Q1 2024 CNO Financial Group Inc Earnings Call
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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CNO Financial Group first quarter 2024 earnings call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question and answer at the end. If you'd like to ask a question, please press star followed by one on your telephone keypad. I would now like to hand this conference call over to our host, Adam Auvil.
Speaker Change: Ladies and gentlemen, thank you for standing by while can see that C&I financial group first quarter 2020 people on its call all lines have been placed on mute. Your the presentation portion of the call with an opportunity for a question and answer.
If you'd like to ask a question. Please press star followed by one on here.
Speaker Change: Allophone keep hot I would now like to hand, This conference call I thought well host Adam Auvil.
Adam Auvil: Good morning, and thank you for joining us on CNO Financial Group's first quarter 2024 earnings conference call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer, and Paul McDonough, Chief Financial Officer. Following the presentation, we will also have other business leaders available for the question and answer period. You can obtain the release by visiting the media section of our website at cnoinc.com.
Adam Auvil: Good morning, and thank you for joining us on <unk> financial group's first quarter 2024 earnings conference call.
Adam Auvil: Today's presentation will include remarks from Gary, but as Ronnie Chief Executive Officer, and Paul Mcdonough, Chief Financial Officer.
Adam Auvil: Following the presentation. We will also have other business leaders available for the question and answer period.
Adam Auvil: 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 website at CN.
Adam Auvil: <unk> Dot com.
Adam Auvil: This morning's presentation is also available in the Investors section of our website and was filed in a Form 8K yesterday. We expect to file our Form 10-Q and post it on our website on or before May 6. 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 statement. Today's presentation contains 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 append Throughout the presentations, we'll be making performance comparisons, and unless otherwise specified, any comparisons made will refer to changes between first quarter 2024 and first quarter 2023. And with that, I'll turn the call over to Gary.
Adam Auvil: Our next presentation is also available in the investors section of our website and was filed in a form 8-K yesterday.
Adam Auvil: We expect to file our Form 10-Q and post it on our website on or before May six.
Speaker Change: 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.
Adam Auvil: Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures you will find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
Adam Auvil: Throughout the presentations, we will be making performance comparisons and unless otherwise specified any comparisons made will refer to changes between first quarter 2024, and first quarter of 2023 and with that I'll turn the call over to Gary.
Gary: Thanks, Adam Good morning, everyone and thank you for joining us.
Gary Chandru Bhojwani: Thanks, Adam. Good morning, everyone, and thank you for joining us. CNO delivered another strong quarter of operating performance, building on our 2023 momentum and track record of sustainable growth. Our first quarter results were among the best operating metrics we've generated in the past several years with respect to consumer and worksite sales, our distribution force, and new products. Our consumer and worksite businesses posted their seventh consecutive quarter of sales production growth and our fifth consecutive quarter of production. Total new annualized premium was up 8%, benefiting from successful distribution force metrics in both divisions.
Gary: <unk> delivered another strong quarter of operating performance building on our 2023 momentum and track record of sustainable growth.
Gary: Our first quarter results were among the best operating metrics, we've generated in the past several years with respect to consumer and Worksite sales, our distribution force and new products.
Gary: Consumer and Worksite businesses posted our seventh consecutive quarter of sales production growth and our fifth consecutive quarter in producing agent counts.
Gary: Total new annualized premium was up 8% benefiting from successful distribution force metrics in both divisions.
Gary Chandru Bhojwani: Our dedicated teams delivered sales growth in nearly all product categories. We posted solid and sustainable earnings with operating earnings per share of $0.52. Results benefited from favorable insurance product margins reflecting growth in the business and continued expansion of the portfolio book yield, which continues to benefit from higher interest rates. The new money rate exceeded 6% for a fifth consecutive quarter.
Gary: Our dedicated teams delivered sales growth in nearly all product categories.
Gary: We posted solid and sustainable earnings with operating earnings per share of <unk> 52.
Gary: Results benefited from favorable insurance product margin, reflecting growth in the business and continued expansion of the portfolio book yield which continues to benefit from higher interest rates.
Gary: The new money rate exceeded 6% for a fifth consecutive quarter.
Gary Chandru Bhojwani: The only material item that offset our strong operating results in the quarter was $24.3 million of unfavorable mark-to-market, pre-tax impacts on real estate partnerships within our alternative investments. Despite these impacts, total net investment income was up in the quarter. Capital and liquidity remain well above target levels after returning $57 million in shareholdings; book value per diluted share, excluding AOCI, was $34.97, up 10%. The underlying fundamentals of our business are sound, as demonstrated by sales momentum in both consumer and worksite, and a growing distribution force. Continued solid and sustainable earnings. Our excellent capital position and no change to our full year guide. Turning to slide five.
Gary: The only material item that offset our strong operating results in the quarter was $24 $3 million of unfavorable mark to market pre tax impacts on real estate partnerships with our alternatives within our alternative investments.
Gary: Despite these impacts total net investment income was up in the quarter.
Gary: Capital and liquidity remain well above target levels after returning $57 million to shareholders.
Gary: Book value per diluted share, excluding OCI was $34 97 up 10%.
Adam Auvil: The underlying fundamentals of our business are sound as demonstrated by sales momentum in both consumer and Worksite.
Adam Auvil: Growing distribution force continued solid and sustainable earnings are excellent capital position and no change to our full year guidance.
Adam Auvil: Turning to slide five.
Gary Chandru Bhojwani: This quarter, we introduced an expanded growth scorecard. This is our first significant change to this document since 2018. As we continue to enhance our focus on sustainable, profitable growth, the Refresh Scorecard focuses on the three key drivers of our performance, production, distribution, and investments in capital. We are pleased that nearly all metrics were up in the quarter. I especially want to draw your attention to our consistent growth in book value per share. I'll discuss each division in the next two slides.
Adam Auvil: This quarter, we introduced an expanded growth scorecard. This is our first significant change to this document since 2018.
Adam Auvil: As we continue to enhance our focus on sustainable profitable growth. The refresh scorecard focuses on the three key drivers of our performance production.
Adam Auvil: Distribution and investments and capital.
Adam Auvil: We are pleased that nearly all metrics are up in the quarter I, especially want to draw your attention to our consistent growth in book value per share.
Adam Auvil: I'll discuss each division in the next two slides Paul will cover investments in capital in more detail during his remarks.
Gary Chandru Bhojwani: Paul will cover investments in capital in more detail during his remarks, beginning with the Consumer Division on slides. Our consumer business posted a very strong start to the year. We continue to be pleased with solid execution and sustainable sales. Our unique capabilities marry a virtual connection with our established in-person agent force to complete the critical last mile of sales and service delivery. These capabilities remain a key differentiator and driver of our growth.
Paul Harrington McDonough: Beginning with the consumer division on slide six.
Adam Auvil: Our consumer business posted a very strong start to the year, we continue to be pleased with the solid execution and sustainable sales growth.
Adam Auvil: Our unique capabilities Mary a virtual connection with our established in person agent force to complete the critical last mile a sales and service delivery.
Adam Auvil: These capabilities remain a key differentiator and driver of our growth.
Gary Chandru Bhojwani: Life and Health NAP was up 7%. HealthMap was up 22%, bolstered by a positive reception from consumers to our new health product. Our Medicare portfolio delivered impressive results during the quarter. Medicare Supplement NAP was up 24%, and Medicare Advantage sales were up 38%. As a reminder, Medicare Advantage fees and sales are not reflected in. By offering both Medicare Supplement and Medicare Advantage products, we provide more coverage options for customers.
Adam Auvil: Life and health Nap was up 7%.
Adam Auvil: Health Nap was up 22% bolstered by a positive reception from consumers to our new health products.
Adam Auvil: Our Medicare portfolio delivered impressive results during the quarter Medicare supplement nap was up 24% and Medicare advantage sales were up 38%.
As a reminder, Medicare advantage fees and sales are not reflected in that.
Gary Chandru Bhojwani: By offering both Medicare supplement and Medicare advantage products, we provide more coverage options for customers.
Gary Chandru Bhojwani: The balance and diversification of our Medicare portfolio is an important part of how we serve the middle-income market. While interest in Medicare products peaks in the fourth quarter during the annual enrollment period, Medicare distribution is a year-round business for CNO. With nearly 11,000 people turning 65 every day in the United States, first-time customers who are new to Medicare are most in need of the service and expertise provided by our field.
Adam Auvil: The balance and diversification of our Medicare portfolio is an important part of how we serve the middle income market.
Adam Auvil: While interest in Medicare products peaks in the fourth quarter during the annual enrollment period Medicare distribution is a year round business, we're seeing now.
Adam Auvil: With nearly 11000 people turning age 65 every day in the United States first time customers, who are new to Medicare are most in need of the service and expertise provided by our field agents.
Gary Chandru Bhojwani: We are uniquely positioned to help them make an educated choice about their coverage. Long-term care NAP was up 71% on the continued strength of our recently launched Long-Term Care Fundamental Plus product. 99% of these policies have benefit periods of two years or less, and more than 90% have benefit periods of one year or less. These plans cover essential costs for one to two years and provide a balanced and affordable approach to funding care for our community. Life production was down slightly the prior year as direct-to-consumer life NAF moderated in the quarter due to our decision to proactively reduce television, Marketing Spam.
Adam Auvil: We are uniquely positioned to help.
Gary Chandru Bhojwani: Help them make an educated choice for their coverage.
Adam Auvil: Long term care nap was up 71%.
Gary Chandru Bhojwani: The continued strength of our recently launched long term care fundamental plus product.
Gary Chandru Bhojwani: 99% of these policies had benefit periods of two years or less and more than 90% have benefit periods of one year or less.
Adam Auvil: These plans cover essential costs for one to two years and provide a balanced and affordable approach to funding care for our clients.
Adam Auvil: Life production was down slightly to prior year as direct to consumer life life Nap moderated in the quarter due to our decision to proactively reduce TV marketing spend.
Gary Chandru Bhojwani: Agents sold LifeNap was flat due to a challenging, Our D2C advertising is rooted in a price-disciplined and measured strategy built on decades of market experience. We maintain an opportunistic approach scaling our marketing expenditure up or down based on demand. As a reminder, television advertising costs are not capitalized and typically fluctuate during presidential election years.
Gary Chandru Bhojwani: Agent sold life Nap was flat due to a challenging comparable.
Adam Auvil: Our D to C advertising is rooted in our pricing discipline and measured strategy built on decades of market experience, we maintain an opportunistic approach scaling our marketing expenditure up or down based on advertising market.
Gary Chandru Bhojwani: As a reminder, television advertising costs are not capitalized and typically fluctuate during presidential election years.
Gary Chandru Bhojwani: We expect 2024 to follow a similar path. Our web and digital D2C capabilities are also instrumental in generating sales. Our teams are working hard to ensure that these channels continue to reach more customers. LifeNap from Web and Digital Channels was up 13% in the quarter and now accounts for approximately 25% of all DFC life.
Gary Chandru Bhojwani: We expect 2024 to follow a similar pattern.
Gary Chandru Bhojwani: Our web and digital DTC capabilities are also instrumental in generating sales. Our teams are working hard to ensure that these channels continue to reach more customers lie.
Gary Chandru Bhojwani: Life Nap from web and digital channels was up 13% in the quarter and now accounts for approximately 25% of all GSE lifestyles.
Gary Chandru Bhojwani: Our diverse lead generation and distribution capabilities enable us to adapt to changing market environments and provide balance and stability to our resources. Annuity collected premiums in the quarter were up 6%, and account values were up 4%. As I shared last quarter, our captive distribution model and the long-term relationships that our agents build with customers provide stability to this block. Persistency remains within expected levels in light of the current interest rate environment.
