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

All right. We're going to get started. Good afternoon, everyone. I'm Ryan Krueger from KBW. Excited to have CNO Financial with us today. Up on stage with me is Gary Bhojwani, CEO of the company. I also want to acknowledge Paul McDonough, the CFO; and Adam Auvil from Investor Relations in the audience.

So yes, just to kick it off, I think it's clear that CNO has made a lot of progress in recent years, improving growth metrics and also expanding your returns. So I was hoping you could just start by discussing how you feel about where the company is at, at this point and where it's headed over the next several years from here.

Okay. Ryan, thanks for having us, and thanks for the question. When I look at the performance of the stock and I look at the sales and I look at the employee retention and customer satisfaction scores and so on, we feel really good about where we're at. But I'm the CEO, and I'm biased, and I still think we're underpriced. And I still think we have tons of potential. And the lawyers get nervous when I say that, but it's the way I feel. We've benefited from a number of things, not the least of which is the demographic that we serve. There's a handful of things that make CNO really unique. And one of them is that we focus exclusively on the middle market. And we define that as customers that have an average net worth of $100,000 or less. So we're focusing on Middle America. And the reality is that, that represents, depending on who you believe, somewhere around 60% or 70% of the population in the U.S. And there's nobody else out there that has a full suite of products and does all the things that we do that's focused on that segment. Most of the people in our business understandably are focused on the affluent that have $1 million or $2 million or $5 million to spend or invest, and that's just not where we're focused. So that demographic continues to have significant need. People should remember that there's 11,000 Americans retiring every day. And oftentimes, that's when the relationships with our customers start. When they're getting ready for retirement or they have retired. They're turning 65 and they need to think about things like Medicare. We're also -- that's another thing that makes us unique is we're one of the few life insurers that also sells Medicare. So we start the relationship oftentimes with something like a Medicare supplement product, and then that goes on into other things. Now I should also mention there are some really specific rules about starting relationships with health-related products and then moving into other things. We, of course, follow all those rules. But the reality is that we have a significant opportunity because of that demographic, because of how many of them are turning 65 every day and the fact that there are so few alternatives. And we have a great team of people that have really been able to turn those opportunities into results.

Great. So CNO has a Consumer division and a Worksite division. I'm going to start on the Consumer side, where you partly sell products to captive agents. So you've had a good success, I think, 14 straight quarters now of growth in the agent count within your consumer business. Can you talk about some of the things that's been driving that success and also how you're thinking about the ongoing momentum from here?

Yes. So just a couple of pieces of information to supplement what you said. So you're correct that we have Consumer and Worksite. Our Consumer business makes up about 80% of the company. And as the name implies, that's where we go out and talk to retail individuals. In our Worksite business, that's about 20% of the company, and that's where we talk to employers and get access to employees that way. One of the biggest challenges in this business is the agents and how to manage them and grow them and so on. And as a side note, I really think this is one of the things that the industry has gotten wrong over the years. I think as an industry, we've lost sight of the fact that when you control distribution, you have a much greater ability to control your future. So we've stayed very committed to having an agent force that's captive, that sells only our products. And the majority of our agents, what they kill, which is to say they're not W-2 employees. They're independent contractors. and they make a living by selling products. And if they don't sell anything, they don't make a living. So it's a very tough model to make sure you get right. We've shown consistent growth. And when you think about building an agent force, I think you have to break it down in a really simple way or at least we do. First, you have to think about what it takes to attract those agents, how you bring them in, and then you need to think about what it takes to keep them. In terms of attracting them, we've been extremely fortunate. We're different than many other companies in that our agents, when they join us, they join us as a full time. It's not that they're a part-time teacher and a part-time selling our stuff. They're full time with us. Half of our agents are millennials and half are women. Those 3 things right there make us very different than the usual model. So in terms of making sure we bring in the right folks, we've done a lot of things over the last several years to ensure that we're appealing to the types of people that are most likely to succeed. And we found that one of our best sources are referrals. Now I know that sounds really obvious, but the agents that have been with us for 3 to 5 years and are really successful, the candidates that they suggest join us are the ones where we have the best retention. So we focused a lot on that. We focused a lot on creating training and compensation and support structures that appeal to those folks. And then once you get them in, you've got to give them a career path that appeals to them. So a decade ago, we started our own broker-dealer. And we're really trying to position our agents. They come in by starting out and learning the business, selling basic protection products, whether that's Med Supp or life or what have you. And ultimately, the goal for the smarter ones, for the ones that want to stick around and make a career out of this is to be able to become financial advisers and create an annuity of income, if you will, a regular stream of income. And so the combination of tweaking the types of folks we go after to join us, along with the enhancements we've made to make the career path compelling has really worked nicely and the stats you provided on both our Worksite and our Consumer side, we've had really good luck. And also having a captive distribution force gives us much more control over our destiny. So we feel very good about that. We're very pleased with the agents we brought on. We think they've done a wonderful job and really delivered some very nice results.

