Q1 2023 CNO Financial Group Inc Earnings Call
Speaker 1: Auto 2023 earnings results call. My name is Adam and I'll be your operator for today. If you'd like to ask a question at the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor over to Adam Orville to begin. Adam, please go ahead when you are ready.
Speaker 2: joining us on CNO Financial Group's first quarter 2023 earnings conference call.
Speaker 2: Today's presentation will include remarks from Gary Bujwani, Chief Executive Officer, and Paul McDonough, Chief Financial Officer.
Speaker 2: Following the presentation, we will also have other business leaders available for the question and answer period.
Speaker 2: release. You can obtain the release by visiting the media section of our website at cnoinc.com.
Speaker 2: This morning's presentation is also available in the investors section of our website and was filed in the form 8K yesterday.
Speaker 2: We expect to file our Form 10Q and post it on our website on or before May 10.
Speaker 2: 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.
Speaker 2: Today's presentation contains a number of GAAP measures , which should not be considered as substitutes for the most directly comparable GAAP measures .
Speaker 2: You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Speaker 2: Throughout the presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will be referring to changes between first quarter 2023 and first quarter 2022.
Speaker 2: And with that, I'll turn the call over to Gary. Thanks, Adam. Good morning, everyone, and thank you for joining us.
Speaker 3: We're off to a positive start in 2023 posting solid operating earnings, production, and capital results.
Speaker 3: Operating earnings per share were 51 cents.
Speaker 3: Our balanced business model lends strength, stability, and resilience to our earnings results. The fundamental health of the business is solid, as demonstrated by strong insurance product margins, growth in fee income, increasing new money rates, and solid overall investment results even as alternative results underperformed compared to the prior year period. Sales production and agent recruiting delivered strong balance results across both our consumer and worksite divisions.
Speaker 3: Total new annualized premium was up 7%. We posted sales growth in nearly all product categories, including direct-to-consumer and field agent sold life.
Speaker 3: Medicare products, including both Medicare Supplement and Medicare Advantage.
Speaker 3: supplemental health, annuities, and worksite insurance sales. Capital ratios and liquidity remain above target levels, underscoring our resilient capital position and disciplined capital management. Our high quality investment portfolio remains well positioned to weather market turmoil and to deliver consistent investment income. Book value per diluted share excluding AOCI was up 13% to over $31.
Speaker 3: Effective January 1, we adopted LDTI, the new GAAP accounting standard for long-duration insurance contracts. This transition represents the culmination of a significant multi-year initiative. We thank and recognize the many CNO associates from across our organization for their hard work and dedication to implementing LDTI. Turning to slide 5 in our Growth Scorecard. Four of our five Growth Scorecard metrics were up for the quarter, demonstrating the value of our broad product portfolio and diverse integrated distribution model.
Speaker 3: I'll discuss each division in the next two slides.
Speaker 3: beginning with the consumer division on slide six.
Speaker 3: We are very pleased with sales performance in the quarter. We saw year over year sales growth in nearly all of our product lines in the consumer division.
Speaker 3: Life and health map was up 4% for the quarter.
Speaker 3: Life production was up nicely. Life sales and the bankers life agent channel were up 5%.
Speaker 3: Our direct-to-consumer channel generated record life sales up 1% against a strong comparable.
Speaker 3: This is the seventh consecutive quarter of sales growth for D2C Live.
Speaker 3: Efficient advertising spend, enhanced distribution, and solid policy conversion rates continued to deliver growth for this business. Supplemental health sales were up 12%, the third quarter of double-digit growth for these products.
Speaker 3: Our Medicare business posted record growth in the quarter, building on sales momentum from the fourth quarter Medicare annual enrollment period.
Speaker 3: As a reminder, our approach to Medicare business includes Medicare supplement products that we manufacture and a broad offering of third-party Medicare Advantage and Part B prescription drug plans for which we collect fees.
Speaker 3: Medicare Supplement NAP was up 20% for the quarter.
Speaker 3: The new more efficient, excuse me, the new more competitive Medicare supplement plans that we launched last year continue to be well received by consumers in this important market.
Speaker 3: Medicare Advantage sales were up 55% for the quarter. This contributed to third-party fee revenue growth of 57%.
Speaker 3: As a reminder, MA policies drive fee revenue and are not reflected in that.
Speaker 3: Enhancements to our Medicare portfolio are enabling double-digit growth.
