Operator: Good day, and thank you for standing by. Welcome to the CNO Financial Group Third Quarter 2026 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Auvil. Please go ahead.
Adam Auvil: Good morning, and thank you for joining us on CNO Financial Group's Third Quarter 2026 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. During this conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting our website at cnoinc.com. This morning's 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.
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. Throughout the presentation, we will be making performance comparisons, and unless otherwise specified, any comparisons made will refer to changes between the third quarter of 2026 and the third quarter of 2025. With that, I will turn the call over to Gary.
Gary Bhojwani: Thanks, Adam. Good morning, everyone, and thank you for joining us. CNO delivered an excellent quarter, demonstrating the strength of our diversified business model and our ability to generate consistent, repeatable results. Operating earnings per diluted share were up 47% in Q3 and up 43% year to date. We delivered our 17th consecutive quarter of sales growth and our 15th consecutive quarter of producing agent count growth. As a result, we are raising our full-year operating earnings per share guidance and either improving or maintaining most other 2026 guidance. We remain focused on growing sales and earnings, improving profitability, and reinvesting in the business. We were also pleased to execute our third reinsurance transaction with our Bermuda affiliate. Paul will provide further details later in his prepared remarks. Our business model continues to perform well. Sales results in the quarter were solid across both divisions.
Gary Bhojwani: Producing agent counts grew 4%. Our career field agents delivered across every major product line, while momentum remains strong in our asset accumulation products. Our exclusive middle market focus and our last-mile captive agent distribution model are the foundation of our durable competitive moat. This difficult-to-replicate model remains a key competitive advantage that drives consistent sales performance and profitable growth. Earnings benefited from strong insurance product margin and investment results, reflecting growth in the business and expansion of the portfolio book yield. Investment results were very strong in the quarter. New money rates have exceeded 6% for 15 consecutive quarters while maintaining a high-quality portfolio. We maintained a robust capital position while returning $77 million to shareholders. Book value per diluted share, excluding AOCI, was $41.29, up 8%. Turning to slide 5 and our growth scorecard.
Gary Bhojwani: Nearly all of our growth scorecard metrics were up for the quarter, with strong performance across production, distribution, and investments in capital. Turning to slide 6 and our consumer division. We delivered our 16th consecutive quarter of sustained sales growth with continued strength in health, annuities, and brokerage and advisory. Strong agent productivity and retention fueled our sales momentum. Producing agent count was up 4%, our 15th consecutive quarter of growth. Total life and health NAP was down year over year against a strong prior year comparison. NAP generated by our career field agents was up 13% in the quarter. This channel is core to our business and a key driver of our success, reflecting the strength of our local agent distribution model and the value of the relationships we build with customers. Total health NAP was up 7%, marking 17 consecutive quarters of growth.
Gary Bhojwani: Our Medicare business continued to perform well. Medicare supplement NAP increased 41% in the quarter and has grown more than 60% over the last 12 months. The results reflect the ongoing shift in consumer preferences from Medicare Advantage to Medicare supplement. The broader Medicare Advantage market continues to experience significant disruption during this year's Medicare annual enrollment period. More than 3 million Medicare Advantage members will need to choose new coverage for 2027, as many leading carriers continue to exit plans, pare back benefits, and/or reduce service areas. This environment reinforces the value of offering both Medicare supplement and Medicare Advantage through our local agents, who can help customers navigate these changes. Medicare remains a flagship door-opening product for CNO, supporting our ability to expand the total number of households we serve over time. Total Medicare policies sold, including Medicare Advantage, were up 20%.
Gary Bhojwani: Life NAP was down 9% for the quarter against a strong prior year comparison that included $13 million of NAP from a third-party pilot program that we discontinued earlier this year. Excluding that production, life NAP increased 20%, and direct-to-consumer NAP was up 29%. In our D2C channel, we continue to take a measured approach to managing our business. We invest where we see productive opportunities to optimize performance while selectively experimenting with third-party partners that complement our existing capabilities and allow us to test new opportunities with limited upfront investments. This strategy will create quarterly variability, but we remain comfortable with the business and its long-term performance. This quarter, non-television marketing channels, including web, digital, and third-party partners, generated 71% of all D2C life sales. We delivered strong results in our asset accumulation business during the quarter.
