Q3 2024 CNO Financial Group Inc Earnings Call
Good morning.
Reagan: Thank you for attending today's C. N O financial groups third quarter 2024 earnings call. My name is Reagan and I'll be your moderator today, all lines will be muted during the presentation portion of this call with an opportunity for questions and answers at the end. If you want to ask a question. Please press star one on your telephone keypad I would now like to pass the conference over to our host Adam Marvell with C.
Speaker Change: You know Adam you May now proceed.
Adam Marvell: Good morning, Thank you for joining us on <unk> financial group's third quarter 2024 earnings conference call.
Adam Marvell: Today's presentation will include remarks from Gary, but as Ronnie Chief Executive Officer, Paul Mcdonough, Chief Financial Officer.
Adam Marvell: Following the presentation. We will also have other business leaders available for the question and answer period.
Adam Marvell: 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 Marvell: <unk> Dot com.
Adam Marvell: This mornings presentation is also available in the investors section of our website and was filed in a form 8-K yesterday.
Adam Marvell: 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 Marvell: 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 appendix.
Adam Marvell: Throughout the presentation, we will be making performance comparisons and unless otherwise specified any comparisons made will refer to changes between third quarter 2024, and third quarter 2023.
Speaker Change: With that I'll turn the call over to Gary.
Adam Marvell: Okay.
Gary: Thanks, Adam Good morning, everyone and thank you for joining us.
<unk> delivered another excellent quarter.
Gary: Operating earnings per diluted share were $1 11 up 26% and.
Gary: 94 cents or up 27% excluding significant items.
Gary: Our results were broad based across operating earnings production investment results and capital.
Our diverse and integrated distribution model and broad product portfolio differentiate us in the marketplace.
Gary: They enable our momentum in baseline of consistent and repeatable results.
Gary: <unk> posted our ninth consecutive quarter of strong sales momentum and our seventh consecutive quarter of growth in producing agent counts.
Gary: Total new annualized premium was up 1% across the enterprise, excluding direct to consumer total nap was up 7%.
Gary: Ill cover the factors impacting the D to C business later in my remarks.
Gary: Green shoots from our strong sales growth are translating into earnings growth, establishing a solid foundation for future results.
Gary: Earnings continue to benefit from favorable insurance product margin and strong investment results, reflecting growth in the business and expansion of the portfolio book yield.
Gary: Our new money rate exceeded 6% for a seventh consecutive quarter.
Gary: Capital and liquidity remained well above target levels after returning $107 million to shareholders.
Book value per diluted share excluding LCI.
Was $35 84 up 6%.
Gary: Each component of our business continues to deliver strong performance as demonstrated by sales momentum in both consumer and Worksite.
Gary: Our growing distribution force.
Gary: Solid and sustainable earnings our excellent capital position.
Gary: Strong free cash flow generation.
Gary: And raising full year guidance for earnings and cash flow.
Gary: As we advance our growth strategy, we continue to optimize the balance between production <unk>.
Gary: Profitability and.
Gary: And capital management.
Gary: Turning to slide five.
Our growth scorecard focuses on three key drivers of our performance.
Gary: Production.
Gary: Distribution and investments in capital.
Gary: We are pleased that all of our growth scorecard metrics are up once again.
Gary: I'll discuss each division in the next two slides.
Gary: Paul will cover investments in capital in more detail during his remarks.
Gary: Beginning with the consumer Division.
Gary: On slide six we delivered our eighth consecutive quarter of sales momentum.
Gary: Solid execution and sustainable sales growth remains a hallmark of the consumer division strong performance and in large part a result of our broad product portfolio.
Gary: Our virtual excuse me, our middle market consumers continue to embrace embrace our differentiated capabilities that Mary a virtual connection with our established in person agent force to complete the critical last mile sales and service delivery.
Gary: Total nap was up 1% for the quarter naphtha field sales it was up 9%.
Health Nap was up 11% led by strong results from new and enhanced products.
Gary: Our Medicare portfolio continues to deliver strong sales growth.
Gary: Medicare supplement nap was up 15% in Medicare advantage policies sold were up 26%.
As a reminder, Medicare advantage sales are not reflected in that.
Gary: By offering both Medicare supplement and Medicare advantage products, we provide more coverage options for customers.
The balance and diversification of our Medicare portfolio is an important part of how we serve the middle income market.
