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

Good morning, and welcome to CNO Financial Group's investment briefing focused on our investments function. I'm Adam Auvil, Vice President, Investor Relations and Sustainability. Thank you for joining us today. This is the first in what we expect to be a series of investor briefings drilling into the various businesses and functions of the company. Our goal is to provide investors with a deeper understanding of who we are so you can invest in CNO Financial Group. I'd like to start today's session with our purpose. We secure the future of middle-income America. For those new to CNO, we are a public insurance company serving middle-income America with a breadth of products, including life, health, annuities as well as a range of workforce benefits solutions. We distribute our products primarily through our proprietary agent force, both at the home and through the workplace. If you're interested in learning more about CNO Financial Group, please reach out to me or a member of the Investor Relations team. Before handing off to the investments team, I'd like to go through some housekeeping. This morning's presentation is available in the Investors section of our website and was filed in a Form 8-K this morning. 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. Finally, today's presentation 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 the non-GAAP measures to the corresponding GAAP measures in the appendix. I'd now like to introduce Eric Johnson, our Chief Investment Officer.

Good morning. My name is Eric Johnson. I'm the Chief Investment Officer here at CNO Financial. I really like my job. One of the things I like about it is that you can count it and you can -- and there's a score on the scoreboard every day, and I like sports and I like winning. But there's a second thing that I like about it. And the second thing I like about it is we're really helping people have better lives. We hear what we do contributes to the process of building insurance products, pricing insurance products, products that people use to have safer, healthier lives and better retirements. I often read letters that policyholders are sent into the company expressing their gratitude for what an agent has done for them and what the company has done for them. I find that really worthwhile. So I show up every day with a very strong sense of purpose. And I think that's true of the rest of my team, as you get to know them today. Typically, we're backstage in an insurance company. You don't really see or hear very much from the investment people. So today, we're going to pull back the curtain a little bit to let you understand better what we do, how we do it, what we think matters about it and the opportunities we have to help make our results even better. A few key takeaways for today. We have a very clear model as to how we get business done. We have a really strong foundation of assets that will weather any storm that market or the economy provide. We have great opportunities to drive more upside in earnings for the company. And we think we work for a company that brings strong competitive advantages to what we do. I want to present the presenters today. These are really the folks who make our investments go here at CNO. They have a lot of experience in their specific roles. They have a long tenure here at CNO and working together as a team. One thing you'll take away from meeting them is that they all have a very clear idea on how they do what they do, what results they need and how they're going to achieve them. I hope you'll get to know them and contact them in the future if you have ideas that can help them be successful and that are helpful to you as well. Before I turn it over to the team, I'd like to say a word about our business model for investing money here at CNO Financial. Our process is highly integrated into the CNO enterprise in terms of product pricing, product management, capital management, ERM, asset liability management, all the things that pull together the financial infrastructure of the company. We are very involved in that process. Speaking from the investment side, we have very strong, long-standing centralized disciplines around asset allocation, research and performance management. We build portfolios around key attributes that make our company work. Some of these key attributes you'll be familiar with, things like duration, cash flow management, capital absorption, targeted return on equity, we do that 17x for 17 different lines of business all the time. These key attributes keep us on track to meet our objectives. Another thing we do very proactively is we outsource performance assets to third-party managers who do them really well. This helps us not just meet our objectives for key attributes, but drive higher and higher levels of earnings in the general account. Wrapped around all of that is a detailed performance management process that helps us understand what we get versus what we'd expect it to get and what we need to change to stay on path. This process has worked well for us. In February '23 in New York at Investor Day at the New York Stock Exchange, I told you guys, our book yield would go up every quarter for the next 4 quarters. I think we're up to 10 quarters in a row now that our book yield has gone higher every quarter. We've had strong growth in our invested assets and strong growth in our yield on those invested assets. You put those 2 things together, along with good credit performance, and that drives to a strong bottom line for the company. We're not just disciplined. We're also opportunistic. We're not too big and we're not too small. We're the right size for ideas to make a difference and people can make a difference. One thing I'd like to say is that we do risky things in safe ways. You've seen us do that during the great financial crisis. You've seen us do that during the COVID crisis. You've seen us do that repeatedly. We're going to continue to do that. We don't just run processes, we think pretty hard. And it's a combination of infrastructure, process and people that drives to the bottom line. Let me introduce Jesse Horsfall. He's a Senior Vice President. He runs our Portfolio Management Group. He's going to take you through our general account.