Gary Chandru Bhojwani: Our diverse lead generation and distribution capabilities enable us to adapt to changing market environments and provide balance and stability to our results.
Gary Chandru Bhojwani: Annuity collected premiums in the quarter were up 6% and account values were up 4%.
Gary Chandru Bhojwani: As I shared last quarter, our captive distribution model and the long term relationships that our agents build with customers provide stability to this block.
Gary Chandru Bhojwani: Assistance he remains within expected levels in light of the current interest rate environment.
Gary Chandru Bhojwani: Client assets and brokerage and advisory were up 32% for the quarter to a record $3 4 billion.
Adam Auvil: New accounts were up 8%.
Gary Chandru Bhojwani: Four consecutive quarters of brokerage and advisory growth reflect an agent force that is building enduring relationships with clients.
Gary Chandru Bhojwani: Client assets and brokerage and advisory were up 32% for the quarter to a record $3.4 billion, and new accounts were up 8%. Four consecutive quarters of brokerage and advisory growth reflect an aging force that is building enduring relationships with clients. When combined with our annuity account values, our clients now entrust us with more than $15 billion of their assets.
Gary Chandru Bhojwani: When combined with our annuity account values, our clients now entrust us with more than $15 billion of their assets.
Gary Chandru Bhojwani: Successful agent recruiting and retention fuel our sales momentum recruiting was up 12% our seventh consecutive quarter of agent force gains.
Adam Auvil: Producing agent count was up 8%.
Gary Chandru Bhojwani: <unk> consecutive quarter of growth.
Gary Chandru Bhojwani: Our proprietary agent referral and retention programs drove strong recruiting results agent metrics also benefited from new initiatives that are leveraging technology to increase the effectiveness and efficiency of our online recruiting presence.
Gary Chandru Bhojwani: Successful agent recruiting and retention fuel our sales momentum. Recruiting was up 12%, our seventh consecutive quarter of Age Enforced, and producing agent count was up 8%, the fifth consecutive quarter. Our proprietary agent referral and retention programs drove strong recruiting results. Agent metrics also benefited from new initiatives that are leveraging technology to increase the effectiveness and efficiency of our online recruiting presence. Next, slide seven in our worksite division. Our worksite division is also off.
Gary Chandru Bhojwani: Next slide seven in our Worksite Division performance.
Gary Chandru Bhojwani: Our Worksite Division is also off to a strong start.
Gary Chandru Bhojwani: Life and health insurance sales were up 19%.
Gary Chandru Bhojwani: And seven of the past eight quarters Worksite insurance sales have delivered at least 15% growth.
Adam Auvil: As I shared last quarter this level of sustained growth underscores the significant value that our worksite insurance offerings bring to employers and their employees.
Adam Auvil: Service fee sales were up 9%. This metric reflects the annual contract value of benefits services sold in the first quarter and is a leading indicator of fee revenue growth.
Gary Chandru Bhojwani: Life and Health Insurance sales were up 19%. In 7 of the past 8 quarters, worksite insurance sales have delivered at least 15% growth. As I shared last quarter, this level of sustained growth underscores the significant value that our worksite insurance offerings bring to employers and their employees. Services fee sales were up 9%.
Gary Chandru Bhojwani: Advancing our benefit services strategy remains a priority for 2024 and beyond.
Gary Chandru Bhojwani: Producing agent count was up 28%, our eighth consecutive quarter of growth.
Gary Chandru Bhojwani: First year, producing agent count was up 36%.
Gary Chandru Bhojwani: This metric reflects the annual contract value of benefit services sold in the first quarter and is a leading indicator of fee revenue. Advancing our benefits services strategy remains a priority for 2024 and beyond. Producing agent count was up 28%, and our eighth consecutive quarter of first year producing agent count was up 36%. We are seeing solid agent retention across all cohorts and are experiencing healthy product growth. Recruiting was up 32% year over year driven by agent referrals that were up 50% in the quarter. Our results underscore the attractiveness of our agent opportunity without. As a reminder, agents who are recommended to us through our proprietary personal referral program typically stay with the company longer and are more productive.
Gary Chandru Bhojwani: We are seeing solid solid agent retention across all cohorts and are experiencing healthy productivity levels.
Gary Chandru Bhojwani: Recruiting was up 32% year over year, driven by agent referrals that were up 50% in the quarter.
Gary Chandru Bhojwani: Our results underscore the attractiveness of our agent opportunity with optimized.
Gary Chandru Bhojwani: As a reminder, agents who are recommended to us through our proprietary personal referral program typically stay with the company longer and are more productive.
Gary Chandru Bhojwani: Ongoing enhancements to our agent training and Onboarding programs continue to support growth in producing agent count and agent productivity.
Gary Chandru Bhojwani: Recent investments in a new learning management system and other digital tools are improving both the personalization and flexibility of how we deliver education to our agents.
Gary Chandru Bhojwani: This quarter, we continued to advance several initiatives designed to accelerate worksite sales growth.
Gary Chandru Bhojwani: Add customer value.
Gary Chandru Bhojwani: And expand our market reach.
Gary Chandru Bhojwani: Ongoing enhancements to our agent training and onboarding programs continue to support growth in both agent counts and agent productivity. Recent investments in a new learning management system and other digital tools are improving both the personalization and flexibility of how we deliver education to our agents. This quarter, we continue to advance several initiatives designed to accelerate worksite sales growth, add customer value, and expand our market. First, new product offerings continue to be well-received by both employers and employees.
Gary Chandru Bhojwani: First new product offerings continued to be well received by both employers and employees.
Gary Chandru Bhojwani: Our refreshed accident insurance product, which launched last June was up 43% in the quarter.
Gary Chandru Bhojwani: Our new critical illness product, which was introduced in the fourth quarter was up 5%.
Gary Chandru Bhojwani: Second our geographic expansion initiatives accounted for 40% of our total sales growth in the quarter.
Gary Chandru Bhojwani: This program targets areas, where we've identified strategic opportunities to grow our market share and footprint.
Gary Chandru Bhojwani: Lastly, we rolled out a client acquisition program to help agents cultivate and add value to new Worksite group clients.
Gary Chandru Bhojwani: A refreshed accident insurance product, which launched last June, was up 43% in the quarter. Our new critical illness product, which was introduced in the fourth quarter, was up five percent. Second, our geographic expansion initiative accounted for 40% of our total sales growth in the quarter. This program targets areas where we've identified strategic opportunities to grow our market share. Lastly, we rolled out a client acquisition program to help agents cultivate and add value to new work sites. The program launched late last year, and we're already experiencing early success. New group clients were up 65% for the quarter. And with that, I'll turn it over to Paul.
Gary Chandru Bhojwani: Program launched late last year, and we're already experiencing early success.
Gary Chandru Bhojwani: New group clients were up 65% for the quarter.
Gary Chandru Bhojwani: And with that I'll turn it over to Paul.
Paul: Thank you Gary and good morning, everyone.
Paul: Turning to the financial highlights on slide eight.
Paul: Our operating earnings in the quarter reflect strong insurance product margins and continued growth in net investment income allocated to products.
Paul: This reflects growth in the business and continued improvement in the book yield of the investment portfolio as we put new money to work at levels above the portfolio yield.
Paul: Offsetting those favorable trends with a decrease in net investment income not allocated to products, which includes our alternative investments, which I'll come back to in a moment.
Paul: We generated solid free cash flow in the period.
Paul Harrington McDonough: Thank you, Gary, and good morning, everyone. Turning to the financial highlights on slide 8. Our operating earnings in the quarter reflect strong insurance product margins and Continued Growth in Net Investment Income Allocated Products. This reflects growth in the business and continued improvement in the book yield of the investment portfolio as we put new money to work at levels above the portfolio yield. However, offsetting those favorable trends with a decrease in net investment income not allocated to products, which includes our alternative investments, which I'll come back to in a moment. We generated solid free cash flow in the period. Capital ratios and liquidity remain well above target levels.
Gary Chandru Bhojwani: Capital ratios and liquidity remained well above target levels Andrew.
Gary: And we deployed $40 million of capital on share repurchases in the quarter contributing to a 3% reduction in weighted average diluted shares outstanding year over year.
Paul Harrington McDonough: On a trailing 12 month basis operating return on equity was nine 7% as reported and eight 5% and significant items.
Paul Harrington McDonough: Turning to slide nine.
Paul Harrington McDonough: Insurance product margin was strong in the quarter, reflecting.
Paul Harrington McDonough: <unk> growth in the business and claims experience generally in line with expectations.
Paul Harrington McDonough: The results highlight the benefit of our diverse product mix with some puts and takes but in total stable and growing.
Paul Harrington McDonough: Traditional life margins benefited from lower advertising expense.
Paul Harrington McDonough: Annuity margins in general were impacted by higher surrenders, but within expected levels in the context of the current interest rate environment.
Paul Harrington McDonough: And we deployed $40 million of capital on share repurchases in the quarter, contributing to a 3% reduction in weighted average diluted shares outstanding year over year. On a trailing 12-month basis, operating return on equity was 9.7% as reported and 8.5% at significant items. Turning to slide nine.
Paul Harrington McDonough: Fixed indexed annuity margins also reflected moderating spreads, but in line with our pricing and target returns.
Paul Harrington McDonough: Turning to slide 10.
Paul Harrington McDonough: New money rate in the quarter was $6, one 7% the fifth consecutive quarter above 6%.
Paul Harrington McDonough: Insurance product margin was strong in the quarter, reflecting growth in the business and claims experience generally in line with expectations. The results highlight the benefit of our diverse product mix, with some puts and takes, but in total, stable and growing. Traditional life margins benefited from lower advertising expense.
Paul Harrington McDonough: Certainly a positive result, and accretive to the portfolio book yield in the quarter.
Paul Harrington McDonough: The average yield on allocated investments was $4 seven zero percent in the quarter up eight basis points year over year.
Paul Harrington McDonough: The increase in yield along with growth in the business drove a 4% increase in net investment income allocated to products for the quarter.
Paul Harrington McDonough: Annuity margins were in general impacted by higher surrenders, but within expected levels in the context of the current interest rate environment. Fixed indexed annuity margins also reflected moderating spreads, but in line with our pricing and target return. Turning to slide 10.
Paul Harrington McDonough: Total investment income reflects $24 million of net unfavorable mark to market impacts on certain real estate partnerships within our alternative investment portfolio.
Paul Harrington McDonough: This is against our expectation in <unk> have a $14 million to $16 million pre tax gain.
Paul Harrington McDonough: The new money rate in the quarter was 6.17%, the fifth consecutive quarter above 6%. Certainly a positive result and accretive to the portfolio's book yield in the quarter. The average yield on allocated investments was 4.70% in the quarter, up eight basis points year over year. The increase in yield, along with growth in the business, drove a 4% increase in net investment income allocated to products for the quarter.
Paul Harrington McDonough: Even with the underperformance in the alternative investment portfolio.
Paul Harrington McDonough: Total net investment income increased two 5% year over year.
Paul Harrington McDonough: Our new investments in the quarter comprised approximately $750 million of assets with an average rating of AA minus and an average duration of seven years.
Paul Harrington McDonough: Our new investments are summarized in more detail on slides 21, and 'twenty two of the presentation.
Paul Harrington McDonough: Turning to slide 11.
Paul Harrington McDonough: Approximately 97% of our fixed maturity portfolio at quarter end was investment grade rated with an average rating of single a.
Paul Harrington McDonough: Reflecting our up in quality actions over the past several years.
