And the middle part of next year and.
And long term care, we expect that.
And the Pearl.
Care will persist through.
And of this year.
And then normalize and the early part of next year, we don't really see and opportunity for you know that's sort of a catch up and claims and.
And that product the other thing I would really emphasize on three and this is all directional.
There's a lot of uncertainty as to how this will play out the extent of it and the timing of it we're giving our view of how.
How do we think it might play out.
But.
It'll certainly be wrong. It's just a question of you know by how much.
Great appreciate that color. Thank you.
And welcome.
Your next question comes from Randy Binner with B Riley's Securities.
And good morning. Thank you I wanted to ask a couple regarding buyback so the buybacks and good and the last couple of quarters at $100 million and.
Looking at.
It kind of a commentary on slide 16 about <unk>.
And the excess capital go to kind of more of a target level.
And then also slide 14 with the kind of line.
I think as and improved cash flow profile that I mean, I guess the two questions are.
With the target RBC ratio and in AR, and AR and kind of a good business environment.
Go into the three handles towards 375, and then with free cash flow.
I guess is it is the is the statutory earnings profile and improving because of your business mix or are we kind of seen.
Signals and hear from just favorable claim activity that we would assume would wood river.
So trying to triangulate buyback potential through throw those items.
So good morning, Randy.
Thanks for the question.
So certainly.
Favorable COVID-19 impacts in the quarter.
Our temporary write those if there was a one line and as we've noted will go the other way, we think and the early part of next year.
So you know certainly you have to adjust for that as you project forward.
And generally.
<unk> speaking.
And I'm really just reiterating the points we've already made.
We have intentionally maintained a relatively conservative posture relative to our target RBC and minimum holdco liquidity in the context of the uncertainty related to COVID-19.
We think that that uncertainty has diminished.
But it hasn't gone away entirely so we will continue to be.
Relatively conservative, but as that uncertainty does diminish and we expect that it will and our base case.
We will over time and gradually.
Uh huh.
And the less conservative more aggressive.
And get closer to our targets so inside of 400 on the RBC closer to $1 50 on the Holdco liquidity.
Yeah, that's helpful and I guess the follow up just on the kind of the statutory earnings part because.
And the company is becoming.
Less risky from an earnings profile because long term care.
It should be.
From an actuarial perspective, you get better every year and I mean COVID-19, it's been helpful. There.
So understanding and we would normalize for and usually favorable claims wouldn't when and I expect a little bit better kind of normalized statutory earnings profile for the company looking out a year or two or three kind of given.
Youre, adding business, that's more fee focused and has better underwriting margins and kind of winding off more of a long term care.
Certainly Randy Directionally, we think that there is.
And.
And opportunity to grow our business and grow our earnings both GAAP and stat.
So in that context, yes, and I would agree with you.
Okay. That's all I had thanks a lot.
Yep. Thank you.
Your next question comes from Ryan Krueger with K B W.
Hi, Thanks. Good morning. My first question was on life sales they were that the highest level since the pandemic began and it.
Just hoping you could give some perspective on the.
I guess, the extent to which you think life sales are still benefiting and meaningfully from.
From changes and awareness, resulting from the pandemic versus.
I guess things Youre doing differently or that you think can be kind of sustained longer term.
Yeah.
Yeah, Hi, Ryan This is Gary thanks for the question.
There's no question that for the last several quarters. There has been increased consumer awareness. So so that's definitely true, it's very difficult to quantify that and.
And when I think about that question.
Look at a few things first.
Definitely did benefits no question.
Second please.
Please remember even before the pandemic, we were showing quite robust direct to consumer life sales growth.
I believe we had a string of either five or six consecutive quarters of growth if memory serves correctly before the pandemic. So we were on a very strong trajectory even before the pandemic.
And then in January of 2020.
We announced our business transformation, where we went from the three separate companies the two divisions.
And we really brought much closer together, our direct to consumer tele sales efforts with colonial Penn and brought that much closer to our bankers life.
Efforts.
And field field agents.
And you know one of the things I really want to emphasize the lift from that as frankly exceeded our expectations and I don't think it's all COVID-19 related I think that we're really benefiting from bringing those two entities closer together and and <unk>.
Sharing leads two data points I think that support that first remember that.
