CNO Financial Group, Inc. (CNO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the CNO Financial Group Annual Meeting of Shareholders. I would now like to hand the conference to your speaker today, Dan Maurer, Chair of Board. Please go ahead, sir.

Good morning. I'm Dan Maurer, Chair of the Board of CNO Financial Group. I'm pleased to welcome you to our 2020 Annual Meeting of Shareholders, and I hope that each of you remain safe and healthy during these unprecedented times. Due to the continuing impact of COVID-19, we are holding our annual meeting in an all-virtual format for the first time. We will strive to make the meeting as inclusive as possible by offering our shareholders the same opportunities to participate as provided at our past in-person meetings. In addition to the authenticated shareholders having the opportunity to vote online during the meeting, we welcome shareholders submit questions through the Ask A Question text box located on your screen. We will address questions related to the various proposals during the formal business portion of the meeting. For questions directed at a given proposal, please clearly note that in your submission to assist us in identifying your question. After the formal meeting has adjourned, we will provide time for general Q&A. In a few minutes, we'll conduct the business portion of the meeting, and then I'll introduce Gary Bhojwani, our Chief Executive Officer, for an update on the company. Following Gary's presentation, we will also have several other business leaders available for the question-and-answer period. First, however, I would like to introduce our current directors who are standing with me for reelection, all of whom are joining us virtually today: Gary Bhojwani, Ellyn Brown, Steve David, Dave Foss, Bob Greving, Nina Henderson, Charlie Jacklin and Fred Sievert. Neal Schneider is also joining us virtually and will retire from the Board at the conclusion of today's meeting. I want to take this opportunity to publicly recognize and thank Neal for his service and contributions to CNO. I speak on behalf of the entire Board when I say that we will miss his experience, his leadership and his perspective. We thank him very much for his nearly 17 years of service. Also with us today is Gabe Alejandro, a representative of our independent registered public accounting firm, PricewaterhouseCoopers. Mr. Alejandro has informed me that he does not wish to make a statement. He will be available during the Q&A session to respond to any shareholder questions. Now let us turn to the business portion of our meeting. [ Todd Schafer ] has been sworn in to act as the independent election inspector for today's meeting. Polls are open and will remain open for a few minutes to allow any shareholders who have not yet cast their ballots, the opportunity to do so. The notice of the meeting, proxy statement and proxy were timely sent to all holders of record of common stock at the close of business on March 10, 2020. Those facts are established by the affidavit of the company's distribution agent. On the record date for the annual meeting, CNO had 144,879,836 shares of common stock outstanding and entitled to vote at this meeting. I've been informed by our inspector of elections that a majority of our outstanding shares are present in person or by proxies returned prior to the meeting. This represents a majority of the votes entitled to be cast at this annual meeting. And accordingly, we have a quorum present. Because, one; notice of the meeting has been appropriately given; two, a quorum is present, this meeting is duly constituted. We have 4 items to be voted upon today. Information about each item is contained in the company's proxy statement. As indicated in the proxy statement, the Board of Directors recommends the approval of all 4 proposals. We will address any questions directed at specific proposals after I read all the proposals. If you have not voted or if you wish to change your prior vote, I encourage you to vote now online. Shareholders who have sent in proxies or voted via telephone or Internet and do not want to change their vote, do not need to take any further action. Proposal 1 is to elect myself, Gary Bhojwani, Ellyn Brown, Steve David, Dave Foss, Bob Greving, Nina Henderson, Charlie Jacklin and Fred Sievert as directors for 1-year terms expiring at the 2021 Annual Meeting of Shareholders or until they're [Audio Gap] been qualified. Proposal 2 is the approval of the company's amended and restated long-term incentive plan. Proposal 3 is the ratification of the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the year ending December 31, 2020. Proposal 4 is the approval by nonbinding advisory vote of the executive compensation of the company's named executive officers as disclosed in the proxy statement. Now we will pause for any questions on these proposals. Operator, please unmute Jennifer Childe's line. Jennifer? Do we have any questions on these proposals?

No questions, Dan.

We will now proceed to complete the voting. If there are any shareholders who have not already voted their shares or who wish to change their vote, please do so now as the polls are about to close. [Voting]

Thank you. The discussion of the matters for shareholder consideration is now closed, and the polls are now also closed. The election inspector has delivered the preliminary voting results. I'm pleased to report that based on these results, each of the director nominees has been reelected and that each of the other proposals on the agenda has been approved. We will report the final voting results in a Form 8-K to be filed within 4 business days. That concludes the business portion of our meeting. And I formally declare that the 2020 Annual Meeting of Shareholders is now closed. I will now turn this meeting over to Gary Bhojwani to review CNO's business. Gary?