Speaker 3: We continue to add Medicare Advantage carrier plans that are available through our My Health Policy platform and make strategic technology investments in the platform's capabilities.
Speaker 3: With branch offices in more than 230 communities, we operate a national footprint of knowledgeable local agents ready to help with Medicare enrollment.
Speaker 3: Our agents build personal relationships with our customers, earning the opportunity to assist with future needs and develop potential crossfails.
Speaker 3: These strong relationships allow us to mitigate the term prevalent in so much of the industry.
Speaker 3: Our unique ability to marry a virtual connection with our established in-person agent force who complete the important last mile of sales and service remains a key differentiator.
Speaker 3: Annuity collective premiums were up 1%, our 10th consecutive quarter of comparable period growth.
Speaker 3: Annuity persistency remains within expected ranges. This is primarily due to our model of distributing annuity products exclusively through our captive agents.
Speaker 3: Client assets in brokerage and advisory were down 8% year over year to $2.6 billion due to ongoing market volatility and declining equity values.
Speaker 3: More importantly, net inflows and new accounts were up, continuing this positive trend from prior quarters.
Speaker 3: Combined with our annuity account values, our clients entrust us with nearly $14 billion of their assets.
Speaker 3: Agent recruiting continued to accelerate and was up 22%.
Speaker 3: Our fifth consecutive quarter of recruiting games.
Speaker 3: As a result of this sustained recruiting success, we achieved an inflection point in our producing agent count, which ended up 1% for the court.
Speaker 3: As I've shared in previous calls, it takes time for new agents to meet production levels to be counted as a producing agent. We're pleased to see meaningful increases in agent recruiting begin to translate into increases in producing agent count.
Speaker 3: We remain bullish on our agent force prospects for the balance of the year.
Speaker 3: Our recruiting strategies support a return to continued agent force growth. These include our proven agent referral program and recent enhancements to our online recruiting coaches.
Speaker 3: A softer labor market has traditionally resulted in more successful recruiting environments.
Speaker 3: Veteran agent retention and productivity remained solid. Our registered agent count increased 5% from prior year, expanding the number of securities professionals available to assist our customers in today's challenging economic environment.
Speaker 3: Turning to slide 7 and our worksite division performance. Our sales were up 28% this quarter.
Speaker 3: This is the eighth consecutive quarter of growth.
Speaker 3: Three of the last four quarters had growth of 20% or more, albeit off a small base.
Speaker 3: Leading indicators of the health of the business continue to trend positively.
Speaker 3: Retention of our existing employer customers remains strong.
Speaker 4: Employee persistency within these employer groups is stable.
Speaker 5: Producing agent counts were up 38% and recruiting was up 48%.
Speaker 6: We remain squarely focused on deepening the integration of our worksite capabilities under our optimized brand.
Speaker 7: Advancing our strategic worksite priorities in both the national and regional employer markets.
Speaker 8: and accelerating agent recruiting momentum.
Speaker 9: In the second half of last year, we introduced our hybrid enrollment platform, Optimize Now. The platform gives our agents greater flexibility to connect with employees wherever they are, including by video meeting or over the phone. It continues to be well received by employers and employees, and we have experienced an uptick in attendance rates as a result of the technology. And with that, I'll turn it over to Paul. Thank you, Gary, and good morning, everyone. Before commenting on our financial results in the quarter, I'd like to say a few words regarding the implementation of LDTI.
Speaker 10: Today we posted our fourth quarter 22 financial supplement recast to reflect the adoption of the new accounting standard. The impact on the balance sheet at transition.
Speaker 11: and on earnings over the re-measurement period, were in line with the estimates we've previously provided. As a reminder, LDTI has no impact on stats, financial results, capital or cash flows. I'd like to second Gary's comment from the beginning of the call and also express my gratitude to the CNO implementation team. We're well positioned, not just for the first quarter close under the new standard, but also to operate smoothly and efficiently going forward.
Speaker 12: Turning to the financial highlights on slide 8, our net income for the quarter was a loss of just under $1 million, driven by a non-operating loss of $59 million, which in turn was driven primarily by $65 million pre-tax.
Speaker 13: of fair value changes in embedded derivative reserve liabilities and market risk benefits.
Speaker 14: both of which relate to the gap accounting for our annuity business, and both of which are largely non-economic in nature.
