CNO Financial Group, Inc. (CNO) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day and thank you for standing by. Welcome to the CNO Financial Group Second Quarter 2021 Earnings Call. All participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. I will now hand the conference over to Jennifer Childe, Vice President of Investor Relations. Please go ahead.
Jennifer Childe: Thank you, operator. Good morning and thank you all for joining us on CNO Financial Group's second quarter 2021 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.
Gary Bhojwani: Good morning everyone and thank you for joining us. Turning to Slide 4, we reported operating earnings per share of $0.66, which represents 20% growth over the prior period or 60% growth excluding significant items in both periods. Sales activity remains strong and we have exceeded pre-pandemic levels in a number of areas. Total Life and Health NAP was up 35% over the second quarter of 2020 and up 10% relative to 2019 level. Our results also benefited from ongoing deferral of medical care which boost our health margins solid alternative investment performance and continued share repurchase activity. Premium collections remain strong in our underlying margins excluding COVID impacts performed well as expected. Our capital and liquidity remain conservatively positioned. We ended the quarter with an RBC ratio of 409% and $336 million in cash at the holding company while also returning $105 million to shareholders through a combination of share repurchases and dividend. We continue to execute well against our strategic priorities, specifically successfully implementing our strategic transformation that we initiated in January 2020, growing the business profitably, launching new products and services, expanding to the right to slightly younger wealthier consumers within the middle-income market and deploying excess capital to its highest and best use. Turning to Slide 5, and our Growth Scorecard, as was the case for 6 consecutive quarters prior to the pandemic, all 5 of our scorecard metrics were up year-over-year. Life sales remained strong, fueled by continued momentum in both our direct to consumer and exclusive field agent channels.
Paul McDonough: Thanks, Gary and good morning everyone. Turning to the financial highlights. On Slide 9,operating earnings per share were up 20% year-over-year and up 60% excluding significant items. The results for the quarter reflect solid underlying insurance margins ongoing net favorable COVID related impacts, strong alternative investment performance and continued disciplined capital management. Over the last four quarters, we have deployed $337 million of excess capital on share repurchases reducing weighted average shares outstanding by 7%. Return on equity improved at 90 basis points in the 12 months ending June 30, 2021 compared to the prior year period. But some of the expenses allocated to products and not allocated to products. Excluding significant items increased by about $6 million sequentially driven by incentive compensation accrual adjustments related to earnings outperformance in the first half of the year. The increase in expenses over the prior year period, also reflects lower agency management expenses in 2020 due to COVID related restrictions and the June 30, 2020 conclusion of a transition services agreement related to the long-term care reinsurance transaction completed in 2018. In general, our expenses continue to reflect both expense discipline and operational efficiency on the one hand and continued targeted growth investments on the other hand.
Gary Bhojwani: Thank you, Paul. We are pleased with the healthy results we've generated this quarter and in the first half of the year. The strength of our diversified business model and the steady execution of our strategic priorities and organizational transformation underpin that success. The consumer division has met or exceeded pre-pandemic performance and our Worksite Division is making meaningful progress. As we enter the second half of the year, we remain squarely focused on maintaining our growth momentum, building upon our competitive advantages and managing the business to optimize profitability, cash flows and long-term value for our shareholders. We thank you for your support and interest in CNO please continue to take care of your health including vaccinations for those that are eligible stay healthy and stay safe. We will now open it up for questions, Operator.
Operator: Our first question comes from the line of Colin Johnson with B. Riley Securities.
Colin Johnson: Just first wondering given that deferral of care had contributed favorably in the quarter, despite the fact that may be coming in the quarter, we expected that to abate as things reopen further if any insight as to maybe why that might have been taking place. Why we would have been seeing a slower resumption of care and then otherwise expected on the part of the consumer?
Gary Bhojwani: Yes Colin, thank you for the question. The short answer is we've got a bunch of theories. I don't know, we have anything that I would point to is being hard to fast, but I'm happy to share with you some of the theories we've heard and seen. First is, some consumers are still afraid to go back to see their doctors. Some consumers have conditions they would have otherwise health care on but those conditions passed. Some of the consumer that would have gone to see doctors now they themselves have unfortunately passed. There are a variety of other things that the short answer at least from our perspective, I haven't seen anything that says here's exactly what happened. We know that fewer people are seeking health care and our health care claims results benefit as a result but I've seen more theories then I can tell you what to do with, in terms of what exactly is the underlying explanation.
