Q4 2024 CNO Financial Group Inc Earnings Call
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Following the presentation. We will also have other business leaders available for the question and answer period.
During this conference call, we will be referring to information contained in Yesterdays press release, you can obtain the release by visiting the media section of our website.
I N C dot com.
This presentation is also available in the investors section of our website and was filed in a form 8-K yesterday.
Let me remind you that any forward looking statements. We make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward looking statements.
Today's presentation contains a number of non-GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures.
Find a reconciliation of the GAAP non-GAAP measures to the corresponding GAAP measures in the appendix.
Throughout the presentation, we will be making performance comparisons and unless otherwise specified any comparisons made will be referring to changes between full year 2024, and full year 2023.
That I will turn the call over to Gary.
Okay.
Gary: Thanks, Adam Good morning, everyone and thank you for joining us.
Gary: <unk> delivered an exceptional quarter and full year financial performance showcasing our ability to grow the franchise, while also growing earnings and improving profitability at the same time.
Gary: 2024 was one of our best operating performances over the past several years highlighted by sales records in both the consumer and Worksite Division.
Gary: This year's performance demonstrated our proven commitment to leverage our business model to enable sustained profitable growth.
Gary: Executing on our strategic priorities.
Gary: Drive Roe expansion.
Gary: Our strong results were broad based across earnings production investment results and capital.
Gary: We delivered our 10th consecutive quarter of sales growth.
Gary: Our eighth consecutive quarter, and producing agent counts and our most productive year ever for the bankers life Field force.
Gary: For the full year total new annualized premium was up 7% across the enterprise.
Gary: Production Records were set in both divisions and in multiple product lines, which demonstrates the strength of our model to serve the varied needs of our middle income consumers.
Gary: I'll cover these results in more detail in each division's comments.
Gary: Our sustained sales momentum continued to translate into earnings growth.
Gary: Operating earnings per diluted share was $3 97, an increase of 28%.
Gary: Excluding significant items the increase was 40%.
Gary: Earnings results were further supported by strong underwriting margins favorable net investment income and expense discipline.
Gary: New money rates have exceeded 6% for eighth consecutive quarters now.
Gary: Paul will go into greater detail on our financial performance.
Speaker Change: Capital and liquidity, we're well above target levels, while we returned $349 million to shareholders. This year, a 50% increase over 2023.
Speaker Change: And for the 12th year in a row, we raised our quarterly common stock dividend.
Speaker Change: Book value per diluted share, excluding <unk> was $37 19 O.
Speaker Change: 10%.
Speaker Change: Additional highlights of our full year performance include growth in nearly all product categories.
Speaker Change: Continued strong capital position and free cash flow generation and an all time high share price.
Speaker Change: Turning to slide five and our growth scorecard.
Speaker Change: All but one of our growth scorecard metrics were up for the quarter and for the full year.
Speaker Change: As a reminder, our growth scorecard focuses on three key drivers of our performance production distribution and investments and capital.
Speaker Change: I'll discuss each division in the next two slides Paul will cover investments in capital during his remarks.
Paul: Beginning with the consumer division on slide six.
Paul: Our consumer division delivered an outstanding year capped off by our ninth consecutive quarter of sales growth.
Paul: We executed well and delivered record sales across multiple product categories.
Paul: Consumer Division total nap was up 5% for the full year led by 10% sales growth in field agent Nap.
Paul: Health Nap was up 18% for the year on the continued strength of our new and enhanced products.
Paul: Medicare supplement nap was up 26% for the year and Medicare advantage policies sold were up 14%.
Paul: Our field delivered another strong Medicare annual enrollment period.
Paul: We submitted a record number of policies in the quarter up 39%.
Paul: And they certified agents were up 8% and we added seven new MAA carriers, bringing our total planned sponsors to 'twenty one.
Paul: As a reminder, Medicare advantage sales are not reflected in that.
Paul: Persistency in both med Sup and MAA has consistently improved over the last few years due in large part to the lasting relationships that are exclusive agents build with our clients.
Medicare products serve as a meaningful introduction point for customers to meet local agents, who can help address additional retirement planning needs.
Paul: Long term care nap was up 35% for the year.
We continue to see a growing need for this product within our target market.
Paul: As a reminder, our LTC products are designed for the middle market consumer 99% of the policy sold had benefit periods of two years or less and more than 90% of that benefit periods of one year or less.
Paul: These plans cover essential cost for one to two years and offer a balanced affordable approach to funding care.
Paul: Life production was down for the year driven by direct to consumer television advertising.
Paul: In line with previous election years, when lease costs were high we remain disciplined and opportunistic in our approach to managing our D to C marketing spend.