Gary Bhojwani: Annuity collected premiums in the quarter totaled $514 million, up 9%. Account values were up 7%. We also delivered our 14th consecutive quarter of brokerage and advisory growth. Client assets were up 15% to a new record, and total accounts were up 13%. Registered agent counts grew 4%. When combined with our annuity account values, our clients now entrust us with nearly $20 billion of their assets, up 9%. Next, slide seven and our worksite division performance. We delivered our 18th consecutive quarter of sustained sales growth. Life and health NAP was up 18% for the quarter. This represents our eighth consecutive quarter of double-digit sales growth. Producing agent count reached a record level, up 6%, marking the 17th consecutive quarter of growth. Productivity remained robust across all agent cohorts. NAP generated by our worksite career field agents was up 29% in the quarter.
Gary Bhojwani: Similar to our consumer division, our last-mile captive agent distribution model is an important driver of our worksite success. Sales highlights from the quarter included life, up 59%, and hospital indemnity and accident each up 16%. Our focus on small to mid-sized businesses and associations continues to drive meaningful sales growth. Employers are increasingly turning to employee-paid voluntary benefits to manage healthcare costs. Our products are designed to address these protection needs, and our career agents and partners are well-positioned to help employees address potential gaps in traditional medical coverage. NAP from new clients increased 168%. This growth is well-balanced between geographic expansion and further penetration into existing markets. Life sales continue to experience a significant uptick from these new client relationships. Across both divisions, our results highlight the value of a diversified product portfolio built around customer needs rather than individual products.
Gary Bhojwani: It's a unique strength that allows us to meet a broad range of needs, build lasting customer relationships, and deliver consistent performance over time. With that, I'll turn it over to Paul.
Paul McDonough: Thanks, Gary, and good morning, everyone. Before turning to my remarks on the quarter, I would like to briefly comment on our third reinsurance treaty with our Bermuda company, CNO Bermuda Re. Effective 1 October, we ceded approximately $270 million of US statutory graded benefit life reserves from Colonial Penn Life Insurance Company to our Bermuda company. With annuity health and now life reserves in the Bermuda company, we have greater diversification across the liabilities, creating opportunities to further optimize the assets and the capital. This will be an area of focus for us in 2027, looking to settle into more of a run rate cadence in 2028 and beyond. Our Bermuda operation has become an important component of how we efficiently deploy capital to support our mission of serving middle-income consumers.
Paul McDonough: We value our working relationship with the BMA, appreciate Bermuda's strong regulatory framework, and look forward to continuing to work closely with them as we grow the operation. Turning now to the financial highlights on slide 8. We had another strong quarter, reflecting continued favorable trends in insurance product margins and net investment income, along with disciplined expense and capital management. We delivered operating earnings per share of $1.90, up 47% from the prior year. Excluding significant items associated with the annual actuarial review, operating earnings per share of $1.42 was up 48% for the quarter, with year-to-date up 45%. Expenses continue to run favorably as they have all year, with the expense ratio at 18.5% on a trailing 12-month basis.
Paul McDonough: This represents a 50 basis point improvement over the prior year, reflecting greater operating leverage due to sustained growth in the business over the last couple of years. We continue to manage within or above our target capital and holdco liquidity levels while deploying $60 million of excess capital on share repurchases in the quarter. This contributed to a 4% reduction in weighted average diluted shares outstanding. On a trailing 12-month basis, operating return on equity was 15.4% and 14.1% excluding significant items, reflecting the continued improvement in the underlying profitability of the business. It is worth noting that this result includes approximately 50 basis points of benefit from outperformance in net investment income not allocated during the period. Our results again demonstrate the strength and quality of our earnings fundamentals and the consistent execution we have delivered over the last several years. Turning to slide 9.