Colin Johnson: Okay, thanks, that's helpful. And then kind of looking at new annualized premium. I think this is the second quarter now that we're about half of the Life and Health NAP digital. Do you think that that number presents maybe longer term equilibrium percentage, so to speak or there might be more room to the upside with respect to that.
Gary Bhojwani: I think there is more. This is Gary. I think there is more room to the upside on that. The one thing I want to be transparent about some of this depends on how you define it. So let's say you're sitting in some city in Iowa and you buy a policy from an agent who is also in Iowa, but that interaction takes place over a Zoom call can you complete the paperwork the email. If the agent is there locally, the agent is there to answer questions is happy to meet you at kitchen table but you happen to do all of this digitally. And that particular product is completed as I describe digitally, but the next product they sell they come to sitting your kitchen table. Was that a digital relationship or what was that. And I share that with you because we are watching this evolve much more quickly than we expected but the bottom line for all of our shareholders, we expect an increasing number of interactions to take place virtually, but not to the exclusion of that in person interaction. At some level. I want our consumers to interact with our agents in person because that's one of our differentiating characteristics. That's one of the things that we can do that others cannot, we can do both. So I want consumers that want some of both but the short answer is we expect that the number of digital interactions will continue to grow.
Colin Johnson: Thank you. And just as the follow-on. So - the number of digital sales potentially rises, do you think that could have any sort of positive impact on operating expenses - digital sale versus one in person.
Gary Bhojwani: I think over time it will, over time given agent should be able to increase the productivity they can cover a broader geographic area and so that should definitely help us. I want to emphasize the overtime part because it's important to remember that in the near term, we're investing in certain technologies and training. So it will take time for all this to work its way through. Paul, do you want to add anything that?
Paul McDonough: The only thing I'd say is that I think we're at a position now where as we continue to grow the business and sustain that growth over time, will get better operating leverage from our expense base, which has the potential to grow earnings and improve ROE.
Operator: Your next question comes from the line of Hung-Fai Lee with Dowling and Partners.
Hung-Fai Lee: A question for Paul, looking at the annuity earnings and margin specifically for fixed index annuities, they were very strong in the quarter. Just wondering was there some sort of going to market benefits running through the numbers for this quarter and if so can you provide some color in terms of what the normalized margin would be for the FIA.
Paul McDonough: Sure. Good morning Hung-Fai. So the sequential improvement in the annuities margin is reflective of market conditions creating favorable option impacts. So just to drill down a bit higher equities, lower treasuries and lower volatility created situation where the value of the option assets increases in value more in the embedded derivative reserve. And just to be clear, this is really it's an accounting phenomenon, if you will, we would expect that the favorable trends to moderate the trends between Q1 and Q2 moderate depending on market conditions. In terms of longer term sort of run rate trends, I would just point to our disclosure over the last couple of years and I think if you look at that there is a noticeable sort of underlying run rate.
Hung-Fai Lee: My second question is related to your fee revenue growth, which was very impressive up 50% year-over-year. Can you provide some color in terms of what's the driver for that growth and how much was from adding DirectPath versus the growth of your existing fee-based business.
Paul McDonough: Yes, the biggest driver is DirectPath but we are also seeing growth in the fee revenue related to distribution of Med Advantage and from WBD.
Hung-Fai Lee: So as we think about. --. But normally first quarter and fourth quarter tend to be your higher - fee revenue quarters and that used to be kind of $30 million-ish. So now because with the second quarter you're had $30 million now. How should we think about seasonality?
Paul McDonough: I think you should continue to expect the seasonality will follow the annual enrollment period which is skewed into Q3, Q4, because remember the Med Advantage policies we sell during the annual enrollment period shelf this fee income.
Hung-Fai Lee: But so is the $30 million now come to the new run rate going forward - low seasonality quarters.
Gary Bhojwani: Yes, certainly Q2 of this year includes a full quarter of DirectPath, WBD and on it and it and MA distribution.
Operator: Your next question comes from the line of Zach Byer with Autonomous Research.