And then -- so there's obviously the number of agents and then there's the productivity of the agents. And I know growing productivity has also been a key priority. And it seems like you've had good success there as well. Can you talk a little bit more about the types of things you've been doing to increase productivity, how technology is playing a role in all of that and just the overall progress there?

Sure. First, a general comment. If you force me to pick between growing agent count and growing productivity, I'd pick productivity. If I can only pick one, I'd pick that. That's way more important. Our sales and net income results have grown better than our agent count has. So by definition, our productivity has consistently gone up. So that effort to focus on productivity has really yielded results, and I think we'll continue to do so. Now the magic happens, of course, when you do both, when you grow the absolute number of agents and the average productivity of each of those. If you can do both at the same time, that's really where you see the results kick in. And that's what we've been fortunate enough to do these last several quarters. In terms of how you grow productivity, so first of all, you got to make sure you're retaining them, right? Back to my earlier comments, if your agents are a revolving door, it's almost impossible to grow productivity. So first, you got to make sure you keep them. Then you've got to give them more tools with technology. You've got to give them a product pipeline that's diversified. So if they start out a relationship with a customer talking about product A, they need to be able to also have product B, C and D that's viable, that's targeted for that consumer. So you've got to give them that portfolio. You've got to show them the career path where they can build an income. And you've also got to do other things that sound really simplistic, but instant underwriting, being able to give the agent tools so that when they're sitting in front of the customer, they can actually respond on the spot and say, yes, we can buy this policy or do whatever it is and really have the customer follow through while they're in the mental place to do so. So it's been a variety of different things. Like many of the other things that have yielded results for CNO, I can't point to 1 or 2 things we've done. I can point to 100 little things we've done, each one of which has added on and helped us build this model. But those are the types of things we've worked on.

I understand that your model is a little bit different. You have a broader product mix, but there are some other life insurers that do focus on the middle income market more with protection-oriented products only. But some of them have cited some level of sales and persistency headwinds due to cost of living pressures on middle-income America. And it doesn't seem like you've really seen that much, but can you talk about what you have seen? And if not, if you haven't seen it, why you think that is?

Yes. So we're, of course, not immune to this. Almost all the products we sell are discretionary in nature, right? They don't have to buy them. There's no requirement. It's not like auto insurance. The closest thing we have to auto insurance in our business is Medicare Supplement or Medicare Advantage. Virtually every American that's turning 65 and/or getting ready to retire will at least look at Medicare Supplement and Medicare Advantage because they're getting off of their employer's health plan and they have to figure out how they're going to cover those exposures. So one of the many things that makes us unique, a lot of life insurers, you're right, they say they focus on middle-income America, but they don't have the breadth of the portfolio. And in particular, they don't have that Medicare-related product. We see so many of our relationships start there. For roughly every 3 Med Supp policies we sell, at least one of those results in some type of a cross-sell where we're building that relationship. That really helps us. And if you're a consumer that either has just retired or is thinking about retiring, chances are you're making that decision whether the inflation rate is at 4% or 10%, meaning you've made a decision to leave your employer or your employer has asked you to leave or whatever is going on. So you've got to do those things regardless of what's going on in the bigger economy. And so we've been fairly insulated from some of these pressures. I don't want to say it's absolute because, of course, it's not. But you make that decision to leave and to retire regardless of what's going on with the economy and then you have to prepare for that, and that has benefited us and therefore, insulated us from some of these pressures. And I see no reason why that won't continue.