Gary: We are in the midst of Medicare annual enrollment period, which began on October 15th and run through December seven we are off to yet another strong start.
Gary: Our thousands of dedicated field agents across the country are uniquely positioned to help customers make an informed decision about how they receive their benefits.
Gary: This season, we have more than 3400 agents certified to sell these plans up 10% over last year.
Gary: Our agents can enroll consumers in Medicare advantage and Medicare prescription drug plans from 21 different plan sponsors and increase of seven carriers over last year.
Gary: For the third consecutive year, we also expanded the number of officers participating in our Medicare advantage inbound referral program.
Gary: As part of this program customers, who contact us by phone or online can be connected in real time to an agent in their local office, who can assist them.
Gary: Okay.
Gary: Long term care Nap was up 31% on the strength of our long term care fundamental plus product. This.
Gary: This quarter represents the fifth consecutive quarter of double digit growth for this product, reflecting the strong consumer demand for practical long term care solutions.
Gary: As a reminder, our LTC products are designed for the middle market consumer 99% of the policies sold had benefit periods of two years or less.
Gary: And more than 90% have benefit periods of one year or less.
Gary: These plans cover essentially all costs for one to two years and offer a balanced affordable approach to funding care.
Gary: Life production was down in the quarter driven by lower spend on direct to consumer marketing.
Gary: As we shared last quarter, we manage our D to C business based on advertising efficiencies.
Consistent with last quarter, we reduced our television marketing spend in response to higher lead costs.
Gary: This stems from competition for TV media space, which tends to spike during presidential election cycles.
Gary: We continue to grow non TV direct response channels, such as web and digital which now account for over 30% of sales generated by D to C leads.
Gary: Annuity collected premiums posted record results in the quarter up 25%.
Gary: Account values were up 6%.
Gary: Our strong annuity performance is led by number of policies sold up 9%.
Higher premium per policy up 14%.
Gary: Demand for these products continues to benefit from favorable demographic tailwind and the growing need from clients to protect against outliving their retirement savings.
Gary: [noise] stability in our block benefits from our captive distribution and the meaningful long term relationships that our agents established with their clients.
Gary: This quarter reflects our seventh consecutive quarter of brokerage and advisory growth.
Gary: Client assets and brokerage and advisory were up 35% for the quarter to a record $3 9 billion.
Gary: New accounts were up 11%.
When combined with our annuity account values, our clients now entrust us with more than $16 billion of assets.
Gary: 12%.
Gary: Recruiting continues to be favorable and reflects our ninth consecutive quarter of year over year gains.
Gary: Producing agent count was up 5%, our seventh consecutive quarter of growth.
Gary: Next slide seven in our Worksite Division performance.
Gary: We delivered a record third quarter performance for insurance sales with nap up 4%.
Gary: This represents our 10th consecutive quarter of growth.
Gary: These sales were up 108% off a small base.
Gary: As a reminder, this metric reflects the annual contract value of benefits services sold in the quarter and is a leading indicator of fee revenue growth.
Gary: Our benefit services strategy remains a priority for 2024 and beyond.
Gary: Recruiting was up 7% for the quarter.
Gary: Producing agent count was up 17%, our 10th consecutive quarter of growth.
Gary: First year, producing agent count was up 16%.
Gary: Agent retention remained strong across all cohorts.
Gary: New products and strategic growth initiatives are key drivers of our Worksite nap growth.
Gary: I'll comment briefly on three programs.
Gary: First new products continue to perform well.
Gary: In the third quarter, we introduced our new hospital indemnity insurance product, which helps provide supplemental coverage for hospital stays.
Gary: Sales of this product are up 66% in the first few months.
Gary: Our critical illness product, which was introduced last year it was up 9%.
Gary: Second our geographic expansion initiatives accounted for 11% of total Worksite nap growth in the quarter.
Gary: This initiative targets areas, where we've identified strategic opportunities to grow our market share and footprint.
Gary: This is the fourth consecutive quarter of growth generated by this program and we're bullish on the results of these new markets and deliver.
Gary: Okay.
Gary: Lastly in 2023, we launched an initiative to help agents cultivate and acquire new employer groups for insurance sales.
Gary: Now from New group clients was up 164% and we continue to experience solid momentum from this program.
Speaker Change: And with that I'll turn it over to Paul.
Speaker Change: Okay.
Paul Mcdonough: Thank you Gary and good morning, everyone.