Erik Bass: This is actually Erik Bass. First, do you have an estimate for the RBC ratio impact of adopting the NAICS new C1 factors and will you make any changes to your RBC target range as a result of this.
Gary Bhojwani: Good morning, Eric. So the impact of the new C1 factors as of June 30, pro forma all else equal, is about 16 points on our RBC, which translates to about $80 million of capital. There are some things that we could do in the investment portfolio that's sort of arbitrage the new risk factors and that improves the 16 basis points by a couple of points as to how we think about it. I think it's involving, I've seen some speculation in the analyst community that some companies will simply reduce their target RBCs, we're in the process of doing some analysis with our own internal capital models to drive how we're thinking about it. So I'd like to come back to this question on a future call as to whether will reduce - formally reduce our target RBC by some amount either the entire sort of adjusted 16 or something less than that. I also think it will be helpful to continue our dialog with the rating agencies to better understand how they think about it. So more to come on this, but that's the pro forma all else equal impact.
Erik Bass: And then maybe moving kind of sales and earnings. I mean your sales obviously had a nice recovery. And as you noted, are back to pre-pandemic levels - in the consumer business. Are you now at a level of sales were the in-force block is growing for most products. And if so should this start to translate into faster organic earnings growth.
Gary Bhojwani: Yes. So we're at the in-force block has been relatively flat, looking backwards. But I think I think we're now at a point with our expense base and with our growth sort of profile. But as we continue to grow that business and that's sustainable and we certainly think that it is will begin to get better operating leverage going forward.
Operator: Next question comes from the line of John Barnidge with Piper Sandler.
John Barnidge: Yes, thank you for the opportunity. You're at $183 million in buybacks for the year, clearly a good cadence but down link quarter, the stock declined obviously a little bit, but - can you talk about how you're thinking about capital return a little bit more on the balance of the year.
Gary Bhojwani: Yes, sure. John, this is Gary. Thanks for the question. I'll give you some high level thoughts and then if Paul wants to share any more details I'll let him and I'll start us out. So some of this for those of you who have been long-term participants in this call. Some of this is going to be a repeat of what you've heard from me before in terms of my thought process. But I would just remind you of a few factors. Number one, we don't have any incentive to hold excess capital, if you look at our incentive comp plans and everything else, we have no incentive to hold excess capital. We have historically at least since I've been in the chair of CEO, which I think I am going on my 15th quarter now,15 to 16 quarter, I have declined to provide specific guidance, but instead talked about our capacity and then asked all of our shareholders and analysts to judge us by our actions not our words. And during the time I've been CEO, we bought back stock every single quarter except one and with the benefit of hindsight everyone realize at the one quarter we didn't was to fund the LTC transaction. So again, I ask you to judge us by our actions not our words in terms of where we are right now. I think about this quarter in particular and even the first half of the year a really simple way, I really like where we're positioned in terms of our capital. I like the fact that given all the uncertainty with COVID we're still conservatively position. I like the fact that despite that we were able to invest in growth. We made some investments in terms of certain technologies and abilities as well as the DirectPath acquisition and despite that both quarters 2021 we were able to return nice, a nice amount of money $100 million and $87 million to our shareholders in the first quarter in second quarter. As to the specific amounts in any given quarter, one of the thing is the factors into this analysis is how we think about price. Not surprisingly the members of management, we believe that the intrinsic value is well above the GAAP book value, but that doesn't change the reality that when we buy shares at 95% of book value say versus 80% of book value. The benefit is different. I think our long-term shareholders would prefer to see us buy more stock when it's at 80% of book and say at 95% of book not because of any commentary on the belief in the company but just because of the accounting treatment how it benefits us. So I think what you saw happen from Q1 to Q2 when the stock is trading lower we'll buy more when the stock is trading higher will buy less. And I want to emphasize, that's not a commentary on our view of the intrinsic value firm rather it's a simple recognition of the accounting treatment and the greater discount to book, i.e., the cheaper the stock is the more we'll buy, so I wouldn't read into that small delta $13 million between Q1 and Q2 at anything meaningful, it's nothing more than an acknowledgment of where the stock is trading.
John Barnidge: Okay. That's fantastic thing.
Gary Bhojwani: In case Paul wants to add part, you want to?
Paul McDonough: Yes, I think that captures it.
