CNO Financial Group, Inc. (NYSE:CNO) Q1 2024 Earnings Call Transcript

CNO Financial Group, Inc. (NYSE:CNO) Q1 2024 Earnings Call Transcript April 30, 2024

CNO Financial Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the CNO Financial Group First Quarter 2024 Earnings Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to hand this conference call over to our host Adam Auvil, please.

Adam Auvil: Good morning, and thank you for joining us on CNO Financial Group’s first quarter 2024 earnings conference call. Today’s presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Paul McDonough, Chief Financial Officer. Following the presentation, we will also have other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday’s press release. You can obtain the release by visiting the Media section of 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. We expect to file our Form 10-Q and post it on our website on or before May 6.

Let me remind you that any forward-looking statements we make today are subject to a number of factors, which may cause actual results to be materially different than those contemplated by the forward-looking 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. You’ll 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 first quarter 2024 and first quarter 2023. And with that, I’ll turn the call over to Gary.

Gary Bhojwani: Thanks, Adam. Good morning, everyone, and thank you for joining us. CNO delivered another strong quarter of operating performance, building on our 2023 momentum and track record of sustainable growth. Our first quarter results were among the best operating metrics we’ve generated in the past several years with respect to consumer and worksite sales, our distribution force and new products. Our consumer and worksite businesses posted our seventh consecutive quarter of sales production growth and our fifth consecutive quarter in producing agent counts. Total new annualized premium was up 8%, benefiting from successful distribution force metrics in both divisions. Our dedicated teams delivered sales growth in nearly all product categories.

We posted solid and sustainable earnings with operating earnings per share of $0.52. Results benefited from favorable insurance product margin, reflecting growth in the business and continued expansion of the portfolio book yield, which continues to benefit from higher interest rates. The new money rate exceeded 6% for a fifth consecutive quarter. The only material item that offset our strong operating results in the quarter was $24.3 million of unfavorable mark-to-market pretax impacts on real estate partnerships with our alternative – within our alternative investments. Despite these impacts, total net investment income was up in the quarter. Capital and liquidity remain well above target levels after returning $57 million to shareholders.

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Q&A Session

Book value per diluted share, excluding AOCI, was $34.97, up 10%. The underlying fundamentals of our business are sound, as demonstrated by sales momentum in both consumer and work site, a growing distribution force, continued solid and sustainable earnings, our excellent capital position and no change to our full year guidance. Turning to Slide 5. This quarter, we introduced an expanded growth scorecard. This is our first significant change to this document since 2018. As we continue to enhance our focus on sustainable profitable growth, the refreshed scorecard focuses on the three key drivers of our performance: production, distribution and investments in capital. We are pleased that nearly all metrics are up in the quarter. I especially want to draw your attention to our consistent growth in book value per share.

I’ll discuss each division in the next two slides. Paul will cover investments in capital in more detail during his remarks. Beginning with the Consumer division on Slide 6, our consumer business posted a very strong start to the year. We continue to be pleased with the solid execution and sustainable sales growth. Our unique capabilities marry a virtual connection with our established in-person agent force to complete the critical last mile of sales and service delivery. These capabilities remain a key differentiator and driver of our growth. Life and health NAP was up 7%. Health NAP was up 22%, bolstered by a positive reception from consumers to our new health products. Our Medicare portfolio delivered impressive results during the quarter.

Medicare Supplement NAP was up 24% and Medicare Advantage sales were up 38%. As a reminder, Medicare Advantage fees and sales are not reflected in NAP. 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. While interest in Medicare products peaks in the fourth quarter during the annual enrollment period, Medicare distribution is a year-round business for CNO. With nearly 11,000 people turning age 65 every day in the United States, first-time customers, who are new to Medicare, are most in need of the service and expertise provided by our field agents. We are uniquely positioned to help them make an educated choice for their coverage.

Long-term care NAP was up 71% on the continued strength of our recently launched long-term care fundamental plus product. 99% of these policies have benefit periods of two years or less and more than 90% have benefit periods of one year or less. These plans cover essential costs for one to two years and provide a balanced and affordable approach to funding care for our clients. Life production was down slightly to prior year as direct-to-consumer life NAP moderated in the quarter due to our decision to proactively reduce television marketing spend. Agent sold Life NAP was flat due to a challenging comparable. Our D2C advertising is rooted in a price disciplined and measured strategy built on decades of market experience. We maintain an opportunistic approach scaling our marketing expenditure up or down based on advertising market.