Paul Mcdonough: Turning to the financial highlights on slide eight.
Paul Mcdonough: We had another strong quarter across both operating earnings and capital, reflecting favorable trends in insurance product margins investment income and free cash flow and continued expense and capital discipline.
Paul Mcdonough: The expense ratio was 18, 8% in the quarter and 19, 2% on a trailing 12 month basis.
Paul Mcdonough: We deployed $90 million of excess capital on share repurchases in the quarter.
Paul Mcdonough: <unk> our capital return in the wake of the debt issuance back in May.
This contributed to a 7% reduction in weighted average diluted shares outstanding year over year.
Paul Mcdonough: On a trailing 12 month basis.
Paul Mcdonough: Operating return on equity was 11, 7% as reported and 10, 5% excluding significant items.
Paul Mcdonough: We remain focused on continuing to improve our run rate return on equity over time.
Paul Mcdonough: I'll briefly touch on two recent actions that will contribute to improved profitability.
Paul Mcdonough: First we took steps in the third quarter to improve how we operate.
Paul Mcdonough: And our efficiency within the organization.
Paul Mcdonough: The actions focused on repositioning certain back office roles for capabilities, we need for the future.
Paul Mcdonough: Removing certain management layers and reducing costs through outsourcing.
Paul Mcdonough: The net effect was a 3% reduction in the workforce.
Paul Mcdonough: <unk> and outsourcing transition costs associated with these actions totaled $8 $3 million pre tax and were reported as nonoperating income in the quarter.
Paul Mcdonough: These changes will improve run rate return on equity and allow us to advance our growth roadmap, including modernizing our technology and service capabilities.
Second we have terminated a reinsurance agreement in which we had been ceding 25% of our long term care and new business.
Paul Mcdonough: Active October one of this year, we will now retain 100% of long term care and new business.
To be clear this does not impact the in force that we had previously ceded.
Paul Mcdonough: But we're pleased to be keeping all of the new business going forward, given the favorable and stable economics of the business.
Paul Mcdonough: Turning to slide nine.
Paul Mcdonough: Total insurance product margin was very strong in the quarter with mostly puts and some takes across products.
Paul Mcdonough: Fixed indexed annuity margins were impacted by higher amortization due to our change in assumption to reflect higher surrenders as well as some modest spread compression.
Paul Mcdonough: Notwithstanding these impacts our <unk> continue to generate returns consistent with our target return for the business.
Paul Mcdonough: For a second consecutive quarter other annuity margins benefited from reserve releases due to higher mortality on larger closed block policies.
Paul Mcdonough: We do not expect this favorable impact to repeat.
Paul Mcdonough: Supplemental health and long term care margins, both benefited from growth in the block and favorable morbidity.
Paul Mcdonough: Traditional life margins benefited from lower advertising expense in the quarter.
Paul Mcdonough: Finally, our annual actuarial review resulted in a $27 $3 million favorable.
Paul Mcdonough: Favorable impact to operating income.
Paul Mcdonough: This was driven by favorable mortality and persistency assumption updates in our fixed indexed annuity business.
Paul Mcdonough: Partially offset by unfavorable morbidity assumption within Medicare supplement.
The remaining results were smaller and mostly offset across the other product lines.
Paul Mcdonough: We're calling this out as a significant item in the quarter and presenting the margin on this slide ex significant items.
Paul Mcdonough: [laughter].
Paul Mcdonough: Turning to slide 10.
Paul Mcdonough: Net investment income results remained strong for another quarter.
Paul Mcdonough: The new money rate was six 5% the seventh consecutive quarter above 6%.
Paul Mcdonough: The average yield unallocated investments was $4 eight 1% up 12 basis points year over year.
Paul Mcdonough: The increase in yield along with growth in the business drove a 5% increase in net investment income allocated to products for the quarter.
Paul Mcdonough: Investment income not allocated to products was up 18% with alternative investment results slightly below expectations, but improved from the comparable quarter.
Paul Mcdonough: We completed a $400 million five year fabienne offering in the quarter.
Paul Mcdonough: Total investment income was up 7% for both the quarter and year to date, demonstrating the strength of our investment portfolio.
Paul Mcdonough: Our new investments in the quarter comprised approximately $600 million of assets.
Paul Mcdonough: With an average rating of single a and an average duration of just under six years.