Hello. My name is Jesse Horsfall. I head up the Portfolio Management Group. Over my professional career, I've spent most of my time in the creation and management of insurance portfolios. With all these years of experience, it has given me an in-depth knowledge of how stat and GAAP accounting intersect with the creation and management of insurance portfolios. The investment portfolio is highly diversified, balancing income, risk and liquidity. Let me share some statistics. 97% of the portfolio is investment grade. 97% of the portfolio is also priced by outside vendors. We have a very conservative risk allocation, and we have plenty of flexibility to take advantage of changing market conditions. CNO has a competitive advantage over our peers. And that one, we have a captive distribution force, issuing products to our target market. Two, significant surrender protection, which drives persistency; and three, a broad spectrum of products, which allows us to invest over the market. CNO enjoys a very robust ALM platform. Over the past 20 years, we have invested broadly in this in both technology and operational enhancements because of that, when we launched CNO Bermuda Re, we were able to do that successfully. Relative to our peers, we have a fewer high-risk assets and abundant liquidity, while we pay very close attention to how we're allocated to other insurance companies, we do not mimic. We invest to our strengths. Further in the presentation, several of my colleagues will be going into more detail in some of these sectors. Summing it up, we have a high-quality portfolio invested to our strengths with abundant liquidity to take advantage of the market when and if it allows. Thank you. Next, you'll hear from Zandra de Haai, to talk about our municipal portfolio.

I'm Zandra de Haai. I run the Credit Research Group. I have over 25 years' experience covering corporates to municipals. The muni market is large, but we are selective, favoring taxable munis with stable contracted cash flows, tax-based stability and strong population trends. We have a high-quality portfolio that avoids high yield and has never experienced a default. We focus on 4 main areas: general obligation, hospitals, higher education and transportation. Here we highlight what we look for in our top 4 sectors, such as Ginnie Mae wrapper on our housing bonds. Within transportation, our focus on essential infrastructure helped to minimize downgrades during COVID. And within higher education, our emphasis on top-tier systems and sizable endowments has helped to mitigate the noise coming from the new administration. To sum it up, our selectivity has led to a portfolio that is high in quality, provides diversification in an attractive yield pickup over corporates. Thank you. Now I will turn it over to my colleague, Jerimy Horner, who will cover Structured Securities.

Hi. I'm Jerimy Horner, and I'm a Vice President in charge of Structured Securities. This includes asset-backed securities, residential mortgage and commercial mortgage securities. I've been in this role for 17 years. Looking at this slide, you can see we financed Main Street, basic traditional assets from issuers with a demonstrated strong track record. It's a high-quality portfolio, 94% investment grade and 0 fallen angels. We focus on 3 main areas in ABS, one, whole business securitizations from national brands; two, consumer lending through traditional channels; and three, equipment finance across all ticket sizes. What makes us special is our intensive analysis and sector discipline. In RMBS, we have a flexible relative value approach, ranging from Agency MBS to pre-GFC originations. We do 3 main things: one, non-Agency prime mortgages with stable cash flows; two, discount Ginnie Maes and three, legacy non-agencies with high loan counts. We're good at this. We've been good at this because of substantial resource investment and deep loan level analysis while avoiding niche products. Let me tell you about our whole loan portfolio. We were an early mover, acquiring residential whole loans with best-in-class partners. Combine that with conservative underwriting guidelines, and we've had a high-performing portfolio, less than 1 basis point of loss in the last 10 years. Lastly, our average loan LTV is 65% and FICO near 750. These metrics indicate a very high-quality portfolio. In conclusion, I want you to take 2 things from this section. We're more active in structured securities than some of our peers because of our investment in infrastructure and our capabilities; and two, the portfolio is positioned to take advantage of volatility with dry powder for emerging opportunities. Next up is Andy Aiello, who is going to be talking about our Commercial Mortgage loan portfolio.

