Q4 2022 CNO Financial Group Inc Earnings Call

Payments to our new agent Onboarding and skill development programs for these positive trends.

The integration of our fee based businesses continues as expected fee revenue with it within the Worksite Division continues to benefit from cross selling.

We expect cross sell activity to accelerate with all products and service offerings now under the optimized brand.

And with that I'll turn it over to Paul.

Thanks, Gary and good morning, everyone.

Turning to the financial highlights on slide eight <unk>.

On balance we reported solid earnings for the quarter and the full year with some pluses and minuses on.

On the plus side number one continued strong and stable underlying insurance product margins number two significant improvements in COVID-19 related mortality impacts in our life products.

Three increases in net investment income allocated to products.

<unk> growth in the business and beginning in the third quarter sequential improvement in the average yield on investments allocated to products.

Fourth an increase in fee income.

Disciplined capital management.

Essentially ending the year with RBC and Holdco liquidity.

Love our targets given where we are in the credit cycle, while still returning some excess capital to shareholders and lastly continued expense discipline seeking to drive operating efficiencies, while also investing in growth opportunities.

On that point in the fourth quarter, we reduced our head count by approximately 2%, resulting in run rate cost savings of about $10 million.

This was accomplished primarily through a voluntary early retirement program for eligible associates, which resulted in a $7 million restructuring charge. That's included in non operating income.

Offsetting these favorable dynamics were number one moderating COVID-19 related benefits and our health product margin.

Number two lower net investment income not allocated to product, primarily reflecting lower returns on alternative investments.

And three fairly significant though largely non economic impacts to our fixed index annuity margin relating to the GAAP accounting for this product in the context of market volatility as.

As mentioned on our last earnings call much of this has to do with the methodology that we use to draw the line between operating and non operating income for this product.

Incidentally as we adopt <unk> in the first quarter of 2023.

We'll also be updating our method of determining nonoperating income.

For our FIA is to better identify the volatile non economic impacts.

We think this new methodology will be more in line with the method applied by peer companies.

This should result in more stable margins and operating income more closely reflecting the true economics of the business.

And we will be more comparable to the results of other companies.

All in all on balance solid year, and we feel good about how we're positioned entering 2023.

We will provide more detail on our outlook for 2003 at our Investor day coming up in about two weeks in February 2003.

We also plan to provide some updated L DTI disclosures at that time.

And then subsequent to that we expect to provide a full financial supplement for 2021 and 2022 under El DTI concurrent with our first quarter 2023 earnings release.

Turning to slide nine insurance product margin was down $20 million or 9% in the fourth quarter as compared to the prior year period.

Adjusting for the GAAP accounting impacts caused by market volatility on our FIA margins.

<unk> impacts across all of our products.

Unfavorable interest sensitive life, unlocking and <unk> 22, and the favorable reinsurance recovery in <unk> 'twenty one.

As referenced on slide two.

Total margin was essentially flat, reflecting the continued strong and stable underlying dynamics of the business.

We completed our annual GAAP actuarial assumption review in the fourth quarter.

Which resulted in no material impact to operating income in total with about a $1 million favorable impact on annuity margin.

And about $3 million unfavorable impact to interest sensitive life margin.

Turning to slide 10. This chart summarizes the largely noneconomic GAAP accounting impacts on our fixed index annuity margin over the last five quarters.

We believe the noise in the GAAP results obscures the economic earnings dynamics of this product.

As you can see from the table adjusting for these impacts our annuity margin is reasonably stable.

Then as we update our method of determining the nonoperating income component from our FIA as in the first quarter of 'twenty three.

Operating earnings from our FIA should be more stable again more closely reflecting the true economics of the business.

The slight downward trend in the margin in 'twenty two versus 21, even adjusting for these impacts despite significant growth in the account value over the 12 month period.

This is due to two things.

First some noise in the methodology that we use to allocate NII to products using reserves rather than account value and second some modest spread compression, resulting from shortening duration to better match the liabilities.

And some asset turnover during the year, coupled with our up in quality bias.

But nevertheless, still leaving us with a spread that's consistent with our pricing and generating attractive returns.

Turning to slide 11.

Investment income allocated to products was up for a second quarter in a row as the new money rates above 5% over the last nine months has reversed the trend of a declining yield.

Investment income not allocated to products fell in the quarter as expected the $13 million decline reflects lower alternative investment returns, partially offset by favorable <unk> and <unk> results.

Our new investments comprised approximately $570 million of assets with an average rating of double a minus.

And an average duration of six two years.

Our new investments are summarized in more detail on slides 21, and 'twenty two of the earnings presentation.

Turning to slide 12 at quarter end, our invested assets totaled 24 billion.

Down 16% year over year.

<unk> declining market values in the quarter, driven primarily by higher interest rates.

Approximately 97% of our fixed maturity portfolio at quarter end was investment grade rated with an average rating of single a reflecting our up in quality actions over the last several quarters.

In the last 12 months the allocation to single a rated or higher securities is up 390 basis points to triple B allocation is down 260 basis points.

And the high yield allocation is down 130 basis points.

These actions continue to position us well relative to potential economic downturn.