Paul: Annuity collected premiums were up 13% for the year capping off two consecutive quarters of record sales.
Paul: Long term relationships, our exclusive agents established with their clients also adds stability to our annuity block.
Paul: The fourth quarter represented our seventh consecutive quarter of brokerage and advisory growth.
Paul: For the full year client assets in brokerage and advisory were up 28% to a record $4 $1 billion and new accounts were up 13%.
Paul: When combined with our annuity account values, our clients now entrust us with more than $16 billion of their assets up 11% from 2023.
Paul: The strength of our agent distribution fueled ourselves some momentum in 2024.
Paul: Producing agent count was up 8% for the year with meaningful gains in recruiting productivity and retention.
Paul: The fourth quarter of 2024 marked our eighth consecutive quarter of producing agent growth for the consumer Division.
Paul: Technology investments continued to enable sales growth and operational efficiency in the division highlights included.
Paul: And digital channels generated.
Paul: 30% of our full year direct to consumer nap.
Paul: My health policy Dot com or Medicare health insurance technology platform processed almost 90% of all EMEA policies, we sold during the AEP.
Paul: An accelerated underwriting on a portion of our simplified life products delivered a nearly 80% decision instant decision rate on submitted policies.
Paul: The consumer division delivered an outstanding year and I'm very pleased with the results.
Paul: Our unique capability to marry a virtual connection with our established in person agent Force, who complete the critical last mile a sales and service delivery remained an attractive and valuable differentiator.
Paul: We expect our differentiated offerings to continue to generate sustained sales and agent force growth in 2025.
Paul: Next slide seven and the Worksite Division performance.
Our Worksite Division finished the year very strong with record full year insurance sales up 16% and.
Paul: And record fourth quarter insurance sales up 23%.
Paul: This represents our 11th consecutive quarter of insurance growth.
Paul: New products and strategic growth initiatives contributed significantly to our strong worksite nap performance I'll share yearend results on three programs in particular.
Paul: First new insurance products generated double digit sales growth in 2024.
Paul: Critical illness was up 24% accident was up 13% and hospital indemnity was up 20%.
Paul: Second our geographic expansion initiatives contributed 35% of the total worksite nap growth for the year and 38% of nap growth in the quarter.
Paul: As a reminder, this initiative targets areas, where we've identified strategic opportunities to grow our market share and footprint. This is the fifth consecutive quarter of growth generated by this program.
Paul: Lastly, Knapp from New group clients was up 78%.
Paul: This initiative helped agents cultivate and acquire new employer groups for insurance sales.
Paul: We remain bullish on all three programs and expect the momentum to continue into 2025.
Paul: <unk> sales were up 37% for the year and up 12% for the quarter off of a small base.
As a reminder, this metric reflects the annual contract value benefits services sold and is a leading indicator of fee revenue growth.
Paul: Producing agent count was up 8% for the year capping off 10 consecutive quarters of growth.
Paul: Recruiting was up 14% for the year and retention remains strong.
Paul: As I mentioned previously Onboarding, new agents, while simultaneously maintaining agent productivity is not easy.
Paul: Our results highlight both the caliber of our Worksite field force and the career opportunity we offer.
Paul: I am pleased with Worksite steady growth record sales and recruiting momentum over the past year.
Paul: The division's solid performance illustrates the value that employers recognize in our integrated insurance and benefit solutions.
Paul: Opportunities still exist to maximize the fee business and drive cross sales.
Paul: We remain confident in our strategic plan for Worksite and our ability to execute on it.
Paul: 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: We certainly finished the year strong with operating earnings per share excluding significant items of 41% in the quarter and 40% for the year.
Paul: The operating return on equity ex significant items improved by 280 basis points.
Paul: The results reflect growth in the business higher interest rates and investment returns and strong insurance product margins, coupled with disciplined expense and capital management.
Paul: Admittedly the results also reflect a year, mostly puts in very few takes in our insurance product margin on.
Paul: On a run rate basis, we estimate the full year operating return on equity at about 10%.
Paul: Our expenses were in line with expectations with the incentive comp accrual pushing the expense ratio to the high end of our guided range.
Paul: We deployed $282 million of excess capital on share repurchases in the year.
Paul: Celebrating our capital return in the wake of the debt issuance back in May.
Paul: This represents a 70% increase from the prior year and contributed to a 6% reduction in weighted average diluted shares outstanding.
Paul: It also reflects the strong underlying free cash flow dynamics of the business.
Paul: Turning to slide nine.
Paul: In general sales growth together with higher interest rates are translating to growth in insurance product margin across all three of our product categories.