Paul Harrington McDonough: Total investment income reflects $24 million of net unfavorable mark-to-market impacts on certain real estate partnerships within our alternative investment portfolio. This is against our expectation in 1Q of a $14 to $16 million pre-tax gain. Even with the underperformance in the alternative investment portfolio, total net investment income increased 2.5% year over year. Our new investments in the quarter comprised approximately 750 million dollars of assets, with an average rating of A- and an average duration of 7 years. Our new investments are summarized in more detail on slides 21 and 22 of the presentation. Turning to slide 11.
Paul Harrington McDonough: In the last 12 months the allocation to single a rated or higher securities.
Paul Harrington McDonough: Is up 270 basis points, the triple B allocation is down 250 basis points.
Paul Harrington McDonough: And the high yield allocation is down 20 basis points.
Paul Harrington McDonough: As you can see from the Pie chart, approximately two 5% of our portfolio for $630 million is allocated to alternative investments.
Paul Harrington McDonough: And as you can see in the Pie chart on the next slide Slide 12.
Paul Harrington McDonough: Our alternatives include an allocation to real estate partnerships.
Paul Harrington McDonough: You just have performed well over the long term and we expect will continue to perform well through the current cycle and beyond.
Paul Harrington McDonough: But the market driven mark to market impacts on the real estate partnerships adversely impacted the results for the quarter.
Paul Harrington McDonough: Approximately 97% of our fixed maturity portfolio at quarter end was investment grade rated with an average rating of single A, reflecting our up-end quality actions over the past several years. In the last 12 months, the allocation to single A rated or higher securities has been up 270 basis points. The BBB allocation is down 250 basis points, and the high yield allocation is down 20 basis points. As you can see from the pie chart, approximately 2.5% of our portfolio, or $630 million, is allocated to alternative investments.
Paul Harrington McDonough: Driven by the annual appraisal of the underlying real estate assets in the context of higher cap rates in the current higher interest rate environment.
Paul Harrington McDonough: The book value of these real estate partnerships was $86 million at March 31, so quite small in both absolute and relative terms.
Paul Harrington McDonough: It's also important to note that the underlying properties and these partnerships are 100% occupied by investment grade tenants, including notable fortune 150 companies.
Paul Harrington McDonough: They're in long term noncancelable leases.
Paul Harrington McDonough: And as you can see in the pie chart on the next slide, slide 12, our alternatives include an allocation to real estate partnerships. These have performed well over the long term, and we expect they will continue to perform well through the current cycle and beyond, but the market-driven mark-to-market impacts on the real estate partnerships, which adversely impacted the results for the quarter, are driven by the annual appraisal of the underlying real estate assets in the context of higher cap rates in the current higher interest rate environment.
Paul Harrington McDonough: And they continue to produce stable cash flows at the property level and stable cash distributions to <unk> as reflected in each of the last 12 months and quarterly distribution columns in the table on the slide.
Paul Harrington McDonough: Away from alternative investments and commenting more broadly on commercial real estate exposure.
Paul Harrington McDonough: Our commercial mortgage loans and <unk> continuing to perform according to our expectations, reflecting our conservative underwriting and proactive management.
Paul Harrington McDonough: We've been glad we have again included some summary metrics in slides 23, and 24 of the presentation.
Paul Harrington McDonough: The book value of these real estate partnerships was $86 million at March 31, so they are quite small in both absolute and relative terms. It's also important to note that the underlying properties in these partnerships are 100% occupied by investment grade tenants, including notable Fortune 150 companies. They're on long-term, non-cancelable leases.
Paul Harrington McDonough: Turning to slide 13.
Paul Harrington McDonough: Our capital position remains strong at.
Paul Harrington McDonough: At quarter end, our consolidated risk based capital ratio was 391%.
Paul Harrington McDonough: Holdco liquidity was $223 million and leverage was just under 23%.
Paul Harrington McDonough: Turning to slide 14, and our 2020 for guidance.
Paul Harrington McDonough: We are maintaining all guidance ranges for the year.
Paul Harrington McDonough: This includes operating earnings per share in the range of $3 10 to $3 30 for the year excluding significant items.
Paul Harrington McDonough: And they continue to produce stable cash flows at the property level and stable cash distributions to CNO, as reflected in each of the last 12 month and quarterly distribution columns in the table on this slide. Away from alternative investments and commenting more broadly on commercial real estate exposure, our commercial mortgage loans and CMBS continue to perform according to our expectations, reflecting conservative underwriting and proactive management. We have again included some of the summary metrics on slides 23 and 24 of the presentation. Now turning to slide 13.
Paul Harrington McDonough: This affirmation includes an expectation that alternative investments generate a return more in line with the long term run rate assumption of between 9% and 10% for the balance of the year consistent with our initial guidance assumptions.
Paul Harrington McDonough: We also continue to expect that fee income will be slightly down year over year.
Paul Harrington McDonough: But with a slight change to the seasonal weighting.
Paul Harrington McDonough: Now expect roughly one third of the full year earnings came in the first quarter and the balance will come in the fourth quarter with the second and third quarters roughly breakeven.
Paul Harrington McDonough: Our capital position remains strong. At quarter end, our consolidated risk-based capital ratio was 391%, holding code liquidity was $223 million, and leverage was just under 23%.
Paul Harrington McDonough: Given the first quarter results the full year operating EPS is more likely to come in at the lower end of the range than the higher end of the range.
Paul Harrington McDonough: But our point estimate for the full year remains comfortably inside of the earnings per share range.
Paul Harrington McDonough: Turning to slide 14 in our 2024 guidance, we are maintaining all guidance ranges for the year. This includes operating earnings per share in the range of $3.10 to $3.30 for the year, excluding significant items. This affirmation also includes an expectation that alternative investments generate a return more in line with a long-term run rate assumption of between 9 and 10 percent for the balance of the year, consistent with our initial guidance assumption. We also continue to expect that fee income will be slightly down year over year, but with a slight change to the seasonal weighting.
Paul Harrington McDonough: We continue to expect excess cash flow to the holding company in the range of $140 million to $200 million.
Paul Harrington McDonough: As stated in our remarks last quarter.
Paul Harrington McDonough: High end of the range assumes status quo in particular, no deterioration in economic conditions and no material change in the risk profile of our investment portfolio.
Paul Harrington McDonough: Finally, we will continue to manage to a consolidated risk based capital ratio of 375% and our U S based insurance companies minimum holdco liquidity of $150 million and target leverage between 25 and 28%.
Paul Harrington McDonough: We now expect roughly one-third of the full-year earnings to come in the first quarter, and the balance will come in the fourth quarter, with the second and third quarters roughly breaking. Given the first quarter results, the full year operating EPS is more likely to come in at the lower end of the range than the higher end of the range. But our point estimate for the full year remains comfortably inside the earnings per share range.
Paul Harrington McDonough: And with that I'll turn it back over to Gary.
Paul Harrington McDonough: Yeah.
Speaker Change: Thanks, Paul last month, we published our sixth annual letter to shareholders.
Paul Harrington McDonough: In it we emphasize the perspective that we have shared in several forums.
Paul Harrington McDonough: <unk> is a growth story that offers a compelling long term shareholder value creation.
Paul Harrington McDonough: Our business model is unique and valuable.
Paul Harrington McDonough: We say what we will do then we do what we say.
Paul Harrington McDonough: We continue to expect excess cash flow to the holding company in the range of $140 to $200 million. As stated in our remarks last quarter, the high end of the range assumes the status quo. In particular, no deterioration in economic conditions and no material change in the risk profile of our investment portfolio. Finally, we will continue to manage to a consolidated risk-based capital ratio of 375% in our US-based insurance companies, minimum hold co-liquidity of $150 million, and target leverage between 25% and 28%. And with that, I'll turn it back over to Gary.
Gary: And we back our commitments with a track record of execution.
Paul Harrington McDonough: As we look to the remainder of 2024, we remain squarely focused on profitable growth and shareholder return opportunities.
Paul Harrington McDonough: We thank you for your support of and interest in <unk> Financial group.
Gary: We will now open it up to questions.
Paul Harrington McDonough: Operator.
Gary: Thank you if you'd like to register a question. Please press star followed by one on your telephone keypad and children you on music locally.
Gary: If you'd like to withdraw your question at any time, you can do so by pressing star Paul It's Mike.
Gary: As a reminder to ask a question it stopped while it's by Bob.
Paul Harrington McDonough: Our last question comes from the line of Brian Kruger of Stifel. Your line is now open. Please go ahead.
Gary Chandru Bhojwani: Last month, we published our sixth annual Letter to Cheryl. In it, we emphasize the perspective that we have shared in several forms. CNO is a growth story that offers compelling long-term shareholder value creation. Our business model is unique in value. We say what we will do, then we do what we say, and we back our commitments with a track record of execution. As we look to the remainder of 2024, we remain squarely focused on profitable growth and shareholder return. Thank you for your support of, and interest in, CNO Financial Group. We will now open it up to questions. Operator?
Operator: Hey, Thanks. Good morning. My first question was on life advertising can you just give some more thoughts around what youre seeing.
Speaker Change: In the external environment for advertising cost in half.
Speaker Change: How that's influencing the level of spend and how that could play out of beer. It goes on with the political election.
Gary Chandru Bhojwani: Yeah, Hey, Brian This is Gary Thanks for the question.
Speaker Change: We see this happen it at every election cycle. So we're expecting the similar pattern and it's starting to play itself through in the bottom line is that advertising costs are going up we track very carefully our yield.
Operator: Thank you. If you'd like to register a question, please press star followed by 1 on your telephone keypad, ensuring that you are unmuted locally. If you'd like to withdraw your question at any time, you can do so by pressing star followed by 2. As a reminder, to ask a question, it's star followed by 1. Our first question comes from the line of Ryan Krueger of Stifle. Your line is now open; please go ahead.
Ryan Krueger: Track, the marketing cost to the premiums that come in until the number of phone calls and so on there's a number of different metrics that our people track and when we believe that the advertising costs get too high to perform against those metrics, we back off and you'll recall, we've done that of past election cycles I expect that's going to happen here again in 2024.
Ryan Krueger: Wait and see but but if I were a betting man that's what I think is going to happen. So we see the costs going up therefore, we see the yield going down and we'll back off Opportunistically, if we see that change or if opportunities present themselves, we'll step back on the gas pedal.
Ryan Krueger: Hey, thanks. Good morning. My first question was about life advertising. Can you just give some more thoughts around what you're seeing in the external environment for advertising costs and how that's influencing the level of spend and, you know, how that could play out as the year goes on with the political election?
Speaker Change: Got it thanks, and then on a long term care.
Ryan Krueger: Any more can you provide any more color on what you saw in the quarter. It looks like the claims were.
Gary Chandru Bhojwani: Yeah. Hey, Ryan, this is Gary. Thanks for the question.
Ryan Krueger: Favorable and then.
Gary: Things have bounced around there a little bit in terms of LTC margins.
Gary Chandru Bhojwani: You know, we see this happen at every election cycle. So we're expecting a similar pattern, and it's starting to play itself out. And the bottom line is that advertising costs are going up. We track very carefully our yield. We track the marketing costs to the premiums that come in and to the number of phone calls and so on. There are a number of different metrics that our people track.
Speaker Change: Any rough sense of kind of what you would view as a more normalized level at this point.
Gary Chandru Bhojwani: Hey, Ryan it's Paul I'd say that are our claims experience and the margins for long term care in the quarter were generally in line with our expectations.
Gary Chandru Bhojwani: It certainly does reflect the growth in the business.
Gary Chandru Bhojwani: There was slightly more favorable new run rate in the wake of the assumption unlocking in the fourth quarter.
