Hello everyone, and thank you for joining the CNO Financial Group Second Quarter 2022 Earnings Results Call. My name is Varis and I will be moderating your call today. [Operator Instructions] I now have the pleasure of handing over to your host Adam Auvil. Please go ahead.

Good morning. And thank you for joining us on CNO Financial Group's second quarter 2022 earnings conference call. Today's presentation will include remarks from Gary Bhojwani, Chief Executive Officer; and Paul McDonough, Chief Financial Officer. Following the presentation, we will also have other business leaders available for the question-and-answer period. During this conference call, we will be referring to information contained in yesterday's press release. You can obtain the release by visiting Media section of our website at cnoinc.com. This morning's presentation is also available in the Investors section of our website and was filed in a Form 8-K yesterday. We expect to file our Form 10-Q and post it on our website on or before August 5. Let me remind you that 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. Today's presentations contain 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. Throughout the presentation, we will be making performance comparisons, unless otherwise specified, any comparisons made will be referring to changes between second quarter 2022 and second quarter 2021. And with that, I'll turn the call over to Gary.

Thanks Adam. Good morning everyone. And thank you for joining us. Turning to Slide 4, and our second quarter performance, we reported strong earnings and solid overall sales for the quarter. Operating earnings per share were $0.85, up 29% over the prior year. Excluding significant items operating earnings per share were up 3%. Variable investment income results performed well in the quarter showing resilience during a period of continued market volatility. Our underlying business results remain strong with insurance product margins, performing as expected. The value of recent strategic investments to accelerate growth and enhance agent productivity were on display in the quarter. We were especially pleased with the performance of our annuities, our direct-to-consumer businesses and our Worksite insurance sales. We continue to advance key strategic initiatives in both the Consumer and Worksite divisions. Notably, we introduced our new Medicare Supplement product and launched Optavise, our new worksite brand in the quarter. We returned $77 million to shareholders and reduced the weighted average shares outstanding by 12%. Our capital position remains within risk tolerance levels and our balance sheet is well positioned to respond to changing macroeconomic conditions. We increased book value for diluted share, excluding AOCI by 15%. Turning to Slide 5 and our growth scorecard. The strength and value of our diversified product portfolio and distribution channels contributed to solid overall sales in the quarter. I'll touch on the specifics by division in the next two slides. Beginning with the Consumer Division on Slide 6. Our results demonstrate continued improvement in agent productivity and reflect some pluses and minuses across our product portfolio. Life and Health sales were down 9% as compared to the prior year. We expect to see this trajectory change in the second half of the year, based on recent updates from our Medicare…

Thanks, Gary, and good morning, everyone. Turning to the financial highlights on Slide 9, we generated operating earnings per share of $0.85 in the quarter, which is up 29% year-over-year as reported and up 3% excluding significant items in both periods. Results in the period reflect favorable variable investment income in life margins partially offset by lower annuity and health margins. Annuity results were again affected by largely non-economic impacts relating to market volatility. The significant item reported in the quarter is an experience refund of $22.5 million earned under the terms of the legacy long-term care reinsurance agreement and based on the successful regulatory approval and implementation of certain rate increases. Fee income was down $3 million year-over-year, primarily due to higher expenses related to the business. The sum of expenses allocated to products and not allocated to products excluding significant items was up 7% primarily reflecting continued investment in growth initiatives. Our annualized effective tax rate was up 80 basis points to 23.5% from the year ago period, but down 130 basis points from the first quarter of 2022. The change from prior year is driven by a change in Illinois state income taxes as discussed last quarter. The sequential decline reflects lower Illinois state income and the impact of state tax credits identified and applied in the second quarter. We deployed $60 million of capital on share repurchases in the quarter, contributing to a 12% reduction in weighted average diluted shares outstanding year-over-year. For the 12 months ending June 30, 2022 operating return on equity was 11.5% or 10.3% excluding significant items. Turning to Slide 10, insurance product margin was down $19 million or 9% in the second quarter as compared to the prior year period. Adjusting for the market impacts on our FIA margins, COVID impacts…

Thanks Paul. Next week we will release our third corporate social responsibility report where we share CNOs various commitments to ESG. These commitments coupled with how CNO operates every day is what we believe will best sustain our long-term performance. We do what's right for our associates, agents, customers and investors. We offer products that make our customers' lives better and we're helping improve our communities and the environment. I advise you to read the report to learn more about how CNO and our remarkable associates and agents are working to create a more sustainable future. Thank you for your support an interest in CNO Financial Group. We will now open it up for questions. Operator?

Hi. Thanks. Good morning. Could you first talk about how you're thinking about the pace of share repurchase going forward and if you have any view on the timeframe that that you'd like to build back the RBC ratio up to the 375 target?