Turning to slide 13.

At quarter end, our consolidated RBC ratio was 384% up from $3, 75% at September 30, and our Holdco liquidity was $167 million $17 million above our minimum target of 150 and up from $162 million at September 30.

Our intentionally maintaining some excess capital above our targets given the near term risk of recessionary economic pressures.

And with that I'll turn it back over to Gary.

Yeah.

Thanks, Paul.

Yes.

We are pleased with our strong performance on the steady execution against our strategic priorities.

We remain confident in our growth and shareholder return opportunities.

Our market is growing but underserved.

In times of economic certainty of the guidance and products, we provide our clients is critical.

Our distribution model and product portfolio continue to be a key differentiator in how we access and serve our market.

Our sales momentum is strong providing a solid foundation for future earnings.

And our robust cash flow remains a cornerstone of our financial strength.

We are hosting our Investor day at the New York Stock Exchange on Thursday February 23rd at the event I will be joined by members of our management team to talk in greater detail about our business in the 2023 outlook.

We hope to see you in person further that.

There will also be a video webcast option available. Please contact the investor relations team for registration structures.

Before moving to Q&A I wish to take a moment to acknowledge the heartbreaking loss of life and devastation from the earthquake in Turkey and Syria.

Our thoughts go out to all who are impacted and to the first responders, providing medical and humanitarian aid.

We will now open it up for questions.

Greater.

Thank you.

Ladies and gentlemen, if you would like to ask a question. Please press star followed up on one telephone keypad now.

<unk> be paying to ask your question. Please ensure your phone is on mute locally.

With our first question comes from Daniel Bernstein from Jefferies.

Your line is now open.

Thanks, Good morning, I guess.

To start the favorable impact of Covid on your health underwriting margin as proved really remarkably durable, particularly in the supplemental health and LTC lines. So I just wanted to see if you had any updated thoughts on what's driving this and how long it might persist going forward I mean, I would've expected that maybe the favorable underwriting trends might've been eroded somewhat by pricing changes at this point so any color on.

And that and what Youre seeing in terms of competition would be helpful.

Sure Hi, good morning, Dan It's Paul.

So basically what youre seeing flow through our earnings.

As you know.

US responding to the sea.

The case experience.

<unk> and so we continue to experience some favorable case reserve development.

In terms of what it looks like going forward clearly we've transitioned from a pandemic stage two and endemic stage I think.

Results will reflect that.

The dynamic is that under L. DTI.

Much of the the impacts from Covid, plus and minus debt offset by by changes in reserves.

Dynamic entering 2023 under <unk> will be a bit different.

Got it.

Thanks, and then maybe just.

Switching gears a little bit just.

With capital levels now having rebounded.

Above your minimum target just any thoughts you can share on how youre thinking about the cadence or pace of share buybacks going forward I mean should we expect it to be.

Back to closer to your run rate level of capital return in the near term or if not how soon might it take for that.

That drove us to more fully reflect your free cash flow generation versus our desire to build a more material capital buffer above those minimum targets given some of the macro and credit uncertainty you talked about any thoughts on that would be great.

Sure.

So Dan will provide a bit more perspective, and the outlook that we share.

At the Investor day in a couple of weeks.

But I'd offer a couple of comments now number one.

<unk> to be a little bit cautious in nearly a cautious in the early part of the year again, just given where we are and the potential for.

Recessionary economic pressures having.

Having said that I think you should expect that we would settle into a run rate over the course of 'twenty three.

But a bit a bit more perhaps in the latter half of the year than the first half of the year.

Got it that's really helpful. Thank you.

Thank you Danielle.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one telephone keypad now.

When they are paying to ask your question Julia Please on mute locally.

With our next question comes from Sam <unk> from autonomous.

It is now open.

Thanks.

So recruiting was up 4% year over year, but total producing agent count declined 3% just kind of curious what dynamics are you seeing in your agent force and can you talk about agent retention trends and the timeline for getting new agents up to producing status.

Yes, Zach this is Gary thanks for the question.

So just a couple of comments on that so first of all just a reminder, that the way companies define what constitutes producing agent varies from company to company in other words. This isn't a GAAP term that you can compare across companies.

And the simplest way to think about it is it takes time, let's say, we recruit a new agent in January it typically takes anywhere from two to six months for them to really get up to a reasonable production level. So you always see producing agent count lagging new agent recruitment.

And if you look in our case, what we've been trying to.

Get our shareholders to understand is.

We've seen new agent recruitment grow nicely, which is a really good leading indicator and a good sign we've also seen the decline in producing agent count shrink every quarter.

So the pace of decline is going down which is a sign that we are at or near the bottom and we would expect producing agent count to turn up now all of that is important and necessary and a good legal leading indicator, but I would tell you that the most important thing is the productivity of the agents and you've seen us.

Demonstrate continued increases in that productivity, while we always need new agents and it's important that we bring in new agents when we get them producing the most important thing is the productivity and that's continued to trend very positively for quite some time.

Did that answer your question.

Yes. Thank.

Thank you.

I guess my second question is just around expenses. So you took some actions for Q, but how are you thinking about.

The level of expenses going forward.