Gary Chandru Bhojwani: And when we believe that the advertising costs get too high to perform against those metrics, we back off. And you'll recall, we've done that in past election cycles. I expect that it's going to happen here again in 2024. We'll wait and see. But if I were a betting man, that's what I think is going to happen. So we see the cost going up. Therefore, we see the yield going down, and we'll back off opportunistically. If we see that change or if opportunities present themselves, we'll step back on the gas.
Gary Chandru Bhojwani: But I think that by and large captures how we're thinking about.
Gary Chandru Bhojwani: LTC margin in the quarter.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Gary Chandru Bhojwani: The next question comes from the line of John Amit.
Speaker Change: Your line is now open. Please go ahead.
Speaker Change: Good morning, Thank you for the opportunity.
Gary Chandru Bhojwani: <unk> talked about there was surrendered trends in.
Gary Chandru Bhojwani: The first quarter and annuities looks like they were increased with outflows can you talk about the surrender trends in Q2 2004 to date.
Gary Chandru Bhojwani: With a one off or is it something that is persisting in the mid <unk>.
Gary Chandru Bhojwani: Higher markets generally.
Gary Chandru Bhojwani: Hey, John This is Gary I'll make some general comments, and then I'll, let Paul and others jump in if they want to add to it.
Gary Chandru Bhojwani: Got it, thanks. And then on long-term care, can you provide any more color on what you saw in the quarter? It looked like the claims were favorable. And then just, you know, things have bounced around there a little bit in terms of LPP margins. Any, any rough sense of kind of what you view as a more normalized level at this point?
Speaker Change: We generally don't provide guidance ahead of the quarter. So so in terms of telling you how <unk> is going to shape up we generally don't do that however, I will make some general observations.
Gary Chandru Bhojwani: Given the interest rate environment.
Gary Chandru Bhojwani: We should expect surrenders to run higher than say a couple of years ago when interest rates were considerably lower.
Paul Harrington McDonough: Hey, Ryan, it's Paul. I'd say that our, you know, claims experience and the margins for long-term care in the quarter were generally in line with our expectations. It certainly does reflect the growth in the business. There was, you know, a slightly more favorable new run rate in the wake of the assumption unlocking in the fourth quarter. But I think that, by and large, you know, captures how we're thinking about the LTC margin in the quarter.
Paul Harrington McDonough: Our persistency models account for that we're expecting that so they will run higher than say a couple of years ago, but I would remind all of our shareholders that we benefit from some things in the marketplace that maybe some of our competitors don't first our annuities are produced exclusively by our captive distribute.
Paul Harrington McDonough: <unk> network, and we have certain policies and procedures in place where they don't have an incentive to churn business. That's number one number two remember that our target market typically doesn't get called on as frequently as say ultra high net worth individuals simply because they don't have the asset pool that.
Paul Harrington McDonough: Okay, got it. Thank you. Thank you. The next question comes from the line of John Barnidge from Piper Fandler. Your line is now open, please go ahead.
Operator: The next question comes from the line of John Barnidge from Piper Fandler. Your line is now open; please go ahead.
Gary Chandru Bhojwani: Hey John, this is Gary. I'll make some general comments and then I'll let Paul and others jump in if they want to add to it. We generally don't provide guidance ahead of the quarter, so in terms of telling you how 2Key is going to shape up, we generally don't do that. However, I will make some general observations.
John Bakewell Barnidge: A lot of distribution to call on them regularly so our products arent regularly facing that type of a high level of competition.
Speaker Change: Like most other players the product design that we have on our annuities has surrender charges. So, particularly in the first several years as the typical 10 10, whether theyre surrender charges for roughly 10 years.
Speaker Change: But typically in the first few years Theres really a significant disincentive, even at the consumer level to surrender so for those reasons.
Gary Chandru Bhojwani: Given the interest rate environment... We should expect surrenders to run higher than, say, a couple years ago when it... Our persistency models account for that, we're expecting that, so they will run higher than say a couple of years ago, but I would remind all of our shareholders that we benefit from some things in the marketplace that maybe some of our competitors don't. First, our annuities are produced exclusively by our captive distribution network, and we have certain policies and procedures in place where they don't have an incentive to churn business. That's number one.
Gary Chandru Bhojwani: We expect our surrenders to be higher than the recent past, but we expect not to suffer the same degree of pressure that some other players in the industry will experience.
Speaker Change: Paul or Jeremy would you like to add anything to my comments.
Gary Chandru Bhojwani: The only thing I'd add is that surrenders are certainly higher today than they were before this rate cycle began.
Gary Chandru Bhojwani: But they've been reasonably stable.
Gary Chandru Bhojwani: Number two, remember that our target market typically doesn't get called on as frequently as say ultra-high net worth individuals simply because they don't have the asset pool that attracts a lot of distribution to call on them regularly, so our products aren't regularly facing that type of high level of competition. Third, like most other players, the product design that we have on our annuities has surrender charges. So particularly in the first several years, it's the typical 10-10 where there are surrender charges for roughly 10 years.
Gary Chandru Bhojwani: The last few months.
Gary Chandru Bhojwani: And within our expectations and the current in the context of the current rate environment.
Speaker Change: Thank you for that and my follow up question do you view the level of annuity earnings achieved in the first quarter is run ratable.
Gary Chandru Bhojwani: Yeah.
Paul: Hey, John It's Paul.
Gary Chandru Bhojwani: I mean the.
Gary Chandru Bhojwani: The margin was was.
Gary Chandru Bhojwani: Impacted certainly by Baidu.
Gary Chandru Bhojwani: By the surrenders.
Gary Chandru Bhojwani: And sort of.
Gary Chandru Bhojwani: Tertiary impact is that.
Gary Chandru Bhojwani: Some of the policies that are surrendering had higher spreads so spreads have moderated.
Gary Chandru Bhojwani: But typically, in the first few years, there's really a significant disincentive even at the consumer level to surrender. So for those reasons, we expect our surrenders to be higher than in the recent past, but we expect not to suffer the same degree of pressure that some other players in the industry will experience. Paul or Jeremy, would you like to add anything to my comments? Gary, the only thing I'd add is that surrenders are certainly higher today than they were.
Gary Chandru Bhojwani: But still within our.
Speaker Change: Pricing and target return levels.
Speaker Change: It bounces around a bit whether the current.
Speaker Change: Quarter is run ratable to your question.
Gary Chandru Bhojwani: Yes.
Speaker Change: Say within the volatility from quarter to quarter, yes.
Gary Chandru Bhojwani: And.
Speaker Change: The account values continued to grow over the long run we would expect that.
Paul Harrington McDonough: Gary, the only thing I'd add is that, you know, surrenders are certainly higher today than they were before this rate cycle began, but they've been, you know, reasonably stable over the last few months and within our expectations in the context of the current rate environment. Thank you for that. And my follow-up question, do you view the level of annuity earnings achieved in the first quarter as run rateable? Hey, John, it's Paul.
Speaker Change: As Marc spreads sort of stabilize.
Paul: And then you should expect growth along with the growth of the business.
Paul Harrington McDonough: John This is Gary there's only one perspective I'd add to that remember that we benefit from a pretty diverse product portfolio in any given quarter. One product is going to run hot ones is going to run call theres going to be some movement.
Paul: I would just remind everybody that we've reaffirmed our annual guidance and thats, probably the strongest testing, but we can give you as to how we think the consolidated portfolio will perform.
Paul Harrington McDonough: I mean, the margin was impacted certainly by the surrender. And sort of a tertiary impact is that some of the policies that are surrendering had higher spreads, so spreads have moderated, but still, you know, within our pricing and target return levels. You know, it bounces around a bit whether the current Order is run rateable to your question. You know, I'd say, within the volatility from quarter to quarter, yes.
Paul Harrington McDonough: Okay.
Speaker Change: Thanks for that Gary and Paul.
Speaker Change: Thank you.
Speaker Change: Thank you.
Paul Harrington McDonough: The next question comes from the line of Wes Carmichael of Autonomous Your line is now open. Please go ahead.
Speaker Change: Hey, good morning, and thanks for taking my question.
Paul Harrington McDonough: Last week, we got the final published fiduciary rule from the department of Labor and I realize it's a pretty big document, but can you help us maybe with your current thinking around any impacts to an increase in compliance costs recruiting or any sales impacts associated with the rule.
Paul Harrington McDonough: Hey, Wes this is Gary thanks for the question.
Paul Harrington McDonough: And, you know, that account values continue to grow. So over the long run, we would expect that, as the spread sort of stabilizes, then you should expect growth along with the growth of the business.
Paul Harrington McDonough: So so you're right. It is a rather voluminous rule and it is rather a reason.
Speaker Change: Let me start with kind of the conclusion and tell you that at CMO, we're not expecting any particular notable adverse developments as a result of that now that said I want to put an asterisk on it.
Gary Chandru Bhojwani: John, there's, this is Gary. There's only one perspective.
Gary Chandru Bhojwani: And John, this is Gary. There's only one perspective I'd add to that. Remember that we benefit from a pretty diverse product portfolio. In any given quarter, one product's going to run hot, one's going to run cool, you know, there's going to be some movement. I would just remind everybody that we've reaffirmed our annual guidance, and that's probably the strongest testament we can give you as to how we think the consolidated portfolio will perform.
Gary Chandru Bhojwani: <unk> was a member of the CLI and we sit on the board on the ACI.
Gary Chandru Bhojwani: I think laid out a pretty cogent case as to why the industry as opposed to the rule and we share some of those views but to your specific question in terms of the significant impact to <unk>, we don't expect that.
Operator: The next question comes from the line of Wes Carmichael of Autonomous. The line is now open, please go ahead.
Wes Carmichael: Got it thanks Gary.
Wes Carmichael: I just wanted to come back to the real estate Mark to market in the quarter. I think you pointed to most of that market being driven by annual appraisals I guess, what I'd like to get your perspective on it if we could continue to see some volatility in that portfolio through the balance of the year. If you think really there is not going to be.
Gary Chandru Bhojwani: Hey, good morning, and thanks for taking my question. So last week, we got the final published fiduciary rule from the Department of Labor. And I realize it's a pretty big document, but can you help us maybe with your current thinking around any impacts on an increase in compliance costs, recruiting, or any sales impacts associated with the rule?
Gary Chandru Bhojwani: Maybe any significant additional margin until we get to the first quarter of next year.
Gary Chandru Bhojwani: Yeah.
Gary Chandru Bhojwani: Hey, Ross this is Paul Eric I'd invite you to provide some color.
Speaker Change: Yeah sure good morning, Wes and Paul.
Gary Chandru Bhojwani: <unk>.
Gary Chandru Bhojwani: If you think about it.
Gary Chandru Bhojwani: We went through a year last year, where.
Gary Chandru Bhojwani: If you believe.
Gary Chandru Bhojwani: Increase.
Gary Chandru Bhojwani: Statistics, the office market was down.
Gary Chandru Bhojwani: Somewhere between 18 and 20% on the year.
Gary Chandru Bhojwani: Hey Wes, this is Gary. Thanks for the question. So, you're right, it is a rather voluminous rule, and it is rather recent. Let me start with a kind of conclusion and tell you that at CNO, we're not expecting any particular or notable adverse developments as a result of that. Now, that said, I want to put an asterisk on it. CNO is a member of the ACLI, and we sit on the board, and the ACLI has, I think, laid out a pretty cogent case as to why the industry is opposed to the rule. And we, we share some of those views. But to your specific question in terms of the significant impact on CNO, we don't expect that.
Gary Chandru Bhojwani: Certainly.
Gary Chandru Bhojwani:
Gary Chandru Bhojwani: The ongoing it's a tough neighborhood the ongoing credit cycle reset in office values.
Gary Chandru Bhojwani: It is.
Gary Chandru Bhojwani: Probably closer to the.