As a reminder, television advertising costs are not capitalized and typically fluctuate during presidential election years. We expect 2024 to follow a similar pattern. Our web and digital D2C capabilities are also instrumental in generating sales. Our teams are working hard to ensure that these channels continue to reach more customers. Life NAP from web and digital channels was up 13% in the quarter and now accounts for approximately 25% of all D2C life sales. Our diverse lead generation and distribution capabilities enable us to adapt to changing market environments and provide balance and stability to our results. Annuity collected premiums in the quarter were up 6% and account values were up 4%. As I shared last quarter, our captive distribution model and the long-term relationships that our agents build with customers provide stability to this block.

Persistency remains with an expected levels in light of the current interest rate environment. Client assets in brokerage and advisory were up 32% for the quarter to a record $3.4 billion. New accounts were up 8%. Four consecutive quarters of brokerage and advisory growth reflect an agent force that is building enduring relationships with clients. When combined with our annuity account values, our clients now entrust us with more than $15 billion of their assets. Successful agent recruiting and retention fuel our sales momentum. Recruiting was up 12%, our seventh consecutive quarter of agent force gains. Producing agent count was up 8%, the fifth consecutive quarter of growth. Our proprietary agent referral and retention programs drove strong recruiting results.

Agent metrics also benefited from new initiatives that are leveraging technology to increase the effectiveness and efficiency of our online recruiting presence. Next, Slide 7 in our Worksite Division performance. Our Worksite Division is also off to a strong start. Life and health insurance sales were up 19%. In seven of the past eight quarters, worksite insurance sales have delivered at least 15% growth. As I shared last quarter, this level of sustained growth underscores the significant value that our worksite insurance offerings bring to employers and their employees. Services fee sales were up 9%. This metric reflects the annual contract value of benefit services sold in the first quarter and is a leading indicator of fee revenue growth.

Advancing our benefit services strategy remains a priority for 2024 and beyond. Producing agent count was up 28%, our eighth consecutive quarter of growth. First year producing agent count was up 36%. We are seeing solid agent retention across all cohorts and are experiencing healthy productivity levels. Recruiting was up 32% year-over-year, driven by agent referrals that were up 50% in the quarter. Our results underscore the attractiveness of our agent opportunity with Optavise. As a reminder, agents who are recommended to us through our proprietary, personal referral program typically stay with the company longer and are more productive. Ongoing enhancements to our agent training and onboarding programs continue to support growth in producing agent count and agent productivity.

Recent investments in a new learning management system and other digital tools are improving both the personalization and flexibility of how we deliver education to our agents. This quarter, we continue to advance several initiatives designed to accelerate worksite sales growth, add customer value and expand our market reach. First, new product offerings continue to be well received by both employers and employees. Our refreshed accident insurance product, which launched last June, was up 43% in the quarter. Our new critical illness product, which was introduced in the fourth quarter, was up 5%. Second, our geographic expansion initiative accounted for 40% of our total sales growth in the quarter. This program targets areas where we’ve identified strategic opportunities to grow our market share and footprint.

Lastly, we rolled out a client acquisition program to help agents cultivate and add value to new worksite group clients. The program launched late last year, and we’re already experiencing early success. New group clients were up 65% for the quarter. And with that, I’ll turn it over to Paul.

Paul McDonough: Thank you, Gary, and good morning, everyone. Turning to the financial highlights on Slide 8, our operating earnings in the quarter reflect strong insurance product margins and continued growth in net investment income allocated to products. This reflects growth in the business and continued improvement in the book yield of the investment portfolio as we put new money to work at levels above the portfolio yield. Offsetting those favorable trends was a decrease in net investment income not allocated to products which includes our alternative investments, which I’ll come back to in a moment. We generated solid free cash flow in the period. Capital ratios and liquidity remain well above target levels, and we deployed $40 million of capital on share repurchases in the quarter, contributing to a 3% reduction in weighted average diluted shares outstanding year-over-year.

On a trailing 12-month basis, operating return on equity was 9.7% as reported and 8.5% ex significant items. Turning to Slide 9, insurance product margin was strong in the quarter, reflecting growth in the business and claims experience generally in line with expectations. The results highlight the benefit of our diverse product mix with some puts and takes, but in total, stable and growing. Traditional life margins benefited from lower advertising expense. Annuity margins in general were impacted by higher surrenders but within expected levels in the context of the current interest rate environment. Fixed indexed annuity margins also reflected moderating spreads, but in line with our pricing and target returns. Turning to Slide 10. The new money rate in the quarter was 6.17%, the fifth consecutive quarter above 6%.

