CNO Financial Group, Inc. (NYSE:CNO) Q4 2023 Earnings Call Transcript
CNO Financial Group, Inc. (NYSE:CNO) Q4 2023 Earnings Call Transcript February 7, 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: Hello, and welcome to today's CNO Financial Group Fourth Quarter 2023 Earnings Conference Call. My name is Baily, and I will be your moderator for today. [Operator Instructions] I would now like to pass the conference over to today's host, Adam Auvil to begin. Please begin.
Adam Auvil: Good afternoon, and thank you for joining us on CNO Financial Group's Fourth Quarter 2023 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-K and post it on our website on or before February 23.
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 presentations 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 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 2023 and full year 2022. And with that, I'll turn the call over to Gary.
Gary Bhojwani: Thanks, Adam. Good afternoon, everyone, and thank you for joining us. CNO delivered strong earnings growth in the quarter and exceptional operating performance for the full year. Our results underscore the health and strength of our business model and lay the foundation for sustained profitable growth. Highlights of our full year performance include four quarters of sustained sales momentum, total new annualized premium up 9%, improvement in virtually all agent metrics across both divisions, strong net investment income results, continued strong capital position and free cash flow generation and our share price reached an all-time high. We delivered a solid earnings performance for the full year with operating earnings per diluted share of $3.09.
Stable underlying insurance product margins were bolstered by our diversified product suite. New money rates exceeded 6% for all four quarters, which drove an inflection point in our investment portfolio yield and reversed several years of decline. Fee income improved as we grew fee revenue and expanded margins. Paul will go into greater detail on our financial performance for the quarter and full year. Sales production and agent force results were strong in both divisions as we posted record sales levels in multiple product categories. A robust calendar of successful product launches in 2023 accelerated our growth. Producing agent counts were up sharply, driven by recruiting and retention initiatives. Total health NAP was up 11% and total life NAP was up 7% with nearly all of our product lines posting sales growth.
Fee revenue was also up for the year and remains an important component in our diversification approach. Our portfolio includes both manufactured and distributed products, which enables us to offer customers a broad selection of solutions to meet their needs. Our strong capital position remains a differentiator for CNO. Notable highlights of our year include our capital and liquidity ended the year well above target levels, we established a Bermuda affiliate and executed its first reinsurance transaction and Fitch upgraded our financial strength rating from A minus to A. We have returned more than $230 million to shareholders in the year, including $165 million in share buybacks. We again raised our quarterly common stock dividend, marking 11 straight years with an increase.
Book value per diluted share excluding AOCI was $33.94, up 6%. Turning to Slide 5 and our growth scorecard. Our growth scorecard metrics for the quarter and the full year reflect our continued focus on and investments in our strategic growth priorities. We expect to build on this momentum in 2024. I'll discuss each division in the next two slides. Beginning with the Consumer division on Slide 6. We delivered a strong production year, illustrating the value and attractiveness of our business model and approach to serving our market. Our unique capability to marry a virtual connection with our established in-person agent force who complete the critical last mile of sales and service delivery remains a key differentiator. Total NAP was up 6% for the full year, led by 16% sales growth in field agent NAP.
Total life sales were up 6% with balanced production from our agent and direct-to-consumer distribution. Field sold life was up 9%. Direct-to-consumer life was up 3%, reflecting six consecutive years of growth and record results in 2023. Health NAP was up 8% for the full year. Long-term care NAP was up 27% on the strength of our new long-term care fundamental plus product. As mentioned last quarter, this product is part of our strategy to offer plans to the middle-market that cover essential costs for one to two years of care. 99% of the policies we sell have benefit periods of two years or less. Our long-term care product policies provide a balanced, affordable approach to funding care. We are pleased to see consumers embrace these plans and the protection that they provide.
We were also pleased with the performance of our Medicare business and how we're growing this portfolio. Total Medicare policies sold were up 5% over prior year. The balance and diversification of our Medicare portfolio is central to how we serve our market. As a reminder, we offer two types of Medicare products, Medicare supplement products that we manufacture and third-party Medicare Advantage and Part B prescription drug plans, for which we collect fees and bear no underwriting risk. Medicare supplement NAP was up 16%, and Medicare advantage fee revenue was up 14%. In the fourth quarter, we completed another successful Medicare annual enrollment period with a strong go-to-market approach. We expanded our MA carriers to 14 and increased the number of MA certified agents by 14%.