Hi. I'm Andy Aiello, and I'm responsible for the Commercial Mortgage portfolio. I've worked in commercial real estate since 2001 with the past 13 years being here at CNO. This slide summarizes various key metrics for the commercial mortgage portfolio. More than 80% of our investments are in industrial, multifamily and anchored retail, widely considered to be the least volatile property types. We avoid hospitality loans, CBD office, transitional assets, construction risk and lease-up risk. Overall, the portfolio LTV is just 44% and average debt service coverage ratio is more than 2x breakeven. As demonstrated, our focus is on industrial, multifamily and anchored retail, and we do not deviate from our standards as it relates to the construction of our commercial mortgage portfolio. We invest in Class A multifamily assets stabilized in nature, primarily located in major metropolitan areas. For industrial, we're looking for institutional quality assets typically with minimal office finish or specialized space. As it relates to retail, our focus is on necessity-based shopping centers typically anchored by a major national or regional grocery store. Sponsorship is very important as we evaluate new transactions, and the majority of our sponsors are institutional in nature with significant management and operations experience. At CNO, we are very selective about the properties we invest in and the sponsors that we transact with. This last slide takes a deeper look at just the office metrics of our portfolio. Clearly, office has been in the headlines now for many years. And historically, we've been very selective about adding this property type to our portfolio, even predating the COVID pandemic. As a result, we currently carry only 15 office loans with about half of those being medical office in nature. Near-term maturity risk here is minimal with only $8 million in office loans maturing in the next 2 years. As a result of the strong and consistent historical performance of the commercial mortgage portfolio, we view this as an area of significant growth and opportunity going forward. Next, I'm going to turn it over to my colleague, Eddy Piedra, to talk a little bit about CLOs.

Hi. I'm Eddy Piedra and I run the CLO desk. I've been involved in leveraged loans and CLOs since 1996 and have been with CNO for over 17 years. A CLO is a portfolio of leveraged loans to midsized companies. The portfolio is financed by a series of liabilities, and we purchased the higher-rated liabilities. One of the benefits is that the asset class has a good relative value versus corporates. This relative value changes over time as volatility comes and goes. What we do is tactfully add to the asset class whenever volatility presents itself. How we do this, we focus on managers. We look at top quality managers. There are no new managers, and there's also no [ custody ] credit investors. We also focus on the collateral. We leverage our knowledge and activities in the leveraged loan space in order to do this. This disciplined approach has produced 4 years of consecutive positive rating migration. We expect this to have more opportunities in the future. Let me tell you a little something about what we're doing in the CLO debt side. With the use of AI, we're focusing on our underwriting process. We look at over 300 indentures per year, each 1 taking approximately 30 to 45 minutes to review. With the use of AI, we're able to reduce this to less than 5 minutes, which gives us a competitive advantage in the market when trying to buy a bond. We expect to find other opportunities in other asset classes similar to what Andy is doing in commercial mortgages. And we expect this to continue to give us a competitive advantage in the market in the future. Let me turn it over now to Matt Hall, who will talk to you about alternatives.