I guess related, but a little separate, how do you view the actual economic sensitivity of recruiting and retaining agents?

So historically, because these are commission-only jobs, the traditional wisdom has been when unemployment goes up, more people are willing to try a commission-only job or lifestyle. So historically, higher unemployment has benefited us. We haven't seen as much fluctuation because we fundamentally changed the types of agents we're trying to recruit and how we go after them, to my earlier point about referrals and so on. So that has really put us in a different place. And most people would be surprised to learn, I talk about how half of our agents are millennials and half are female, almost all of our agents that we bring into the company, they've never sold insurance. We really look for people that have a customer service orientation that think about customers in the way that we want. And frankly, we have better luck when they don't have insurance experience. We don't want people to unlearn another organization's habits. We want to teach them the way we want to teach them in terms of how to service our customer base and so on. So some of the macroeconomic conditions that have influenced agents elsewhere, we just -- we haven't been as impacted by that. And there, too, I don't see any reason why that won't continue.

So within consumer, the other area or way you sell business is through a direct-to-consumer operation. And you've been shifting significantly away from television advertisements to digital and other sources. I think at the same time, there's been a lot of changes to digital advertising lately with the use of AI and other things like that. So how are you -- like kind of give us an update on your direct-to-consumer business and how you're navigating all this change?

Sure. When I joined the company about a decade ago, almost all of our direct-to-consumer business emanated from our television advertising. Colonial Penn is one of our companies in our portfolio. And it used to be you couldn't turn on the TV without seeing a commercial with Alex Trebek talking about Colonial Penn. And he, by the way, did a wonderful job for us. He was just a wonderful human being and did great for us. But things have changed. When I was growing up, when you watch TV, it was ABC, CBS, NBC or later on Fox. It was 1 of 4 channels. It was live television and you saw all sorts of advertisements. Today, when my wife and I watch TV, there's XYZ show on Hulu or Amazon Prime or HBO Max or whatever the streaming service, we don't watch ads anymore. The closest I come to advertising is when I have -- during the day, I have CNBC running in the background and Squawk Box is going on, but it's on mute and there's advertising. That's the closest I get exposed to ads anymore. And I don't think we're that different. I think the vast majority of people out there, they're regionally watching television in an on-demand way. So you can't rely on Alex Trebek anymore and that type of advertising. So we've shifted to be much more focused with our direct-to-consumer business on other types of digital advertising, and we disclosed in our Q2 results that 70% of our D2C sales actually emanated from non-television advertising sources, some type of social media, online and so on. And I think that trend is only going to continue. Now 30% is still a big number. We can't walk away from the television stuff, and we're constantly refining this balance. We've got a pretty sophisticated model internally where we track the advertising cost and the yield, meaning how many people call in and how many people we ultimately sell from those incoming calls. And we know that if the advertising costs more than X dollars, it's not going to work. It's got to cost Y dollars or less. in order to make the model work. And so we're pretty disciplined about that. But I think that, that television advertising will continue to go down. And that will be, I think, ultimately to our benefit. Now there's also an interesting thing here in terms of how the accounting works. Television advertising is very expensive and under accounting rules, you can't capitalize it. So it makes the numbers look screwy because you take 100% of that very expensive television advertising upfront, but you recognize the revenue over time. So it doesn't break my heart that we're also moving away from TV, but we're still learning how to do that, and it's going to take a little time to get it right, but we're pleased so far with the results.

