Q3 2021 CNO Financial Group Inc Earnings Call
[music].
Okay.
Good day and thank you for standing by welcome to the C. N O financial group third quarter 2021 earnings conference call. 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 if you acquire.
Any further assistance press Star Zero I would now like to hand, the conference over to your speaker today, Jennifer Childe, Vice President of Investor Relations and sustainability. Thank you. Please go ahead.
Thank you operator, good morning, and thank you for joining us on piano financial groups third quarter 2021 earnings Conference call. Today's presentation will include remarks from Gary Bunch, wanting Chief Executive Officer, and Paul Mcdonough, Chief Financial Officer. Following the presentation. We will also have other business leaders available for the question and <unk>.
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. This mornings presentation is also available in the investors section of our website and was filed in a form 8-K yesterday.
Back to file our Form 10-Q and posted on our website on or before November staff.
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 third quarter 2020, and third quarter 2021 and with that I'll turn the call over to Gary.
Yeah.
Thank you Jennifer good morning, everyone and thank you for joining us.
We delivered another strong quarter with operating earnings per share up 7% over the prior year period, excluding significant items and COVID-19 impacts in both periods.
Our results reflect ongoing deferral of medical care, which continued to boost our health margins.
Solid variable investment income results and robust share repurchase activity.
Our sales metrics exceeded pre pandemic levels in a number of areas.
Total life and health Nap was up 1% over the third quarter of 2020 and up 1% relative to 2019 levels.
As the pandemic continued to pressure an already tight labor market, we experienced a slowdown in new agent recruiting.
Premium collections remained strong exceeding pre pandemic levels.
As expected our underlying margins, excluding COVID-19 impacts performed well.
Our capital and investment portfolio remain conservatively positioned with ample liquidity.
We ended the quarter with an RBC ratio of 388% and $366 million in cash at the holding company.
This is after returning $131 million to shareholders through a combination of share repurchases and dividends.
We continue to execute well against our strategic priorities, specifically successfully executing on our strategic transformation.
Growing the business profitably launching new products and services.
Spanning 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.
Four of our five growth scorecard metrics were up compared to 2020.
Relative to 2019, all five metrics were up for the second consecutive quarter.
As a reminder, pre pandemic, we had delivered five consecutive quarters of growth in all five of our scorecard metrics.
Life sales were up modestly compared to 2020 fueled largely by continued momentum in our direct to consumer channel.
The 2019 life sales were up 22%.
Overall health sales were essentially flat year over year, but down 16% relative to 2019.
Total collected life and health premiums were down 2%.
This reflects continued solid growth in life, nap and persistency of our customer base offset as expected by lower Medicare supplement premiums.
Annuity collected premiums were up 17% year over year and up 2% relative to the third quarter of 2019.
Client assets in our brokerage and advisory grew 30% year over year to $2 7 billion.
Fueled by new accounts, which were up 16%.
Net client asset inflows and market value appreciation.
Sequentially client assets grew 2%.
Fee revenue was up 41% year over year to $28 million, reflecting growth within our broker dealer and registered investment advisor.
Your fees generated by web benefits design or Worksite technology platform.
The inclusion of <unk> Paas results, which is our worksite enrollment and advisory services business.
Turning to our consumer division on slide six.
I continue to be pleased with how we're executing on our transformation to leverage synergies between our agents and direct to consumer businesses.
Consumer segment life, and health sales were down 2% over the prior period, but up 8% over 2019.
Life sales were essentially flat in the quarter.
Direct to consumer life sales were up 13% on top of 23% growth in the prior period.
Life sales generated by our exclusive field agents were down 15%.
Health sales were down 5%, largely reflecting continued weakness in Medicare supplement sales as discussed in previous quarters. Our market is experiencing a secular shift away from Medicare supplement and towards Medicare advantage, we continue to invest in both our Medicare supplement and Medicare advantage offerings to ensure we are well positioned to meet our customers' needs.
<unk> and preferences.
In 2022 we will be launching a new Medicare supplement product that we believe is more aligned with consumer preferences.
We've also made several enhancements to our Medicare advantage platform My health policy Dot com.