Thanks, Dan. Good morning, everyone, and thank you for joining us. I'd like to start with some remarks on the COVID-19 crisis. First and foremost, I hope that you and yours are keeping healthy and safe. Second, every one of us at CNO would like to extend our gratitude to the health care professionals, first responders and many others who are providing essential services that keep our country running. We also extend our deepest sympathies to the families who have lost a loved one to the virus or are ill and recovering. Our thoughts and prayers are with you. I'd also like to take a moment to thank our many associates who worked night and day to mobilize our remote work capabilities and keep our infrastructure running smoothly. I'm incredibly proud of how our associates and agents have responded and adapted to these challenges. They have been working tirelessly to support our customers during this difficult period. Every business is navigating unprecedented economic fallout from COVID-19. We are truly in uncharted territory. Thankfully, CNO was operating from a position of strength. I share a few key highlights with you before I move on to discuss our 2019 performance. First, our capital and liquidity remains strong. Even under our severe stress case scenario, we expect to maintain our dividend and have the capacity to resume share repurchases should that make sense as conditions evolve. Second, our investment portfolio is solid and defensively positioned. We are underweight in the most COVID-19 impacted sectors. Third, though the pandemic will pressure sales in the near term, our growth engine remains intact. In fact, demand for some of our products, especially our direct-to-consumer life insurance has increased meaningfully. Fourth, the business transformation we announced in January positions us well for an increasingly digital world. The groundwork laid by our transformation enables us now to accelerate virtual selling, digital service and lead sharing between channels. Turning to Slide 3. As we navigate the COVID-19 crisis, I share our approach by our 3 constituencies: our associates and agents, our customers and our communities. Starting with our associates and agents. Although we cannot predict what the long term holds, it was important to reaffirm our commitment to our workforce. Last month, we communicated that there would be no associate reductions due to COVID-19 for at least the balance of this year. We also introduced financial support programs for our exclusive agents who have seen their businesses disrupted and their livelihoods challenged. In response to COVID-19, numerous health and well-being resources were made available to eligible associates, which include expanded PTO policies, COVID-19 testing and treatment reimbursed at 100% and free telehealth visits and 24/7 counsel. Our exclusive agents, financial advisers and customer care centers remain fully engaged and available for our more than 1.3 million policyholders. We are also working with consumers who may be experiencing financial difficulty. We provide an extended period of time to make premium payments without the risk of losing their benefits during these difficult times. Also, many customers prefer to meet with our agents in a face-to-face setting. To assist, we deployed enhanced technology tools and training for our exclusive agents to allow them to serve consumers through virtual consultations and digital insurance applications. For our communities, CNO committed to maintaining our 2020 budgeted donations for corporate philanthropic partners. Associates are participating in virtual volunteering opportunities offered to our Team CNO volunteer program. CNO and senior leaders also donated $300,000 to 2 financial assistance funds to support associates and agents within the CNO family that have been impacted by COVID-19 or other personal financial hardships. The actions we are taking to respond to the pandemic are consistent with our core values and our commitment to social responsibility. We realize that our long-term success is tied to the collective well-being of our customers, associates, agents and communities. It is our privilege and duty to support these constituents. We embrace this role. Moving to Slide 4 and a review of our 2019 performance. In 2019, we continued to grow and diversify the franchise. The investments we've made in growth over the past year or so are paying off as expected, translating to solid and sustainable top line growth. All 5 metrics on our growth scorecard were up for the full year. Life and health sales were up 5%, which included record sales in worksite and direct-to-consumer. Annuity collected premiums were up 12%. Collected premiums were the strongest in 10 years. Fee revenue was up 76%. Client assets in our broker-dealer and registered investment adviser were up 37% to $1.5 billion. And we ended 2019 with our sixth consecutive quarter of growth in producing agent comp. During the year, we launched several new manufactured and third-party products, including Medicare Supplement Plan D; [ Living Health ], which combines simplified issue life insurance products with optional accelerated health providers. And we piloted Humana's Medicare Advantage plan through our direct-to-consumer channel. At the end of April, we acquired Web Benefits Design, or WBD, which added an online benefits administration technology platform to our suite of worksite products and services. The transaction added full-service employer benefits administration capabilities to our fast-growing worksite business. This technology strengthens our value proposition for both new business and existing employer group retention and offers numerous cross-selling opportunities for both companies. During the year, S&P and Fitch upgraded our credit ratings. With these 2 upgrades, CNO's debt is now rated investment-grade by all 4 leading rating agencies. A new tax planning strategy developed in 2019 will allow us to utilize all net operating losses that were set to expire in 2023 without being utilized. This translated to a $194 million benefit to the company or $1.28 per share enhancement to shareholder value. We generated $327 million in gross free cash flow for the year before capital retained to fund organic growth. Net of this capital strain, free cash flow was $287 million. While low interest rates are causing significant headwinds to our earnings, we are not being complacent. In 2019, we focused on offsetting increasing regulatory burdens with aggressive discretionary spend cuts. For example, we initiated a strategic technology partnership with estimated savings of $20 million over 5 years. We also began the organizational transformation work we implemented in January 2020, which we estimate to save us $22 million gross and $11 million net by the end of 2020. We continue to be laser-focused on generating operating efficiencies in 2020. Turning to Slide 5. In 2019, we generated operating earnings of $290 million, which was down 4%. On a per share basis, our operating earnings were up 1% year-over-year to $1.85 per share. This reflected an increase of $0.02. To put this in context, to generate the $0.02 increase, we had to overcome a decline in net investment income of $0.24 per share, which was driven largely by lower interest rates. We accomplished this through improved margins, increased fee income, a higher level of invested assets and a lower share count resulting from our recent share repurchase activity. Book value per diluted share was up 13% due to our strong operating performance and a tax strategy I mentioned. Leverage and liquidity remains steady and within our targeted ranges. At year-end, statutory capital was $1.7 billion, and our consolidated risk-based capital ratio was 408%. We remain committed to good capital stewardship and intend to deploy 100% of our excess cash flow to highest and best use over time. In 2019, we returned $319 million to shareholders, which included $252 million in share repurchases. To put this in context, we spent nearly double the amount spent on share repurchases as in 2018 and the most we've deployed on share repurchases since 2015. We have returned $700 million or 25% market cap since 2017. Turning to Slide 6. To wrap up, I'm proud of the progress we made in 2019. We executed well against our playbook, posting solid operational and financial results. Growth initiatives that we implemented over the past few years and our ongoing investments in technology are paying off, and the significant savings opportunities we identified will dampen the impact from the low interest rate environment. From where we sit today, it is too soon to predict when the country will return to normalcy and what that path will look like. But you can be assured that we remain focused on delivering value to all of our customers, communities and shareholders as we navigate through these unprecedented times. Despite these significant short-term challenges, our franchise remains healthy, and our strategies and priorities remain consistent. We are benefiting today from the actions we've taken over the last several years to diversify our business, strengthen our balance sheet and manage risk in our investment portfolio. We are well positioned to weather what is ahead of us. And I'm confident that we will exit this crisis as a stronger and more resilient company. To all of our shareholders, please stay healthy, please stay safe. And with that, I will now turn it to Jennifer Childe, Vice President of Investor Relations, to moderate the question-and-answer session. Jennifer?