Hello. I'm Matt Hall, Vice President responsible for the Alts Allocation and FABN program. I joined CNO in 2007 and was previously responsible for the Credit Research Group. I'll start off by highlighting the alternatives allocation. The alts portfolio is focused on proven asset managers and core strategies, which you can see depicted in the slide. It's a diversified allocation with over 50 fund managers and 75 funds. We invest in time-tested benchmark strategies, not esoteric narrowly defined strategies. Areas that we currently find attractive and are leaning into from an allocation perspective include the infrastructure sector, and secondaries more broadly. The theme of our alts portfolio is middle of the road. Again, we are focused on core strategies with proven asset managers. We talk to and diligence dozens of asset managers in any given year. And whether they're focused on commercial real estate or private equity, what we're looking for is a track record of consistency and good performance. Diversity is another focus point for us, and there's a strong correlation between the size of our commitment to a fund and that funds underlying diversity. And to ensure that we're not overly exposed to any single asset across multiple funds, we focus on managers that have unique asset sourcing. Last but most importantly, is cultural alignment. Our goal is to have a long-term meaningful relationship with the asset manager. So we think it's important that we have shared values can relate to one another and enjoy partnership. This next slide highlights the historical performance of the alternatives portfolio. As you can see, performance was good through 2021. However, recent performance has not met expectations. In response, we've actively rebalanced the portfolio over the last several quarters in an effort to reduce market beta and tighten the range of likely outcomes in any given period. Most notably, the rebalancing reduced our exposure to commercial real estate and increased our exposure to private equity. The number of funds, strategies and managers also increased in the portfolio, all of which should aid stability. We put greater emphasis on performance management and benchmarking and recent results suggest the rebalancing is paying off. To sum up alternatives, we take a simple approach. We want a diversified portfolio of core strategies with proven asset managers. We believe that the rebalancing we've done over the last several quarters has positioned the portfolio to deliver on expectations. In short, our FABN program is a winner. From an economics perspective, from a market reception perspective and from the noteholders perspective, the results are good. The CNO story is a good one, and we want to leverage that by being a consistent issuer in the FABN markets. We take a disciplined approach to each 1 of our issuance windows. Each issuance must meet economics without compromising credit quality or ALM. From an asset perspective, we manage the program at the issue level. Each portfolio is self-liquidating, and we maintain strict guidelines around credit quality, ALM and diversification. To sum up, the FABN program has performed, and we are pleased with results. As you can see on the slide, the program is a real contributor to CNO's bottom line. As such, you should expect to see us in the market as we continue to tell our story and grow this program.

Hi. My name is Jay Mantz. I'm President of Rialto Capital. Rialto is a commercial real estate credit investment management and asset management firm, major offices here in New York and our headquarters in Miami. We control about $120 billion of commercial mortgage loans and we have been partners now with CNO Financial for about 37 months. CNO is more than just a source of capital for Rialto. I think most important -- and I think the reason that this partnership really started was because their acumen and insight as to what insurance company executives need to think about in terms of managing the business and managing their investments. The insurance companies today are one of the biggest capital providers. And the environment has shifted quite significantly to alternatives, whether it's private credit, private equity, real estate, et cetera. They've been very helpful to us in terms of how to structure products, the return profile the structure necessary to be very efficient for insurance company capital like any really good partnership. It's not about the documents, it's about the culture of 2 respective firms. CNO could not be a better partner. They are supportive. They have a very good sense of what's going on in the environment and the market. They have the ability to pivot when necessary and they are always there for us. Their response time is second to none. And when I think about our relationship with CNO, the word I do use is partner. That is the #1 thing that we say. They are our partner. And that is -- that word is probably the most important to me to Jeff Krasnoff, our CEO and to the firm is that we have CNO as our partner.