Paul Mcdonough: Our new investments are summarized in more detail on slides 20, and 21 of the presentation.
Paul Mcdonough: Turning to slide 11.
Paul Mcdonough: The market value of invested assets grew 21% in the quarter.
Paul Mcdonough: With roughly one third of the growth a result of the recent fabienne and debt issuances and two thirds due to market appreciation on the investment portfolio.
Paul Mcdonough: Growth in the business.
Paul 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 in quality bias over the last several years.
Paul Mcdonough: [laughter].
Paul Mcdonough: Our commercial real estate portfolio continues to perform within expectations, reflecting conservative underwriting and proactive management. We've again included some summary metrics on slides 22, and 23 of the presentation.
Paul Mcdonough: Turning to slide 12, our capital position remains strong.
At quarter end, our consolidated risk based capital ratio was 388%.
Paul Mcdonough: Available Holdco liquidity was $453 million well above our target minimum.
Paul Mcdonough: Reflecting the debt issuance completed in may as well as continued strong free cash flow to the holdco.
Paul Mcdonough: Leverage at quarter end was 32, 5% as reported <unk>.
Paul Mcdonough: Adjusting for the senior notes that will be paid off at maturity in may of next year.
Paul Mcdonough: Average at quarter end was 26.0%.
With the incremental debt issued in May Leverages move just inside our target range of between 25 and 28%.
Paul Mcdonough: Turning to slide 13 and our.
Paul Mcdonough: 24 guidance.
Paul Mcdonough: We are raising and narrowing guidance on operating earnings per share to between between $3 50 and $3 60.
Paul Mcdonough: For the full year, excluding significant items, reflecting our strong third quarter results consistent.
Paul Mcdonough: Consistent with guidance assumptions. This includes an expectation that alternative investments generate a return in line with the long term run rate assumption of between 9% and 10% for the fourth quarter.
Paul Mcdonough: At the midpoint our guidance is now 11% above the initial range for the year, reflecting the strong earnings results, we've reported year to date.
Paul Mcdonough: We are raising and narrowing guidance for excess cash flow to the holding company to a range of between 250 and $275 million.
Paul Mcdonough: The midpoint of the new range is 50% higher than the midpoint of the original range for the year.
Paul Mcdonough: <unk> solid earnings year to date together with capital consumption in our investment portfolio.
Paul Mcdonough: <unk> with the high end of the original free cash flow range, which of course, then corresponds to no material increase in the risk profile of the investment portfolio throughout the year.
Paul Mcdonough: We are maintaining the expense ratio range of between 19 point 19, 2%.
Paul Mcdonough: We will continue to manage to a consolidated RBC ratio of 375%.
Paul Mcdonough: U S based insurance companies and minimum holdco liquidity of $150 million over the long term.
Paul Mcdonough: Though we expect to end 2024, well above those target levels.
Paul Mcdonough: There is no change to our target leverage of 25% to 28%.
Speaker Change: And with that I'll turn it back to Gary.
Paul Mcdonough: Okay.
Gary: Thanks, Paul.
Speaker Change: <unk> delivered another excellent quarter, our sustained sales growth is translating into earnings growth, establishing a solid foundation for future results.
Speaker Change: We have a unique and differentiated position to serve the middle income market to our products distribution and proven track record of execution.
Our capital position liquidity and free cash flow are strong and we continue to deliver on our commitment to shareholder return.
Speaker Change: <unk> enters the fourth quarter with considerable momentum and we expect to end the year strong.
Speaker Change: Before we open it up for questions. As you know next Tuesday November 5th is election day.
Speaker Change: Voting is one of our most important civic rights at C&I, we encourage our associates to take the time to vote I extend that encouragement to everyone on the call as well.
Speaker Change: We thank you for your support of and interest in C&I Financial Group, We will now open it up for questions operator.
Speaker Change: Thank you we will now be moving into a Q&A session. So if you would like to ask a question. Please press star followed by one on your telephone keypad to me will be a question press star I would like to again to ask a question that is star. One other reminder, if youre using a speakerphone. Please remember to pick up your handset before asking a question.
Our first question comes from Wes Carmichael with autonomous.
Speaker Change: Your line is now open.
Speaker Change: Your line is now open.
Speaker Change: Yeah.
For the interest of time, we will be moving onto our next question.
Our next question comes from John Barnidge of Piper Sandler.
Speaker Change: John Your line is now open.