Gary Chandru Bhojwani: At the end of the ball game than the beginning of the ballgame.
Gary Chandru Bhojwani: It will take some some time.
Gary Chandru Bhojwani: And may not be a straight line.
Gary Chandru Bhojwani: <unk>.
Gary Chandru Bhojwani: One way of thinking about the <unk>.
Gary Chandru Bhojwani: Ongoing valuation here is that.
Gary Chandru Bhojwani: Yeah.
Gary Chandru Bhojwani: Yes.
Paul Harrington McDonough: Thanks Gary. And I just wanted to come back to the real estate mark to market in the quarter. I think you pointed to most of that mark being driven by annual appraisals. I guess what I'd like to get your perspective on is if we could continue to see some volatility in that portfolio through the balance of the year, or if you think really there's not going to be, you know, maybe any significant additional marks until we get to the first quarter of next year.
Gary Chandru Bhojwani: Thank you can think about cap rates.
Gary Chandru Bhojwani: As in.
Paul Harrington McDonough: Proxy to a degree.
Speaker Change: And if you look at.
Paul Harrington McDonough: Maybe.
Paul Harrington McDonough: About 150 basis point move in cap rates.
Speaker Change: That's probably worth.
Paul Harrington McDonough: <unk>.
Paul Harrington McDonough: You know $10 million of valuation meaning.
Paul Harrington McDonough: Meaning that it takes a really strong moving cap rates too to effect a material change in evaluation.
Paul Harrington McDonough: Hey Wes, this is Paul. Erik, I'd invite you to provide some color. Yeah, sure. Good morning, Wes and Paul.
Paul: Dealing with here.
Speaker Change: Long term assets.
Speaker Change: With a stable NOI that our restaurant act in a with long term fixed rate financing.
Paul Harrington McDonough: Yeah, sure. Good morning, Wes and Paul.
Paul Harrington McDonough: If you think about it, we went through a year last year where, you know, if you believe, you know, the increase statistics, the office market was down. The one way of thinking about the ongoing valuation here is that, you know, it's a, you think you can think about cap rates as a, as a, as a proxy to a degree. And if you look at, you know, maybe 150 basis point moving cap rates, that's, that's, you know, probably worth $10 million of valuation, meaning that it takes a really strong moving cap rates to affect a material change in valuation.
Erik: With 100% occupancy, meaning that youre kind of.
Paul Harrington McDonough: Kind of a long cash flow short leverage trade.
Paul Harrington McDonough: And so I think.
Paul Harrington McDonough: During during the year youre not going to see a whole lot of volatility and at the end of the year, depending on the kind of a point to point.
Paul Harrington McDonough: Revaluation.
Paul Harrington McDonough: Yes.
Paul Harrington McDonough: That's what you produce.
Paul Harrington McDonough:
Paul Harrington McDonough: <unk>.
Paul Harrington McDonough: We're not going to replicate 2023.
Paul Harrington McDonough: And.
Paul Harrington McDonough: But there could be.
Paul Harrington McDonough: You're dealing with here, you know, long-term assets with a stable NOI that are refinanced with long-term fixed rate financing, you know, with 100% occupancy, meaning that there could be some favorable development during 2024 or some additional unfavorable development. If you think about it, during the period before this first quarter, the revaluation on these properties was up maybe $10, $12 million, and they gave back 20 of it in 2023. So that's to suggest to you that 2023 is probably an outlier and probably won't replicate itself.
Paul Harrington McDonough: Some favorable development during during 2024 or some additional unfavorable development if you think about it.
Paul Harrington McDonough: The period before 'twenty before this first quarter.
Paul Harrington McDonough: It was a revaluation on these properties were but in aggregate.
Paul Harrington McDonough: Maybe $10 million to $12 million and gave back 20 of it in 2023 so.
Paul Harrington McDonough: So suggest to you that 2023 is probably the outlier.
Paul Harrington McDonough: And probably and won't replicate itself.
Speaker Change: Thanks, that's helpful.
Speaker Change: Youre welcome.
Operator: The next question comes from the line of Scott Heleniak of RBC Capital Markets. Your line is now open, please go ahead.
Speaker Change: The next question comes from the line of.
Scott Gregory Heleniak: Hello, Matt.
Scott Gregory Heleniak: RBC capital markets. Your line is now open. Please go ahead.
Gary Chandru Bhojwani: Yes, good morning. The Medicare Advantage and Medicare Supplement, you had strong growth trends there for a while, but just wondering if you could talk about the drivers there, whether it's market share, agent productivity, obviously the demographics are working your way. If you can talk about that a little bit, and then just anything you can add on what you're seeing out there in the competitive landscape in those areas and those product lines, that would be great.
Scott Gregory Heleniak: Yes, good morning, the Medicare advantage Medicare supplement you had strong growth trends there you have for a while but.
Gary Chandru Bhojwani: Just wondering if you could talk about the drivers there whether it's market share agent productivity, obviously, the demographics are working your way.
Gary Chandru Bhojwani: If you can talk about that a little bit and then just anything you can add on what youre seeing out there in the competitive landscape in those areas and those product lines.
Speaker Change: That'd be great.
Gary Chandru Bhojwani: Yeah, hey, Scott, this is Gary. Thanks for the question. Yeah, you're right.
Gary Chandru Bhojwani: Yes, Hey, Scott This is Gary Thanks for the question, Yes, you're right. We've been very very pleased with the success we've seen for several quarters now.
Gary Chandru Bhojwani: We've been very, very pleased with the success we've seen for several quarters now. I think there are a number of things working for us. Number one, as you point out, the demographics are definitely working for us. We've got 11,000 people a day retiring.
Gary Chandru Bhojwani: Think there are a number of things working for us.
Gary Chandru Bhojwani: One as you point out the demographics are definitely working for us about 11000 people a day retiring so demand for the products continues to be very strong.
Gary Chandru Bhojwani: Virtually every retiree at least looks at Medicare advantage or Medicare supplement not all of them by of course that virtually every single one looks at the closest thing we have the auto insurance in our business.
Gary Chandru Bhojwani: Demand for the products continues to be very strong. (Inaudible) So, that's one thing that's helping us. More unique to CNO, there's a handful of things that we've done. First, we've invested pretty substantially in our online platform, particularly for Medicare Advantage. We now represent virtually all of the major carriers in just about every jurisdiction, and we've got a technology platform that I think is quite good, based on the feedback that we're getting and the success we're seeing with that.
Gary Chandru Bhojwani: So thats one thing thats, helping us more unique casino theres, a handful of things that we've done first we've invested pretty substantially in our online platform, particularly for Medicare advantage. We now represent virtually all of the major carriers and just about every jurisdiction.
Gary Chandru Bhojwani: And we've got a technology platform.
Gary Chandru Bhojwani: And then I think is quite good the feedback that we're getting and the success, we're seeing with that.
Gary Chandru Bhojwani: Third, we can marry that technology offering with face-to-face agents for those consumers that want it. That's one thing I think that really sets us apart. If I look back over the last three to five years, we've seen a number of entrants come into the space with a purely technology offering, and in my opinion, the fatal flaw in those models is that they only appeal to people who want to buy at the lowest price.
Gary Chandru Bhojwani: Third we can marry that technology offering with face to face agents for those consumers that want it. That's one thing I think that really sets us apart if I look back over the last three to five years, we've seen a number of entrants come into the space with a purely technology offering.
Gary Chandru Bhojwani: And in my opinion, the fatal flaw in those models is that they only appeal to people who want to buy on the lowest price.
Gary Chandru Bhojwani: They don't really have the ability to provide that personal, kitchen table service that we can provide. So, that's something that's really helped us, and I think our agents have done a fantastic job. I should have probably started with this.
Gary Chandru Bhojwani: Don't really have the ability to provide that kitchen table service that we can provide so thats something thats really helped us.
Gary Chandru Bhojwani: Our agents have done a fantastic job I shouldn't probably started with this they deserve.
Gary Chandru Bhojwani: Some of them presented the credit here for the work they are doing out there, helping people understand and knocking on doors and so on.
Gary Chandru Bhojwani: They deserve, you know, 90-some-odd percent of the credit here for the work they're doing out there, helping people understand and knocking on doors and so on. We undertook a repricing of our Medicare Supplement policy. Remember, we manufacture Medicare Supplement insurance, and we distribute Medicare Advantage. So we undertook a repricing of that, and that happened to coincide with some regulatory pressures being put on Medicare Advantage that I think were leading more consumers back to Medicare Supplement than they had historically been looking at it.
Gary Chandru Bhojwani: And finally, the final thing that you need to see.
Gary Chandru Bhojwani: We undertook a repricing of our Medicare supplement policies remember, we manufactured Medicare supplement and we distribute Medicare advantage. So we undertook a repricing of that.
Gary Chandru Bhojwani: And that happened to coincide with some regulatory pressures being put on Medicare advantage that I think was leading more consumers back to Medicare supplement and historically had been looking at it. So all of these things have come together some of them are across the industry. Some of them are unique to <unk>.
Gary Chandru Bhojwani: I think all of these things have come together to give us a really nice tailwind and of course the thing I want to remind everybody on this wasn't in your question, but I think this is really critical to remember when you think about our business model.
Gary Chandru Bhojwani: So all of these things have come together. Some of them are across the industry. Some of them are unique to CNO. But I think all of these things have come together to give us a really nice tailwind.
Gary Chandru Bhojwani: What makes us unique among life insurers, we regard Medicare and oftentimes the first step of the way we get into the door of the household then we build the relationship where we talk to those customers about annuities or long term care or life insurance or what have you.
Gary Chandru Bhojwani: And of course, the thing I want to remind everybody of, this wasn't in your question, but I think this is really critical to remember when you think about our business model. What makes this unique among life insurers is that we regard Medicare as oftentimes the first step, the way we get into the door of the household. Then we build a relationship where we talk to those customers about annuities or long-term care or life insurance or what have you.
Gary Chandru Bhojwani: The ability to supplement if you will of Medicare advantage and Medicare supplement really make sure that those relationships are built on a much broader and deeper foundation, but let us grow and keep those customers with us So I would point to all of those things.
Gary Chandru Bhojwani: His thoughts to why we're doing well and why I think more importantly, we will continue to do well.
Gary Chandru Bhojwani: Yeah.
Gary Chandru Bhojwani: So the ability to supplement, if you will, Medicare Advantage and Medicare Supplement really makes sure that those relationships are built on a much broader and deeper foundation that allows us to grow and keep those customers. So I would point to all of those things as reasons why we're doing well and why, more importantly, I think we will continue to.
Speaker Change: Okay. That's really helpful. And then just so anything anything new or any changes on the competitive front in that in that area. I mean, it sounds like you are gaining market share, but is there anything you can point to or is it just the execution you've kind of talked about the reasons you've talked about.
Gary Chandru Bhojwani: Yes, I mean, I'd like to give the credit to our to our agents and the execution that they're out there doing every day I think there have been some market trends I know there've been regulatory pressures I alluded to this a little bit, particularly on some of the Medicare advantage distributors.
Gary Chandru Bhojwani: Okay, that's really helpful. And just so anything, anything new or any changes on a competitive front in that area? I mean, it sounds like you're getting market share, but is there anything you can point to? Or is it just the execution you kind of talked about and the reasons you talked about?
Gary Chandru Bhojwani: Think of that pressure is about to go away anytime soon.
Gary Chandru Bhojwani: Think that the government is taking a close look at it some of these practices and policies and that's created some pressure.
Gary Chandru Bhojwani: I'm not going to comment on how it's impacting their businesses, but I'll just say that we continue to do the right things the right way with great people that are out there executing every day.