Sure. Ryan, hey, it's Paul. A little context and perspective, and then I think Gary will probably want to provide some, some color as well. So first of all 50 million of the 60 million of share repurchases in the quarter was through a 10b5-1 program in the earnings blackout period in April. In May and June we dialed back our share repurchase due to market conditions and also the Rialto Capital investment that we made in late April. If you recall, we issued a press release on that. We didn't dial back to zero given where our stock was trading at the time. In the near-term certainly you should expect that we'll continue to dial back our share purchase as we build back to our target RBC and holdco liquidity levels. I also want to just emphasize a couple things. Number 1, our business should continue to generate healthy levels of free cash flow. Number 2, we hit two very important inflection points in the quarter that that we referenced on the – in our prepared remarks. Number 1, a new money rate above the portfolio rate, and number 2 sequential improvement in producing agent count in both consumer and work site. We expect both of those dynamics to persist, which should translate to a tailwind going forward in terms of sales, earnings and free cash flow. So with that Gary, I'll defer to you for additional perspective and color.

No, I think I'm good, Paul. I'll see if Ryan's got any follow up on that, but I otherwise I think we're good.

Okay. Sounds good.

Thanks. I had a separate follow-up. You had a pretty big uptick in the non-variable component of unallocated investment income in FHLB and the FABN program. Is that type of level that you had in this quarter, something you'd expect to continue given the higher interest rate environment, if you could give us more color on that? Thanks.

Sure. So Eric Johnson is here with us and Eric I'll defer to you to provide some color on those two.

Yes, sure. I think during the period we were fortunate enough to benefit from wider credit spreads particularly in kind of the intermediate part of the curve and particularly in securitized markets as markets became less liquid. And we were able to add an increment over the cost of funds that was pretty healthy. I would not assume that that's a permanent persisting dynamic, although I think we are continue to make some progress this quarter of a similar type as long as the market makes that possible for us we'll do it. Now bearing in mind, however, also that those programs – it's, you don't turn all the assets over every quarter and there's only a certain amount of turnover and new money investment opportunity to be had. So I think I'm not expecting that that increment to run off in the near-term and we might get a little additional tailwind in the near-term, but it's kind of how I'm thinking about it.

Just one quick follow-up; what's the duration of the assets that are backing FHLB and, and FABN programs?

Sure. Well as you know we've done a handful of funding agreement issues three, five and seven and you should assume that the assets have a symmetrical quality such that we have good duration matches in each of those three buckets. If you look at Federal Home Loan Bank the great bulk of the liabilities and assets are on a floating rate basis. And so have very short durations on both sides of the balance sheet. But the cash flows are very carefully muzzled and we feel comfortable that we have good asset and liability management in both of those programs such that they were not likely to hit a – have any kind of dis-intermediation effect or anything like that.

Got it. Thanks a lot.

You're welcome

Our next question comes from Dan Bergman from Jefferies. Please go ahead, Dan.

Thanks, good morning. Your comments are not expecting further pressure on the RBC from the statutory impact of weak markets on that FAA block were very helpful. But I just wanted to see if you could provide some thoughts on whether we should expect any snap back in the RBC ratio or reversal of that pressure we saw in the first half of equity markets are favorable in the third quarter, given the momentum we saw in July. Just trying to get a sense of it, if there's any – how the symmetry works there or would the recovery be more gradual. Any more color on how that statutory accounting works would be helpful?

Sure. So Dan, it basically works in reverse subject to this floor you have on a call options, but limits the downside sort of from where we sit here. But the movement you saw on the first half of the year is traded down would be largely symmetrical going the other way.

Got it. That's really helpful, thanks. And then maybe shifting gears a little bit, it looked like the life advertising spend was down, I think both year-over-year and quarter-over-quarter after seemingly the meaningful step-up last quarter. So I just wanted to see if there's any more color you can give on that? What you're seeing in terms of the cost of advertising and any pressure or impact you're seeing from inflation?

Sure. So I'll provide – I'll take a first crack at that. So essentially Dan with, with our advertising we manage to a number of internal metrics to make sure that we're getting the expected productivity out of the ad spend. So in particular, what's the relationship between the premium that we're generating and the ad spend? We're also very opportunistic in terms of where we're placing those ads. And so that generally drives the level of the ad spend in any given quarter. So I guess I'd leave it there. Gary, would you add anything to that.

Paul the only thing I would just emphasize and you touched on it if an opportunity presents itself where we think we can really maintain or increase the yield, we would be willing to spend more. And as we've said throughout, will we dial the expenses up and down depending on the efficacy of the advertising?

Got it. Makes sense. Thank you.

Next question comes from John Barnidge from Piper Sandler. Please go ahead, John.

Thank you very much. So the NAIC is considering increased RBC charges on CLO investments. What are your views on the proposal and maybe discuss potential impact to require capital and RBC?

Hey, John, it's Paul. You're asking about the S&P Capital changes.

Yes, that's correct.