Paul McDonough: Total insurance product margin, excluding significant items, increased 7%, continuing the favorable trend we have seen throughout the year and primarily reflecting the compounding benefit of sustained sales momentum. Within annuities, fixed indexed annuities benefited from growth in the block and a favorable change in the go-forward income pattern resulting from the annual actuarial review. Other annuities benefited from favorable reserve releases on a handful of closed block policies. Supplemental health benefited from growth in the block, offset by less favorable morbidity compared with the prior year. Medicare supplement results reflected higher morbidity, partially offset by continued growth in the block and the benefit of rate increases implemented over the course of the year. Long-term care benefited from growth in the block and lower morbidity. Within life, interest-sensitive life benefited from growth in the block and lower mortality. Traditional life results reflected higher non-deferrable advertising expense in the quarter.
Paul McDonough: Our annual actuarial review resulted in a $56.3 million favorable impact to operating income. The net benefit reflected broad-based favorable experience across the product portfolio, led by traditional life, fixed indexed annuities, supplemental health, and long-term care, partially offset by unfavorable claims trends in Medicare supplement. Consistent with prior years, we are calling out the impact from the annual review as a significant item and presenting insurance product margin on this slide, excluding that impact. The annual review also resulted in changes to our quarterly go-forward operating income patterns, including an estimated favorable impact of approximately $3.5 million in fixed indexed annuities and $1 million in Medicare supplement. Turning to slide 10. Net investment income remained a meaningful contributor to earnings growth, increasing 13% year over year and marking the 12th consecutive quarter of growth in total net investment income.
Paul McDonough: Investment income allocated to product lines increased 4%, primarily reflecting growth in average net insurance liabilities as we continue to grow the business. Net investment income not allocated to products increased 72%. The improvement was primarily driven by favorable alternative investment income, with positive contributions across the portfolio and no meaningful offsets. The result was approximately $12 million above our long-term yield estimate. While we are pleased with the performance, we would not expect this level of contribution to continue. We also benefited from higher funding and margins in our FHLB and FABN programs. The new money rate was 6.24% in the quarter, representing the 15th consecutive quarter above 6%. We continue to find opportunities to invest in high-quality names at attractive yields, and that has helped drive a 9 basis point increase in book yield year-over-year.
Paul McDonough: The continued benefit from attractive new money rates, combined with growth in the business and disciplined portfolio management, supports durable investment income generation over time. Overall, our investment results reflect a high-quality portfolio that continues to generate strong and consistent income while maintaining the flexibility and liquidity necessary to perform across market environments. Turning to slide 11. Our total capital position remains robust, with all of our capital and liquidity metrics within or above our target levels. Overall, our capital and liquidity position provides flexibility to support organic growth, invest in the business, manage risk, and continue returning capital to shareholders. Turning to our 2026 guidance on slide 12.
Paul McDonough: Based on our strong Q3 performance and outlook for Q4, we are raising our full-year operating earnings per share guidance to a range of between $5.05 to $5.15, representing a 9% increase at the midpoint from our prior guidance. This increase reflects an expense ratio of 18.6% to 18.8%, down from the prior range of 18.8% to 19.0%, an operating effective tax rate of approximately 20.5% compared to the prior estimate of 21.5%, and full-year fee income of approximately $25 million, primarily reflecting the continued shift from Medicare Advantage to Medicare supplement. We now expect full-year free cash flow of between $220 million and $240 million. There is no change to our target RBC ratio, minimum holdco liquidity, or leverage ranges.
Paul McDonough: Regarding return on equity, our 2026 operating return on equity is clearly on track to exceed the 12% target previously established for year-end 2027. We remain focused on improving operating return on equity, with the long-term objective of achieving top quartile performance in our peer group. We expect to establish new long-term targets in February of next year, in line with our normal planning cadence. With that, I will turn it back to Gary.