Speaker Change: Yeah.
John Barnidge: Good morning, Thank you for the opportunity.
John Barnidge: Can you maybe talk about the long term care announcement the reinsurance arrangement.
John Barnidge: And within that maybe the opportunity to further utilize the Bermuda platform for other liabilities of the company. Thank you.
Speaker Change: Maybe I'll ask John and just a general comment.
John Barnidge: Sorry.
Speaker Change: Just a general comment and then Paul can dive into the specifics.
John Barnidge: <unk>.
John Barnidge: I think the biggest thing I would like our shareholders to take away is we really like this business. We think we know what we're doing it's performed well.
John Barnidge: And basically we want to eat more of our own cooking.
Paul Mcdonough: <unk> can speak to some of the details on the numbers, but it's really a reflection of our belief in the business and the solid performance.
John Barnidge: <unk>.
Speaker Change: Yes, so on the numbers John I think it's pretty straightforward. We're now keeping the 25% that we used to seed and so that'll flow through to earnings over time and on the margin should be one of the many things that we're doing and contemplating to improve our return on equity over time.
John Barnidge: And then with respect to Bermuda.
John Barnidge: Completed the first treaty in the fourth quarter of last year.
John Barnidge: Where are we ceded.
John Barnidge: Much of the enforce book and 100% of the new business.
Speaker Change: That's going well.
Speaker Change: We've been very focused on building out the infrastructure of our Bermuda company.
Speaker Change: And <unk>.
Speaker Change: Tableau Xing relationships on the island, including with the.
Speaker Change: Bermuda Monetary authority. That's also gone very well, we have a solid team.
Speaker Change: Bermuda now.
Speaker Change: That's occupying our office there.
Speaker Change: So we are beginning to turn our attention to other things that we might see.
Speaker Change: To the Bermuda company.
Speaker Change: That's a work in process and more on that in future periods. Obviously, it's.
Speaker Change: Whatever we proposed to feed is subject to regulatory approval and so we'd be going through the normal approval process.
Speaker Change: Thank you for that and then the.
Speaker Change: The actions to improve the organizational.
Speaker Change: Structure repositioning it back off after removing management layers and reducing costs through outsourcing.
Speaker Change: How do we think about that having an impact in improving the direct expense ratio prospectively. Thank you.
Speaker Change: So John no change to the guidance that we provided for the full year.
Speaker Change: Back into what that means for the fourth quarter I don't want to get ahead of guidance for next year, but.
Speaker Change: As we typically do on our February call, we will provide guidance for the full year, 25%, including the.
The expense ratio certainly the actions that we've taken.
Prove our run rate expenses.
Speaker Change: And will contribute to <unk>.
Speaker Change: <unk>.
Speaker Change: The efforts that we're taking across the value chain to improve the Roe.
Speaker Change: Thank you.
Speaker Change: Thank you.
Thank you.
Our next question comes from Ryan Krueger of K B W.
Speaker Change: Brian Your line is now open.
Hey, good morning.
Speaker Change: On free cash flow and when you think about the $250 million to $270 million this year.
Speaker Change: Yeah, I guess, how much of that do you to what extent do you view that as a sustainable run rate.
Speaker Change: Sure.
Speaker Change: I guess can you help us understand how much favorability this year it may be impacting that number.
Paul Mcdonough: Hey, Ryan it's Paul.
Paul Mcdonough: As you know, it's hard to say because there are there.
Paul Mcdonough: There are.
Paul Mcdonough: Impacts related to.
Paul Mcdonough: Capital efficiency in terms of how we're structured.
Paul Mcdonough: Their impacts.
Paul Mcdonough: At the holding company level related to the debt that we issued in may, but what I would emphasize is that.
Paul Mcdonough: The underlying dynamics of the business generate a very healthy level of free cash flow I think that's.
Paul Mcdonough: Been clearly demonstrated over time, including in the last nine months.
Paul Mcdonough: So without putting a specific number on it.
Paul Mcdonough: Thank the takeaway is that the business generates healthy levels of free cash flow.
Which will in the first instance.
Paul Mcdonough:
Paul Mcdonough: Well it's.
Paul Mcdonough: It's a function of what the business generates over time.
Paul Mcdonough: That may be reduced if we're putting more capital to work to grow the franchise, which would certainly be a good thing.
Paul Mcdonough: So I know I'm not answering your question directly because they are simply too many moving parts.