I just wanted to make sure I heard the question. Yes. Okay. So, as you know they put it out for proposal, got some feedback, withdrew it are expecting to sort of resubmit it for comment with the goal, I think, of implementing at year end. So at this stage, we're primarily just staying tuned. I think, however, it shakes out, it will be very manageable. We may have to make some adjustments to top context of revise capital charges. So I I'd say that's where we are with it at this stage.

Okay, great. Thank you. And my follow-up your annuity gross deposits were rather strong in the quarter. Can you talk about outlook for that maybe where that demand came from? Thank you.

Yes. So John, this is Gary. Thanks for the question. A couple of things. Remember that we've been on a voyage for quite a long time to have an increasing number of our agents get their securities license. And the main reason we've been undertaking that strategy is to fundamentally change the relationship we have with our consumers, so that it's no longer a transactional relationship where they are simply buying an insurance product and paying the premium. And of course that can be canceled at any time. When consumers entrust us with their assets like annuity, the relationship changes, because now we're viewed as an investment as opposed to an expense. So we've been on the journey for a long time to do more and more of that. We very much like the business, it's a great service to our consumers, we like the margins we make on the products, and so on. And then you have, I think, an environmental set of forces generally speaking, during periods of market volatility and/or interest rates rising, these products become more and more interesting to consumers because they represent a way for the consumers to participate in the upside of the equity markets or insulate themselves against significant downside and still participate in that upside if it should happen to turn around. So we see the demand for these products grow in volatile times like this and that combined with our own internal efforts, I think led to this growth. We've been enjoying some good growth on our annuity sales for a couple years now. I don't know that we're going to continue to grow it at this rate 26%, it’s a pretty robust clip. But we like the product, we continue to push it and we continue to develop internal skills to go after it.

The next question is from Erik Bass from Autonomous Research. Please go ahead, Eric.

Hi, thank you. I just wanted to follow-up on the equity market sensitivity in the annuities block. I think your answer is very clear on kind of what happens on the capital front at least in the short term, which is hoping you could provide a similar sensitivity on GAAP. And is it a similar dynamic where if markets fall further, there is less impact to the downside and that you would see benefit to the upside of markets rise. And I guess the other question is just on capital, I mean, your call option portfolio is continuously changing as you sell new business and the options expire. So how does that sensitivity change as we move forward a few quarters? And does it go back to being sort of your expose to upside and downside?

Hi Eric is Paul. So on the GAAP side it certainly does work in both directions and by and large symmetrical. There are more moving pieces on the GAAP side sort of complicated draw the line between operating income and non-operating income. But directionally, you should expect favorable impacts if market conditions are sort of the reverse of what we've experienced in the first half of this year. And then with respect to the statutory dynamic, you are exactly right. We're purchasing call options every month as we write new business and as annuities are reaching their anniversary. And so it is a dynamic process. And you are right, you would get back to a point where there is symmetry up and down.

Got it. And just on the GAAP side, just to be clear. So if markets were to go down again from here, would there still – would you expect a negative adjustment in the quarter, or would that be largely, are a lot smaller now, given that you've essentially zeroed out index credits?

Yes. Couple of thoughts. Number one, on the GAAP side it's sensitive to and equity valuations although equities are sort of sub the puzzle. So I think all else equal up equities would be favorable. But as I say, it's much more complicated with the different factors in inter shades being more dominant. And then again, where we draw the line between operating and non-operating.

Got it. And then I was just curious how you are thinking about the outlook for credit, just given the uncertain economic outlook and how this factors into how you are thinking about the level of capital buffers you may want to maintain in the near term?

Well, the target $375 million RBC is really intended to be a target level of capital that we're comfortable with through the cycle. And in stressed market conditions we're comfortable stressing that down, flexing that down subject to the minimum of $350 million. In very bullish markets and very healthy sort of economic backdrop, that would sort of drive the RBC north of $375 million all else equal. We would still by and large manage to the $375 million to the extent that the dynamic with FIAs that we've talked about sort of takes you above the $375 million. I think we have to acknowledge that that comes and goes. So that may cause us to stay above $375 million by some amount, $380 million, $385 million.

Got it. I guess it sounds like nothing on the credit front that's worrying you and making you feel the need to be…

No, again, because the $375 million is intended to take us through the credit cycle. And also just in the context of the composition of our portfolio and our discipline around [indiscernible] of viability matching and the fact that the up and quality bias that we've adopted the last several quarters on top of what was already, I think, a fairly conservative bias, I think, we’re very well positioned for a potential and more recessionary and credit migration and whatnot.

Got it. Thank you.

Today's Q&A Session has came to an end. I will hand it back to Adam Auvil for final remarks.

Thanks operator. Thanks everyone for joining us today, and thanks for your interest in CNO.

This concludes today’s call. Thank you for joining. You may now disconnect your lines.