And our product offerings to position us well for this season's Medicare annual enrollment period, specifically, we expanded our carrier partners and product offerings.
We now have nearly 3000 exclusive field agents certified to sell Medicare products, which is up 14% from last year.
And we boosted our DTC capabilities through enhanced lead acquisition and sales capabilities.
As I mentioned annuity collected premiums were up a healthy 17% as compared to the prior year and up 2% versus 2019.
The number of new accounts grew 6% and the average annuity policy rose 10%.
We continue to maintain prices put strict pricing discipline on our annuities to balance sales growth and profitability.
Participation on crediting rates are reviewed regularly to reflect current macro environment conditions.
Client assets and brokerage and advisory grew 30% year over year to $2 $7 billion in the third quarter.
Combined with our annuity account values, we now manage $13 billion of assets for our clients.
This has fundamentally shifted the relationship we have with our customer base. Unlike some insurance products, which can be transactional in nature investment products, typically create deeper and longer lasting customer relationships.
Over the last several years, we have shifted our agent recruiting strategy to focus more heavily on targeted recruiting approaches.
And boosting the productivity levels of our existing agent base.
This has periodically resulted in fewer new agent recruits. However, the new agents, we appoint are more likely to succeed and stay with us over time.
Until recently, we haven't felt much impact from the tight labor market.
In the third quarter. However, our total producing agent count was down largely due to fewer first year agents.
Our veteran agent retention and productivity remains strong.
The number of agents that have been with us for at least three years has remained consistent through the third quarter and is up 1% year to date.
Productivity. Among these veteran agents is up 5% over the prior period and up 13% year to date.
These more seasoned agents typically generate higher premiums for policy and drive cross sales of other products, including annuities and health products.
We remain committed to prioritizing agent retention and productivity. However, we also want to attract new agents. Therefore.
Therefore, we are experimenting with various pilots and programs to jumpstart, our new agent recruiting but expect these near term headwinds to continue.
Turning to slide seven in our Worksite Division.
Worksite sales were up sharply in the third quarter as compared to 2020, However, sales remained well below 2019 levels.
The emergence of the delta various caused a number of onsite enrollments to be postponed or canceled.
We expect the pace of Worksite recovery to improve as workplaces, reopen and COVID-19 disruption subsides.
The workplace as we know it continues to evolve.
As more companies shift to permanent hybrid work arrangements, we continue to explore new approaches to improve access to existing employer groups and their employees.
At the same time pilots and programs to target new employer groups and offer new products and services remain a key strategic priority for us.
Retention of our existing customers remained strong and employee persistency with them. These employer groups continues to be stable.
Our producing agent count was down 5% year over year and down 11% sequentially due to the tight labor market.
Agent count remains down more than 45% from pre COVID-19 levels.
Our recently launched field agent referral program, which was modeled after our consumer Division program is generating promising results in its early stages.
Retention and productivity levels, among our veteran agents, who have been with us for more than three years remains very strong.
These agents have been the driving force behind recent sales activity.
The integration of our fee based businesses continues to run smoothly.
Fee revenue nearly doubled in the quarter due to both organic growth within W. BD Worksite technology platform and direct path, our worksite enrollment and advocacy services business.
Our average client size when these businesses increased 15%.
And our average per employee per month rates were up double digits.
Market feedback on our unique combination of Worksite products and services remains positive and we are realizing meaningful cross sale success.
Turning to slide eight.
Our robust free cash flow enabled us to return $131 million to shareholders in the third quarter, including $115 million in share buybacks.
This is the highest level of capital returned in the past six years.
Our capital allocation strategy remains unchanged, we intend to deploy 100% 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.
And with that I'll turn it over to Paul.
Paul.
Thanks, Gary and good morning, everyone turning to the financial highlights on slide nine we generated operating earnings per share of <unk> 72 cents in the quarter, which is down seven cents year over year as reported.
<unk>, excluding significant items and up four or 7%, excluding significant items and adjusting for the net favorable COVID-19 impacts on insurance product margin.
We had $3 million pretax or <unk> <unk> per share unfavorable significant items in the current period.
None in the prior year period.