Our agents bring local knowledge and experience to every customer they assist. The personal sales and service provided by agents reduces churn and builds relationships for potential cross sales. As I've mentioned before, our local agents represent the unique strength of our last mile distribution capabilities. Annuity account values were up 4% and we reported record annuity collected premium in the quarter. Consistent with previous quarters, our captive agent distribution model lends stability to this block and persistency remains within expected levels. Client assets and brokerage and advisory were up 20% to a record $3.2 billion. Total accounts were up 7% for the full year. When combined with our annuity account values, our clients now entrust us with nearly $15 billion of their assets.
Our Consumer division had a very strong recruiting year, up 23%. We have consistently grown agent recruiting for six consecutive quarters and we credit this growth to ongoing investments in agent referrals, productivity and retention. Producing case agent count was up 9% and continues to build on our four consecutive quarters of year-over-year growth. These results contributed to the meaningful growth we reported for the year and position us well for a strong 2024. Three notable investments in 2023 contributed to our sales momentum and illustrate how our approach to technology can improve operational efficiency. First, we enhanced our life, health and annuity product lines, which bolstered sales growth. Second, we expanded the scale and capabilities of our Medicare health insurance technology platform.
Nearly 9 out of 10 Medicare advantage policies sold during the AEP were processed through our myhealthpolicy.com portal. This represents a 14% increase from 2022. Lastly, by introducing accelerated underwriting on a portion of our simplified life products, approximately 75% of those applicants received an instant decision. Next, Slide 7 and our Worksite division performance. Our Worksite division finished the year strong with continued insurance sales momentum and a successful fourth quarter benefits enrollment fee. Life and health insurance sales were up 29% for the full year and up 20% for the quarter. In five of the past six quarters, insurance sales have delivered 20% growth. This level of sustained incremental growth is exceptional and underscores the significant value that our Worksite insurance offerings bring to employers and their employees.
Initiatives to grow our Worksite agent force generated significant gains in 2023. For the full year, recruiting was up 15% and agent productivity was up 4%. Improving agent productivity while onboarding new agents is not easy. It takes time and training to grow these metrics simultaneously. Having both of these measures up is a testament to the strength of our field leadership to attract and develop career agent talent. Producing agent count was up 27%, our seventh consecutive quarter of year-over-year growth, and partially driven by agent retention, which was up 20%. Enhanced agent referral and onboarding programs also delivered double digit growth in first year agent count, which was up 43% and first year agent productivity, which was up 40%.
Multiple investments in product development, geographic expansion and sales enablement created a foundation for accelerated Worksite growth in 2023 and beyond. Our accident insurance product, which was refreshed in June, was up 34% for the full year, and our updated critical illness product launched in the fourth quarter has already received positive early reception. Our geographic expansion initiative generated approximately one-fourth of Worksite's total sales growth for the year. We are pleased with this early result. As a reminder, this program targets key markets where we've identified strategic opportunities to grow our market share and footprint. We'll also continue to be opportunistic in engaging third-party technology partnerships that enhance the tech-enabled services in our benefits enrollment offerings.
I am pleased with our Worksite insurance sales momentum and recognize that there is still a sizable opportunity for us to get more value out of our Worksite fee business. We're focused on continuing to deepen the integration across our sales channels to improve our client service capabilities and cross sale opportunities. As we enter 2024, we remain bullish on our Worksite business and confident in our strategic path forward. And with that, I'll turn it over to Paul.
Paul McDonough : Thanks, Gary, and good afternoon, everyone. Turning to the financial highlights on Slide 8. We finished the year strong with operating earnings excluding significant items up 34% year-over-year. This reflects an improvement in every major component of operating income, including insurance product margin, net investment income, fee income and expenses. Fee income in the quarter was up 31% with solid growth in net advantage sales, despite reduced advertising and lead spend. Expenses were down year-over-year and we posted a full year expense ratio excluding significant items of 19.4%, in line with our prior guidance. The significant items in the quarter relate to the impact of our annual actuarial review, which I'll summarize on the next slide.
For the full year, operating earnings per share were $2.72 excluding significant items as compared to $2.91 in the prior year period with variance driven by two things. Number one, lower alternative investment income, which is volatile by definition. And second, elevated health claims during the second quarter, which moderated as expected during the second half of the year. The underlying trends evident in our strong third and fourth quarter results position us well for solid earnings growth going forward. We're also well positioned from a capital perspective with the recent formation of CNO Bermuda Re, and the initial treaty between our Illinois based operating company and the new Bermuda company, which settled on November 30 with an October 1 effective date.