Paul: Drilling down a bit or supplemental health and long term care margins, both continued to benefit from favorable morbidity in the quarter.
Paul: As they have for much of the year.
Paul: Reflecting claims trends that are within our expected range of outcomes, but favorable to what we would consider a sustainable run rate.
Paul: In addition.
Paul: For a third consecutive quarter, though to a lesser degree.
Paul: Other annuity margins benefited from reserve releases due to higher mortality on larger closed block policies. We do not expect this favorable impact to continue.
Paul: Our estimated run rate operating return on equity of about 10% in 2024 adjust for the insurance product margin outperformance in 2024 in these three product lines.
Paul: Turning to slide 10.
Paul: The new money rate was 672% setting a high watermark for the year and the eighth consecutive quarter above 6%.
Paul: The average yield on allocated and investments was $4 eight 7%.
Paul: Up 19 basis points year over year.
Paul: The increase in yield along with growth in the business drove a 7% increase in net investment income allocated to products for the quarter.
Paul: Investment income not allocated to products was up 70%.
Paul: Primarily due to a $28 1 million dividend from our investment in our Rialto capital.
Paul: Alternative investment results met yield expectations in the quarter.
Paul: We completed a $450 million three year F. A b N offering in the quarter.
Paul: The third F N b at offering this year, bringing total 2020 for issuance to one $6 billion.
Paul: Total investment income was up 16% for the quarter and 9% for the year.
Paul: Our new investments in the quarter it comprised approximately $820 million of assets with an average rating of single a and an average duration of just under six five years.
Paul: Our new investments are summarized in more detail on slides 22, and 23 of the presentation.
Paul: Turning to slide 11, the market value of invested assets grew 12% from the prior year.
Paul: With roughly half of the growth. The result of recent F. A b N issuances and the other half due to growth in the business.
Paul: Approximately 96% 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: Turning to slide 12.
Paul: Our capital position remained strong at quarter end, our consolidated risk based capital ratio was 383%.
Paul: Available Holdco liquidity was $372 million well above our target minimum reflecting the debt issuance completed in may as well as continued strong free cash flow to the holdco.
Paul: We generated $284 million in excess cash flow to the holding company for the year exceeding the high end of the guidance range provided on our third quarter call.
Paul: And well above the original guidance provided last February this.
Paul: This result demonstrates the enterprises significant ability to generate free cash flow.
Paul: Leverage at quarter end was 32, 1% as reported.
Paul: Adjusting for the senior notes that will be paid off at maturity in may of this year leverage at quarter end was 25, 6%.
Paul: Turning to slide 13, and our 2025 guidance.
Paul: As I mentioned, we estimate our run rate operating return on equity at about 10% in 2024.
Paul: From that baseline, we expect to improve run rate operating Roe.
Paul: 150 basis points over the next three years, including 50 basis points in 2025.
Paul: In other words, we expect to generate an operating return on equity of about 10, 5% in 2025 and about 11, 5% by 2027.
Paul: We expect 2025 operating earnings per share between $3 70 and $3.90.
Paul: We expect the 2025 expense ratio to be between 19.0, and 19, 4% with the midpoint in line with 2024.
Paul: Inclusive of some pressure from expenses related to exploring a second reinsurance treaty with our Bermuda company.
Paul: And by an initiative that I'll touch on further in a moment.
Paul: We expect the seasonality of the expense ratio to follow our quarterly trend similar to the last two years starting at the high end in the first quarter and then grading down through the year.
Paul: We expect improved results in net investment income not allocated drill.
Paul: Driven by our standard assumption that our alternative investments will generate a return in line with our long term run rate assumption of between 9% and 10%.
Paul: And we expect a modest decrease in fee income notwithstanding continued growth in Medicare advantage sales driven by a sales mix shift to smaller Medicare advantage providers, which puts pressure on fee income in the near term.
Paul: In addition, we are making investments in the service side of our Worksite business, which is also putting pressure on fee income in the near term.
Paul: We again expect roughly a quarter of the full year fee income in the first quarter and the balance in the fourth quarter with the second and third quarters roughly breakeven.
Paul: We expect 2025 excess cash flow to the holding company to be between 200 and $250 million.
Paul: Consistent with prior years, we expect the 2025 effective tax rate to be 23%.
Paul: We will continue to manage to a consolidated risk based capital ratio of 375%.
Paul: U S based insurance companies minimum holdco liquidity of $150 million.
Paul: And target leverage between 25 and 28%.
Paul: In addition to these high level metrics for 2025, and our projected return on equity improvement over the next three years, we want to preview an initiative that will be starting in <unk> of this year.