Gary Chandru Bhojwani: Yeah, I mean, I'd like to give the credit to our agents for the execution that they're out there doing every day. I think there have been some market trends. I know there have been regulatory pressures. I alluded to this a little bit, particularly with some of the Medicare Advantage distributors. I don't think that pressure is about to go away anytime soon. I think that the government is taking a close look at some of these practices and policies, and that's creating some pressure.
Speaker Change: Yeah, that's fair enough. Okay, and then just a question too on the persistency levels you mentioned, they're consistent with your expectation in the script can you.
Gary Chandru Bhojwani: Can you talk a little bit more about how that how that's kind of been trending over the past year by by segment is there any more detail you can you can give on that.
Gary Chandru Bhojwani: To give a little bit of sense of trend.
Gary Chandru Bhojwani: Or are they just stable.
Gary Chandru Bhojwani: Yeah.
Gary Chandru Bhojwani: So Scott you are asking about persistency trends for med sup in med advantage.
Speaker Change: Yes, just to clarify that's your question.
Gary Chandru Bhojwani: Jeremy do you want to comment on that Jeremy well, yes.
Gary Chandru Bhojwani: I'm not going to comment on how it's impacted their businesses, but I'll just say that we continue to do the right things the right way with great people that are out there executing every day. Yep, that's fair enough.
Gary Chandru Bhojwani: I can comment on that this is this is jeremy.
Gary Chandru Bhojwani: Generally they've been pretty stable they've been a little bit higher on the on the med sup maybe than what they were.
Gary Chandru Bhojwani: Previous to that but generally generally in line with expectations nothing.
Gary Chandru Bhojwani: Nothing nothing to really write home about there.
Gary Chandru Bhojwani: Yeah, that's fair enough. Okay. And then just a question, too, on the persistency levels. You mentioned they're consistent with your expectation in the script. Can you... Can you talk a little bit more about how that's kind of been trending over the past year by segment? Is there any more detail you can give on that just to give a little bit of a sense of direction?
Speaker Change: Okay. Thanks, a lot.
Speaker Change: Yes, Scott if I could just add one perspective on that.
Gary Chandru Bhojwani: The more the more of our clients that have multiple products with us conventional wisdom holds the better our persistency across the book should be and in particular, the more of our clients that have annuities with us because remember when our clients entrust us with an annuity fundamentally.
Gary Chandru Bhojwani: Changes the relationship.
Gary Chandru Bhojwani: Most of our other products are regarded as expense excuse me as expenses.
Gary Chandru Bhojwani: So, Scott, you're asking about persistency trends for MedSupp and MedAdvantage? Yeah, just to clarify, that's your question. Yeah. Jeremy, do you want to comment on that? Jeremy?
Speaker Change: Think about a consumer pays their monthly Medicare bill or their annual life insurance Bill They regard those as expenses.
Gary Chandru Bhojwani: Okay, thanks a lot. Scott, if I could just add one perspective on that. The more, the more...
Gary Chandru Bhojwani: When they buy an annuity from us that changes the relationship into one of an investment.
Speaker Change: So the consumer of that place those products with us are more likely to stay with us across the product portfolio and so as our annuity book has grown as the number of clients. We have annuities with US has grown we would expect to see that now one other thing we've been focusing our comments really on the consumer business, which makes up the majority.
Gary Chandru Bhojwani: Scott, if I could just add one perspective on that. The more of our clients that have multiple products with us... transcripts provided by Transcription Outsourcing, LLC when they buy an annuity from us, that changes the relationship into one of an investment.
Gary Chandru Bhojwani: And so the consumers that placed those products with us are more likely to stay with us across the product portfolio. And so, as our annuity book has grown, as the number of clients who have annuities with us has grown, we would expect to see that. Now, one other thing. We've been focusing our comments really on the consumer business, which makes up the majority of CNO, of course. But I do want to point out that our worksite business has also been doing very well, particularly in persistency.
Gary Chandru Bhojwani: <unk> of course, but I do want to point out that our Worksite business has also been doing very well, particularly on the persistency.
Gary Chandru Bhojwani: The products that we're providing through employers to consumers.
Gary Chandru Bhojwani: Our very highly valued by both the employee and the employer and we've seen very strong persistency there as much as we focus our comments on consumer I want to get a plug in for works at the folks that are doing a fantastic job and we're seeing really really seeing those products can appreciate it.
Speaker Change: Great. Thanks.
Gary Chandru Bhojwani: The next question.
Gary Chandru Bhojwani: The products that we're providing through employers to consumers are very highly valued by both the employee and the employer. And we've seen very strong persistency there. As much as we focus our comments on consumers, and I want to plug a plug in for work, the folks that are doing a fantastic job, and we're really, really seeing those products get appreciated.
Gary Chandru Bhojwani: Comes from the line of Amit Kumar of Jefferies. Your line is now open. Please go ahead.
Speaker Change: Yes, thanks, good morning, everyone.
Speaker Change: So I guess for Paul if I think about your EPS guidance.
Gary Chandru Bhojwani: Backing out the first quarter it looks like a pretty decent step up in the balance of the year in terms of what's implied.
Speaker Change: I get that Youre expecting all to come back but is there any other sort of big drivers that you expect that'll get you to something closer to that.
Operator: comes from the line of Suneet Kamath of Jefferies. Your line is now open; please go ahead.
Suneet Laxman L. Kamath: Mid to high 80% low nineties kind of range.
Suneet Laxman L. Kamath: Yeah, thanks. Good morning, everyone. So I guess for Paul, if I think about your EPS guidance, you know, backing out the first quarter, it looks like a pretty decent step up in the balance of the year in terms of what's implied. I get that you're expecting Alt to come back. But is there any other sort of big driver that you expect that'll get you to something closer to that, you know, mid to high 80s, low 90s kind of range?
Suneet Laxman L. Kamath: Hey, so need yes, I'd say, there's always puts and takes and certainly in the first quarter.
Suneet Laxman L. Kamath: Margin was was a bit favorable to our expectations.
Suneet Laxman L. Kamath: <unk> was clearly below expectations.
Suneet Laxman L. Kamath: As you know and as I mentioned, we're assuming that all of this will be more in line with our long term run rate.
Suneet Laxman L. Kamath: Between 9% and 10% the balance of the year and in that context.
Suneet Laxman L. Kamath: As I mentioned in my earlier comments.
Paul Harrington McDonough: Hey, Suneet. Yeah, I mean, I'd say there are always puts and takes, and certainly in the first quarter, the margin was a bit favorable to our expectations. ALTS was clearly below expectations, and as you know and as I mentioned, we're assuming that ALTS will be more in line with the long-term run rate of between 9 and 10 percent for the balance of the year. And in that context, as I mentioned in my earlier comments, the point estimate for EPS for the year is comfortably inside of that original 310 to 330 EPS range.
Suneet Laxman L. Kamath: The point estimate.
Paul Harrington McDonough: For EPS for the year is comfortably inside of that original 310 to $3 30 EPS range.
Paul Harrington McDonough: And as I mentioned before certainly in the context of Q1.
Suneet: There's a higher chance that it comes in at the lower end of that range than when we sat here.
Paul Harrington McDonough: In February.
Suneet: Got it so is most of it.
Suneet: Ultra recovering I just wanted to see if theres anything other any other big pieces that we should be thinking about.
Suneet: I mean, that's certainly an important assumption.
Paul Harrington McDonough: And as I mentioned before, certainly in the context of Q1, there's a higher chance that it comes in at the lower end of that range than you know when we sat here in February.
Paul Harrington McDonough: But.
Paul Harrington McDonough: Again, our expectation is that is that.
Paul Harrington McDonough: As actual results play out there's always going to be puts and takes.
Suneet Laxman L. Kamath: Got it. So is most of it, the alts, recovering? I just want to see if there's anything else any other big pieces that we should be thinking about.
Paul Harrington McDonough: And I think it's worth noting that although.
Suneet Laxman L. Kamath: Margin in total.
Suneet Laxman L. Kamath: It was generally in line with our expectations. It was kind of to the plus side of the range of expectations.
Paul Harrington McDonough: I mean, that's certainly an important assumption, but again, our expectation is that, as actual results play out, there's always going to be puts and takes, and I think it's worth noting that although the margin in total was generally in line with our expectations, it was kind of on the plus side of the range of expectations. You know, I think it's reasonable to assume that this trend will continue to some extent over the balance of the year.
Paul Harrington McDonough: And.
Paul Harrington McDonough: Yeah.
Paul Harrington McDonough: I think it's reasonable to assume that.
Paul Harrington McDonough: <unk>.
Paul Harrington McDonough: Trend continues to some extent over the balance of the year.
Speaker Change: Okay. It makes sense and then I guess, maybe bigger picture question for Gary.
Paul Harrington McDonough: I think the issue of like field Force management has become very topical in.
Paul Harrington McDonough: In the eyes of the market.
Paul Harrington McDonough: So I was just wondering especially as we think about the independent contractor model 10 99 employees.
Suneet Laxman L. Kamath: Okay, makes sense. And then I guess maybe a bigger picture question for Gary. I think the issue of field force management has become very topical in the eyes of the market. So I was wondering, especially as we think about the independent contractor model, 1099 employees, or independent contractors, can you just talk a little bit about how you manage distribution risk within your overall organization?
Gary: Or independent contractors can you just talk a little bit about how you manage distribution.
Gary: Distribution risk within your overall organization.
Gary: Sure. Thank you for the question and I recognize that this topic is getting attention.
Gary: So the first thing I want to assure all of our shareholders.
Gary: We have a very robust compliance program.
Gary Chandru Bhojwani: Sure. Thank you for the question. And I recognize that this topic is getting attention. So the first thing I want to assure all of our shareholders is that we have a very robust compliance program. We have different ways of monitoring the activities of our agents. And I also want to remind people that roughly one out of six or seven of our agents also hold a security license. Remember that when you have a securities license, there's a whole different level of compliance, oversight, scrutiny, and so on and so forth, above and beyond what an insurance policy is. So I think that's the first thing. The second thing to point out is that the nature of our field force is slightly different.
Gary Chandru Bhojwani: We have different ways of monitoring the activities.
Gary Chandru Bhojwani: Our agents and I also want to remind people that roughly one out of six or seven of our agents also hold the securities license remember that when you have a securities license. The results all different level of compliance oversight scrutiny and so on and so forth above and beyond what an insurance agent experience.
Gary Chandru Bhojwani: So I think that's the first thing to point out the second thing to point out.
Gary Chandru Bhojwani: Recognize that the nature of our field force is slightly different most of our offices. If you look at the leadership of most of our field offices. Those leaders are W. Two employees I believe that's a rather unique model now the downside is we did because we opened new offices.
Gary Chandru Bhojwani: Most of our offices, if you look at the leadership of most of our field offices, those leaders are W-2 employees. I believe that's a rather unique model. Now, the downside is that we, because we own the offices, so to speak, we have a higher fixed cost. So, that's the downside of our model, but the upside is, I would argue, greater accountability, greater control, and greater oversight than a model where we don't have that cost and that infrastructure.
Gary Chandru Bhojwani: Speak we have a higher fixed cost base.
Gary Chandru Bhojwani: So that's the downside of our model, but the upside is I would argue greater accountability greater control and greater oversight.
Gary Chandru Bhojwani: Then then a model where we don't have.
Gary Chandru Bhojwani: That cost and that infrastructure now I want to emphasize the majority of our agents R&D $2 99.
Gary Chandru Bhojwani: 10, 99 folks and they do a fantastic job, but I think we've got this hybrid that makes us different than other players out there because we have leadership at the field level that are W. Two employees because the offices are ours as opposed to independently contracted 100% and because we have a.
