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Text: You can obtain the release by visiting the media section of our website at cnoinc.com.
We expect to file our Form 10-Q and post it on our website on or before November five.
You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
We delivered another strong quarter with operating earnings per share up 7% over the prior year period, excluding significant items and COVID impacts in both periods.
Our results reflect ongoing deferral of medical care, which continue to boost our health margins, solid variable investment income results and robust share repurchase activity.
Our sales metrics exceeded pre-pandemic levels in a number of areas.
Total life and Health NAP was up 1% over the third quarter of 2020 and up 1% relative to 2019 levels.
As the pandemic continued to pressure an already tight labor market, we experienced a slowdown in new agent recruiting.
Premium collections remained strong, exceeding pre-pandemic levels.
As expected, our underlying margins excluding COVID impacts, performed well.
Our capital and investment portfolio remain conservatively positioned with ample liquidity.
We ended the quarter with an RBC ratio of 388% and $366 million in cash at the holding company.
This is after returning $131 million to shareholders through a combination of share repurchases and dividends.
We continue to execute well against our strategic priorities, specifically, successfully executing on our strategic transformation, growing the business profitably, launching new products and services, expanding to the rise to slightly younger, wealthier consumers within the middle-income market and deploying excess capital to its highest and best use.
Turning to slide five and our growth scorecard.
Four of our five growth scorecard metrics were up compared to 2020.
Relative to 2019, all five metrics were up for the second consecutive quarter.
As a reminder, pre-pandemic, we have delivered five consecutive quarters of growth in all five of our scorecard metrics.
Life sales were up modestly compared to 2020 fueled largely by continued momentum in our direct-to-consumer channel.
Relative to 2019, life sales were up 22%.
Overall, health sales were essentially flat year-over-year but down 16% relative to 2019.
Total collected life and health premiums were down 2%.
This reflects continued solid growth in Life NAP and persistency of our customer base offset as expected by lower Medicare Supplement premiums.
Annuity collected premiums were up 17% year-over-year and up 2% relative to the third quarter of 2019.
Client assets in our brokerage and advisory grew 30% year-over-year to $2.7 billion, fueled by new accounts, which were up 16%, net client asset inflows and market value appreciation.
Sequentially, client assets grew 2%.
Fee revenue was up 41% year-over-year to $28 million, reflecting growth within our broker-dealer and registered investment advisor, higher fees generated by Web Benefits Design, our worksite technology platform and the inclusion of DirectPath results, which is our worksite enrollment and advisory services business.
Turning to our consumer division on slide six.
I continue to be pleased with how we're executing on our transformation to leverage synergies between our agent and direct-to-consumer businesses.
Consumer segment life and health sales were down 2% over the prior period but up 8% over 2019.
Life sales were essentially flat in the quarter.
Direct-to-consumer life sales were up 13% on top of 23% growth in the prior period.
Life sales generated by our exclusive field agents were down 15%.
Health sales were down 5%, largely reflecting continued weakness in Medicare Supplement sales.
As discussed in previous quarters, our market is experiencing a secular shift away from Medicare Supplement and toward Medicare Advantage.
We continue to invest in both our Medicare Supplement and Medicare Advantage offerings to ensure we are well positioned to meet our customer's needs and preferences.
In 2022, we will be launching a new Medicare Supplement product that we believe is more aligned with consumer preferences.
We've also made several enhancements to our Medicare Advantage platform, myhealthpolicy.com and our product offerings to position us well for this Medicare annual enrollment period.
Specifically, we expanded our carrier partners and product offerings.
We now have nearly 3,000 exclusive field agents certified to sell Medicare products, which is up 14% from last year, and we boosted our D2C capabilities through enhanced lead acquisition and sales capabilities.
As I mentioned, annuity collected premiums were up a healthy 17% as compared to the prior year and up 2% versus 2019.
The number of new accounts grew 6% and the average annuity policy rose 10%.
We continue to maintain strict pricing discipline on our annuities to balance sales growth and profitability.
Participation in crediting rates are reviewed regularly to reflect current macro environment conditions.
Client assets in brokerage and advisory grew 30% year-over-year to $2.7 billion in the third quarter.
Combined with our annuity account values, we now manage $13 billion of assets for our clients.
This has fundamentally shifted the relationship we have with our customer base.
Unlike some insurance products, which can be transactional in nature, investment products typically create deeper and longer-lasting customer relationships.
Over the last several years, we have shifted our agent recruiting strategy to focus more heavily on targeted recruiting approaches and boosting the productivity levels of our existing agent base.
This has periodically resulted in fewer new agent recruits.