And certainly a positive result and accretive to the portfolio’s book yield in the quarter. The average yield on allocated investments was 4.70% in the quarter, up 8 basis points year-over-year. The increase in yield along with growth in the business drove a 4% increase in net investment income allocated to products for the quarter. Total investment income reflects $24 million of net unfavorable mark-to-market impacts on certain real estate partnerships within our alternative investment portfolio. This is against our expectation in 1Q of a $14 million to $16 million pretax gain. Even with the underperformance in the alternative investment portfolio, total net investment income increased 2.5% year-over-year. Our new investments in the quarter comprised approximately $750 million of assets with an average rating of A- and an average duration of seven years.

Our new investments are summarized in more detail on Slides 21 and 22 of the presentation. Turning to Slide 11. Approximately 97% of our fixed maturity portfolio at quarter end was investment-grade rated with an average rating of A, reflecting our up in quality actions over the past several years. In the last 12 months, the allocation to single A rated or higher securities is up 270 basis points. The BBB allocation is down 250 basis points and the high-yield allocation is down 20 basis points. As you can see from the pie chart, approximately 2.5% of our portfolio for $630 million is allocated to alternative investments. And as you can see in the pie chart on the next slide, Slide 12, our alternatives include an allocation to real estate partnerships.

These are performed well over the long-term, and we expect will continue to perform well through the current cycle and beyond, but the market-driven mark-to-market impacts on the real estate partnerships adversely impacted the results for the quarter, driven by the annual appraisal of the underlying real estate assets in the context of higher cap rates in the current higher interest rate environment. The book value of these real estate partnerships was $86 million at March 31, so quite small in both absolute and relative terms. It’s also important to note that the underlying properties in these partnerships are 100% occupied by investment-grade tenants, including notable Fortune-150 companies. They are in long-term non-cancelable leases, and they continue to produce stable cash flows at the property level and stable cash distributions to CNO as reflected in each of the last 12 months and quarterly distribution columns in the table on the slide.

Away from alternative investments and commenting more broadly on commercial real estate exposure, our commercial mortgage loans and CMBS continued to perform according to our expectations, reflecting conservative underwriting and proactive management. We have again included some of the summary metrics in Slides 23 and 24 of the presentation. Turning to Slide 13. Our capital position remains strong. At quarter end, our consolidated risk-based capital ratio is 391%. Holdco liquidity was $223 million and leverage was just under 23%. Turning to Slide 14 and our 2024 guidance. We are maintaining all guidance ranges for the year. This includes operating earnings per share in the range of $3.10 to $3.30 for the year, excluding significant items. This affirmation includes an expectation that alternative investments generated a return more in line with the long-term run rate assumption of between 9% and 10% for the balance of the year, consistent with our initial guidance assumptions.

We also continue to expect that fee income will be slightly down year-over-year, but with a slight change to the seasonal weighting. We now expect roughly one-third of the full year earnings came in the first quarter and the balance will come in the fourth quarter with the second and third quarters roughly breakeven. Given the first quarter results, the full year operating EPS is more likely to come in at the lower end of the range than the higher end of the range. But our point estimate for the full year remains comfortably inside of the earnings per share range. We continue to expect excess cash flow to the holding company in the range of $140 million to $200 million. As stated in our remarks last quarter, the high end of the range assumes status quo.

In particular, no deterioration in economic conditions, and no material change in the risk profile of our investment portfolio. Finally, we will continue to manage to a consolidated risk-based capital ratio of 375% in our U.S.-based insurance companies, minimum holdco liquidity of $150 million and target leverage between 25% and 28%. And with that, I’ll turn it back over to Gary.

Gary Bhojwani: Thanks, Paul. Last month, we published our sixth annual letter to shareholders. In it, we emphasize the perspective that we have shared in several forms. CNO is a growth story that offers compelling long-term shareholder value creation. Our business model is unique and valuable. We say what we will do then we do what we say, and we back our commitments with a track record of execution. As we look to the remainder of 2024, we remain squarely focused on profitable growth and shareholder return opportunity. We thank you for your support of and interest in CNO Financial Group. We will now open it up to questions. Operator?

Q – Ryan Krueger: Hey, thanks. Good morning. My first question was on life advertising. Can you just give us some more thoughts around what you’re seeing in the external environment for advertising costs, and how that’s influencing the level of spend? And how that could play out as the year goes on with the political election?