Gary Bhojwani: Thanks, Paul. Turning to slide 13, CNO delivered an excellent quarter. Our performance remains consistent and repeatable, underpinned by strong execution and our focus on the underserved middle-income market. We enter the Q4 with meaningful momentum, and we once again expect to end the year strong. Thank you to everyone who joined us in September for our CNO investor briefing on our worksite division and Medicare business. As a reminder, the webcast and materials from that session are available in the investor relations section of our website, cnoinc.com. Thank you for your support of and interest in CNO Financial Group. We will now open it up for questions. Operator?
Operator: As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Randy Binner with Texas Capital Securities. Your line is open.
Randy Binner: All right, great. Good morning. I had a question about the guide of free cash flow that is $220 million to $240 million. I think that is a tighter range than prior, but not as high on the high end. Two-part question. What changed there? Then, kind of confirming that that includes this third reinsurance deal with the Colonial Penn Life Reserves. If so, how that reinsurance transaction affects that guide?
Paul McDonough: Sure. Good morning, Randy. It's Paul. Our year-to-date free cash flow has been generally in line with our expectations, with some puts and takes. A little bit higher capital consumption from investments, primarily the growth in our FHLB program, offset a little bit by lower expenses and some favorable cash flow from our Bankers Life Agency. The full-year guidance, just for context, in the 3 years since we completed the first reinsurance treaty with our Bermuda affiliate, we've built up a fair amount of excess capital in Bermuda. Our original free cash flow guidance for 2026 assumed that we would somehow solve for a portion of that. We ultimately solved for it in the context of the third treaty with the Bermuda affiliate, which, as you know, closed on 1 October, therefore impacting not September year-to-date, but Q4 and full-year free cash flow guidance.
Paul McDonough: Recall that our free cash flow is, again, just for context and perspective, net of the investment we're making to modernize our technology, which includes a cash spend in 2026 of approximately $45 million through September, and an expected roughly $70 million for the full year. Then more broadly, free cash flow is ultimately the output of an intentional balance of funding near-term organic growth, which has been quite healthy in the form of new business, which creates first-year strain, optimizing the risk and return in our investment portfolio. As I mentioned, we decided to increase the size of our FHLB program. That generates earnings and an attractive return, but it consumes capital.
Paul McDonough: Investing for our long-term growth in things like the TechMod project that I just mentioned, while also returning some amount of excess capital to shareholders through our ordinary dividends and on the margin through share repurchases, which have also been quite healthy. We think that we've managed that balance reasonably well, while also improving the underlying profitability of the business, as reflected in the improving ROE. So that's it in terms of the year, again, just trying to offer some broader perspective, Randy.
Randy Binner: No, that's great. I guess the follow-up, is it possible to isolate the capital freed up from this $270 million reinsurance transfer? If it spans over different calendar years, which I imagine it does, is there kind of a way to think of in isolation? Because that was a very comprehensive answer and covered the whole gamut of what goes into capital management there, which is really helpful. But is there a way to say the $270 over time can free up X amount of capital versus what it would have been domestically?
Paul McDonough: Yeah. The initial treaty certainly does have an impact on capital, and we certainly quantify that internally. We've generally not quantified it in our external remarks, primarily because it's one component of lots of variables that drive free cash flow. We think it makes sense to talk about free cash flow in total. But certainly, it contributed to the free cash flow in the quarter and the full year. As we continue to operate in Bermuda with flow business, that helps us operate more efficiently. As I mentioned, we solved a portion of the excess cash flow that's built up, excess capital that's built up in Bermuda with this third treaty. There's more to do there.
Paul McDonough: Again, that'll be a focus for us in 2027, as in the wake of this third treaty, we look to optimize assets and capital in the context of a very nicely diversified set of liabilities. There's specific things that we are contemplating doing in 2027, all subject to regulatory approval. So, we'll be working with regulators, both in the US and Bermuda, to try to accomplish those things.