However, the new agents we appoint are more likely to succeed and stay with us over time.
Until recently, we haven't felt much impact from the tight labor market.
In the third quarter, however, our total producing agent count was down, largely due to fewer first year agents.
Our veteran agent retention and productivity remains strong.
The number of agents that have been with us for at least three years has remained consistent through the third quarter and is up 1% year-to-date.
Productivity among these veteran agents is up 5% over the prior period and up 13% year-to-date.
These more seasoned agents typically generate higher premiums for policy and drive cross-sales of other products, including annuities and health products.
We remain committed to prioritizing agent retention and productivity.
However, we also want to attract new agents.
Therefore, we are experimenting with various pilots and programs to jump-start our new agent recruiting, but expect these near-term headwinds to continue.
Turning to slide seven and our Worksite division.
Worksite sales were up sharply in the third quarter as compared to 2020.
However, sales remained well below 2019 levels.
The emergence of the delta variants caused a number of on-site enrollments to be postponed or canceled.
We expect the pace of worksite recovery to improve as workplaces reopen and COVID disruption subsides.
The workplace, as we know, continues to evolve.
As more companies shift to permanent hybrid work arrangements, we continue to explore new approaches to improve access to existing employer groups and their employees.
At the same time, pilots and programs to target new employer groups and offer new products and services remain a key strategic priority for us.
Retention of our existing customers remain strong and employee persistency within these employer groups continues to be stable.
Our producing agent count was down 5% year-over-year and down 11% sequentially due to the tight labor market.
Asian count remains down more than 45% from pre-COVID levels.
Our recently launched field agent referral program, which is modeled after our consumer division program is generating promising results in its early stages.
Retention and productivity levels among our veteran agents who have been with us for more than three years remains very strong.
These agents have been the driving force behind recent sales activity.
The integration of our fee-based businesses continues to run smoothly.
Fee revenue nearly doubled in the quarter due to both organic growth within WBD, our website technology platform and DirectPath, our worksite enrollment and advocacy services business.
Our average client size in these businesses increased 15%, and our average per employee per month rates were up double digits.
Market feedback on our unique combination of worksite products and services remains positive, and we are realizing meaningful cross-sale success.
Turning to slide eight.
Our robust free cash flow enabled us to return $131 million to shareholders in the third quarter, including $115 million in share buybacks.
This is the highest level of capital return in the past six years.
Our capital allocation strategy remains unchanged.
We intend to deploy 100% of our excess capital to its highest and best use over time.
While share repurchases form a critical component of our strategy, organic and inorganic investments, also play an important role.
Turning to the financial highlights on slide nine.
We generated operating earnings per share of $0.72 in the quarter, which is down $0.07 year-over-year as reported, down $0.05, excluding significant items and up $0.04 or 7% excluding significant items and adjusting for the net favorable COVID impacts on insurance product margin.
We had $3 million pre-tax or $0.02 per share of unfavorable significant items in the current period and none ended prior year period.
And we had $23 million or $0.14 per share of net favorable COVID impacts in the current period as compared to $42 million or $0.23 per share in the prior year period.
The results for the quarter reflect solid underlying insurance margins, ongoing net favorable COVID-related impacts, strong alternative investment performance and prepayment income and continued disciplined capital management.
Over the last four quarters, we have deployed more than $400 million of excess capital on share repurchases, reducing weighted average shares outstanding by 9%.
The operating return on equity was 11.5% for the 12 months ending September 30, 2021.
The sum of expenses allocated to products and not allocated to products, excluding significant items, was flat to the first quarter of 2021 as expected.
In general, our expenses continue to reflect both expense discipline and operational efficiency on the one hand and continued targeted growth investments on the other.
Turning to slide 10.
Insurance product margin, excluding significant items, was down $21 million or 9% in the third quarter as compared to the prior year period, driven by the $19 million year-over-year change in COVID impacts.
The year-over-year decrease in net COVID impacts primarily reflects a decrease in the favorable benefit in our Med Supp product.
Sequentially, the net favorable COVID benefit was essentially flat with the offsetting changes in the impact on our health and life products.
Page 10 of our financial supplement summarizes those impacts by quarter.
The sequential decline in our annuity margin reflects volatility related to the indexed annuity FAS 133 accounting for our embedded derivative reserve, which had a favorable impact in the second quarter and an unfavorable impact in the third quarter.
Excluding COVID impact, insurance margin was essentially flat year-over-year, both in total and by major product grouping.
This is in line with expectations, reflecting the underlying stability of the book of business.
Turning to slide 11.