Gary Bhojwani: Okay, got you John.
John Barnidge: And then the follow-up. Fair to say claims tailwind persisted to a greater level than initially expected. Can you talk about maybe how each month in the quarter progressed and how you're thinking about it run rating into the third quarter?
Paul McDonough: Yes, John it's Paul I'd say broadly speaking there has been some volatility from month-to-month over the course of the pandemic, you know, going back a year, going back more than a year now, within an individual product line, you might have a month for it's up and then the next month it's down but it's been relatively stable. There is certainly not in any persistent trend up towards more normal levels, as we said in our outlook for the third quarter in a row, we think it's going to begin to trend up towards more normal levels the next quarter, and we'll see. I think that if our base case assumption holds that we don't see another spike in material spike in infections and death. And I think that's a reasonable expectation. If we do see another spike in infection and death, it's probably not, but it also doesn't necessarily mean that will have the same behavior by consumers that we've seen so far. In other words, there is a possible scenario where death spike again and you have the mortality impact but consumer say, you know what, I need to get back to my doctor's office and may begin doing that. So I guess I'd just emphasize that how things actually evolve is very uncertain and I wouldn't pretend to know exactly what that may look like.
Gary Bhojwani: John, this is a Gary. The only thing I'd add to that, I think what you're hearing from us, we don't know, we've been surprised as Paul indicated for the third quarter in a row, we thought claims have come back and they didn't, so we simply don't know. But we keep trying to send the signal take a conservative position because we feel like that's our obligation to try and say hey we think it will come back next quarter. The reality is especially that now that we've been wrong for three in a row.
Paul McDonough: I would even know how to give you odds how the likelihood is that it's actually going to come back. We just don't know, but we're trying to be as conservative as began.
John Barnidge: That's helpful. I get, it's like a ping-pong ball you have all these assumptions and they've been a it's going to land further on one side of the other based on an average. So I appreciate that's all from my questions, best of luck.
Operator: Your next question comes from the line of Ryan Krueger with KBW.
Ryan Krueger: I was hoping you could talk a little bit about recruiting trends some of your peers have talked about in some challenges in terms of recruiting due to tight labor conditions. I know you've also been shifting away, from shifting some of the sort of the recruit. So I was just hoping for some commentary there.
Gary Bhojwani: Yes, Thanks for the question. Ryan, I've been involved in a handful of other groups both within the insurance industry and other industries with other business leaders, I don't know a CEO out there right now that's not worried about ability to get labor. Every single CEO, I've talked to regardless of industry has expressed concerns over the tightness of the labor market and how difficult it is to get help. So we are absolutely no exception in that regard. One could argue that some of that trend is even more difficult for us because remember our agents work on a commission basis they will - they kill - if they don't sell anything they don't make money. Now we have support programs and so on. early on, but those difficulties are absolutely hitting our business. Frankly, we got very, very lucky, a couple of years ago, we started to make a move to de-emphasize just a raw number of recruits and instead try and focus on more targeted recruiting with an idea that that would benefit our productivity in our tenure even if we didn't grow the topline in terms of agent count quite as much. So we're staying consistent with our strategy. I think that strategy is really good in this environment. And again, just out of pure luck, we started a few years ago. So we're well into that we're going to stay on that path. You'll see us continuing to emphasize productivity, we of course do need to grow agents but I am less focused on that more focused on productivity and tenure. And if you could look at our numbers, you can see that on both of those metrics, we've done a pretty reasonable job will continue to do that but right the time will continue to be challenging, no question about it.
Ryan Krueger: And then can you comment at all on persistency trends you've seen in the life and health business through the pandemic, if you've seen any benefit persistency. I guess maybe, particularly in the life that and you've gone through the last couple of years now.
Paul McDonough: Good morning. Yes. The persistency really across our product portfolio through the pandemic has been relatively stable a little volatility here and there that has driven some pluses and minuses on the margin. But by and large it's remains relatively consistent with pre-COVID experience.
Operator: At this time there are no further questions, I'll turn the call back over to Jennifer Childe for closing remarks.
Jennifer Childe: Thanks very much for your participation in the call and we look forward to speaking with you again soon.
Operator: Thank you, ladies and gentlemen, you may now disconnect.