This past quarter, 50% of our sales and life and hotels took place and a virtual setting meaning either face to face agents over zoom or our telesales agents or online or what have you, but in a non face to face way, that's a big big change for us the second point I would emphasize.
And I can't recall, if we called this out specifically, but.
The life and health sales completed by bankers life agents, so by the historically face to face field agents.
20% to 25% were completed virtually.
And that number two years ago was zero and so there's a profound shift happening.
Both in terms of consumer demand.
And.
How they think about purchase decisions and so on and as well as the proficiency of our agents and our systems.
To break down how much of that is all is COVID-19 is very difficult to do.
And I think there's a very significant portion of that that is just due to our reorganization and our online efforts and our growing proficiency.
Thanks, and then on the.
And the potential.
Use of excess capital and bringing it down towards your target is do you anticipate that share repurchase would be the primary method or are there still other bolt on M&A capabilities that you like that over time.
Yeah.
So.
So thank you for the question.
I wish I could say I was surprised we and we know we get this question and every call. So thank you for that.
And my party line remains unchanged and with one slight twist this past quarter.
Those bolt on acquisitions and share repurchase are not mutually exclusive and indeed look at Q1, we did book.
We continue to think of share repurchases as a.
And that's a good use of capital there is no question about that.
No we are biased, but we believe that the intrinsic value of CMO financial as well beyond where the share prices today. So so that influences our thinking we're of course mindful of the GAAP impacts of buying shares above book value, but we really believe the company is worth more than what the share price is showing so we think about that when we make those decisions.
And as I remind everybody I've been CEO for 13 quarters now we've bought back stock and 12 of those 13 quarters. The only quarter. We didn't was one we were prepping for the LTC reinsurance transaction. So again I ask you to judge us by our actions.
We continue to be mindful of what our shareholders want and put that capital to its highest and best use over time. So it will continue to be.
One of the many options that we consider.
Thank you.
The next question comes from Erik bass with Autonomous research.
Hi, Thank you and appreciate the additional color on kind of your outlook for health claims going forward and one follow up on LTC and think in addition to lower kind of benefits utilization and other trend that has happened or may happen.
More of a preference for home health care as opposed to being in and nursing home and I'm. Just wondering from your perspective, how does that affect share cost of.
Of claim if more people elect a home health care option as opposed to nursing homes.
And Gary I'll.
And I'm sorry go ahead Paul.
Hi, good morning, Eric.
I'm, just thinking out loud honestly.
Hum most of our policies nearly all of our policies have home health care.
Coverage is a benefit.
Your question is if.
And if there as a result of COVID-19 and post COVID-19 dynamics, there is a skew towards more heavy utilization of that and benefit as opposed to facilities and I just wanted to clarify the question.
Exactly I guess is there a difference in terms of your cost.
Providing the caring people elect and one option versus the other so there's one more favorable.
Yeah.
And it's an interesting question, Gary you're shaking your head no.
Yes.
A couple of things I'd remind you of.
I think generally speaking the answer to that is I would not expect to see a material shift and the reason is very simple remember that particularly for the policies. We've sold over the last several years. They last three to five years at least.
Those are policies that are much more modest and nature of the daily benefits is quite modest.
It's not like we have a number of unlimited benefit policies, where we would really see a different claims resulted because of that when you are talking about the benefit of I don't know three to $400 a day.
And whether they go into a facility or they have that home health care I would guess that the financial impact as it is.
He is not going to be materially different against that couple of hundred Bucks a day. So for that reason I wouldn't expect to see that claims experience.
In terms of dollars paid out differ materially and I could be could be wrong, we haven't or at least I haven't looked at it slice up that way, but that would be my.
My estimate.
Got it. Thank you that's helpful perspective, and then wanted to follow up maybe on Randy's question on free cash flow and I think the other dynamic is certainly that your sales are recovering and I think you'd expect to grow them from here and you've seen a shift more towards the life and annuity products. So how should we think about the level of new business strain and and that impact on free cash.
Cash flow.
So Eric and obviously.
It creates a call on capital if you will and reduces our free cash flow.
I wouldn't.
And put a number on it but certainly directionally it.
And just the dynamic.