One thing I'm frequently asked is, what do you like right now? What are you doing right now? Right now, we've been safety first. Since April, the markets have been very volatile. Credit spreads, while they blew out, they've run right back in. And I think they're probably asymmetric to the downside right now. So we're hitting it right down the middle of the fairway. We're achieving good results for the company, but we're not taking it -- we don't think the market is compensating for excess risk right now. So we're not taking it. So we're offensively defensive right now. The consumer is doing okay. Household wealth and jobs are both pretty strong, but expectations are pretty gloomy. Short rates seem floored. Long rates may become the opportunity for us, strong quality at the long end, maybe the insurance asset of 2025. I think. One another thing we're doing is a lot of scenario planning around disparate and low probability, high-impact outcomes. We weren't surprised by Moody's recent downgrade of the U.S. government. In fact, we've been planning around scenarios that are far more severe. In all of our scenarios that we've planned for you'll be happy to hear that our assets in our company stand up very strong. Standing still is not good enough. We know we have to lean forward to achieve the results that our company deserves and our shareholders deserve. Fortunately, we have good line of sight opportunities to drive net investment income higher in the coming year or 2. This slide describes 3 or 4 of them. We're continually looking for new and differentiated ideas to drive income higher. Let me say a word about a couple of them. We have the chance to optimize our existing portfolio like-to-like, just as the yield curve has shifted higher at the long end in recent months, we're going to take advantage of that and roll some old vintage assets up the curve and drive higher income. Second, our alternatives portfolio rebalancing, which Matt Halls described will, we think, contribute to a higher level of variable income in 2025 and 2026. And we also think we have a great potential to take advantage of our strong asset liquidity by rolling into some less liquid assets when the market rewards us for that. We want to be very thoughtful about that. I think you should get paid some positive convexity for taking on that incremental risk. The market really hasn't done that the last couple of years. We think it will and when it does, we'll be ready to take advantage because we've stored up a lot of dry powder as we moved up in quality in the last 3 years. We didn't do that not to spend it but we've been -- we're waiting for the right opportunity. We also think we can continue to grow our funding agreement program, Matt Hall described that to you earlier. That's been a big success for us. We have more room to continue to increase our outstandings there, and that drives a nice steady flow of income to the bottom line. So you put that all together, we think there are real material opportunities to impact NII upward and without stressing capital or credit quality and look forward to seeing those play out over the next year to 18 months. One of my key messages earlier is that here at CNO, we think we operate from a position of relative competitive advantage. In uncertain times, this is a really good place to be. We're at the right scale, not too big, not too small. We have strong capital, yet we can impact our results by thinking smart, taking smart risks, as Gary would say, we're able to invest with selectivity. We don't have to buy the whole market. We can be very tactical. We have a strong foundation of asset quality to build from, and we have a lot of dry powder. We have an in-force of insurance business that is consistently growing that provides fresh liquidity. And we have inherent financial strength from the diversity of our in-force products and our captive distribution. You put that all together and you couldn't pick a better company to be an investment person, and that's why we've all been here so long, and we're also happy to be here.

The investment team did an excellent job walking us through their investment approach and ability to continue their strong results. Before moving to Q&A, I'd like to remind investors, we continue to demonstrate our ability to grow the franchise while also growing earnings and improving profitability. We're in a unique and differentiated position, serving the middle income market with our products, distribution and track record of execution. CNO is well positioned to continue profitable growth and drive ROE expansion through 2025 and beyond. We'll now move to the Q&A session.

Welcome to the Q&A portion of today's event. I'm joined by -- with a number of the presenters, including Eric, Jerimy, Andy, Matt as well as our CFO, Paul McDonough. [Operator Instructions] Thank you all for being here today. To start off with the Q&A -- what's the most concerning economic scenario that you are evaluating?

Well, I'll get that 1 started and then ask others if they'd like to chime in. But first, thanks, everybody, for listening in this morning and taking your time, and we hope you learned some things about us that help you feel good about CNO and this future prospects. Now to your question about thinking about the economy and where that might go going forward, we look at a tremendous range of different scenarios that go well beyond kind of a base case. We think about what might happen if the economy slows tremendously. We think about what might happen if you had very rapid economic growth and a high rate of inflation, credit spreads blowing out, credit losses rising, changing liquidity patterns in the market, broken government environment. We think about all those different cases. I'd say history doesn't repeat, but it does rhyme. And historically, we found the more challenging circumstance is actually to be down rate scenarios in terms of the long-term value of the company, the ability to drive NII and push income higher. We were more challenged probably in down rate scenarios. We have very strong credit quality. So it's very difficult to shake the foundations from a fundamental credit perspective and we've proven it out through the great financial crisis and other actual cases. So down rate probably is the hardest pretty much everything else. We find ways not just to get through it, but in the long-term to capitalize from it. And so that's something we put a lot of energy into on a consistent basis. Let me ask Jerimy or Matt if they have anything they would like to add to that?

Yes. Eric mentioned the opportunity, but we're good, I think, at playing both defense and offense, like that kid that played football in Boulder last year. I think right now, we're leaning into a little bit of offense, but stressing the portfolio as part of our routines. Nothing there.

Nothing.

All right. Next question. You already did some portfolio optimization trades last year is the $600 million to $1.5 billion cited all incremental from here?

Yes.