Speaker 15: Conversely, our operating income for the quarter was a gain of $59 million, or $0.51 per share, $6 million, or $0.03 per share lower than the prior year period, driven by a decline in the variable components of that investment income.
Speaker 16: Expenses were also elevated compared to the prior year period, but in line with our expectations for the quarter. The projected expense ratio for the full year is unchanged at between 19.0 and 19.4%.
Speaker 17: On a run rate basis, we're very pleased with the results in the quarter.
Speaker 18: Notably, insurance product margin increased by $14 million or 7% year over year, and fee income increased by $6 million or 57%.
Speaker 19: We deployed $15 million of capital on share repurchases in the quarter, contributing to a 5% reduction in weighted average diluted shares outstanding year over year.
Speaker 20: For the 12 months ending March 31, 23, operating return on equity was 10.3%. Turning to slide 9, the growth in insurance product margin was driven by growth in lower mortality.
Speaker 21: For the 12 months ending March 31, 23, operating return on equity was 10.3%. Turning to slide 9, the growth and insurance product margin was driven by growth and lower mortality in the life business.
Speaker 22: and also reflects growth in fixed-indexed annuities and supplemental health. The annuity and health margins were largely flat in total year over year, with pluses and minuses by individual product line within each product category.
Speaker 23: reflects growth in fixed index annuities and supplemental health. The annuity and health margins were largely flat in total year over year with pluses and minuses by individual product line within each product category. Turning to slide 10.
Speaker 24: The new money rate in the quarter was 6.34%, up from 3.73% in the prior year period and 5.96% in 4Q22. This is the fourth consecutive quarter with new money rates exceeding the average yield on allocated investments, which increased to 4.62% in the quarter, up two basis points both sequentially and year over year.
Speaker 25: This marks the third quarter of sequential improvement and the first quarter of year-over-year improvement in that yield.
Speaker 26: While the improvement is small, it's nevertheless an important inflection point after years of declining yield and together with growth in net insurance liabilities contributes to growth in net investment income allocated to product which was up 4% in the quarter.
Speaker 27: Investment income not allocated to products fell in the quarter, driven by a decline in the return on alternative investments, and also a decline in prepayment and call income.
Speaker 28: Notably, the decline was in part mitigated by growth in income from general account assets, the FHLB and FABN programs, and the contribution from Coley Investments.
Speaker 29: Our new investments comprised approximately $690 million at BAPTES with an average rating of double A minus and an average duration of three years.
Speaker 30: Our new investments are summarized in more detail on slides 21 and 22 of this presentation.
Speaker 31: Turning to slide 11.
Speaker 32: At quarter-end, our invested assets totaled $25 billion, down 8% year-over-year, reflecting declining market values, 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 460 basis points.
The triple D allocation is down 330 basis points.
and the high yield allocation is down 130 basis points.
These actions served us well during the recent banking crisis and continue to position us well relative to potential broader economic downturn.
Given the amount of attention the commercial real estate market has received in the media and in equity research recently, I thought I should touch on that briefly.
You'll note that 9.8% of our invested assets are in commercial mortgage backed securities and 4.7% are in commercial mortgage loans.
We've included some metrics on these investments in slides 23 and 24 of this presentation. The key messages are number one that our CMDS allocation is highly rated with significant structural protection tilted toward lower risk property types.
and with limited loss content in extreme stress scenarios. And second, that our commercial mortgage loan allocation is also conservatively positioned across a number of metrics.
Turning to slide 12, at quarter end, our consolidated RBC ratio is 380%.
Hold cold liquidity was $158 million. We'll continue to manage this to the targets of 375% RBC and $150 million hold cold liquidity.
was $158 million. We'll continue to manage this to the targets of 375% RBC and $150 million whole code liquidity. Turning to slide 13.
Our outlook for the full year, as summarized on this slide, is unchanged from what we shared back in February at our investor day.
I do want to provide an update on our planned formation of a captive Bermuda Reinsurance company. We continue to work through the regulatory approval process, which we expect will conclude in time to initiate a treaty in the third quarter of this year. Under this treaty, we intend to seed a portion of our fixed index.
at inception of the initial reinsurance treaty.
We'll certainly be judicious in how and when we deploy that capital, applying the same discipline and logic that we have historically. Regulatory approval is by no means assured, and we don't want to get ahead of the approval process.
But we thought it was nevertheless appropriate at this stage to dimensionalize what the capital impact might be.
And with that, I'll turn it back to Gary. Thanks, Paul.