And we had $23 million or 14 cents per share a net favorable COVID-19 impacts in the current period as compared to 42 million or <unk> 23 per share in the prior year period.
The results for the quarter reflect solid underlying insurance margins ongoing net favorable COVID-19 related impacts strong alternative investment performance and prepayment income.
And continued disciplined capital management.
Over the last four quarters, we have deployed more than $400 million of excess capital on share repurchases, reducing weighted average shares outstanding by 9%.
Operating return on equity was 11, 5% for the 12 months ending September 32021.
The some of the expenses are allocated to products and not allocated to products. Excluding significant items was flat to the first quarter of 2021 as expected.
In general our expenses continue to reflect both expense discipline and operational efficiency on the one hand and continued targeted growth investments on the other.
Turning to slide 10 insurance product margin, excluding significant items was down $21 million or 9% in the third quarter as compared to the prior year period, driven by the $19 million year over year change in Covid impacts.
The year over year decrease in net Covid impacts primarily reflects a decrease in the favorable benefit in our med sup product.
Sequentially, the net favorable COVID-19 benefit was essentially flat with offsetting changes and the impact on our health and life products page 10 of our financial supplement summarizes those impacts by quarter.
The sequential decline in our annuity margin reflects volatility related to the indexed annuity <unk> thousand 133 accounting for our embedded derivative reserve.
You had a favorable impact in the second quarter and an unfavorable impact in the third quarter.
Exclude excluding COVID-19 impacts insurance margin was essentially flat year over year.
Both in total and by major product grouping.
This was in line with expectations, reflecting the underlying stability of the book of business.
Turning to slide 11.
Investment income allocated to products was up slightly as it grew.
And the net liabilities and related assets was mostly offset by a decline in yield.
Investment income not allocated to products, which is where the variable components of investment income flow through.
Increased $7 2 million or 16%, reflecting solid performance within our alternative investment portfolio and higher prepayment income.
Our new money rate of 355% for the quarter was up 17 basis points sequentially, reflecting increased allocation to direct investments and an increase in market yields.
Our new investments comprised $849 million of assets with an average rating of AA minus and an average duration of 13 years.
Our new investments are summarized in more detail on slide 22, and 23 of the earnings presentation.
Turning to slide 12 at quarter end, our invested assets totaled $28 billion.
5% 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 is up 20 basis points sequentially.
Ripple deallocation comprised 39% of or fixed income maturities down 180 basis points year over year, and 40 basis points sequentially.
During the quarter, we established a 3 billion dollar funding agreement backed notes program and in early October we issued an inaugural $500 million funding agreement back in five year notes.
Program provides a new vehicle for us to leverage our core innovation investment competencies to generate incremental earnings at an attractive return on the underlying capital.
It is complementary to our existing federal home loan Bank program.
They both improve the company's financial flexibility and draw on similar investment capabilities with slightly different duration and asset allocation strategies. The combination of the two provides you know with greater funding diversification and earnings potential.
We expect the F. A b N program will provide roughly 100 basis points annualized pretax spread income net of expenses on the notional amount of the notes outstanding.
We'll report the net spread income in NII not allocated products just as we currently report the net spread income associated with our federal home loan Bank program on page 17 of our quarterly financial supplement.
Turning to slide 13.
We continued to generate strong free cash flow to the holding company in the third quarter with excess cash flow of $166 million or 179% of operating income, which reflects the solid operating results in the quarter. The continued up in quality bias in our investment portfolio and our decision to him.
Increased dividend out of the operating companies to bring the RBC ratio down into our targeted range.
Turning to slide 14.
At quarter end, our consolidated RBC ratio was 388%, which represents approximately $70 million of excess capital relative to the low end of our targeted range.
Our holdco liquidity at quarter end was $366 million, which.
<unk> $216 million in excess capital relative to our $150 million minimum holdco liquidity target.
Turning to slide 15, we.
We are not projecting beyond year end, given the ongoing uncertainty of how the pandemic will evolve from here, particularly as we enter the winter months.
That said, we will share our expectations for the fourth quarter based on our most recent internal forecast.