Thanks, Gary. We have 2 questions. The first question comes from the carpenter union pension fund. Chair, the carpenter union pension fund with combined assets of $70 billion have a collective ownership position of 236,952 shares of the company's common stock. As long-term investors, we appreciate the company's actions to address the difficulties being experienced by employees, customers and other important corporate stakeholders related to the COVID-19 pandemic. As long-term investors, we encourage executive compensation features that promote long-term performance. The design of the Executive Compensation Plan is strong, but I would like to ask the rationale for the relatively short, 3-year pro rata vesting schedules for restricted stock units and stock option grants. Thank you.

Thank you for that question, Jennifer. This is Dan Maurer. We share your view on promoting long-term performance of our executives and our company. RSUs do have a 3-year vesting. The latest stock options that we granted had 10-year terms. These we judge as being consistent with promoting long-term performance. I would also assure you that we consult with a compensation consultant, Willis Towers Watson, to ensure our compensation designs promote pay for performance, that they're competitive in the marketplace and that they drive retention of our key executives.

Thank you, Dan. The second question also comes from the carpenter union pension fund. The recent dramatic growth in the size of passive mutual funds' corporate ownership interests in U.S. corporation raises important public policy and corporate governance issues. Currently, BlackRock holds 13% and Vanguard holds 10% of the company's outstanding shares. Vanguard is an investment manager for a portion of the assets of the company's retirement plan. Does the Board see this growing ownership concentration as a positive or negative development as regards to long-term corporate planning and performance? And also, are there potential conflicts of interest when a 5% holder is managing company retirement planned assets?

Yes. And thanks for that question, we appreciate it. We also appreciate the broad ownership and the reflected confidence that, that shows in CNO. It is true that Vanguard is an investment manager of a portion of the assets of the CNO retirement plan, but it's also very important to note that they have no influence and does not seek -- and do not seek any influence on the design of those plants. So simply, we see no conflict. And I would add, this is not an uncommon situation in the marketplace.

Thanks, Dan. There are no further questions.

Thank you, Jennifer. We will now conclude the meeting. Thank you for participating today. Thank you for your support for CNO Financial Group. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.