Gary Chandru Bhojwani: Now, I want to emphasize that the majority of our agents are indeed 1099 workers, and they do a fantastic job, but I think we've got this hybrid that makes us different than other players out there because we have leadership at the field level that are W2 employees, because the offices are ours, as opposed to independently contracted 100%.
Gary Chandru Bhojwani: Pretty significant population of our agents with the securities license that again the folks on this call probably know better than most when you have that type of a securities license. The degree of oversight and personal liability that you have is significant so I think when you bring all of those things together does that make it impossible for us to have a problem of course.
Gary Chandru Bhojwani: And because we have a pretty significant population of our agents with securities licenses. And again, you know, the folks on this call probably know better than most, when you have that type of securities license, the degree of oversight and personal liability that you have is significant. So I think when you bring all of those things together, does that make it impossible for us to have a problem? Of course. Does it materially reduce the likelihood of a problem? And does it materially increase the visibility we'd have, meaning early warning signals and so on?
Gary Chandru Bhojwani: Hi.
Gary Chandru Bhojwani: Does it materially reduce the likelihood of a problem and does it materially increase the visibility we'd have meaning early warning signals and so on I think so.
Gary Chandru Bhojwani: I think we're in a good place.
Gary Chandru Bhojwani: You never want to be the CEO of that business, we're not going to have a problem because you know that.
Gary Chandru Bhojwani: Tempting fate, but but I feel very very good about where we are our programs our processes.
Gary Chandru Bhojwani: And the folks that we have overseeing these things.
Speaker Change: Okay. That's helpful. Thanks, Gary.
Gary Chandru Bhojwani: I think so. I think we're in a good place. And you never wanna be the CEO that says we're not gonna have a problem because that's tempting fate. But I feel very, very good about where we are, our programs, our processes, and the folks that we have overseeing these.
Gary Chandru Bhojwani: Yeah.
Gary Chandru Bhojwani: Yeah.
Gary Chandru Bhojwani: Your next question comes from the line of will Novartis of Raymond James Your line is now open. Please go ahead.
Gary Chandru Bhojwani: Hey, good morning could you discuss the path from current 9% Roe.
Speaker Change: What are we can achieve over time, how long might that take and what are some of the steps to get there. Thanks.
Operator: Okay, that's helpful. Thanks, Gary. The next question comes from the line of Wilma Burdis.
Wilma Carter Jackson Burdis: Hey, <unk> Paul.
Wilma Carter Jackson Burdis: The question is asking for a specific number and I'm sure. It won't surprise you that I'm not going to give you a specific number but I will say that.
Operator: The next question comes from the line of Wilma Burdis of Raymond James. Your line is now open. Please go ahead.
Wilma Carter Jackson Burdis: Gary and the entire executive management team is very focused on.
Paul Harrington McDonough: Hey Wilma, it's Paul. The question is asking for a specific number. And I'm sure it won't surprise you that I'm not gonna give you a specific number, but I will say that Gary and the entire executive management team are very focused on what we can do to take our ROE, which current run rate is sort of nine and a half ish, to something that's more in line with the peer group, which would be, you know, 11 to 13, 12 to 14.
Paul Harrington McDonough: What we can do to take our ROE, which current run rates sort of.
Paul Harrington McDonough: Nine and a half ish.
Paul Harrington McDonough: To something that's more in line with the peer group, which would be.
Paul Harrington McDonough: 11% to 13 12 in 2014.
Paul Harrington McDonough: We don't think there are any silver bullets, but we think there are lots of things that in aggregate.
Paul Harrington McDonough: Over time, we will close the gap.
Paul Harrington McDonough: All I can tell you that we're very focused on that and I expect that we will.
Paul Harrington McDonough: We don't think there are any silver bullets, but we think there are lots of things that, in aggregate, over time, will close the gap. And all I can tell you is that we're very focused on that. And I expect that we will, you know, achieve that objective over time. Yeah, with Wilma, if I can jump in, I just want to add a couple of perspectives.
Paul Harrington McDonough: <unk> achieved that objective over time.
Wilma: Yes, well if I can jump in I just wanted to add a couple of perspective, So 100, and you would expect a 100% agree with Paul.
Wilma: I would also say like Paul said, we're not going to provide a specific guidance at this stage, but what I do want you to hear from me is.
Wilma: We have line of sight on the ability to improve our or we know we can drive this higher.
Wilma: Number two we know we need to drive this higher we absolutely have to get the ROE.
Wilma: More in line with industry peers, and so that's a significant point of focus for us.
Gary Chandru Bhojwani: Yeah, with Wilma, if I can jump in, I just want to add a couple of perspectives. So, as you would expect, I 100% agree with Paul. I would also say, like Paul, that we're not going to provide specific guidance at this stage. But what I do want you to hear from me is that we have a line of sight on the ability to improve our ROE. We know we can drive this higher.
Speaker Change: And we expect to deliver against that we absolutely do.
Speaker Change: Thanks, just a quick follow up on that could you identify a couple of the things that.
Gary Chandru Bhojwani: Could help towards that goal.
Speaker Change: Sure I can give you just kind of in broad strokes the kinds of things that you would expect we'd be looking at number one expenses, obviously a lever that.
Gary Chandru Bhojwani: That we can pull and that's that.
Gary Chandru Bhojwani: Something that we're looking at.
Gary Chandru Bhojwani: There are things that we can do with the in force book to influence.
Gary Chandru Bhojwani: Number two, we know we need to drive this higher. We absolutely have to get the ROE more in line with industry peers. And so that's a significant point of focus for us. And we expect to deliver against that. We absolutely do.
Gary Chandru Bhojwani: Policyholder behavior.
Speaker Change: There are some things we can do with pricing, obviously things, we can do with pricing with with new business.
Gary Chandru Bhojwani: There are things that we can do that.
Gary Chandru Bhojwani: That impact the denominator.
Gary Chandru Bhojwani: In the equation.
Gary Chandru Bhojwani:
Gary Chandru Bhojwani: Sure, I can give you just kind of in broad strokes the kinds of things that you would expect we'd be looking at. Number one, expenses are obviously a lever that we can pull, and that's something that we're looking at. There are things that we can do with the Enforce book, you know, to influence policyholder behavior. There are some things we can do with pricing. There are obviously things we can do with pricing for new business.
Gary Chandru Bhojwani: So that's that's not a comprehensive list, but that's.
Gary Chandru Bhojwani: The kinds of things that are that we're looking at.
Gary Chandru Bhojwani: And I'd like to add a perspective on that in terms of the sequencing.
Speaker Change: At least in my view.
Gary Chandru Bhojwani: It was really critical to get the sales engine firing first.
Gary Chandru Bhojwani: We had a fair bit of momentum going into Covid, and then obviously COVID-19.
Gary Chandru Bhojwani: And it wasn't unique to us of course, it screwed up a lot of things for a lot of different folks in it.
Gary Chandru Bhojwani: There are things that we can do that impact the denominator in the equation. So that's not a comprehensive list, but those are the kinds of things that we're looking at. And Wilma, I'd like to add a perspective on that in terms of the sequence. At least in my view...
Gary Chandru Bhojwani: It slowed us down.
Wilma: We felt it was absolutely imperative to get that sales engine firing again to get our recruiting where we needed to be to get our new product launches, where they need to be to get our agent offerings to where they need to be I think we've got a fair bit of momentum now now that we've got the sales and in the top line. If you will I think firing in a consistent and sustainable way now it's time.
Gary Chandru Bhojwani: And Wilma, I'd like to add a perspective on that in terms of the sequencing, at least in my view. It was really critical to get the sales engine firing first. We had a fair bit of momentum going into COVID, and then obviously COVID, you know, it wasn't unique to us, of course. It screwed up a lot of things for a lot of different folks, and it slowed us down
Wilma: To make it more efficient.
Speaker Change: There was a sequencing on our part.
Gary Chandru Bhojwani: This was a you know it's not that we're just realizing that the ROE we need to improve it was a conscious choice on our part to first focus on getting that top line momentum going getting its sustainable and now we need to turn our attention to making the machinery more efficient.
Gary Chandru Bhojwani: And that's what we're focused on next.
Gary Chandru Bhojwani: We felt it was absolutely imperative to get that sales engine firing again, to get our recruiting where we need it to be, to get our new product launches where they need to be, to get our agent offerings where they need to be. I think we've got a fair bit of momentum. Now that we've got the sales engine, the top line, if you will, I think firing on all cylinders in a consistent and sustainable way, now it's time to make it more efficient. There was some sequencing on our part.
Speaker Change: Okay. Thank you and then could you talk about the opportunities to acquire distribution are you probably saw that globe did not complete a distribution deal with <unk>, but it seems like theres some possible targets in the market.
Gary Chandru Bhojwani: Yes.
Gary Chandru Bhojwani: We've seen targets over the years, we've looked at quite a few.
Gary Chandru Bhojwani: As you know we've done two rather small acquisitions over on the Worksite side.
Gary Chandru Bhojwani: At least on the consumer side most of the acquisition opportunities we've seen.
Gary Chandru Bhojwani: This was a, you know, it's not that we are just realizing that the ROE needs to improve. It was a conscious choice on our part to first focus on getting that top line momentum going, making it sustainable, and now we need to turn our attention to making the machinery more efficient, and that's what we're focused on. Thank you.
Gary Chandru Bhojwani: Just couldn't get my head around the valuations.
Speaker Change: They might be able to work for others I, just I couldnt get there on the math.
Gary Chandru Bhojwani: But we're open to it I want to send the signal that we definitely would consider the right opportunities but.
Gary Chandru Bhojwani: But at least if I think about the candidates we've looked at over the last three years to 40 years I just I couldnt make the numbers work on the valuation side.
Speaker Change: Paul you you, obviously looked at that stuff pretty carefully Paul and Eric Eric runs corporate development for US I know if you guys want to add any comments.
Gary Chandru Bhojwani: And then could you talk about the opportunity to acquire distribution? You probably saw that Globe did not complete the distribution deal in one go, but it seems like there are some possible targets in the market. Yeah, we've seen targets over the years; we've looked at quite a few. As you know, we've done two rather small acquisitions over on the worksite side. At least on the consumer side, most of the acquisition opportunities we've seen, I just couldn't get my head around the valuations.
Speaker Change: I think that captures it Gary.
Gary Chandru Bhojwani: Okay.
Speaker Change: Great. Thank you.
Speaker Change: Thank you.
Gary Chandru Bhojwani: The next question comes from Nicholas.
Evercore ISI: Evercore ISI your line is now open.
Gary Chandru Bhojwani: Ahead.
Speaker Change: Hi, I think it's for.
Gary Chandru Bhojwani: Tom Gallagher.
Speaker Change: But my question is.
Gary Chandru Bhojwani: The poll for the full year 'twenty four guide are you you're using 52 <unk> that you reported in operating as the Q1 earnings number or the normalized backing out the adverse alternatives of 79 cents I just want to.
Gary Chandru Bhojwani: You know, they might be able to work for others. I just couldn't get there on the math. But we're open to it. I want to send the signal that we definitely would consider the right opportunities. But at least if I think about the candidates we've looked at over the last three to four years.
Speaker Change: To make sure I'm understanding that correctly.
Speaker Change: Hey, Tom we're using 52 as reported.
Speaker Change: Gotcha, and then that being the case.
Gary Chandru Bhojwani: You know that that's a 27% Delta that's actually to me your.
Gary Chandru Bhojwani: Couldn't make the numbers work on the valuations. Paul, you obviously looked at that stuff pretty carefully. Paul and Erik. Erik runs corporate development for us. I don't know if you guys want to add any comments. I think that captures it, Gary.