Paul: It is a three year project to modernize certain elements of our technology, enabling continued growth of the business over the long term.
Paul: It will result in a more stable and agile technology stack, leveraging AI and cloud, which would position us to more effectively leverage new technologies in order to speed up product development enhancing the agent experience and improve customer service.
Paul: The initiative is expected to cost approximately $170 million over three years, including approximately $60 million in 2025.
Paul: That $60 million in 'twenty five is reflected in our excess cash flow to the holdco guidance for 2025.
Paul: In terms of the accounting for this initiative, a small portion will be capitalized and amortized through operating income over time.
Paul: A small portion will be expensed as incurred through operating income.
Paul: Mentioned this is putting some pressure on our expense ratio in 2025.
Paul: The majority of the cost will be expensed as incurred but excluded from operating income and included as a component of nonoperating income.
Paul: The expenses excluded from operating income our discrete expenses onetime in nature related to the three year initiative largely paid to third parties as well as some asset write offs. They are clearly above run rate expenses during the project period and do not continue beyond the project period.
Paul: In closing I would emphasize that all of the 2025 guidance metrics.
Paul: And the three year return on equity improvement metrics are inclusive of this technology investment.
Paul: Other words, we expect to improve sales and earnings and expand return on equity over the next three years, while also investing for the long term benefit of the company.
Paul: And with that Gary I'll turn it back to you.
Thanks, Paul turning to slide 14.
Paul: As you have heard us discuss over the last several earnings calls expanding ROE is the next step in the strategic evolution of Seattle.
Paul: Before 2019, our fixed and focused strategy was aimed at strengthening and fortifying our balance sheet.
Paul: That phase culminated in our successful long term care reinsurance transaction and an upgrade to investment grade ratings.
Paul: Around 2020.
Paul: We turned our attention to restarting our sales engine.
Paul: We completed the strategic transformation of our business units to realign our operating model with changing consumer behaviors.
Paul: Consumer and Worksite divisions were the result of these efforts.
Paul: With 10 consecutive quarters of growth our sales momentum is strong.
Paul: These building blocks create a strong financial foundation C&I enjoys today.
Paul: From 2024 onward, we had been positioning <unk> for growth and optimizing the results.
Paul: As Paul shared in our 2025 guidance, we expect to generate 150 basis points of operating ROE improvements over the next three years.
Paul: It's critical to note that we expect to deliver this improvement while continuing our sales momentum and investing back into the business to enable long term growth.
Paul: We're using multiple levers from across the enterprise to deliver these results.
Paul: This slide highlights a representative sample of initiatives already in flight.
Paul: I won't address them, all but we will share thoughts on again.
Paul: Number one brokerage and advisory.
Paul: Generation retirement income is a critical need for our market. We expect the demand for these services to accelerate.
Paul: Two new products.
Paul: <unk> have embraced our new and refreshed product offerings significant additional opportunities remain to leverage our product portfolio.
Paul: Number three <unk>.
Paul: Bermuda REIT.
Paul: We are pleased with our initial treaty and remain committed to working with regulators on future opportunities to do additional business in Bermuda.
Paul: Number four modernizing our technology as Paul referenced we're investing in our technology to enable growth now and in the future upgrading systems will bring enhanced stability and efficiency to our Tech Foundation.
Paul: We're positioning <unk> for long term growth and none of this would be possible without the outstanding team, we haven't seen how our team executes and the capabilities of our leadership and associates drive our success.
Paul: We also recognize that our ROE target for the next three years as a mile marker on the path and not our final destination.
Paul: As our track record has demonstrated we fully intend to keep leveling up as we advance <unk> growth story.
Paul: Turning to slide 15.
Paul: C N O had exceptional full year financial performance in 2024.
Paul: We demonstrated our ability to grow the franchise, while also growing earnings and improving profitability.
Paul: We once again enter a new year with considerable sales momentum and a growing agent force.
Paul: Our capital position liquidity and cash flow generation remains strong.
Paul: <unk> is well positioned to continue profitable growth and drive ROE expansion in 2025 and beyond.
Paul: We thank you for your support of and interest in <unk> Financial Group, We will now open it up for questions.
Paul: Operator.
Paul: Thank you well not so if the lines for Q&A, if you'd like to ask a question. Please press star flip I wanted to go telephone keypad now if you got ceramic yourself Atlanta questioning will be stuff slipped by too fast.
Speaker Change: First question comes from John Bonn ratio of Piper Sandler John Your line is now open.
Paul: Okay.