Randy Binner: Okay. The last one I have is just that the run rate cadence you mentioned in your prepared remarks would be kind of, I guess, executing on those special things you're looking to do.
Paul McDonough: Right.
Randy Binner: In 2027?
Paul McDonough: Right. I am just referring to, in the wake of the things that we are contemplating in 2027, assuming we accomplish those, we would expect to then settle into more of a run rate cadence in Bermuda, which has become, as I mentioned, an important component of how we operate, and we expect will remain so for the foreseeable future.
Randy Binner: Okay, great. I will leave it there. Appreciate it.
Paul McDonough: Thank you.
Operator: Thank you. Our next question comes from Joel Hurwitz with Dowling & Partners Securities. Your line is open.
Joel Hurwitz: Hey, good morning. A couple on expenses. Just in the quarter, it came in better than what you guys had guided to. I think earlier in the year, Paul, you had talked about it being timing, but it seems like it might be more than that, and maybe some actions that you've taken to keep expenses down. Could you just provide some more color on what you're doing on the expense side? Any further opportunities you see there? Is the 2026 level sort of a good baseline for moving forward?
Paul McDonough: Sure. Good morning, Joel. The favorable trend in the expense ratio is, at a high level, it is simply a reflection of expenses a little bit lower than we had anticipated at the beginning of the year, and revenues a little bit higher, reflecting the strong sales growth that we have generated, combining to deliver improvements in operating leverage, which translates to the ratio. There have not been any significant initiatives that we have undertaken in the year to drive expenses lower. Again, I would say that the lower amount of dollar expenses is relatively modest, kind of in the range of puts and takes that you can see across quarters. We have expected that it is a bit of timing and that it would come back. It has not through September as much as we thought back in March, April, and July, August.
Paul McDonough: We will see how it plays out over the next few months. I would say that the current expense ratio is sustainable. We think that there is even some room for improvement going forward as we continue to grow the business and capture better operating leverage. Obviously, it is a trade-off. Again, this is also a balance. How much do you invest in various things to grow in the near term and grow in the long term? Even with that, in the context of the continued growth opportunities that we see, we think there is opportunity to continue to improve that ratio through better leverage.
Joel Hurwitz: Got you. That is helpful. A couple from me on Bermuda. Have you guys taken any dividend out of that entity this year? Any color on expectations, what you are going to look to take out next year? Just on this third deal that you did, it was a bit smaller than prior deals. It is a subset of your overall life business. Just any color on the rationale to only do this block, and do you see other opportunities with other life blocks?
Paul McDonough: Yeah. With the closing of this third treaty, we've essentially completed the transactions that we had initially contemplated. We don't currently expect to see a material additional block of in-force reserves. Recall, however, that the existing treaties include 100% of FIA new business and 50% of supplemental health new business. The near-term focus is to optimize on the assets and the capital in the context of what now is a very well-diversified set of liabilities. There's some discrete things that we're looking to do there. In terms of your first question, have we taken dividends out? No. We haven't taken dividends out as such. As we did the second treaty and now the third treaty, we do capture efficiencies in the context of the initial settlement of those treaties. But haven't specifically taken out dividends.
Joel Hurwitz: Got it. Thank you.
Paul McDonough: You bet.
Operator: Thank you. Our next question comes from Ryan Krueger with KBW. Your line is open.
Ryan Krueger: Hey, thanks. Good morning. One follow-up on Bermuda first. I guess, why aren't you ceding more life business to Bermuda? I would have thought that would have also had efficiencies in addition to the FIA and supplemental health on an ongoing basis.
Paul McDonough: Why are we not ceding more
Ryan Krueger: traditional life insurance business
Paul McDonough: In force for the new business?
Ryan Krueger: I guess it seems like you have only ceded a small block of life business in force to Bermuda.
Paul McDonough: Got it.
Ryan Krueger: You do not have a flow reinsurance treaty related to life insurance products.