In February , we held our investor day at the New York Stock Exchange. It was nice to see so many of you in person.
We also appreciated those who were able to join virtually. At the meeting, I opened my remarks with this comment.
CNO is a growth story.
After several years of navigating the pandemic and macroeconomic uncertainties, we're resuming our growth momentum.
The pivot to growth was again on display this quarter in the strong sales performance delivered by both of our divisions.
We have solidly free cash flow to fund both growth and capital return.
Our balance sheet, capital position, and liquidity remain strong.
As we look to the remainder of 2023 and beyond, we are squarely focused on accelerating that profitable growth, consistent steady execution on our strategic priorities.
and generating sustainable long-term shareholder value.
We thank you for your support of and interest in CNO Financial Group.
We will now open it up for questions. Operator? Thank you.
So reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. We're preparing to ask your question. Please ensure your headset is fully plugged in and unmuted locally. That's star followed by one on your telephone keypad.
And our first question today comes from Ryan Kruger from Steve Hall. Ryan, please go ahead, your line is open.
Hey, thanks. Good morning. My first question was on the Bermuda.
There's some proposed changes to Bermuda capital rules and I just want to confirm that the expected $150 to $200 million benefit already incorporated those potential impacts.
Good morning, Ryan. It's Paul. The range certainly incorporates the potential impact of the...
the new rules that Bermuda has presented. Honestly, we're still sort of working through what the specific impacts might be, but we don't expect them to be material. Okay, great. And then as a follow-up, how are you thinking about the potential use of the additional capital freed up? Would you...
done historically. We are thoughtful and deploy it appropriately on the margin. Certainly we've used it to return excess capital to shareholders so I would imagine that would be a component of it but we as I said will not do anything.
you know, right away. We'll think about it and approach it again the same way we have historically.
Okay, great. Thank you. Yep. The next question comes from Eric Bath from Autonomous. Eric, your line is open. Please go ahead. Okay. Great. Thank you. Great. Thank you. Great. Thank you. Great. Thank you. Great. Thank you. Great. Thank you. Great. Thank you. Great. Thank you. Great.
Hi, thank you. I was hoping you could talk a little bit more about the level of capital generation and excess cash flow to the holding company this quarter and curious if this was affected at all by any seasonal impacts or timing issues.
Sure, good morning, Eric. It's Paul. So the excess cash flow in the quarter was a bit on the low side. I would emphasize that we expect the cash flow for the full year to be in the range of 170 to 200.
There are really two things that pushed it to the low side in the quarter. The first is the other category in sources of cash. This is largely timing differences of intercompany cash flows between the Holdco and the operating subsidiaries. It was minus 17 million in the quarter.
on a full year basis it tends to be neutral to slightly positive. And then the second thing is holding company expenses and other are typically higher in the first quarter and that's driven primarily by annual bonus payments made in March. So it was minus 38 million in the quarter and we'd expect that to to improve in subsequent quarters.
Got it. Thank you. That's helpful. Then the follow-up on the Bermuda cap. Is the plan initially to re-insure all of the enforced bankers life-fixed annuity policies? And then thinking about the benefit prospectively, can we use the size of the capital release as a percentage of liabilities seeded?
to kind of approximate what that go forward benefit would be on new sales? So Eric, it's Paul again. So on the on the Inforce book, we're proposing to seed the 2018 and more recent issue years and that translates to about 60 percent.
of the in force of fixed indexed annuities, which have an account value currently of about $9 billion. With respect to the new business, we do propose to feed 100% of the new business. I wouldn't.
Take the amount freed up at inception necessarily as a proxy. I think they're more moving parts. And we're, we're declining to size that at this stage, but certainly as. As we get into this, we'll provide some appropriate disclosure.
So it's really based on actuals for the first quarter and plan for the balance of the year.
So it does not presume that we get back the low VII in the first quarter, but it does presume that all income reverts to the mean in subsequent quarters. It also notably assumes that life margin.
improves off the seasonal first quarter lows and that expenses trend down resulting in a full year expense ratio in our guidance of between 19.0 and 19.4.
Thank you very much.
The next question comes from John Barnage from Piper Sandler. John , your line is open. Please go ahead. Good morning, thank you very much. If we could stick with guidance for a second, it looks like the income is really, really strong in the quarter. Can you talk about how we should be thinking that in the balance of the year? I know there's seasonality with the weightings for the first quarter. Thanks.