Paul: Good morning, Thank you for the opportunity how should we be thinking about buybacks assumed in guidance you offered a extra free cash flow.
Paul: Guidance as well some further color on that would be helpful. Thanks.
Paul: Good morning, John It's Paul.
Paul: You should you can you should consider the free cash flow guidance together with the excess cash position relative to our minimum holdco liquidity at the end of 'twenty four I think that gives you a sense for share repurchase capacity.
Paul: In 2024 absent more compelling uses of that capital.
Paul: I think I think I can leave it there.
Speaker Change: Thank you my follow up question distributions has been good geographic expansion it looks like it contributed 38% of nap growth and <unk>, 35% of the full year, how much additional geographic expansion opportunities there. Thank you.
Paul: Yeah.
Paul: Okay.
Paul: The short answer John is a lot.
Paul: We think we're at the front end of this we're very pleased with what our results have been so far.
Paul: And we're always just trying to balance this against expense discipline.
Paul: So we see tremendous potential, particularly in our Worksite business, our consumer division has a very well developed national footprint.
Paul: Worksite division is considerably smaller.
Paul: About the dedicated agents, we have our Worksite division literally has 110 the number of agents. So that gives you a sense now do I believe that the Worksite division has the potential to have all of the same footprint no I think that's neither one nor necessary, but I think theres a lot more upside left I'm very encouraged by what the geographic expansion has yielded.
Paul: And I think theres lots more upside.
Paul: Thank you.
Paul: Thank you very much.
Paul: Our next question comes from Ryan Krueger of Keefe.
Paul:
Paul: Ryan Your line is open.
Paul: Good morning.
Paul: First just wanted to.
Speaker Change: To ask Paul I think you mentioned, you're evaluating additional Bermuda opportunities can you give us any more sense of what you're considering there.
Speaker Change: Sure. Good morning, Ryan So I don't want to get ahead of the process.
Speaker Change: Don't provide any specifics, but yes, we are.
Speaker Change: Very closely evaluating what the opportunities are prioritizing.
Speaker Change: Those opportunities are.
Speaker Change: Our focus over the last year or so has been to just establish the team in Bermuda.
Speaker Change: Develop Uh huh.
Speaker Change: Relationships on island, including with our with the Bermuda Monetary authority.
Speaker Change: We're in a good place there we've got an established team.
Speaker Change: They are hitting their stride.
Speaker Change: So now our primary focus is to look.
Speaker Change: We'll look for opportunities to.
Speaker Change: Leverage that platform beyond the initial treating.
Speaker Change: Thanks and.
Speaker Change: In fixed annuities, particularly fixed indexed annuities you saw surrender rates moderate.
Speaker Change: In the fourth quarter back towards historical levels and also pretty strong sales activity can you give us some color around what you're seeing there and if you think.
Speaker Change: This will kind of continue into 2025.
Speaker Change: Yeah, Ryan I'll comment on the surrenders and then and then Gary can kind of done more broadly on sales activity. So the surrenders.
Speaker Change: <unk> are down a little bit from sort of the.
High watermark.
Speaker Change: Last year, I wouldn't say they've gotten back to where they were a couple of years ago, but they've come down a little bit it seemed to have stabilized at a at the current level.
Speaker Change: Gary.
Gary: I'll turn it over to you on the sales.
Speaker Change: Going forward for them.
Speaker Change: Yeah, Thanks, Paul and Brian Thanks for the question.
Speaker Change: We feel very bullish about the opportunity we have with annuity sales, we think that the demographics are with us meaning the number of people that are retiring or turning 65. Every day continues to be growing we're hitting near the peak of that so we expect that to continue there are fewer and fewer alternatives.
Offered meaning pensions and other things that offer lifetime income.
Speaker Change: Virtually nonexistent anymore.
So we think when you take those things together, particularly for Middle income America, specifically in the population we serve as well.
Speaker Change: Think that theres going to be.
Speaker Change: New demand now we've had a really good run in in my experience the real world. It doesn't move in a straight line. The comps are getting tougher for us. So those will certainly present headwinds, but I think if you look at a longer term trend, let's call. It three to five years. I think you are going to continue to see very robust growth with a given quarter here theyre not match.
Speaker Change: Up to a previous year's quarter I'm sure that's going to happen just because the comps are getting tougher but in the aggregate demand will be strong our clients need these products our agents.
Speaker Change: Using them because there is such a useful tool. So we see a really bright future for annuities for Middle income America.
Speaker Change: Thank you.
Speaker Change: Thank you very much as a reminder, if you would like to raise a question. Please press star followed by one telephone keypad now.
Will: As yourself that line of questioning will be stuff flip on to our next question comes from will <unk> of Raymond James Your line is now.