Easy one. All right. Next, let's go to FABN. So I'm going to merge 2 questions here. Can you give a sense for the magnitude of potential increases in FABN, FHLB and also how is the FABN program managed?

I'll take a start on that. And I think, Paul might want to chime in as well and then Matt, who is really at the center of all of that activity can follow through as well. But one thing we've been is fairly modest and cautious in terms of investment leverage. We -- I think we probably are at the lower end of the range that we could ultimately learn to live in, but we've built the program consistently and modestly over a very long time with the FHLB, we've been at that for more than 10 years. And you haven't heard a lot about it, but it's made a lot of money for the company. FABN is a newer thing for us, may be a couple of years old now. Again, we're going to walk before we run and try to avoid any unnecessary stumbles, very conservative underwriting quality and good ALM match and just take the money to the bank quarter-over-quarter. So I think those activities have good prospects. But Paul, I want to ask if there's anything you'd want to say about that.

We see what Matt might add, and then we'll see if I have something to contribute.

Sure. In terms of growth rates, I think what I would target more in the longer-term growth of the FABN is going to be more in tune with growth of the overall enterprise. I think in the short, intermediate term, growth rates might be a little more elevated given we're still ramping the program. But having said that, growth is not going to be linear here. We're a pretty disciplined issuer and as you've seen historically from us in terms of issuance, when the markets are cooperating when we can achieve our economics or an active issuer like we were in the back half of 2024 and when the markets aren't cooperating, and we can't achieve economics, we're going to sit still like we did in most of 2022 and 2023.

I guess the only thing I'd add is in terms of the size of the program, current program size is $4 billion. We currently have $3 billion or so outstanding. So there's some capacity there. $4 billion isn't necessarily the limit. We could grow it from there. At $4 billion, we're not approaching any sort of limits in terms of our operating leverage. So we've got some capacity even beyond the $4 billion.

Excellent. Thank you. Always a hot topic, and I know Matt did a great job explaining a little bit of this on the call, but maybe this could give an opportunity for Eric and Paul to comment. Could you provide more detail on how CNO rebalanced the alternatives portfolio?

Yes. I'm going to let Matt -- I think Matt probably can speak to that better than anybody else here, Matt, do you want to...

Yes, sure. So really, the catalyst of the rebalance was that we weren't satisfied with performance in the aftermath of COVID. And what we did with the rebalance is we lowered our allocation to commercial real estate and really added diversity to the overall portfolio. And we did that really to lower market beta and hopefully, bring in the range of possible outcomes in any given period. And so we like what we see so far, and the goal really is to get better and more consistent performance out of the allocation. All right.

All right. Next, would CNO ever consider outsourcing a greater portion of its investment portfolio and/or partnering with an alternative traditional asset manager like many life and annuity companies have done in recent years or conversely, the CNO see opportunity to capitalize on its investment expertise by managing assets for third parties and generating additional fee income.

Yes, I'll take that. Thanks for the question. It's a pretty broad question, and I'll maybe take it in pieces and try to cover as much of it as I can. I'm pretty agnostic as we described earlier in the presentation, don't have any aversion at all to leveraging outside expertise where it can add value to the company and to the shareholder and particularly in very specialized areas. We tend -- we'll outsource very actively, and we're always looking for good partners. It could be in commercial real estate, it could be in emerging markets, some other alternatives areas. We are always looking for good people to partner with now let me kind of take the question a level lower. A lot of life companies have partnered with private credit managers and outsourced pretty good chunks of AUM in that space. It's conceivable we would do something like that. On the other hand, I haven't thought personally in the last couple of years that private credit has been the best bargain in the marketplace. And I think that's an area where I think fundamentals are -- have some questionable qualities and that in the longer run, it's got to get cheaper for it to be a real bargain for the buyer. So I don't want to foreclose on that as a future possibility, but we haven't felt from an asset allocation perspective that, that was the best deal in the marketplace. Now in terms of -- we're very CNO centric and our -- we're an integral part of the enterprise and built into all the different disciplines that help make the company go from capital management to liquidity to risk management, et cetera. So personally, I don't necessarily think we want to take our eye off of a very important ball, which is helping making money for our shareholders here. That's job one. I don't want to foreclose any possibility way down the line. But right now, we've got plenty of work we can do to help CNO make more money, and that's what we're going to focus on. Now Paul, I'll let you...