Investment income allocated to products was up slightly as growth in the net liabilities and related assets was mostly offset by a decline in yield.
Investment income not allocated to products, which is where the variable components of investment income flow through increased $7.2 million or 16%, reflecting solid performance within our alternative investment portfolio and higher prepayment income.
Our new money rate of 3.55% for the quarter was up 17 basis points sequentially, reflecting increased allocation to direct investments and an increase in market yields.
Our new investments comprised $849 million of assets with an average rating of A minus and an average duration of 13 years.
Turning to slide 12.
At quarter end, our invested assets totaled $28 billion, up 5% year-over-year.
Approximately 95% of our fixed maturity portfolio is investment-grade rated with an average rating of single A. This allocation to A-rated holdings is up 20 basis points sequentially.
The BBB allocation comprised 39% of our fixed income maturities, down 180 basis points year-over-year and 40 basis points sequentially.
During the quarter, we established a $3 billion funding agreement backed note program and in early October, we issued an inaugural $500 million funding agreement backing five-year notes.
The program provides a new vehicle for us to leverage our core investment competencies to generate incremental earnings at an attractive return on the underlying capital.
It is complementary to our existing Federal Home Loan bank program because they both improved the company's financial flexibility and draw on similar investment capabilities with slightly different duration and asset allocation strategies.
The combination of the two provides CNO with greater funding diversification and earnings potential.
We expect the FABN program will provide roughly 100 basis points of annualized pre-tax spread income, net of expenses on the notional amount of the notes outstanding.
We'll report the net spread income in NII, not allocated products, just as we currently report the net spread income associated with our Federal Home Loan Bank program on page 17 of our quarterly financial supplement.
Turning to slide 13.
We continue to generate strong free cash flow to the holding company in the third quarter with excess cash flow of $166 million to 179% of operating income, which reflects the solid operating results in the quarter, the continued up in quality bias in our investment portfolio and our decision to increase dividends out of the operating companies to bring the RBC ratio down into our targeted range.
Turning to slide 14.
At quarter end, our consolidated RBC ratio was 388%, which represents approximately $70 million of excess capital relative to the low end of our targeted range.
Our Holdco liquidity at quarter end was $366 million, which represents $216 million of excess capital relative to our $150 million minimum Holdco liquidity target.
Turning to slide 15.
We are not projecting beyond year-end, given the ongoing uncertainty of how the pandemic will evolve from here, particularly as we enter the winter months.
That said, we will share our expectations for the fourth quarter based on our most recent internal forecast.
First, we expect modest growth in Total Life and Health NAP and total collected premiums.
This reflects our continued positive momentum, particularly in our direct-to-consumer business, coupled with the challenges of a very tight labor market and for our worksite business, ongoing delays in office reopenings and in businesses, allowing on-site enrollments.
We expect continued net favorable COVID impacts on our insurance product margin, but at a lower level than recent quarters.
We expect net investment income allocated to products to remain relatively flat as growth in assets is offset by lower yields, reflective of both the lower interest rate environment and our up in quality shift in asset allocation.
We expect net investment income not allocated to products to trend down as compared to recent quarters in light of market conditions in the third quarter; recall that our alternative investments are reported on a one quarter lag.
We expect fee income to be up sequentially and year-over-year as we grow our third-party Medicare Advantage distribution and improve the unit economics of that business.
Growth in web Benefits Design earnings and the inclusion of Direct Path will also contribute to growth in fee income.
We expect the sum of our allocated and non-allocated expenses ex significant items to be generally in line with recent quarters.
Finally, we expect dividends out of the operating companies to be lower than in recent quarters as we absorbed the impact of the revised C1 factors on our consolidated RBC ratio.
As mentioned previously, that will reduce our RBC by approximately 16 points, all else equal, which translates to about $80 million of capital.
For the time being, we are not reducing our target RBC ratio, but we will manage the low end of the 3.75% to 400% target range.
And we will move closer to our $150 million minimum Holdco liquidity target.
I'm pleased with our results for the third quarter, which reflects solid execution against our strategic objectives.
Although uncertainty surrounding the pandemic remains, I am confident that we are well positioned to successfully navigate whatever lies ahead.
The earnings and cash flow generating power of the company remains strong, and our team is laser-focused on building upon our progress in delivering long-term growth and value creation for our shareholders.
Finally, please continue to take care of yourself, including getting vaccinated if you are able.
Stay healthy and stay safe.

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q3 operating earnings per share $0.72.
qtrly book value per share was $42.11, up 15% from 3q20.
qtrly total revenues $968.3 million versus $1,013.5 million.

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