Paul Mcdonough: In February when we provide outlook for 2005.
Paul Mcdonough: We will provide a bit more insight into that in terms of our outlook for.
Paul Mcdonough: For the 25 period.
Speaker Change: Understood. Thanks, and then just a quick one.
Speaker Change: With the fed cutting rates 50 basis points in September just wanted to make sure I understood. If you had much short term rate sensitivity, we should consider for the fourth quarter or if we shouldnt expect much impact from that.
Speaker Change: Okay.
Speaker Change: So.
Speaker Change: Ryan Your question is our sensitivity to change.
Speaker Change: Changes in rates broadly is that the question.
Speaker Change: Really just the short term rates.
Speaker Change: You do have within for example, like on allocated NII.
Speaker Change: With some of the spread lending you do there just wanted to see if we should if theres really much impact to short term rates on a net basis.
Speaker Change: Or if it's pretty neutral.
Speaker Change: Got it okay.
Speaker Change: Thanks.
Yeah happy to Ryan good morning.
Speaker Change: For the most part.
Speaker Change: The assets, we hold that are floating rate or in a couple of places.
Speaker Change: And largely matched off against also floating rate liabilities. So there is a.
Speaker Change: Substantially.
Speaker Change: Actually offsetting.
Speaker Change: Impact.
Speaker Change: As the short end of the curve moves.
Speaker Change: We do have some floating rate assets that are.
Speaker Change: The term in the general account for the most part.
Speaker Change: Those are very high in credit and credit quality and sustain their market value and we have the option and have.
Speaker Change: Sure.
Speaker Change: Exercise it from time to time to reallocate those out further out the curve as opportunities develop there and then in the curve steepen. So.
Speaker Change: Don't see a tremendous amount of really a noticeable amount of impact in our in our income statement off of the 50 basis points.
Speaker Change: You probably wouldn't see.
Speaker Change: If you get another 50 going into the second through the remainder of the you probably wouldn't see any any significant impact from that either.
Speaker Change: Yeah.
Speaker Change: Okay, great. Thank you.
Speaker Change: Youre welcome.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Thank you our.
Speaker Change: Our next question comes from Raimo <unk> of Raymond James.
Speaker Change: Your line is now open.
Speaker Change: Hey, good morning could you give us a little bit of a deep dive on where CNA stands on cutting expenses.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Well no. That's that's something that we're always focused on cutting expenses.
Speaker Change: Been here for five and a half years, it's been a very.
Speaker Change: A very significant focus of every annual planning process that we've gone through.
Speaker Change: The recent action that we took that I described in my prepared remarks are an example of that.
Speaker Change: So the overall goal is to be as efficient as we possibly can.
Speaker Change: As an organization.
Speaker Change: So that we free up as much as possible.
Speaker Change: Two.
Speaker Change: Invest in the growth from the business.
Speaker Change: So that's how I would describe it at a high level.
Speaker Change: Okay. Thank you.
Speaker Change: And then not to ask for guidance, but could you just talk a little bit about the market opportunity for sales over the next I.
Speaker Change: I guess kind of near term and also maybe next few years just looking for some color on the demographics.
Speaker Change: What youre seeing in the economic environment right now in the area.
Speaker Change: Thanks.
Speaker Change: Well, Matt This is Gary thanks for the question.
Speaker Change: The headline I would give you is we remain very bullish.
Speaker Change: When we look at the primary macroeconomic and demographic factors virtually all of them are tailwind.
Speaker Change: We still have people retiring at a significant level roughly 11000, a day, that's not going to change if I remember the data right. It's still five to eight years before you see that even begin to slow.
Speaker Change: That's very significant.
Speaker Change: Second there is to my way of thinking no.
Speaker Change: The other.
Speaker Change: Government type of solution to the problem BS retirees are prospective retirees were facing in terms of.
Speaker Change: Income for retirement, those few that have pensions those arent growing are getting bigger getting richer.
Speaker Change: And if anything government programs, we've all seen the work on the deficits and so on I don't know if these two particular candidates are going to do anything about it but at some point somebody is going to have to do something about it which means that benefit levels, certainly arent going to go up and they probably will have to go down whether thats means testing or whatever but in any event.
Speaker Change: There is not a private solution or a public solution that goes across and satisfy these issues.
Speaker Change: And health care cost continue to go up.