First we expect modest growth in total life and health Nap and total collected premiums. This reflects our continued positive momentum in particular, particularly in our direct to consumer business, coupled with the challenges of a very tight labor market and for our Worksite business ongoing delays in office reopening and <unk> businesses.
Allowing on site enrollments.
We expect continued net favorable COVID-19 impacts on our insurance product margin, but at a lower level than recent quarters.
We expect net investment income allocated to products to remain relatively flat.
Rose and assets is offset by lower yields reflective of both the lower interest rate environment and our up in quality shift in asset allocation.
We expect net investment income not allocated to products to trend down as compared to recent quarters in light of market conditions in the third quarter recall that our alternative investments are reported on a one quarter lag.
We expect fee income to be up sequentially and year over year as we grow our third party Medicare advantage distribution and improve the unit economics of that business.
Growth in web benefits design earnings and the inclusion of a direct path will also contribute to growth in fee income.
We expect the sum of our allocated and not allocated expenses ex significant items to be generally in line with recent quarters.
Finally, we expect dividends out of the operating companies to be lower than in recent quarters as we absorb the impact of the revised C. One factors on our consolidated RBC ratio.
As mentioned previously that will reduce our RBC by approximately 16 points, all else equal, which translates to about $80 million of capital.
For the time being we are not reducing our target RBC ratio, but we will manage to the low end of the $3, 75% to 400% target range and we will move closer to our $150 million minimum holdco liquidity target.
And with that I'll turn it back over to Gary.
Thank you Paul.
I'm pleased with our results for the third quarter, which reflects solid execution against our strategic objectives.
Although uncertainty surrounding the pandemic remains.
I am confident that we are well positioned to successfully navigate whatever lies ahead.
The earnings and cash flow generating power of the company remains strong and our team is laser focused on building upon our progress in delivering long term growth and value creation for our shareholders.
Sure.
Finally.
Please continue to take care of yourself.
Including getting vaccinated, if you are able to stay healthy and stay safe, we will now open it up for questions operator.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again, that's star then the number one.
First question comes from the line of Humphrey Lee with Dowling and partners.
Good morning, and thank you for taking my questions.
My first question is related to the funding agreement program. So if you talk about the target spread is 100 basis points.
As we think about that program by selling your appetite like how big can you think that business can grow to.
Sure Good morning, Humphrey, it's Paul So it is.
As disclosed upon launching the program. The program size is $3 billion. As you know we did the first issuance of $500 million and the five year maturity.
Priced in September closed in October.
Our expectation is that the market conditions, you know permitting and supporting that we would.
Do issuances every sort of three to six months.
So that would translate to reaching the 12 3 billion dollar size and.
Over a two to three year period.
I guess any appetite to go beyond the $3 billion.
I'm, sorry, say again I'm sorry.
Any appetite to go beyond the $3 billion.
Well, we'll revisit that as we get closer to the $3 billion.
The rating agencies have some bright lines Moody's in particular.
That will be careful not to cross.
So for the time being we're focused on 3 billion, then and we'll see what things look like as we approach that amount.
Got it.
And then on the in the annuity margin you talked about the embedded debris that's had an impact in recent quarters performance, but given how volatile. It has been lately I was just wondering if there's anything that you can share to help us think about the market sensitivities for the for that segment.
Sure. So maybe maybe I'll just size.
The impacts that we've seen as I mentioned it was favorable in the second quarter.
Roughly $6 million was the impact of that.
That favorability.
Market conditions went the other way in the third quarter.
And resulted in an unfavorable impact.
And roughly the same size 6 million. So if you adjust for those two things in the sequential quarters.
The margin was relatively stable.
Got it thank you.
Mhm.
Your next question comes from Cullen Johnson with B Riley Securities.
Hey, good morning, Thanks for taking my question I'm looking at the unfavorable COVID-19 impact and life $3 million in the quarter relative to the $9 million, we saw in three Q 'twenty. Despite.
Despite COVID-19 deaths statistics broadly in the U S. I think we're relatively similar in those quarters. So is there do you have any insight into what maybe drove the difference and the impact on the bottom line.
Sure so calling it we booked in the quarter is really a reflection of the claims experience in the quarter.