Yes. I mean I would say that managing the investment portfolio is such a critical component of the business model. I'm reluctant to outsource that entirely. I think it's very important to maintain that discipline in-house and to retain sort of decision-making over strategic asset allocation. And so that's sort of the basic mindset but we're very open to partnering on certain asset classes as we have done historically, as we're currently doing, as Eric and team have talked about. And that's a constantly evolving process as we seek to optimize the risk-adjusted return that the portfolio is generating.

Excellent. Why don't we continue on with that theme? Could you talk about what types of assets you partner with third parties to manage? And if possible, could you highlight some of the partners CNO works with?

Sure. One particular area that we've done really a lot in is in the residential mortgage area. So why don't we start with that one and let Jerimy give a description of what we're doing, who we're doing it with and what the benefits are.

Yes. There's a slide on this in the deck with some more details. But what we like about it is there's excess spread over public investment-grade corporates. Right now, it's around 100 basis points, and we get capital charges that are roughly equivalent to an A+ capital charge. Some of our partners, Neuberger Berman, Angelo Gordon, TPG and Bayview. And they all have their specialties. And they're really great partners, the underwriting work upfront kind of facilitates that and they've been really good and helpful partners for us.

Second area, maybe we talk about a little bit is in the EM area where we -- we've outsourced all of that to GSAM, Goldman Sachs Asset Management. We've been working with them in that area for maybe 7 years now. That's a fairly sizable allocation and they've done very, very well. We have a very particular set of investment guidelines that are intended to shape the kind of the risk, the income and the capital allocation, the way we want it to be. They've done a very, very good job of working within those guidelines, keeping us up on trends, fundamental and technical in that marketplace, helping us find opportunities. And it's been operationally seamless as well. We're about to do another mandate with GSAM in IG private placements of pretty good size as well and do a lot of other work with them. So -- and then we had earlier some discussion about the partnership with Rialto, which Matt can maybe speak to. Point being that we work very hard to find partners who culturally who are aligned with us, operationally who are aligned with us, understand what we need and can produce it. And then we tend to stay with them for a really long time, and that has had very good results. I don't know, Matt, if you want to say a few words.

Yes, sure. The other area in which we've been active in terms of private credit is ABF. We've signed some pretty sizable SMAs with partners over the last 12, 18 months, the likes of BlackRock, Sixth Street, Barings and we're going to sign on with Goldman here coming up. So we like partnership can come in many forms. It can be, as Eric and Paul mentioned, it could be a strategic partnership. It could be us putting a bunch of dollars in SMA or it could be us anchoring -- have an anchor commitment for a commingled fund. So we're up for business on the partners upfront.

Excellent. Thank you very much. Next question. Has your new money allocation changed as you've leveraged your affiliated Bermuda reinsurance platform, are there assets that are more efficient in the Bermuda capital framework?

Good question. I'll take that one. One reason we've had so much success with our annuity business here at CNO the last couple of years has been our Bermuda captive, which has enabled us to achieve very good returns on capital in our annuity business. The Bermuda general account is not really focused around credit. It's really focused around ALM. And we get the best capital result -- capital management result from that platform by very close adherence to quality and asset liability matching. So to some extent, it's been kind of a furtherance of our up in quality down in volatility strategy. It's played into that very, very well. And so -- it's very well aligned with our -- has been very well aligned with our overall asset allocation model. In that portfolio, you would find a subset of our larger general account. It tends to be kind of a mid-duration higher-quality portfolio. And we're very happy with the results we're achieving there.

Thanks, Eric. Next question. Do you worry about the credit ratings that some private investments are getting?

I'll start on that, but Matt can chime in because in terms of alts, he is very involved in that. But we've been very consistently attentive to making sure that the ratings on our assets, we think, are reflective of their underlying quality and that the raters will be generally respected so that we don't have a slip and fall risk there. And so you would find if you looked at our portfolio of private assets, that are credit oriented that there's -- we have very little risk of ratings migration just due to the nature of the rater. But Matt, I'll let you jump in.