Speaker Change: Even if healthcare costs moderate and stopped going up by six 7% a year. Even then even if they just get down to that 2% to 3% number that's still a significant issue in the absence of government solutions. So when we look at health care costs. When we look at life spans when you look at number of prospective retirees. When we look at the absence of government solutions all of those provide a very significant.
Speaker Change: Bullish case.
Speaker Change: Final comment I would make remember we focus exclusively on the middle market.
Speaker Change: There are plenty of people focusing on the more affluent consumers.
Speaker Change: And that's wonderful for us but.
Speaker Change: But we don't see any.
Speaker Change: Any major new entrants coming into this space and frankly, if we had to start this business from scratch today, focusing on Middle income America, we couldn't afford to do it it's only because we've got this historical critical math that we're able to make.
Speaker Change: The benefit ratio is in the cost ratios and so on work. This is a very tough place to come into so that forms a bit of a natural moat. So for all of those reasons, we remain very bullish on the prospects and.
Speaker Change: That doesn't mean that we're going to have everything be rosy. All the time of course, there are challenges from time to time, but when we look at the big picture the macro trends, we feel at all in our favor.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Sydney Camus of Jefferies.
Speaker Change: Your line is now open.
Sydney Camus: Great. Thanks, I guess just for Paul to start I think you said your guidance for 2024 assumes.
Speaker Change: Fourth quarter VII is in line with your long term target.
Sydney Camus: We've been going through these calls it seems like some companies are suggesting it will still be under some pressure.
Speaker Change: Is that.
Speaker Change: What do you expect to happen or should we think about that as more of just a planning assumption.
Yes, it's very much more of a planning convention suni.
Speaker Change: I think if you asked Eric.
Speaker Change: Whether you think that's a reasonable expectation that for the fourth quarter I think he would tell you that theres certainly downside risk.
Speaker Change: Because that's not the only thing that flows through.
Speaker Change: AI not allocated over the last couple of quarters. There have been other things that have kind of picked up the slack.
Speaker Change: So in general I think there's probably some downside risk there in the fourth quarter, but it's muted by other things that might might go the other way.
Speaker Change: Okay got it and then I guess on the ROE.
Speaker Change: I know, we've talked about ROE improvement on these calls for the past several quarters.
Speaker Change: And you've highlighted multiple levers that you have to improve the ROE, but as we think about those levers in big buckets would you say that most of them are focused on kind of improving the earnings sort of the numerator of the calculation or are you also contemplating.
Speaker Change: Actions to optimize the dominator and again I don't know if you can give us sort of a split between the two but if you had to think about which one is more important if you could provide some color on that that would be helpful. Thanks.
Speaker Change: Sure, Yes, I think it's fair to say most of the things we're focused on the numerator.
Speaker Change: But not exclusively there.
There are things we can can you continue to do.
Speaker Change: That will.
Speaker Change: We will help move the needle on the on.
Speaker Change: The denominator as well.
Speaker Change: And if I could just follow that up real quick just in terms of the earnings again, another sort of drill down question should we think about that more on that.
Speaker Change: The top line side or more on like the margin side, just trying to figure out.
Speaker Change: How do we start to see this row continue to climb.
Speaker Change: It's really all of the above.
Speaker Change: There is no.
Speaker Change: Silver bullet.
Speaker Change: But.
Speaker Change: The combination of continued topline sales growth, helping to drive better operating leverage.
Speaker Change: Thinking about.
Speaker Change: The trade off between risk and return inside the investment portfolio in the context of the current rate and spread environment.
Speaker Change: Now things, we can do with the enforce book things that we can do with pricing things. We can do to continue to manage expenses, it's really all of those things, which in aggregate. We're confident AR will help us improve the Roe.
Speaker Change: Overtime.
Speaker Change: Okay.
So maybe I'd like to add a little bit of context, our detailed to Paul's comments.
Speaker Change: First I wanted to just make sure I remind everybody that that from our standpoint. This has been a long term and intentional gameplan.
Speaker Change: First we needed to get the company on solid financial footing clean up some capital issues do some basic things there than we needed to get the organization growing consistently and sustainably. We've now done that now we're in the phase where we want to make the organization more efficient as we look to efficiency I can assure you that I remember.
Speaker Change: This management team they are keenly aware of the need to improve ROE. That's been the number one thing we're focused on we've literally got a list within the management team.