Paul McDonough: Right. As we looked at the opportunity, this is what we settled on as optimal. I do not know, Jeremy, if you want to offer any additional color there.
Jeremy Williams: Yeah, thanks. This is Jeremy Williams, the Chief Actuary. We did look at it, Ryan, quite a bit and determined that this was the right size block to eventually optimize the diversification. While the reserve doesn't seem like a large number, it is over 600,000 policies that are involved in the transaction. So it is still a very substantial block of our life insurance.
Ryan Krueger: Okay. Thank you. Then, you mentioned XN on a cash basis for 2026. Can you tell us what you'd expect that to be in 2027?
Paul McDonough: Sorry, Ryan, you were breaking up a little bit there. Can you repeat the question?
Ryan Krueger: Sorry about that. The $70 million of TechMod costs in 2026 on a cash basis, can you say what you expect that to be in 2027?
Paul McDonough: Yeah, in 2027, I think we are expecting a comparable amount.
Ryan Krueger: Okay. Thank you.
Operator: Thank you. Our next question comes from Suneet Kamath with Jefferies. Your line is open.
Suneet Kamath: Great. Thanks. Maybe just to follow up on Bermuda with one, and then I will have a separate question. Just on this decision to stop ceding in-force blocks, is that entirely your decision, or are you hearing something either from the agencies or anybody else, regulators, that are maybe saying, "We want to kind of slow this transfer of blocks from onshore to Bermuda"? Anything along those lines that you are hearing?
Paul McDonough: Yeah, it is entirely our decision. We are not being pressured by anyone to do more or less. It is just, as we have analyzed our liabilities, we have concluded that what we have ceded through these three treaties is the optimal mix. Jeremy, I do not know if you want to offer any additional color.
Suneet Kamath: Sorry, is he offering anything, or should I move on?
Paul McDonough: Looks like not. No.
Suneet Kamath: Not. Okay, we will move on then. I guess for Gary, I mean, it looks like your target market has been pretty resilient as we just look at sales and production and those kind of metrics, which is good to see. But I guess some of the economic pressures that we monitor have probably been lasting longer than maybe some of us thought earlier in the year, whether it is gas prices or short-term interest rates, inflation, that kind of thing. I am just trying to understand how those two things relate to one another. Are you seeing anything that would suggest maybe economic pressures could start to build and impact new production as we move into Q4, but also 2027? Any color there would be helpful. Thanks.
Gary Bhojwani: Yeah. Thanks, Suneet, for the question. I think it is a really good question. I can just share with you how we think about it. We are not seeing anything that tells us there is going to be a material reduction in the need or demand for our services. Now, I think the reality is that on the margin, meaning people that are really close to deciding whether or not they need some of our products, of course higher expenses has an influence. But, the things that are somewhat immune to those things, when someone turns 65 and they are retiring, it does not matter whether gas is at $4 a gallon or $6 a gallon. If they are retiring and they need to retire and their employer has moved on, they need to do that.
Gary Bhojwani: When we see folks looking at Medicare, generally those things are necessary regardless of what is happening in the macroeconomic picture. We expect the demand trends to remain relatively robust. Some other factors that simply are not changing regardless of what is happening in the economy, the employers and the government are not offering more coverage for these types of exposures. That is, if anything, going down, so that drives demand for us. The number of people turning 65 every day continues to grow. That drives demand. The absence of other credible alternatives, that is not changing. All of these other things, I think, frankly, are trumping whatever forces are being exerted by the economic pressures of gas prices and other things like that.
Gary Bhojwani: I do not want to say that we are immune, but I do want to say that we are far less subject to it than other things because many of these products, they need to be purchased by middle-income America, and there just are not alternatives.
Suneet Kamath: Got it. Can I just sneak one more in? Just on Medicare, it sounds like this whole Medicare Advantage issue is going to create incremental opportunities for Medicare supplement. Is there anything that you guys need to do to sort of either staff up or increase advertising? It seems like you have a great opportunity here. Just wondering, do you have in place what it takes to really take advantage of it? Thanks.
