CNO Financial Group, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• CNO delivered a strong quarter with record total new annualized premiums of $120 million, up 17%, and 12th consecutive quarter of strong sales momentum and 10th consecutive quarter of growth in producing agent comp.
• Operating earnings per diluted share were $0.87, benefiting from favorable insurance product margin and solid investment results; new money rates have exceeded 6% for 10 consecutive quarters.
• Consumer division had excellent sales results with nearly all product lines up double digits, and Worksite division had record second quarter performance for insurance sales.
• Investments in technology enabled customer experience improvements and operational efficiency, such as accelerated underwriting on simplified life products with an 89% instant decision rate in the quarter.

Segment Performance

• Consumer Division: Delivered excellent sales results with 11th consecutive quarter of sustained growth. Annuity collected premiums hit a new record, surpassing $500 million in a single quarter, up 19% with 8 consecutive quarters of growth; average account size up 11%, in-force account values up 8%. Brokerage and advisory client assets up 27% to $4.6 million, new accounts up 13%, average account size up 12%. Life and health NAP up 17%, total life insurance up 20%, direct-to-consumer life insurance sales up 29%, field agents sold life insurance up 4%; web and digital now account for over 30% of D2C sales. Total Health NAP up 13%, supplemental health up 21%, Medicare Supplement up 18%, Medicare Advantage policies sold down in quarter but up 4% year-to-date. Producing agent count up 3%, registered agent count up 6%.
• Worksite Division: Delivered record second quarter performance for insurance sales with Worksite life and health NAP up 16%, sixth consecutive quarter of record NAP growth. Life insurance sales up 54%, hospital indemnity insurance up 22%, accident insurance up 16%; life sales now 35% of total worksite insurance sales. Geographic expansion initiative contributed 25% of NAP growth, sixth consecutive quarter of growth; NAP from new group clients up 84%; worksite recruiting up 34%, agent productivity up 16%; producing agent count up 4%, 12th consecutive quarter of growth.

Guidance

• Reaffirming all guidance with a small adjustment: lowering the upper bound in the expense ratio range to 19.2% from 19.4% due to better operating leverage.
• On track to generate operating return on equity of around 10.5% for full year 2025 and achieve 3-year target of 11.5% in 2027, reflecting an improvement of 150 basis points relative to 2024's run rate return on equity.

Risks

• Competition in the annuity space, with tremendous interest and competition from asset managers targeting higher-net-worth consumers, though less competition in CNO's middle-income target area.
• Potential impact of regulatory changes on Medicare Advantage, though CNO's business model mitigates risks due to diversified distribution and underwriting.
• Spread compression in investments, particularly with alternative investments yielding below long-term run rate expectations.

Question and Answer

Q: On direct-to-consumer sales, can you give more color on the momentum from the web digital piece?

A: Gary Bhojwani says web and digital sales were up 39% year-over-year, representing nearly 1/3 of total D2C sales, with recovery in lead generation and shift from TV to digital.

Q: Can you talk about the expense experience in the quarter and the change in the guide?

A: Paul McDonough says expenses were generally in line with expectations, and the expense ratio is better due to better operating leverage as the business grows.

Q: How diversified is the mix of carriers in Medicare Advantage?

A: Gary Bhojwani says CNO uses about 20 carriers, no particular concentration risk, and no risk to CNO from carriers with claims issues.

Q: If the Fed starts cutting rates, does that have an impact on the annuity business?

A: Paul McDonough says the rate environment impacts the par rate set on products, but generally has an impact on product pricing.