No, I agree. Ultimately, we're not underwriting to a rating, we're underwriting the underlying fundamentals as well as the underlying return on any investment certainly cognizant of who the rater is on any deal. And there's certainly ones we favor and ones we don't favor so much. And that's just how we evaluate opportunities.

I like the next 1 because it's something I think we're good at. Could you talk about the attractiveness of allocating 11% of your general account to taxable munis.

Sure. Earlier in the presentation, Zandra gave a -- spent a few minutes on that. And we realize that we have a relatively high allocation to munis. We like the space. It's had good results for us. It's had -- we've achieved excess spread over like rated corporates 20 to 40 basis points. Typically, it's long duration, so it matches up well from an ALM perspective. Good diversification from fundamental corporate credit risk, less economically sensitive. We recognize in the muni space that there are some areas that are having some challenges in higher ed. You'd be happy to hear we don't -- any of the names you hear about in the newspaper all the time. We don't have exposure to, although I am a Harvard Alumni and I have a bias. I have some of a personal account actually. The -- we realize though there are some challenges in higher ed, for example, some challenges in the housing space as well. But we have a really strong portfolio, really diversified, very highly rated. The great bulk of its double -- single double and AAA and very, very happy with it. It's something a little different than most other companies do. But we're not trying to be like other companies, we're trying to get good results for us.

All right. Thank you. We've got time for a couple more. Can you elaborate on areas where CNO is thinking of increasing allocations to illiquid assets? How much of an illiquidity premium does CNO generally get on these investments today versus more traditional liquid securities?

Jerimy , you want to take a crack at that one?

Yes, I'll start on the more public side, but you take things like esoteric ABS, you're picking up about 25 to 50 basis points and same message from my slide, but those are financing Main Street assets. So don't let esoteric be a scary worth. These are things like whole business, which Taco Bell issues that kind of securitization. To the other end of the spectrum and things I work follow and responsible for is the RMLs. And like I said, that's about 100 basis points over and again, that's a liquid market. So calling illiquid might be a stretch, but you're not going to turn them into cash in 24 hours, I think, more like 60 days in that spectrum.

Excellent. Okay. We did have another 1 come up here, so we'll go 2 more. Could you talk about what characteristics of private credit have made the asset class less attractive? Is it too much competition in the market or other factors?

Matt, do you want to take that one?

Yes. Sure. Yes, take it. Our focus in alts in general is really on proven asset managers. And I think we're troubled bubbles up within the private credit space is on managers that are a little newer to the space and maybe more incentivized to have some bad behavior. But areas within private credit itself that is really maybe on the radar is just what rates have done and the short-term rates have moved up quickly over the last couple of years. And that takes away a lot of cash flow that these companies would otherwise have to reinvest into the business. And certainly, that's going to certainly slim the margin for error, and I think that's probably the most of the focus that we have within private credit right now.

Thanks, Matt. Okay. Last question. Regarding the NII enhancement ROE uplift drivers on Slide 38, are these levers that are already being pulled or just options that CNO is considering? Can you quantify how much these could contribute to CNO's ROE 150 basis point uplift target by 2027?

Sure. So I'd say these are levers that are both being pulled and being contemplated. It's a dynamic process. And in terms of how much it will contribute, if you think about the business model, I don't want to be too prescriptive because, again, it's a dynamic process, particularly when you're looking 3 years out. But in the context of the insurance business model, you would expect and we do expect that up to 50% of the NII or sorry, the ROE improvement will come from the contribution from NII, and it will come from the kinds of things we've been talking about today, the clear opportunities that we see, given our portfolio, given the market dynamics and how things will evolve over time.

Excellent. Thanks, Paul. This wraps the Q&A portion of today's event. Thank you for joining. I hope you found it valuable and informative. And please reach out to Investor Relations, myself or my team if you have further questions around this topic or any other topics around CNO. We thank you for your support of and interest in CNO Financial Group. Have a great rest of your day.