Gary Bhojwani: Well, I think if you look at our growth rates that we have been posting through the year, I think we are doing pretty well in terms of taking advantage of the opportunity. I feel like our agents are doing a fantastic job. I would make two observations on this. First of all, what you observed is absolutely correct. There is a secular shift happening from Medicare Advantage to Medicare supplement. That creates an obvious opportunity for us because we offer both, but in particular, we offer the Medicare supplement. I think the part that is less appreciated and frankly harder to measure, any time there is a dislocation in a market like this, when you see 3 million policies put into play because other carriers are making changes, that increases the need for what is our point of differentiation, meaning specifically advice.
Gary Bhojwani: Any time there is a dislocation, that causes more consumers to want to seek advice, and that plays to our strength. We have never tried to appeal to only the price shopping consumer. We have always had a strategy of focusing on those consumers that want advice, that want a fuller relationship, that want other products. Any dislocation like this plays into that. It has more people talking to us and looking at this. We believe this is a trend that will continue, and if by some chance it should revert, that is fine. We are happy to offer Medicare Advantage too.
Suneet Kamath: Got it. Okay, thanks.
Operator: Thank you. Our next question comes from Jack Matten with BMO. Your line is open.
Jack Matten: Hey, good morning. Just at the higher level, one on the ROE trend line. If we look at the roughly 14% normalized ROE today, is there anything that you would expect to either revert or normalize in the coming quarters? I think you might have said there was 50 basis points of better unallocated NII, if I heard correctly from the prepared remarks, but wondering if there's anything else. In context, of course, the longer term trend line is that the ROE is moving higher.
Paul McDonough: Hi, Jack. I'll answer the sort of the numbers question, and then Gary may want to share some perspective. Yes, if you just look at the NII, not allocated line item, and as we've done that sort of relative to our expectations, the outperformance has contributed about 50 basis points. So you might reasonably sort of adjust for that to get to a run rate. That's the only specific thing that I would point to. We've had really favorable experience in insurance product margin. Normally, there's sort of offsetting puts and takes. It feels like we've had more puts than takes for the last couple of years almost, with some exceptions in certain quarters. So maybe there's some reversion to the mean there at some point. Obviously, we addressed what we thought was sustainable run rate in our actuarial assumption update. But we wouldn't try to quantify that.
Paul McDonough: And then, generally, our expectation is to continue to improve ROE, but I'll stop there, and Gary, see if you want to provide some context.
Gary Bhojwani: Yeah. Thanks, Paul. So, I would say a couple things. First of all, I've been very pleased with the way the organization has responded to our desire to improve ROE. All of our leadership has really kind of circled around this and come up with ideas from the bottom up on how to do this. Everything I'm seeing indicates that that improvement will continue. Will it continue at exactly the same pace? I don't know. We will provide more guidance in February as to what our long-term expectations are. But I've been very pleased with the progress over the last three years since we launched this initiative. We've, as you know, exceeded our targets. We've hit the higher targets sooner. We expect to do that. And the next goal for us is really to become a consistent top quartile player. We have line of sight on that.
Gary Bhojwani: I believe we can achieve that. On any given quarter, I do not know, it might be up or down a little bit, but when I look at the long-term trends and what we are able to do, I really feel like the flywheel is picking up momentum, and I see no reason why we cannot get to that place of being a consistent top quartile ROE performer. That is the goal, and I expect us to get there.
Jack Matten: Got it. That is helpful. Thank you. Just one on the assumption review. Does any of the favorability you have on a GAAP basis, would you say any of that should translate at all to your statutory reserving or earnings timelines?
Paul McDonough: Jeremy, you want to take that?
Jeremy Williams: Yeah, I am sorry. You asked about the ongoing impacts of the unlocking? Sorry, it is breaking up a little bit for me.
