Gary Bhojwani: Hey, Wes. This is Gary. Thanks for the question. So you’re right, it is a rather voluminous rule, and it is rather recent. Let me start with kind of the conclusion and tell you that at CNO, we’re not expecting any particular or notable adverse developments as a result of that. Now that said, I want to put an asterisk on it. CNO is a member of the ACLI, and we sit on the board and the ACLI has, I think, laid out a pretty cogent case as to why the industry as opposed to the rule, and we share some of those views. But to your specific question in terms of the significant impact to CNO, we don’t expect that.
Wes Carmichael: Got it. Thanks, Gary. And I just wanted to come back to the real estate mark-to-market in the quarter. I think you pointed to most of that mark being driven by annual appraisals. I guess what I’d like to get your perspective on is if we could continue to see some volatility in that portfolio through the balance of the year or if you think really there’s not going to be maybe any significant additional mark until we get to the first quarter of next year.
Paul McDonough: Hey, Wes. This is Paul. Eric. I’d invite you to provide some color.
Eric Johnson: Yes. Sure. Good morning, Wes and Paul. If you think about it, we went through a year last year where if you believe increased statistics, the office market was down somewhere between 18% and 20% on the year. And certainly, the ongoing – it’s a tough neighborhood, the ongoing credit cycle, reset and office values is probably closer to the end of the ball game than the beginning of the ball game. The recovery will take some time and may not be a straight line. The one way of thinking about the ongoing valuation here is that it is – you think you can think about cap rates as a proxy to a degree. And if you look at maybe 150 basis point move in cap rates that’s probably worth $10 million of valuation meaning that it takes a really strong move in cap rates to affect the material change in valuation.
You’re dealing with here long-term assets with a stable NOI that are refinanced with long-term fixed rate financing with 100% occupancy, meaning that you’re kind of a long cash flow short leverage trade. And so I think during the year, you’re not going to see a whole lot of volatility and at the end of the year depending on the kind of a point-to-point revaluation that’s what you produce. I think we’re not going to replicate 2023, and – but there could be some favorable development during 2024 or some additional unfavorable development. If you think about it, during the period before 20 – before this first quarter, the revaluation on these properties were like in aggregate, up maybe $10 million, $12 million and gave back $20 million of it in 2023.
So that suggests to you that 2023 is probably the outlier and won’t replicate itself.
Wes Carmichael: Thanks, Eric. That’s helpful.
Eric Johnson: You’re welcome.
Operator: The next question comes from the line of Scott Heleniak of RBC Capital Markets. Your line is now open. Please go ahead.
Scott Heleniak: Yes. Good morning. The Medicare Advantage/Medicare Supplement, you had strong growth trends there. You have for a while. But just wondering if you could talk about the drivers there, whether it’s market share, agent productivity. Obviously, the demographics are working your way. If you can talk about that a little bit? And then just anything you can add on what you’re seeing out there in the competitive landscape in those areas and those product lines. That would be great.
Gary Bhojwani: Scott, this is Gary. Thanks for the question. Yes, you’re right. We’ve been very, very pleased with the success we’ve seen for several quarters now. I think there are a number of things working for us. Number one, as you point out, the demographics are definitely working for us, about 11,000 people a day retiring. So demand for the products continues to be very strong. Virtually, every retiree at least looks at Medicare Advantage or Medicare Supplement, not all to buy it, of course, but virtually every single one looks, it’s the closest thing we have the auto insurance in our business. So that’s one thing that’s helping us. More unique to CNO, there’s a handful of things that we’ve done. First, we’ve invested pretty substantially in our online platform, particularly for Medicare Advantage.
We now represent virtually all of the major carriers in just about every jurisdiction, and we’ve got a technology platform that I think is quite good. The feedback that we’re getting and the success we’re seeing with that. Third, we can marry that technology offering with face-to-face agents for those consumers that want it. That’s one thing I think that really sets us apart. If I look back over the last three to five years, we’ve seen a number of entrants come into the space with a purely technology offering, and in my opinion, the fatal flaw in those models is that they only appeal to people who want to buy on the lowest price. They don’t really have the ability to provide that kitchen table service that we can provide. So that’s something that’s really helped us.