Will: Good morning could you give us a bit of a breakdown on the tech investments.
Will: Is it kind of platforms consultants implementing systems other items and then just can you talk about a few of the use cases, where they're taking AI investments. Thank you.
Rob: Sure Good morning, Rob.
Speaker Change: I'll start off and then I'm sure Gary want to provide some color right.
Gary: <unk> focus of this disinvestment. This initiative is converting various legacy policy admin platforms and select foundational systems from mainframe systems to cloud based SaaS solutions.
Speaker Change: And.
Speaker Change: With the new platform.
Speaker Change: We'll be able to evolve with the quickly changing gen. Eight gen AI landscape and in general it will allow us to adopt and leverage new technologies.
Speaker Change: More fully in the future.
Speaker Change: Yeah.
Speaker Change: Yeah, maybe I can just supplement that I think the way to really think about this is exactly what Paul touched on.
Speaker Change: Getting away from historical.
Speaker Change: And in some cases.
Speaker Change: These were things that had been built at home so to speak getting away from these mainframe platforms, we really need to position ourselves to where we can offer consumers and agents the new kinds of technology and flexibility that they expect and we just can't keep building them on these old systems, we have to have newer systems that are.
Speaker Change: Cloud base that our software as a service space and so on to give us that flexibility. So really the way. It's been explained to me is the non tech Guy. This is US building a new foundation that we can put other new features on top of we can't put keep putting these new features these new bells and whistles on top of an old foundation that just doesn't work.
Speaker Change: Anymore as a side note I would just add that as a 30 year insurance executive I think virtually all insurers have some version of this challenge that they have dealt with or need to deal with this is not a unique thing to see you know technology.
Speaker Change: He has changed so much in recent years and its just imperative that we get on that New foundation. So that we can add these new features and benefits.
Speaker Change: Well does that does that clarify what you were looking for.
Speaker Change: Yeah that that did that definitely helps.
Speaker Change: And then it's great to see the other thing you guys on the ROE improvement.
Speaker Change: I realize there's a lot of pizza smaller moving pieces and you talked about many of them.
Speaker Change: Maybe just help us think through what gives you the confidence or there are some.
Speaker Change: Some of the small pieces that you can identify them and it certainly sounds like this platform investment will probably help streamline things as well. So maybe just if you could talk about all that.
Speaker Change: Yeah, well it maybe maybe start with kind of.
Speaker Change: Oh I'm sorry go ahead, Paul did you want to start.
Paul: No. Please go ahead.
Speaker Change: Okay.
Speaker Change: I think I'm, just going to start maybe with some general comments about how we think about guidance kind of a little bit maybe more philosophical and then I'll, let paul fill into some specifics I.
Speaker Change: That one of the things.
Speaker Change: That we are particularly mindful of within C&I was we're really careful about the commitments, we make particularly when we make them in a public setting and and I know that sounds obvious, but if you look over the last five years.
Speaker Change: What you'll see is we've been very cautious about when we provided guidance and the types of things we've provided guidance about so we've been very disciplined about making sure.
Speaker Change: That we were committing to things that we really had a strong belief in and I think if you take a look at our track record I think we've got a pretty good track record of when we say we will do it actually delivering it but we're really careful about that I think on the ROE.
Speaker Change: In particular, because that's the biggest thing that we've gotten feedback from our shareholders about was providing more visibility into that this is something we've been working on for quite some time as you know our ROE is one of our incentive comp metrics. So we've always had attention on it but really being able to get to a point, where we've got good line of sight and we feel like we've got the ability to.
Speaker Change: Execute against it we feel like this is the natural point in our evolution in other words, I'm, saying all of that to make the point that it was very intentional that we didnt provide guidance. Prior we feel like we're in a place now where we've got good line of sight good credibility the right people and so on.
Speaker Change: So we feel good about our ability to do those things there are a number of things. If you take a look at that slide that I spoke to in terms of levers, we're pulling to get there whether it's re exploring our reinsurance whether it's thinking about how we handle our capital whether it's the expense discipline. There are a number of different things. We're looking at to make sure that we can perform at.
Speaker Change: Against that commitment or that guidance, Paul do you want to add any more specifics to that.
Paul: I guess at a couple of comments. So we will know we're not going to give specific guidance beyond 'twenty five in terms of what drives that additional improvement.
Paul: But I would emphasize that.
Paul: The sales growth over the last couple of years and the sales growth that we expect will continue over the next.
Paul: No foreseeable future.
Paul: Together with sort of higher for longer interest rates, let's imagine the 10 year settles in here at about four and a half and.