Paul McDonough: He is asking how GAAP may translate to stat.
Jeremy Williams: How GAAP earnings translate to stat earnings specifically? Generally, statutory earnings, if there is new business and those sorts of things, it is certainly less on that side simply because of the strain that is involved on that front, and then eventually later on, it comes back. Generally, we see a little bit lower statutory earnings on most blocks these days simply because we are growing moving forward. I will just leave it at that.
Jack Matten: Okay. I was just asking more like specific to the assumption review. I know it is a GAAP assumption review, but I just wondered if there was any.
Jeremy Williams: I am sorry.
Jack Matten: Any flow-through or translation to what happens on a stat basis from that review.
Jeremy Williams: I am sorry. The phone was breaking up a little bit there. Not really any statutory impacts of unlocking to speak of. All of the impacts are GAAP on the LDTI side, and then statutory is largely book value and is locked in at issue, and there are no implications on that front.
Jack Matten: Thank you.
Operator: Thank you. Our next question comes from Wilma Burdis with Raymond James. Your line is open.
Wilma Burdis: Hey, good morning. I am going to try to squeeze kind of two into one for the first question here. Given the unfavorable morbidity that you had in med sup, could you just talk about what is driving the improved kind of high $20 million run rate for the segment? I guess along the same lines, if you could just give us a little bit more detail on what about the assumption review is driving the more favorable run rate in annuities? Thanks.
Paul McDonough: Jeremy, you want to take that one?
Jeremy Williams: Yeah, certainly. On the med sup, on the morbidity side, which I believe was your first question, certainly we have seen the much higher morbidity the last several periods, and therefore we reflected in the assumptions, and that did create unfavorable immediate unlocking impacts as part of that. Now, as part of those updates, we are reflecting the higher near-term claims as part of that. As we move forward now, the expectation in the new run rate is a larger reserve release to offset those claims. You end up with a relatively small million-dollar quarterly improvement moving forward. On the FIA side, the two major updates we did specifically were around surrenders, a little bit higher surrenders, as you might imagine, with some of the higher interest rate scenarios.
Jeremy Williams: We also see people utilizing the GLWB product less so than what we had expected in our prior assumptions. So we pushed the utilization out on that as well, and those two things together lowered our GLWB benefit expectations in the future and created immediate reserve release in our MRB. In addition to that, because we are now expecting less benefit in the future, it means lower accrual of that reserve moving forward as well. It then comes through as a favorable quarterly reserve impact on that front as well.
Wilma Burdis: Okay, thank you. Can you talk a little bit about some of the ABF purchases you guys took on in the quarter, and what types of products you are specifically focused on within ABF? Thanks.
Eric Johnson: Wilma, good morning. This is Eric Johnson. I am going to talk about that briefly. Let me give you kind of the high-level depiction. We roughly have $2 billion of private credit in total. That includes ABF, which is about half of that. Direct lending is about 20%. Portfolio finance is about 20%. Then there are some other bits and pieces that are not significant individually. If you look at it by rating, it is pretty much all investment grade. All the ABF is higher rated investment grade. For the most part, the end risk is some flavor of structured consumer credit that will have both excess spread and credit support behind it, and an equity contribution also. So it is pretty highly belt-and-braces structured and protected. It is a real good earner for us. We like it. It does not have binary risk.
Eric Johnson: It does not have any kind of direct interest rate risk that you see in traditional private credit. It tends to be fairly short duration as well, and the assets turn over very quickly, as well as the structure turns over very quickly. So, for some of our ALM needs versus annuities especially, and med sup, it fits real very well. Very happy with it, and open for business, more business in that area as the company continues to grow. We are long cash, short great ideas, so always looking for the next one.
Wilma Burdis: Okay, thank you.
Eric Johnson: You are welcome.
Operator: Thank you. I am showing no further questions at this time. I would now like to turn it back to Adam Auvil for closing remarks.
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: This concludes today's conference call. Thank you for participating. You may now disconnect.