And I think our agents have done a fantastic job. I should have probably started with this. They deserve 90 some odd percent credit here for the work they’re doing out there, helping people understand and knocking on doors and so on. And finally – the final thing that’s unique to see, we undertook a repricing of our Medicare Supplement policy. Remember, we manufacture Medicare Supplement and we distribute Medicare Advantage. So we undertook a repricing of that, and that happened to coincide with some regulatory pressures being put on Medicare Advantage that I think was leading more consumers back to Medicare Supplement that historically had been looking at it. So all of these things have come together. Some of them are across the industry.
Some of them are unique to CNO, but I think all of these things have come together to give us a really nice tailwind. And of course, the thing I want to remind everybody of this wasn’t in your question, but I think this is really critical to remember when you think about our business model, what makes us unique among life insurers, we regard Medicare as oftentimes the first step, the way we get into the door of the household, then we build the relationship where we talk to those customers about annuities or long-term care or life insurance or what have you. So the ability to supplement, if you will, Medicare Advantage and Medicare Supplement really make sure that those relationships are built on a much broader and deeper foundation that let us grow and keep those customers with us.
So I would point to all of those things as thoughts to why we’re doing well, and why I think more importantly, we’ll continue to do well.
Scott Heleniak: Okay. That’s really helpful. And then just – so anything new or any changes on the competitive front in that area? I mean it sounds like you’re gaining market share, but is there anything you can point to? Or is it just the execution you kind of talked about and the reasons you talked about.
Gary Bhojwani: Yes. I mean I’d like to give the credit to our agents and the execution that they’re out there doing every day. I think there have been some market trends. I know there’s been regulatory pressures. I alluded to this a little bit. It’s particularly on some of the Medicare Advantage distributors. I don’t think that pressure is about to go away anytime soon. I think that the government is taking a close look at some of these practices and policies and that’s created some pressure I’m not going to comment on how it’s impacted their businesses, but I’ll just say that we continue to do the right things the right way with great people that they’re executing every day.
Scott Heleniak: Yes. That’s fair enough. Okay. And then just a question, too, on the persistency levels. You mentioned they’re consistent with your expectation in the script. Can you talk a little bit more about how that’s kind of been trending over the past year by segment? Is there any more detail you can give on that, just to give a little bit of sense of trend? Or are they just stable?
Paul McDonough: So Scott, you’re asking about persistency trends for Med Supp and Med Advantage?
Scott Heleniak: Yes.
Paul McDonough: Just to clarify, that’s your question. Yes. Jeremy, do you want to comment on that, Jeremy Williams?
Jeremy Williams: Yes, I can comment on that. This is Jeremy. Generally, they’ve been pretty stable. They’ve been a little bit higher on the Med Supp maybe than what they were previous to that, but generally in line with expectations, nothing to really write home about there.
Scott Heleniak: Okay, thanks a lot.
Gary Bhojwani: Scott, if I could just add one perspective on that. The more of our clients that have multiple products with us, conventional wisdom holds the better our persistency across the book should be. And in particular, the more of our clients that have annuities with us. Because remember, when a client entrust us with an annuity, it fundamentally changes the relationship. Most of our other products are regarded as expense – excuse me, as expenses think about a consumer pays their monthly Medicare bill or their annual life insurance bill. They regard those as expenses. When they buy an annuity from us, that changes the relationship into one of an investment, and so the consumer that place those products with us are more likely to stay with us across the product portfolio.
And so as our annuity book has grown as the number of clients we have annuities with us has grown we would expect to see that. Now one other thing we’ve been focusing our comments really on the consumer business, which makes up the majority of CNO, of course, but I do want to point out that our worksite business has also been doing very well, particularly on the persistency. The products that we’re providing through employers to consumers are very highly valued by both the employee and the employer, and we’ve seen very strong persistency there. As much as we focus our comments on consumer, and I want to get a plug-in for work, the folks there are doing a fantastic job, and we’re really seeing those products get appreciated.
Scott Heleniak: Great. Thanks.
Operator: The next question comes from the line of Suneet Kamath of Jefferies. Your line is now open. Please go ahead.