And we will continue to generate healthy levels of free cash flow and it will change over time, there's as you know.
Lots of moving pieces to that equation.
Got it I mean to give it some perspective I don't know if you can disclose the sort of the approximate level of capital and you allocated to new sales last year.
Yeah, we haven't and I don't I don't have a number off the top of my head.
Okay. Thank you.
As a reminder to ask a question press star and the number one on your telephone keypad.
And your next question comes from John Barnidge with Piper Sandler.
Yeah.
Can you talk about the directionality of conversion rates and the last several years I'm just trying to get a better.
And to be improved effectiveness of marketing spend once you brought all the brands together and those two divisions.
So just to make sure I understand the question you're talking about basically sales closure rates is that what you're asking about how effective are we good at.
<unk> can you talk about the trajectory over the last several years because it appears you're clearly grown the DTC channel and having benefits shut off and to maybe some of the more traditional channel as previously.
Yeah. So a couple of responses to that so first of all.
And that move was initiated in January of 2020, so in relative terms, particularly because COVID-19 slowed us down and in some respects that move is still relatively recent so I don't want to overstate state that has a multi year trend. It's a relatively new that's the first point I'd make.
The second point I'd make we do track our closure rates and probably the best proxy for that or the best way to think about that as the productivity of our agents and we've seen that continue continue to grow materially over several years.
So we really feel like that's probably the best way to think about it and and our close rates do continue to improve the third and final point I'd make.
Remember that that with our D to C business.
It's highly highly sensitive.
Two how and when we choose to advertise I've been in the insurance business for over 30 years and I've never seen a business that is so frankly predictable we know when we're going to spend X in the first quarter and advertising I can tell you within 5% or so what my sales are going to be following that and so for us.
D to C and particular as really an exercise and dialing in that advertising and make sure we're buying it and the most cost effective way and that's why you see these expenses bounce around a little bit when we can buy AD rates at what we believe will produce a favorable yield we do so and sometimes and some quarters, we escalate that but.
We really base that on the productivity on the marketing cost and and what nap it yields and what the annualized premium and deals we got dialect and quite.
Quite strongly and as long as advertising costs and the yield allow for it we'll ratchet that up or down depending on what's going on so I think on both of those metrics RMC to nap, which we don't disclose we regard that as a proprietary metric RM seat and app as well as our agent productivity, we've seen a very nice trend over quite some time.
Both of those numbers getting better.
Okay. That's fantastic and then my follow up I'm sorry, John.
John One thing I want to add to that.
<unk> is focused on consumer and that was a mistake I should have also made some comments about work site, we've seen similar trends and our Worksite business and we expect as workplaces open up and we really integrate the offerings the insurance offerings, we Havent, Washington National and PMA.
The technology offerings from web benefits and the service offerings from from direct path. We expect that that will also increase the productivity and the close rates and now we're at the front end of that so I don't want to overstate that but we expect that to happen and we saw early signs of that pre COVID-19 recall that our worksite business, particularly at <unk>.
<unk> had been growing I believe for five or six consecutive quarters before COVID-19 and so we expect that productivity and those close rates to get back to those pre COVID-19 levels. So sorry for interrupting John you had another question and I believe.
Hey, John and I would offer I'd offer one more data point, it's Paul if you consider and and and consumer producing agent count and down slightly year over year.
And the life and health Nap up nine 5% and annuity collected premium up 11, 4% and that gives you a sense from the degree to which our productivity has improved.
That's a really good point and then the follow up registered agent count up 6% you made a comment that you're moving more towards kind of recruitment from referrals as opposed to like going out and finding them can you talk about or dimension, maybe when you get a registered agent.
The follow through potential and timing and like how long that takes and then within that by doing more referrals do you think that fall through is gonna be quicker.
Yeah.
We don't want it to be quicker when the insurance agents come on and.
Join our field force, particularly if they didn't grow up and insurance. So if they're new to insurance, we want them to spend the first one or two years strictly and insurance and really understands that business.
I would get concerned if we started converting folks that haven't been and insurance.
To become registered agents too.
And to quickly so there's a that's more art than science and it depends on the caliber and the agents, we recruit and what their experiences and these things, but I think a good rule of thumb, it's somewhere between 12 and 24 months, we want to see them.