Paul: And stays there maybe goes higher who knows.
Paul: I don't imagine goes quite slower.
Paul: That's a compounding tailwind.
Paul: So that's part of it there are things that we're doing in 'twenty five that.
Paul: Don't really begin to show up until 26 in terms of driving ROE expansion. There are additional things that we have line of sight on that we'll do in 'twenty six that'll help a little bit in 'twenty, six and more than 27.
Paul:
Speaker Change: So it's it's all the things that are referenced are alluded to in the last slide of our deck I think all the things that Gary just talked about.
Paul: In aggregate.
Paul: Give us a lot of confidence in hitting.
Paul: This is a three year road.
Paul: ROE metric that we put out.
Paul: Okay. Thank you.
Paul: Thank you very much.
Speaker Change: Our next question comes from some E Commerce of Jefferies. Your line is now open.
Speaker Change: Great. Thanks.
Speaker Change: So first on the on the Tech investments.
Speaker Change: We got the 170 million over three years, but I don't recall I don't know if you've quantified what the savings element.
Speaker Change: Associated with that would be in sort of over what timeframe and then Paul it sounds like a lot of this will be excluded from operating results. But then I thought you had said, it's all embedded in the ROE. So I just wanted to understand.
Speaker Change: What's going on there.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Good morning, Sue need so.
Speaker Change: First of all this isn't really a cost play we don't we don't expect this to translate to significant cost savings, but it's also not.
Speaker Change: The run rate of of of our technology will be no better or worse for this for this investment.
Speaker Change: But it creates a more stable platform that allows us to leverage current technology as Gary was talking about.
Speaker Change: So that's really the play it's not a cost play.
Speaker Change: It's a it's an investment that enables long term growth of the business right. We're at a point in our evolution as a company, where we need to make these kinds of investments and as Gary said by the way many of our peers will will also.
Speaker Change: As an industry, we've got some sort of aging.
Speaker Change: Systems that are mainframe based and don't really allow you to leverage some of the newer technology, we're making this investment to enable long term growth.
Speaker Change: So that's that's really had and then in terms of.
Speaker Change: So it will flow through yes, the majority of it we will characterize as nonoperating will give it a lot of visibility.
Speaker Change: As a component of nonoperating.
Speaker Change: And all of the guidance in 'twenty five is inclusive of the impact on operating income the impact on <unk>.
Speaker Change: On equity the impact on free cash flow to the Holdco so that.
Speaker Change: 225 at the midpoint free cash.
Speaker Change: Hello to the Holdco is after investing $60 million in tech Mod in 2025.
Speaker Change: Got it Okay, and then just on Bermuda.
Speaker Change: Just at a high level. It does seem like a lot of life insurance companies are using this.
Speaker Change: Opportunity and I guess I worried when I see so many companies doing it at some point.
Speaker Change: Bermuda kind of raise the tan and say kind of enough is enough or just getting these treaties approved just takes longer just curious if that's a concern that you have or how we should think about it. Thanks.
Speaker Change: Yeah.
Speaker Change: I don't I don't foresee that being an issue in Bermuda and then it's.
Speaker Change: It's the market that operates.
Speaker Change: Very effectively very efficiently.
Speaker Change: And.
Speaker Change: <unk> regime that that works well also that I think has lots of capacity for growth. So I don't see that as an issue I think that's why.
Speaker Change: So many companies have.
<unk> moved business, there and I think I expect that trend will continue.
Speaker Change: Okay. Thanks.
Speaker Change: Mhm.
Speaker Change: Thank you very much.
Speaker Change: As a reminder, if you would like to raise a question. Please press star followed by one on that sort of thing keep has now and so it makes us definitely line of questioning is stuff slipped by two our next question comes from Jack Morton for FEMA.
Speaker Change: Chuck Your line is not open.
Speaker Change: Okay.
Speaker Change: Hi, good morning.
Speaker Change: Just a question on the excess cash flow outlook and I understand you were coming off a very strong 2024 baseline.
Speaker Change: If I think about the $200 million to $250 million range could.
Speaker Change: Could you just discuss some of the drivers there and I don't know you mentioned that some of the it investments are floating through.
Speaker Change: Any other moving pieces that might cause you to reach the higher end versus the lower end of that range.
Speaker Change: Sure.
Jack: Good morning, Jack.
Jack: It's just a reflection of of our of the dynamics of the business. There are obviously lots of moving pieces that.
Jack: Determine.
Jack: Our estimate of a free cash flow.
Jack: I think it reflects a balance of our commitment to organic growth.
Jack: At.
Jack: Healthy slash reasonable pace.