Suneet Kamath: Yes, thanks good morning everyone. I guess for Paul, if I think about your EPS guidance, backing out the first quarter, it looks like a pretty decent step-up in the balance of the year in terms of what’s implied. I get that you’re expecting alts to come back. But is there any other sort of big drivers that you expect that will get you to something closer to that mid- to high 80s, low- 90s kind of range?
Paul McDonough: Hey Suneet, yes, I mean I’d say there’s always puts and takes. And certainly, in the first quarter, margin was a bit favorable to our expectations, alts was clearly below expectations. As you know, and as I mentioned, we’re assuming that alts will be more in line with the long-term run rate of between 9% and 10% the balance of the year. And in that context, as I mentioned in my earlier comments, the point estimate for EPS for the year is comfortably inside of that original $3.10 to $3.30 EPS range. And as I mentioned before, certainly in the context of Q1, there’s a higher chance that it comes in at the lower end of that range than when we sat here in February.
Suneet Kamath: Got it. But so is most of it the alts recovering? I just want to see if there’s anything other – any other big pieces that we should be thinking about?
Paul McDonough: I mean that’s certainly an important assumption. But again, our expectation is that as actual results play out, there’s always going to be puts and takes, and I think it’s worth noting that although margin in total was generally in line with our expectations. It was kind of to the plus side of the range of expectations, and I think it’s reasonable to assume that trend continues to some extent over the balance of the year.
Suneet Kamath: Okay. Makes sense. And then I guess maybe a bigger picture question for Gary. I think the issue of like field force management has become very topical in the eyes of the market. So I’m just wondering, especially as we think about the independent contractor model 1099, employees or independent contractors. Can you just talk a little bit about how you manage distribution risk within your overall organization?
Gary Bhojwani: Sure. Thank you for the question. And I recognize that this topic is getting attention. So the first thing I want to assure all of our shareholders is that we have a very robust compliance program. We have different ways of monitoring the activities of our agents. And I also want to remind people that roughly one out of six or seven of our agents also hold a securities license. Remember that when you have a securities license, there’s a whole different level of compliance, oversight scrutiny and so on and so forth, above and beyond what an insurance agent experiences. So, I think that’s the first thing to point out. The second thing to point out recognize that the nature of our field force is slightly different.
Most of our offices, if you look at the leadership of most of our field offices, those leaders are W-2 employees. I believe that’s a rather unique model. Now the downside is we – because we own the offices, so to speak, we have a higher fixed cost base, so that’s the downside of our model, but the upside is, I would argue, greater accountability, greater control and greater oversight than a model where we don’t have that cost and that infrastructure. Now I want to emphasize the majority of our agents are indeed 1099 folks. And they do a fantastic job. But I think we’ve got this hybrid that makes us different than other players out there because we have leadership at the field level that are W-2 employees. Because the offices are ours, as opposed to independently contracted 100% and because we have a pretty significant population of our agents with a securities license.
And again, the folks on this call probably know better than most. When you have that type of securities license, the degree of oversight and personal liability that you have is significant. So, I think when you bring all of those things together, does that make it impossible for us to have a problem, of course, not. Does it materially reduce the likelihood of a problem? And does it materially increase the visibility we have, meaning early warning signals and so on? I think so. I think we’re in a good place. And you never want to be the CEO that says we’re not going to have a problem because that’s a tempting fate. But I feel very, very good about where we are, our programs, our processes and the folks that we have overseeing these states.
Suneet Kamath: Okay. That’s helpful. Thanks, Gary.
Operator: The next question comes from the line of Wilma Burdis of Raymond James. Your line is now open. Please go ahead.
Wilma Burdis: Hey, good morning. Could you discuss the path from current 9% ROE? What are we – can CNO achieve over time? How long might that take? And what are some of the steps to get there? Thanks.
Paul McDonough: Hey, Wilma, it’s Paul. The question is asking for a specific number, and I’m sure it won’t surprise you that I’m not going to give you a specific number. But I will say that Gary and the entire executive management team is very focused on what we can do to take our ROE, which current run rate sort of at 9.5-ish to something that’s more in line with the peer group, which would be 11% to 13%, 12% to 14%. We don’t think there are any silver bullets, but we think there are lots of things that in aggregate over time, we’ll close the gap. And all I can tell you is that we’re very focused on that, and I expect that we will achieve that objective over time.
