CNO Financial Group, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Overall Performance: 2024 was a strong year with sustained sales momentum, operating earnings per diluted share $3.97 (+28% vs 2023, +40% excluding significant items). New money rates over 6% for 8 consecutive quarters. Capital and liquidity well above target, $349 million returned to shareholders (+50% vs 2023), 12th year raising quarterly dividend, book value per diluted share up 10%.
• Consumer Division: Ninth consecutive quarter of sales growth, record sales across product categories, Medicare Advantage sales and persistency improvements, LTC NAP growth, annuity growth, and brokerage/advisory growth.
• Worksite Division: 11th consecutive quarter of insurance growth, new products driving growth, geographic expansion and new group clients contributing, fee sales growth, and producing agent count growth.
• Financial Highlights: Operating earnings per share ex significant items up 41% Q4 and 40% full year, operating return on equity ex significant items improved 280 basis points. Excess capital deployed on share repurchases ($282M, 70% increase vs prior year). New money rate 6.72%, average yield on allocated investments 4.87%, net investment income up, capital position strong (consolidated risk-based capital ratio 383%, available Holdco liquidity $372M).

Segment Performance

• Consumer Division: Total new annualized premium (NAP) up 5% for the full year, with field agent NAP up 10%. Health NAP rose 18%, Medicare Supplement NAP 26%, and Medicare Advantage policies sold 14%. Long-term Care NAP was up 35%, annuity collected premiums up 13%, and client assets in brokerage and advisory up 28% to $4.1 billion. Producing agent comp was up 8%.
• Worksite Division: Finished the year strong with record full year insurance sales up 16% and fourth quarter up 23% (11th consecutive quarter of insurance growth). New products (critical illness +24%, accident +13%, hospital indemnity +20%) contributed, geographic expansion accounted for 35% of full year worksite NAV growth and 38% in Q4, NAP from new group clients up 78%, fee sales up 37% full year and 12% Q4, and producing agent count up 8%.

Guidance

• Estimated run rate operating return on equity in 2024 at ~10%, expect to improve by 150 basis points over 3 years (50 basis points in 2025). 2025 operating earnings per share between $3.70-$3.90. Expense ratio 19.0-19.4%. Net investment income not allocated expected to improve. Fee income modest decrease due to sales mix shift and service investments. Excess cash flow to holding company $200M-$250M. Technology modernization initiative costing ~$170M over 3 years, ~$60M in 2025.

Risks

• Uncertain economic conditions affecting insurance product margins and sales.
• Challenges with execution of technology modernization initiative.
• Regulatory changes in Bermuda impacting reinsurance opportunities.

Question and Answer

• Q: How should we be thinking about buybacks assumed in guidance you offered excess free cash flow guidance as well. Some further color on that would be helpful. A: Paul McDonough said to consider free cash flow guidance together with excess cash position relative to minimum Holdco liquidity at end of 2024 for share repurchase capacity.
• Q: Distribution has been good. Geographic expansion. It looks like it contributed 38% of NAP growth in 4Q, 35% in the full year. how much additional geographic expansion opportunity is there. A: Gary Bhojwani said there's a lot of potential, especially in Worksite division which has fewer agents compared to Consumer, indicating more upside.
• Q: First, just wanted to ask, Paul, I think you mentioned you're evaluating additional Bermuda opportunities. Can you give us any more sense of what you're considering there? A: Paul McDonough said they're evaluating opportunities, focusing on leveraging Bermuda platform beyond initial treaty after establishing team and relationships.
• Q: Could you give us a bit of a breakdown on the tech investments? Is it kind of platforms, consultants, implementing systems, other items. And then just can you talk about a few of the use cases for the tech and AI investments? A: Paul McDonough said primary focus is converting legacy policy and foundational systems to cloud-based SaaS solutions to leverage Gen AI and new technologies; Gary Bhojwani added it's about getting off mainframe platforms for flexibility and new features.
• Q: So first on the tech investments. We got the $170 million over 3 years, but I don't recall -- I don't know if you quantified what savings element associated with that would be and sort of over what time frame? And then Paul, it sounds like a lot of this will be excluded from operating results. But then I thought you had said it's all embedded in the ROE. So I just wanted to understand what's going on there? A: Paul McDonough said it's not a cost savings play but an investment for long-term growth; majority of costs are nonoperating, and guidance includes impact on operating income, equity, and free cash flow.
• Q: On long-term care, Paul, I think in your commentary on getting to the run rate ROE the 10% here. LTC has been pretty favorable relative to run rate levels. You had margin of $133 million in 2024. Any help with how you're thinking about what core earnings power would be not really looking for a guide, but maybe in terms of how much uplift that had on ROE versus the 10% would be helpful. A: Paul McDonough said adjustments are made for favorable LTC and other annuity margins, expecting reversion to mean, which is part of 2025 guidance basis.
• Q: On the excess cash flow outlook. And I understand that you're coming off a very strong 2024 baseline. If I think about the $200 million to $250 million range, can you just discuss some of the drivers there? I know you mentioned that some of the IT investments are flowing through. Any other moving pieces that might cause you to reach the higher end versus the lower end of that range. A: Paul McDonough said it reflects business dynamics, organic growth pace, economic climate, and risk taking in investment portfolio.
• Q: On long-term care, Gary, I think you mentioned in your prepared remarks a new and refreshed product offerings. What are you seeing in the near term? Where do you see consumer demand and maybe attractive margins for CNO in your perspective? A: Gary Bhojwani said good demand for refreshed products, but next 2-3 years focus on technology modernization, so tweaks to products rather than major launches, but long-term demand for annuities for middle-income America remains strong.