Jack: Investments that were making in the business like like Tech Mod.
Jack: And you.
Jack: You put all that together in this 200 to $2 50 is what you get.
Jack: In terms of what what causes you to be at the low end or the high end.
Jack: It's primarily the pace of organic growth.
Jack: The economic climate.
Q tip into a recession that causes some credit migration down, which which which results in higher capital charges.
Jack: And then the third sort of primary element is the degree to which we take.
Jack: Take more or less risk inside of our investment portfolio.
Speaker Change: Got it that makes sense. Thank you and just a follow up on the I T initiative and I heard the commentary about it not being a pure kind of expense saving program. There is there is more to it but I guess given kind of the operating leverage you might expect to get over time is there maybe like a longer term expense ratio that we should think about realm.
Speaker Change: To the 19 to 19.4 for this year I mean should we expect the ratio to keep coming down over time, just any other color on the benefits of the program that you might expect.
Speaker Change: So in the long run.
Expenses broadly not just the <unk> initiative.
Speaker Change: I would expect our expense ratio to come down as we grow as we develop more operating leverage you would expect that that's a lever that that.
Speaker Change: That would help.
Speaker Change: And you'd see that move down.
Speaker Change: It's not moving down a 24 to midpoint of our guided 25.
Speaker Change: Largely because of you know on the margin some pressure on operating income in this operating expense ratio.
Speaker Change: <unk> had some pressure on the margin.
Speaker Change: You know from expenses related to exploring.
Speaker Change: Additional sessions.
Speaker Change: Sessions to the Bermuda.
Speaker Change: Company.
Speaker Change: That takes some time and money before you can actually get to something that youre proposing.
Speaker Change: To the Permian and monetary authority.
Speaker Change: So in.
Speaker Change: In my mind it reflects the balance that we're trying to get to between.
Speaker Change: Growing the business investing in the business, but also growing earnings and improving profitability.
Speaker Change: So I think probably maybe flat for a while in the context of that balance.
Speaker Change: But at some point certainly moving down.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you very much.
West Carmichael: Our next question comes from West Carmichael of Autonomous your line is not with them.
West Carmichael: Hey, Thanks, good morning.
Speaker Change: Long term care, Paul I think in your commentary on getting to the run rate Roe.
Speaker Change: Sent here, Okay, so you've been pretty favorable relative to run rate levels, yet margin of $133 million in 2020 for any help with how you're thinking about what core earnings power would be and I'm not really looking for a guide, but maybe in terms of how much uplift that I don't know.
Speaker Change: 10% would be helpful.
Speaker Change: Right so.
Speaker Change: The three adjustments that we're making are to annuities, which sorry, other annuities, which we really expect kind of one or $2 million per quarter in <unk>.
Speaker Change: Got a lot more than that and in in 2024. So that's the one adjustment and then the other is to margin in LTC and somehow so you can kind of do the math and the.
Speaker Change: The adjustments, we're making there to get to something around 10% in 2024.
Speaker Change: And what's happening there is.
Speaker Change: Our experience has been quite favorable really at the sort of.
Speaker Change: The high end of the range of expectations.
Speaker Change: And we don't expect that to always happen or continue forever. We expect some reversion to the mean in and that's what.
Speaker Change: That's where what we're assuming will happen in 2025.
Speaker Change: Part of the basis for the 25 guidance.
Speaker Change: Got it thanks, and Gary I think you mentioned in your prepared remarks, new and refreshed product offerings. What are you seeing in the near term what do you see consumer demand maybe attractive margins for seeing that from your perspective.
Gary: Yeah. Thanks for the question, we've had really good fortune in the products, we have refreshed and we've seen good demand on the annuity side, we launched some new features on the Worksite side, we lost launched a number of new products and we've seen good reception to all of those.
Gary: As we move forward here with our Tech Mod will continue to look at products, but to be honest for the next two or three years I don't envision us doing major product launches because we need to keep the organization focused on effectively executing against this technology modernization initiatives. So I would expect for the next two to three years any.
Gary: Product enhancements, we make to be more tweaks.
Gary: Then full on.
Gary: New launches.
Gary: I think there is opportunity to do that I think theres bandwidth within the organization to handle those types of modifications, but I don't see us doing major launches.
We're in the thick of this technology modernization initiatives.
Gary: Thank you.
Speaker Change: Thank you very much. We currently have no further questions I'd like to hand back to Adam over for any closing remarks.
Speaker Change: 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.
Speaker Change: Yes.
Speaker Change: We conclude today's call without thank everyone for joining you may now disconnect your lines.
Speaker Change: [music].