And get those licenses, if they're interested and the way we've thought about it and it certainly increases productivity, but I think the more important points. There's two points that are much more important.
One is that it fundamentally changes the relationship with the consumer when they buy a life or a health policy from our stats and expense and frankly, they can they can decide to stop paying the premium and move to brand X. If they want to when they entrust us with assets and or and annuity they've now change the relationship we now become and investment for them.
As opposed to and expense. So that's the first reason, we very much like the second is <unk>.
Having that path enables us to recruit a better caliber of agent and someone who really wants to stay in this business and make a career out of it that's not to say they can't make a career out of being purely an insurance agent, but and opens up yet another avenue and.
And the income stream also changes for people, who are purely insurance agents versus registered agents. So we do it for a number of different reasons, not the least of which is productivity.
Thank you.
And your next question comes from Humphrey Lee with Dowling and partners.
Thank you again for taking my follow up questions. My first question is from Gary I, just want to mature I heard that right in your comment on the long.
Long term care daily benefits, you said 304 hundred per.
Per day, which seems high to me. So I just want to make sure I I did and misheard you.
Yes.
And look at the sorry, we're in a virtual environment and I'm looking at my colleagues I believe that the average benefits that's on the high side of the policies that we saw recall that we saw a short term policy I think the average is probably closer to $200 I'm waiting for the high side and from my colleagues. If that's if that's correct.
Or potentially even slightly lower than 200, and the average so I think I'm just day to day. Thank you for clarifying that Humphrey My point simply was that because of the nature of our middle market consumer and what they can afford and what they buy this policy for the overall benefit that we offer is in relative terms quite modest to what historically the long term.
From care industry has offered a policy is really our short term care in nature.
And typically are resolved within a one year period and the way. They work is we sell a policy.
The average.
And is around $70000 of the total benefits and whether they spread that out over one year or three years. The total benefits is still that number and it works out to around 200 per day and the point I was trying to make earlier was I don't know that home health care is going to be much less than what that average sales, but thank you.
And for clarifying Humphrey you're correct I think our average is closer to 200 or less.
Okay got it and then my second follow up is regarding the expenses for advertising and I think you talked about U S.
You you would be doing it ended up opportunistically based on where you're saying you can get the bang for the book, So, but just thinking about for this quarter. The advertising expenses were a little higher compared to recent quarters and I think long ago, you used to have kind of day of the first quarter and third quarter seasonality for advertising expense.
Since you have clearly move away from relying so much on T V assets that may have changed so.
We like so like looking at just just looking at Cid and higher expenses in the quarter. We shouldn't think of the first quarter third of course seasonality will come back or like how should we think about the D day that advertising expenses going forward.
There will always be some seasonality to this business and it's going to vary a fair bit by two factors number one the product line. So if you think about as an example, the annual enrollment period for all of the Medicare policies Q3, Q4, so as we build out our my health plan Dot com offering and as we get more.
Proficient at selling those products.
On line you would expect some seasonality there the second thing that drives it is what's happening in terms of other advertising. So as an example, if theres a presidential election and running.
Or some other significant events happening that's driving up advertising rates, that's going to drive. It. So those are two factors that are relevant and beyond just the pure seasonality that we would talk about it.
Okay, but so we should stay away from just thinking the old way of first quarter and third quarter correct.
Paul I'm going to look to you on that one.
I haven't looked at that data lately in terms of how it's trended over the last few years.
Yeah. So last year for example, it was highest in the first quarter, then trended down thereafter of course last year, you had and election, so that that changes.
Changes the dynamic a bit.
But generally speaking the first quarter is our highest quarter.
Television AD spend and not surprising that there was a bit higher this year 23 versus <unk> 20 last year, just given the opportunity we have given the tailwind we have and.
And the momentum.
I think.
Directionally Humphrey you should expect slightly higher spend by quarter this year than last year.
Again, just given where we are.
And and and.
Current dynamics.
Okay got it thank you.
Yep.
And there are no further questions I will now and turn the conference back over to Jennifer for closing remarks.
Youre on mute Jennifer.
Thank you everyone for joining us this morning, and we look forward to speaking with you again soon.
Yeah.
This concludes today's conference call you may now disconnect.
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