Speaker Change: A number of different levers 10 to 20 different levers, we can pull and there is not one that will give us 100 basis points of improvement on row. There's 20 different things that will give us five basis points of improvement so where it may sound like we're not being specific it's actually the converse we have a lot of specificity within the organization.
Speaker Change: Theres just no one big thing we're in a place in our evolution, where there are 10 to 20 different small things and we've got to pull all of them most of them as Paul points out around the topline, but some has to do with excuse me. The numerator. Some has to do with the denominator as well and continuing to eat more efficiently use that that equity.
Speaker Change: So we're very focused on this it is the number one metric that the team entire team is focused on and we've got a variety of frankly small things that were pulling on to drive that ROA up we will stay focused on as I've been talking about this for four to six quarters now and I have assured our investors, we will improve the ROE youre seeing signs of that and we will continue to drive it.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Wes Carmichael of autonomous.
Speaker Change: Your line is now open.
Wes Carmichael: Hey, thanks.
Wes Carmichael: Hey, Thank you I apologize my line dropped earlier, but my first question was on advertising spend and I know that's been pulled back quite a bit related to election cycle, but when would you expect to reaccelerate that and how are you. How are you expecting that to come through the margin in 2025.
Speaker Change: Yes, thanks for the thanks for the question. So let me first say this is sitting in the chair here at <unk>. This is my third presidential election cycle.
Speaker Change: And this one appears to be following the same exact pattern as the two before it.
Speaker Change: And that is the following remember that we manage our D to C business very tightly.
Speaker Change: Based on the yield we get from the advertising and when we see AD costs go up or the yield go down when we see basically that efficacy deteriorate, we stop spending the money.
Speaker Change: Fine letting the volume go away, we're confident that when the AD spend can be done more efficiently and we get the yield we want we'll step it up again and we will see good results again, now I will say that that one of the things that changed over the last three election cycle that I've been sitting in the chair is the fact that the two.
Speaker Change: The viewing habits of America have changed.
Speaker Change: So we are very intentionally relying less and less on TV I do expect that when the AD rates come back down after the cycle and I don't know what that'll be in <unk> or early <unk>, but it'll be sometime in the next one or two quarters I can't tell you exactly what when AD pricing comes back down we will once again step up that TV advertising, but it may be too.
Speaker Change: A degree that's less than it was say in the election cycle of 2016, and that's primarily because we're starting to rely more and more on non television advertising.
Speaker Change: Almost 30% of the volume from our D to C leads is now coming from non television shows sources, So social media online and so on we expect that shift to continue so again the television advertising will be higher than it is through the advertising cycle, but it may not be quite as high as it was eight years ago, primarily because we're adjusting to.
Speaker Change: <unk> and viewer habits, and where the advertising deals the efficacy the bottomline to take away is we've got a really good D to C business, we've got a model, where we know how to appeal to our target consumer and we continue to pivot and adjust our advertising venues based on where the eyeballs are and where the yield is the best and we will.
Speaker Change: Continue to do that.
Speaker Change: Thanks, Gary that's very helpful.
Speaker Change: My follow up was on the annuity segment I think there's a couple of moving pieces. This quarter I think there is a benefit from some reserve releases in the closed block and maybe a little bit of sequential pressure on on the fixed indexed annuity portion of the business. So just hoping you could help us a little bit.
Speaker Change: With how youre thinking about the run rate margin going forward.
Paul Mcdonough: So Ross, it's Paul I'll take that.
Paul Mcdonough: So yes as I said in my in my prepared remarks.
Margins were impacted by higher amortization due to our change in assumption.
Like higher surrenders over the last couple of years.
Paul Mcdonough: That.
Paul Mcdonough: Assumption was taken in <unk> of last year and then additionally.
Paul Mcdonough: Additionally, in <unk> of this year, so you're seeing that in the year over year comparison.
The current period I think is.
Paul Mcdonough: Fairly reflective of.
Paul Mcdonough: Of run rate.
Okay got it thanks Paul.
Paul Mcdonough: Mhm.
Yeah.
Thank you.
Speaker Change: The Q&A session. So we'll bring it back over to Adam for any further remarks.
Adam Marvell: Thank you operator, and thank you all for participating in today's call. Please reach out to the Investor Relations team with any further questions have a great rest of your day.
Speaker Change: Thank you that concludes today's call. Thank you for your participation you may now disconnect your lines.