And should we expect them to decline or did the savings that you've taken just offset pressures from inflation and natural growth in the cost base.

Hi, Zack it's Paul So again, we'll provide more perspective on the outlook at Investor Day.

But I'd offer a couple of comments number one.

The expenses in the quarter and the fourth quarter, particularly not allocated products were a bit below our annualized run rate, but I would say the full year 2022 expenses were in line with our expectations.

Going forward as we continue to grow that business I think you should expect some <unk>.

Growth in expenses.

But we will continue to try to strike the right balance between being as efficient as we possibly can be.

While also investing in growth.

Growth in the business I think the action that we took in the fourth quarter has proved to the point that.

We tried very hard to be as efficient as possible.

Thank you.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on tantalum keypad now.

Sure.

We have our next question comes from Mark and Lee from RBC Mark Your line is now open.

Yes, good morning.

Just a couple of questions mainly related to the health segment.

Supplemental sales were pretty strong in the.

Medicare supplement sales in particular were pretty strong, but there wasn't really any notable change in margin in the quarter. So how long is the transmission time between when you get the sales and when that starts to show up and potentially improved margins.

Yeah.

Hey, Mark it's Paul.

So yes, generally you've got some strain in the first year.

On a GAAP basis from from new sales. So sales this year tend to contribute to margin.

In the following year and then subsequent years.

So.

The lag would be measured in years or quarters.

Well I suppose.

The trailing 12 month basis.

In general over the course of 2022.

The sales growth will translate to earnings growth in subsequent years.

Got it okay.

Then with respect I know you made some.

Some changes too.

The supplement product I mean, what's the feedback been like from.

From agents force as far as the.

The sale ability and acceptance on that from the customer standpoint.

The numbers are pretty good but are there more tweaks on the way or.

If you kind of landed on a winter.

Hey, Mark this is Gary we feel pretty good about the way the med sub product.

Has been received by the market the feedback from the agents has been good.

I would tell you that there is the potential for some further tweaks.

But probably on a state by state basis in other words at the present time, we're not aware of major tweaks that need to be made nationwide now all that said the AEP just ended and we are still collecting feedback and we'll work with our agents. If we see something we'll certainly keep our options open, but I would expect it to be more.

And the range of tweaks as opposed to wholesale changes.

Last observation remember that med sup as the product that we manufacture and therefore the one that's most susceptible to these types of tweaks and changes. We're also pretty pleased with the performance of our med advantage business and remember Thats products, where we distribute the product and we continue to get better frankly at our online platform and bringing customers there.

With our agents and so on and so forth. So we expect to continue to see growth there and again those are products, we distribute that manufacturer.

Okay I appreciate that I appreciate the thoughts and I'm sure, we'll get more insights on all of that.

Yesterday in a few weeks.

Absolutely thanks for the questions.

Thank you Mark.

As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one telephone keypad now.

Let me paint to ask your question.

Do you focus on mute locally.

We have a follow up question from Sal <unk> from autonomous.

Thank you your line is now open.

Hey, Thanks for taking my follow up.

Just kind of curious on the benefits of higher interest rates.

Great.

Right.

That's been a positive earnings, but how should we think about.

Any uplift going forward.

Sure.

Into the products to be on an upward trajectory and is there still some upside to earnings spreads in your ethane Shelby lending process.

Sure. So Zach I'll offer some comments and then I'll end by Derek you to.

To provide some perspective on those two programs.

So absolutely directionally higher rates are good for us good for the industry.

They have already contributed to.

A meaningful inflection point with the portfolio yield.

Increasing.

Sequentially in both the.

Third and fourth quarter.

We havent gotten yet to a point, where it's increasing year over year, but I think we're approaching that and as long as rates stay where they are perhaps a little bit higher.

We should reach that point over the next few quarters.

So all good.

Eric maybe I'll turn it turn it over to you to comment on <unk> and ABS.

Sure.

Thanks for the question.

Two.

Follow up on something Paul a couple of times, we will.

At Investor Day, we will have some comments around around.

The trajectory of NII in some ways.

I believe that.

There can be some good guys there on a sustained basis.

Going forward one of them.

Obviously, depending on market.

Condition.

Higher new money rate feeding into a higher book yield feeding into more NII a second one.

We continue to.

Expand the.

Institutional funding programs.

Programs be it Shelby or Fabienne.

Not only will hopefully over time, we'll see the.

AUM from those programs expand hence more more money, but we will recycle some of the existing inventory.

In the existing.

AUM.

<unk> spread.

So.

And then thirdly, we.

And as long as circumstances.

It makes sense.

We have some floating rate exposure on the bulk side benefits from.

Benefited from the.

The shape of the yield curve.

<unk>.

That's played through well also so.

At Investor Day.

You can expect that I'll have some comments around this and put some dimensions around it.

But I do think there is opportunity there for us.

Something that can really impact.

Bottom line.

Okay.

Does that answer your question.

Okay.

Yes that does thank you.

Okay.

Thank you Sam.

We have no further questions on the line I will now hand back to Adam for closing remarks.

Thank you for your support of and interest in <unk> financial group.

Thank you.

Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your lines.

[music].