Gary Bhojwani: Yes. Hey Ryan, this is Gary. Thanks for the question. We see this happen at every election cycle. So we’re expecting the similar pattern, and it’s starting to play itself through. And the bottom line is that advertising costs are going up. We track very carefully our yield. We track the marketing cost to the premiums that come in and so the number of phone calls and so on. There’s a number of different metrics that our people track. And when we believe that the advertising costs get too high, to perform against those metrics, we back off. And you’ll recall, we’ve done that in past election cycles. I expect that’s going to happen here again in 2024. We’ll wait and see. But if I were a betting man, that’s what I think is going to happen. So we see the cost going up. Therefore, we see the yield going down and we’ll back off opportunistically. If we see that change or if opportunities present themselves, we’ll step back on the gas pedal.

Ryan Krueger: Got it. Thanks. And then on long-term care, any more – can you provide any more color on what you saw in the quarter? It looked like the claims were favorable. And then just things have bounced around there a little bit in terms of LTC margins. Any rough sense of kind of what you view as a more normalized level at this point?

Paul McDonough: Hey Ryan, it’s Paul. I’d say that our claims experience and the margins for long-term care in the quarter were generally in line with our expectations. It certainly does reflect the growth in the business. There was slightly more favorable new run rate in the wake of the assumption unlocking in the fourth quarter. But I think that, by and large, captures how we’re thinking about the LTC margin in the quarter.

Ryan Krueger: Okay. Got it. Thank you.

Operator: Thank you. The next question comes from the line of John Barnidge of Piper Sandler. Your line is now open. Please go ahead.

John Barnidge: Good morning. Thank you for the opportunity. You talked about there were surrender trends in the first quarter in annuities. It looks like they were increased with outflows. Can you talk about the surrender trends in Q2 2024 to date? Does it seem like it was a one-off, or is this something that is persisting in the mid-higher markets generally?

Gary Bhojwani: Hey John, this is Gary. I’ll make some general comments, and then I’ll let Paul and others jump in if they want to add to it. I – we generally don’t provide guidance ahead of the quarter. So in terms of telling you how 2Q is going to shape up, we generally don’t do that. However, I will make some general observations. Given the interest rate environment, we should expect surrenders to run higher than, say, a couple of years ago when interest rates were considerably lower. Our persistency models account for that. We’re expecting that. So they will run higher than, say, a couple of years ago. But I would remind all of our shareholders that we benefit from some things in the marketplace that maybe some of our competitors don’t.

First, our annuities are produced exclusively by our captive distribution network, and we have certain policies and procedures in place where they don’t have an incentive to churn business, that’s number one. Number two, remember that our target market typically doesn’t get called on as frequently as, say, ultra-high net worth individuals simply because they don’t have the asset pool that attracts a lot of distribution to call on them regularly. So our products aren’t regularly facing that type of high level of competition. Third, like most other players, the product design that we have on our annuities has surrender charges. So particularly in the first several years, is the typical 10, 10, where there’s surrender charges for roughly 10 years.

But typically in the first few years, there’s really a significant disincentive even at the consumer level to surrender. So for those reasons, we expect our surrenders to be higher than the recent past, but we expect not to suffer the same degree of pressure that some other players in the industry will experience. Paul or Jeremy, would you like to add anything to my comments?

Paul McDonough: Gary, the only thing I’d add is that surrenders are certainly higher today than they were before this rate cycle began, but they’ve been reasonably stable the last few months and within our expectations in the current – in the context of the current rate environment.

John Barnidge: Thank you for that. And my follow-up question, do you view the level of annuity earnings achieved in the first quarter is run ratable?

Paul McDonough: Hey, John, it’s Paul. I mean, the margin was impacted certainly by the surrenders and sort of a tertiary impact is that some of the policies that are surrendering had higher spreads. So spreads have moderated, but still within our pricing and target return levels. It bounces around a bit, whether the current quarter is run ratable to your question, I’d say, within the volatility from quarter-to-quarter, yes, and the account values continue to grow. So over the long run, we would expect that as spreads sort of stabilize than you should expect growth along with the growth of the business.

Gary Bhojwani: John, there’s – this is Gary. There’s only one perspective I’d add to that. Remember that we benefit from a pretty diverse product portfolio. In any given quarter, one product is going to run hot, one is going to run cool. There’s going to be some movement I would just remind everybody that we’ve reaffirmed our annual guidance, and that’s probably the strongest testament we can give you as to how we think the consolidated portfolio will perform.

John Barnidge: Thanks for the answers, Gary and Paul.

Gary Bhojwani: Thank you.

Operator: Thank you. The next question comes from the line of Wes Carmichael of Autonomous. Your line is open. Please go ahead.

Wes Carmichael: Hey, good morning and thanks for taking my question. So last week, we got the final published fiduciary rules from the Department of Labor. And I realize it’s a pretty big document, but can you help us maybe with your current thinking around any impacts to an increase in compliance costs, recruiting or any sales impacts associated with the rule?