This structure materially enhances capital efficiency, which is reflected in our year end capital and holding company liquidity metrics. Turning to Slide 9, our annual actuarial review resulted in a $33.9 million favorable impact driven by favorable morbidity and persistency assumption updates in our supplemental health business with smaller, mostly offsetting impacts across the remaining product lines. As mentioned, we're calling this out as a significant item in the quarter and presenting the margin on this Slide X significant items. On that basis, total insurance product margin posted another strong quarter with some puts and takes across products, highlighting the value of our diverse product mix. It's worth noting that the assumption unlocking related to the annual actuarial review creates new go-forward income patterns beginning with the fourth quarter results, separate from and in addition to the $33.9 million impact reported in the quarter.
In particular, Supp Health was favorably impacted by $4 million, and FIA and Med Supp were unfavorably impacted by $2 million and $1 million, respectively. Turning to Slide 10, the new money rate in the quarter was 6.92%, up from 5.96% in the prior year period and 6.03% in the third quarter of this year. This is the fourth consecutive quarter of new money rates above 6% and set the high watermark for the year. The average yield on allocated investments was 4.68% in the quarter, up 8 basis points year-over-year. The increase in yield, along with strong production driving growth in net insurance liabilities and the assets supporting them contributed to 4% growth in net investment income allocated to products for the quarter and up 5% for the year.
Investment income not allocated to products increased 52% in the quarter, primarily driven by an improvement in income from alternative investments. Our new investments in the quarter comprised approximately $350 million of assets with an average rating of single A minus and an average duration of 7.5 years. Our new investments are summarized in more detail on Slides 22 and 23 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 single 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 310 basis points, the BBB allocation is down 290 basis points and the high yield allocation is down 20 basis points.
With respect to commercial real estate, our commercial mortgage loan and CMBS investments continue to perform well, reflecting conservative underwriting and proactive management. We have again included some summary metrics in Slides 24 and 25 of the presentation. Turning to Slide 12, we ended the quarter with a consolidated RBC ratio of 402%, up 18 points for the year and comfortably above our 375% target. Holdco liquidity was $256 million, above our minimum threshold of $150 million. Again, these metrics reflect the impact of the capital efficiency of our new Bermuda captive reinsurance structure. We generated $311 million in excess cash flow to the holding company for the year, slightly below our guidance, but excess capital relative to our target RBC and holdco liquidity levels was in line with our expectations.
Turning to Slide 13 and our 2024 guidance. We expect operating earnings per share to be in the range of $3.10 and $3. 30 for the year, which at the midpoint represents an 18% increase from full year 2023 excluding significant items. This reflects an expectation of modest improvement in insurance product margin and expense ratio of between 18.8% and 19.2%, a slight improvement from the 19.4% in 2023 and following a quarterly trend similar to 2023, starting on the high-end in the first quarter and then grading down through the year. Significant improvement in net investment income not allocated to product, which assumes that, alternative investments generate a return more in line with the long-term run rate assumption of between 9% and 10%. Fee income to be slightly down year-over-year with roughly a quarter of the full year earnings coming in the first quarter and the balance coming in the fourth quarter with the second and third quarters roughly breakeven, and no change to our expected effective tax rate of 23%.
We expect excess cash flow to the holding company in the range of $140 million to $200 million. The high end of the range assumes status quo, in particular that we maintain the current pace of organic growth, we maintain the current asset mix in our investment portfolio, and there is no change to economic conditions and the related pattern of credit migration in the investment portfolio. The low end of the range assumes a departure from the status quo, in particular that we accelerate organic growth or we take more risk in our investment portfolio and/or economic conditions deteriorate, prompting adverse credit migration. Certainly, decisions to accelerate organic growth and/or to take more risk with our assets would consume more capital in the near-term, but those decisions would be based on an expectation of enhancing value creation and free cash flow in the long-term.
Finally, we will continue to manage to a consolidated RBC ratio of 375% in our US-based insurance companies, minimum holdco liquidity of $150 million and target leverage of between 25% and 28%. And with that, I'll turn it back over to Gary.
Gary Bhojwani: Thanks, Paul. Our business continued to perform well in the year and we are proud of how the CNO team executed against our strategic growth priorities. Our sales engine has momentum and our agent force is growing. We enter 2024 well-positioned to build on our strong operating performance. Our capital position, our liquidity and the cash flow generating power of the company remain robust. We remain confident in our profitable growth and shareholder return opportunity. We thank you for your support of and interest in CNO Financial Group. We'll now open it up for questions. Operator?
See also 20 Dating Sites with the Most Users in 2024 and 15 Highest Quality Bath Towels of 2024.
To continue reading the Q&A session, please click here.