Gary Chandru Bhojwani: I guess slightly raising.
Speaker Change: Two above the range, our underwriting expectations considering that alternative adjustment.
Speaker Change: So if that's true what when you assess the businesses what's outperforming.
Speaker Change: Or at least performing at the top end of the range from an operating standpoint.
Operator: The next question comes from Nicholas Liu of Evercore ISI. Your line is open, please go ahead.
Nicholas Liu: And what is not like when you just assess the various businesses and what youre seeing in Q1, so far.
Operator: Hi, I think it's for Tom Gallagher. But my question is... The Paul, for the full year 24 guide, are you using 52 cents that you reported in operating as the Q1 earnings number or the normalized backing out the adverse alternatives of 79 cents? I just wanna make sure I'm understanding that correctly.
Operator: Sure.
Operator: Tom I'd make two points number one.
Speaker Change: I think you'd expect that.
Operator: When we initially put our guidance out we were kind of.
Operator: Solving for the midpoint.
Speaker Change: As I mentioned.
Speaker Change: Context of the first quarter, you would expect that we'd be.
Operator: A higher probability we ended up lower than the range so on that side.
Speaker Change: I encourage you to factor that into your thinking.
Operator: And then in terms of.
Operator: What else might be better than then.
Paul Harrington McDonough: Hey, Tom, we're using 52, the number as reported.
Operator: Than previously contemplated.
Paul Harrington McDonough: Gotcha. And then that being the case, you know, that that's a 27 cent delta, it's actually, to me, you're gas slightly rising to above the range or underwriting expectations considering that alternative adjustment. So if that's true, when you assess the businesses, what's outperforming? Or at least, you know, performing at the top end of the range from an operating standpoint. And what is not? Like when you just assess the various businesses and what you're seeing in Q1 so far.
Tom: Part of the dynamic is.
Paul Harrington McDonough: Sure.
Paul Harrington McDonough: Better run rates in certain products in the wake of the.
Paul Harrington McDonough: The fourth quarter, unlocking, which wasn't fully contemplated and baked into the.
Paul Harrington McDonough: The initial guidance.
Speaker Change: Gotcha that makes sense.
Paul Harrington McDonough: On the.
Speaker Change: Sorry go ahead and anything else you would add to that Paul.
Speaker Change: No I just I just was going to ask if if you were following that logic.
Speaker Change: I am yes.
Speaker Change: Just a question on the statutory earnings in the quarter. They were a bit soft and I think there is normally some seasonal weakness in Q1, but what what drove the weaker stat earnings in the quarter and how.
Paul Harrington McDonough: Sure. So, Tom, I make two points. Number one, I think you'd expect that when we initially put our guidance out, you know, we were kind of solving for the midpoint. And as I mentioned, in the context of the first quarter, you'd expect that we'd be, you know, there's a higher probability we end up lower in the range. So I'd encourage you to factor that into your thinking. And then, in terms of what else might be better than... than previously contemplated, a part of the dynamic is better run rates in certain products in the wake of the fourth quarter unlocking, which wasn't fully contemplated and baked into the initial guidance.
Speaker Change: How were the LTC stat earnings relative to GAAP.
Paul Harrington McDonough: Because I saw a gap obviously was pretty favorable on long term care did you see a similar benefit in statutory.
Speaker Change: Yeah. So a few things I think worth noting there time number one to one is seasonally lower as you mentioned.
Paul Harrington McDonough: And then with respect to long term care there is pretty significant.
Paul Harrington McDonough: First year sales strength given the.
Paul Harrington McDonough: Growth in long term care, so there's a pretty significant gap to stat difference there. So that's all pre tax and then the.
Paul Harrington McDonough: Gotcha. That makes sense.
Paul Harrington McDonough: Sorry, go ahead. Anything else you would add to that, Paul?
Paul Harrington McDonough: The other thing to point out is that the taxes are quite high. So we had $23 million of pretax <unk> income and then $27 million of attach.
Paul Harrington McDonough: No, I just I just was going to ask if you were following that logic.
Paul Harrington McDonough: Taxes.
Speaker Change: Resulting in a $4 million.
Paul Harrington McDonough: I am, yes. Then, just a question on the statutory earnings in the quarter, they were a bit soft, and I think there's normally some seasonal weakness in Q1, but what drove the weaker statutory earnings in the quarter and how were the LTC statutory earnings relative to GAAP? As I saw, GAAP obviously was pretty favorable on long-term care. Did you see a similar benefit in statutory?
Paul Harrington McDonough: Stat tax loss.
Paul Harrington McDonough: And on the taxes. They are really two things that are driving what appears to be.
Paul Harrington McDonough: And the elevated level of taxes, one is that.
Paul Harrington McDonough: You have increased taxable income relative to the stat earnings for our FIA business.
Paul Harrington McDonough: And that's in the context of favorable equity equity market movements.
Paul Harrington McDonough: Yeah, so a few things I think are worth noting there, Tom. Number one, Q1 is seasonally lower, as you mentioned. And then with respect to long term care, there's pretty significant first year sales strain given the growth in long term care. So there's a pretty significant gap to stat difference there. So that's all pre-tax. And then the other thing to point out is that the taxes are quite high. So we had $23 million of pre-tax stat income and then $27 million of taxes, resulting in a $4 million stat tax loss.
Paul Harrington McDonough: Which increase the stat reserves more than the tax reserves.
Paul Harrington McDonough: So that's a big driver and then the second is the fact that our U S out codes are now paying.
Paul Harrington McDonough: The U S holdco for use of Nols.
Paul Harrington McDonough: Which at the Opco level or.
Paul Harrington McDonough: Fully utilized.
Paul Harrington McDonough: As of <unk> of last year.
Paul Harrington McDonough: So those are the those are the primary things that.
Paul Harrington McDonough: Emphasize as you think about the stat results.
Tom: That's helpful. And then a final question for I guess it would be Eric just on the investment portfolio. So you have about a third of your alternative investments or in commercial real estate.
Paul Harrington McDonough: And on taxes, there are really two things that are driving what appears to be an elevated level of taxes. One is that you have increased taxable income relative to the state earnings for our FIA business. And that's in the context of favorable equity market movements, which increased the stat reserves more than the tax reserves, so that's a big driver. And then the second is the fact that our U.S. OPCOs are now paying the U.S. HOLDCO for the use of NOLs, which at the OPCO level were fully utilized as of 3-Q of last year. So those are the primary things that I would emphasize as you think about the stat results.
Paul Harrington McDonough: And just given I would say the ongoing pressure on that asset class.
Speaker Change: Would you expect to have results for the year that come in below plan and I and I asked that because you do have some peers like metlife that have lowered their return expectations in that asset class this year.
Speaker Change: Got it Tom good morning, or good afternoon, almost at this point.
Paul Harrington McDonough: So as I think about things.
Paul Harrington McDonough: In the first quarter.
Paul Harrington McDonough: I think we are we're trending toward nor.
Paul Harrington McDonough: Normalized results in an RFP allocation.
Paul Harrington McDonough: Which.
Paul Harrington McDonough: Total return basis was probably in the.
Paul Harrington McDonough: No.
Paul Harrington McDonough: In the kind of mid single digits in the quarter at private credit.
Paul Harrington McDonough: That's helpful. And then a final question for, I guess it would be Eric, just on the investment portfolio. So about a third of your alternative investments are in commercial real estate. And just given the ongoing pressure on that asset class, I would say. Would you expect to have results for the year that come in below plan? And I ask that because you do have some peers like MetLife that have lowered their return expectations for that asset class this year.
Paul Harrington McDonough: Very similar outcome, maybe kind of mid single digits on the quarter and stabilizing.
Paul Harrington McDonough: And in a reasonable way infrastructure are the same.
Paul Harrington McDonough: And you know all of which offset.
Speaker Change: Bye bye.
Paul Harrington McDonough: That was gonna be excuse me the institutional funds on the real estate side.
Eric: Produced a marginally positive return on the quarter and looking back over the trailing quarters.
Paul Harrington McDonough: Yeah, Tom, good morning or good afternoon almost at this point. So, as I think about things in the first quarter, you know, I think we're trending toward normalized results in our P. E. allocation, which, you know, on a total return basis was probably in the, you know, the kind of mid-single digits in the quarter. At private credit, a very similar outcome, kind of mid-single digits for the quarter, and, you know, stabilizing in a reasonable way, infrastructure the same, and, you know, all of which was offset by, excuse me, the institutional funds on the real estate side producing a marginally positive return that's obviously not going to replicate itself every quarter.
Paul Harrington McDonough: That that.
Eric: The allocation is moving toward a more normalized result, also and so really it's just this one particular 80 ish million dollar piece of the of the <unk>.
Paul Harrington McDonough: Oh allocation that that produced a materially negative and outside the our expectations return on the on the quarter. That's obviously not going to replicate itself every quarter.
Paul Harrington McDonough: So I think as we particularly look toward that.
Paul Harrington McDonough: <unk>.
Paul Harrington McDonough: The trailing part of the year that you are part of the year ahead of us.
Paul Harrington McDonough: I have every reason to think that.
Paul Harrington McDonough: We're looking toward normalized returns now.
Paul Harrington McDonough: Nothing is for sure and markets or just have an inherent uncertainty.
Paul Harrington McDonough: Which you know is what will die but.
Paul Harrington McDonough: So, I think as we particularly look toward the trailing part of the year, part of the year ahead of us, you know, I have every reason to think that, you know, we're looking toward normalized returns, the trends we are seeing suggest to us that, and the actions we're taking in developing the portfolio. As you know, we, for example, completed a hundred million ICOLY with a largely PE allocation at the tail end of next year.
Paul Harrington McDonough: The trends we are seeing.
Paul Harrington McDonough: Jeff two Bosch that.
Paul Harrington McDonough: With that.
Paul Harrington McDonough: And the actions we're taking.
Paul Harrington McDonough: In developing the portfolio as you know we.
Paul Harrington McDonough: For example.
Paul Harrington McDonough: Completed a 100 million icarly.
Paul Harrington McDonough: With.
Paul Harrington McDonough: Largely EPA allocation.
Paul Harrington McDonough: Tail end of next year.
Paul Harrington McDonough: And that will we think we'll have a good influence as we get past the J curve.
Paul Harrington McDonough: And that will, we think, will have a good influence as we get past the J curve on that later this year. So, you know, I look forward to future earnings calls where I don't have to talk about this because it's producing the results that it expects. And, you know, I think that day will come readily.
Paul Harrington McDonough: In that later this year so.
Paul Harrington McDonough: I look forward to our future earnings calls, where I don't have to talk about this because it is producing the results.
Paul Harrington McDonough: And we expect to.
Paul Harrington McDonough: And I think that day I can foresee rapidly.
Paul Harrington McDonough: Okay, thanks for the caller.
Speaker Change: Okay. Thanks for the color.
Speaker Change: Youre welcome.
Adam Auvil: As there are no additional questions waiting at this time, I'd like to hand the conference call back over to Adam Auvil for closing remarks.
Paul Harrington McDonough: Yeah.
Adam Auvil: As there are no additional questions at this time.
Adam Auvil: I would like to hand, the conference called Buckeye, that's okay for closing remarks.
Operator: Thank you, Operator, and thank you all for participating in today's call. Please reach out to the Investor Relations Team if you have any further questions. Have a great rest of your day.
Adam Auvil: Thank you operator, and thank you all for participating in today's call. Please reach out to the Investor Relations team. If you have any further questions have a great rest of your day.
Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining us. You may now disconnect your line.
Operator: Ladies and gentlemen. This concludes today's call. Thank you for joining you may now disconnect your line.
Operator: [music].