Which is a reflection of the profile of our book, which I suspect is more geographically diverse than some other companies certainly skews older than most companies, which likely translates to.
Higher vaccination rates.
Yeah.
Okay, Yeah that makes sense.
And then kind of thinking about a I guess, it's as deferral of cash slowly starts to normalize.
Would it be fair to think that the longer it persists, maybe at a lower likelihood of a sort of catch up period, where utilization exceeds your kind of longer term average.
Yeah call. It I think that that's a reasonable expectation.
I would continue to emphasize.
How things actually evolve is very uncertain, which is why we.
Gotten out of the business of saying when we when.
When we think.
It will change and and you know what the impact of that might be but directionally I think what youre, suggesting is a reasonable baseline expectation.
Great. Thank you those are my questions.
Your next question comes from Erik bass with Autonomous research.
Hi, Thank you, it's hoping you could talk a bit about your health experience over the course of the quarter and did you see any signs of normalization later in the quarter as the Delta wave started to wane.
Hi, Eric It's Paul I'd like to your your Groundhog day referencing in your write up.
Because it certainly does feel that way.
So the only thing.
You know that I would comment on in the claims experience on the health side is that we did see in August.
What looked like the beginning of an uptick in claims in med sup.
But then it went the other way again in September.
So that that's what drives the lower favorable COVID-19 impact and that's up in the quarter.
We'll see where it goes from here.
Got it and maybe extending that to long term care as well any.
Kind of changes in claims incidents or experience there.
Yeah, no not on the Covid side, we did have some some.
Slightly favorable non COVID-19 experience in the quarter. So if you look at the the.
The trend in both long term care margin.
Ex Covid, there's a little bit of.
An improvement in the quarter.
Nothing that we think is a long term trend but.
Some favorable sort of quarterly volatility.
Got it and then with the health and LTC claims and realize this is probably a tough question to answer but do you have a sense of how much of the lower level of claims is due to less incidence of covered events are just reluctant to people to seek care versus how much may be related to capacity constraints and an inability to <unk>.
Things like non emergency procedures or to find home health care nurses or things like that that are.
Kind of inhibiting people's ability to to actually.
Put in a claim I guess.
Yeah.
Yeah, I don't I don't think we have any any insight into what the mixes that certainly some of those.
Hey.
Hi.
I don't think we have any kind of unique insight into what the mixes.
Eric This is Gary I would say I completely agree with Paul I would just add one perspective to share remember that we haven't seen any material changes in our persistency rates and so if there was a reluctance that was expected to be.
Significant indoor long lasting you you might see that so I think that tells us something about policy holder behavior, they're still paying the premiums.
Yes.
Got it.
Helpful point, Thank you.
Again, if you would like to ask a question. Please press Star then the number one on your telephone keypad that star one.
Next question is from John <unk>.
And Nick with Piper Sandler.
Thank you can you talk a little bit maybe about the lag in mortality and current.
In claim I'm, just trying to understand better whether the delta surge was completely captured in the life insurance results in <unk> 'twenty one.
Sure John.
There is certainly a lag.
The amount of lag, it's been pretty volatile as we move through the pandemic.
So I think it's reasonable for you to expect that some of the.
The.
The deaths in the.
The latter part of the quarter.
It would show up as claims and.
In the fourth quarter.
Okay, and then my follow up and thanks for the answers is the Covid benefit on a net basis certainly has remained longer than expected how should we be thinking about buyback capacity in light of that at least in the near term.
Well I mean buyback capacity is a function of free cash flow and the biggest driver of free cash flow is good.
<unk> capital lot of Jaap COSE.
And stronger operating earnings translates to.
More dividend double capital so.
On the margin, obviously to the extent that that tailwind persists we have.
<unk>.
More dividend or both.
Capacity more free cash flow more share repurchase capacity.
Great. Thank you for the answers and best of luck in the quarter ahead.
Thank you.
Once again, if you would like to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment.
There are no additional questions in queue at this time I would like to turn it back over to management for closing remarks.
Thank you operator, thank you everyone for joining us and we look forward to speaking with you again soon.
Thank you. This concludes today's conference call you may now disconnect speakers hold the line.
[music].