You talked a little bit about Medicare and how it's a product that you often lead with. So CNO underwrites Medicare Supplement and you sell third-party Medicare Advantage products. In the last 2 or 3 years, there's been a major resurgence in Medicare Supplement sales at CNO. To what extent do you think that is being driven more by a shift back in consumer preference? And to what extent do you think that's somewhat company specific?

I think it's a combination. It would be hard for me to parse them out precisely. But in general, for the last decade, we saw more consumers preferring Medicare Advantage over Med Supp. Now we made a choice a long time ago not to manufacture Med Advantage and instead to keep focused on manufacturing Med Supp. The economics internally for us are such that we're frankly indifferent. If a consumer needs Med Advantage more than they need Med Supp, sell them Med Advantage. It's a third-party company, UnitedHealth, Humana, whoever. We sell their products, we collect a commission. Economically, we're indifferent because remember, while the absolute revenue dollars may be lower, we don't have the risk and the capital we're tying up because we're not a manufacturer of that product. So the distribution income drops to the bottom line. So economically, we've set it up so that we're indifferent, so our agents know that they can sell whatever makes the most sense for the consumer. Now in more recent years, the economics got out of whack for the companies that were manufacturing Medicare Advantage primarily because their benefit offerings and their inducements just got too rich. So as the government subsidies change, they've had to reel those in, which has pushed more consumers back to Med Supp. Now at the end of the day, we're indifferent to that from an economic standpoint. I like the idea that the consumers are coming back and buying things that we manufacture and distribute. Our cross-sell ratio tends to be a little bit better on the Med Supp than it is on the Med Advantage. But I think that will continue. The reason I say it's difficult to parse is, on the one hand, the trend that I just talked about, everyone has benefited from. But if you look at our Medicare Supplement growth rates, they've been better than most of the other consumers. So I think that has something to do with the way we're going to market as well. It's a combination of the 2 things. We're happy to take the benefit regardless of whether it's us or the market, we're pleased with the result.

And then I guess just with the big increase in sales of Med Supp, how do you ensure that you maintain your target margins?

Yes. So we're -- so we've been doing this a long time. We've got a good track record of understanding it. And one of the things I always tell our investors, of all the products we write, Med Supp is the one you should worry the least about. We get to reprice that every year as compared to a life product or another product with a 20- or 30-year liability duration, I don't get to reprice those every year. The Med Supp, if we screw something up, we get to fix it within a year, and we've got a pretty good track record of doing that. You can look at what our underwriting results have been and our historic margin have been as proof to the point that we generally price this properly, and we're able to get the right return and the right results.

Yes. I guess one other thing it might be useful to discuss is just the differences between the Med Advantage and Med Supp product because sometimes we see a health insurer that has some issue with Medicare Advantage, people get concerned about how that's going to affect Med Supp. Usually, it doesn't actually have an impact because it's not the same product.

It's a very different product. There are a number of different -- there are a number of differences. And maybe if I keep this at a high level, think of Med Supp as your traditional health insurance, okay? No matter what doctor you go to, no matter where you are in the country, no matter what. Med Advantage, think of more like an HMO, certain geographies, certain health care providers and so on. So that's one big difference. The government created Medicare Advantage as a means of letting private industry participate in this. And so there are differences. Now all of these policies, Med Supp and Med Advantage, they vary by county in the United States, the benefit levels, what network you can go to, all these sort of things. So you really have to understand and know what you're buying. And this, frankly, is what helps us because part of our philosophy is to have that controlled distribution that goes into the homes and really explains things. So the increased complexity actually makes our people that much more valuable and that much more necessary. But there are 2 very different things. And you can see and give an insurer, if you have an insurer that manufactures both, as you pointed out, they can have different results between the 2 because they are different coverages and they appeal to different populations.

Moving to the retirement side of your business and annuities, in particular, the annuity market has grown a lot. It's gotten a lot more competitive, but you have your own captive distribution. So how much annuity competition do you actually run into? Or is the -- really the growth constraint more just your ability to find and grow the agents and people that want to buy the product?