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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-K and post it on our website on or before February 26.
You'll find a reconciliation of the non-GAAP measures to the corresponding GAAP measures in the appendix.
And unless otherwise specified, any comparisons made will be referring to changes between fourth quarter 2019 and fourth quarter 2020.
I'm going to start with a discussion of the DirectPath acquisition, we announced last night.
I'll then provide brief commentary on our fourth quarter and full year performance, before turning it over to Paul to discuss our financial results and outlook in more detail.
Turning to Slide 4.
We are very excited about this transaction and the enhanced worksite capabilities it brings to CNO.
The transformation that we announced last year created a Worksite division dedicated to this market.
Growing our Worksite business is the next step in our strategy.
We are significantly expanding our Worksite business to position CNO as a full service provider of Worksite solutions.
DirectPath is a leading national provider of employee benefits management services to employers and employees.
It brings three primary new revenue sources to CNO; employee education services, employee advocacy and transparency services and employer benefits communications and compliance services.
DirectPath operates directly nationwide through approximately 7,000 benefit broker partners.
It serves 400 employers of all sizes from small businesses to Fortune 100 companies, which reflects a covered employee base of more than 2.5 million individuals.
Prior to COVID, Worksite was one of the fastest growing higher multiple businesses for us and in the industry.
We expect that dynamic to resume over the next year or so.
DirectPath builds out our capabilities and gets us deeper into the employer value chain.
It will also create extensive cross-selling and referral opportunities for us.
Through its fee-based structure, DirectPath will diversify our Worksite revenue base.
It adds to our existing high return fee-based businesses that will help drive expansion in our overall ROE.
The purchase price of $50 million was funded out of holding company cash.
There is an additional earn-out, if certain financial targets are achieved.
The transaction is expected to add $0.01 per share to our earnings beginning in 2022.
This transaction aligns well with the M&A playbook we've been executing against, and is reflective of the types of opportunities we may consider again in the future.
Turning to Slide 5 and our full year performance.
We reported operating earnings-per-share growth of 37% for the full year, $387 million of free cash flow or 107% of our operating income and we returned $330 million to shareholders in the form of buybacks and dividends, which reflects 12% of our market cap at the beginning of 2020.
End results underscore the continued strength and resiliency of our diverse product portfolio and distribution channels.
Despite the COVID backdrop, we achieved many important operational accomplishments during 2020.
Within the Consumer division, we've continued to build upon success with our direct-to-consumer life business and cross-channel collaboration efforts.
Integrating these channels has led to significant improvements in overall lead conversion rates and per customer acquisition cost.
Leads generated from our D2C business have become an increasingly important source of new business for our exclusive field agent force.
In 2020, these leads drove two-thirds of the increase in life sales generated by our exclusive field agents.
This year we recognized the opportunity to create a similar multi-channel sales and service experience for the Medicare market.
We launched our new digital health insurance marketplace myHealthPolicy.com.
Our objective is to take the strength of our face-to-face distribution, couple it with our growing online strength and use our unique offerings to become a significant player in the online health insurance market.
This is a competitive space.
The depth and strength of our agent force is the key differentiator.
Just as we successfully scaled and became a top five provider of direct-to-consumer life insurance, we intend to profitably grow the direct-to-consumer healthcare business.
Within the Worksite division, despite COVID, we saw modest growth in our employer client base.
Of course, we faced significant restrictions accessing workplaces to complete employee enrollments.
In response, we focused extensively on building out our virtual and online enrollment capabilities.
For the full year, virtual sales comprised 23% of total production.
Continued premium persistency was another key driver of our Worksite business this year.
Persistency was actually up modestly over historical levels, reflecting the critical value of our -- our consumers' attribute to our protection products and the mix of stable industries we serve.
While we intentionally slowed our agent recruiting efforts in 2020 to align with the softer demand for on-site enrollment due to COVID, we retained our core managers who are critical to rebuilding our sales force and driving our ultimate recovery.
As I've shared in previous quarters, in 2020, we made significant investments in supporting the safety, wellness and financial well being of our associates, customers and agents in response to the pandemic.
We expanded our commitment to diversity, equity and inclusion and named a senior director to support our ongoing initiatives to develop and embed ENI practices across our organization.
We also made progress in our ESG efforts, the principles of which are central to our overall business strategy.
CNO is now a signatory to the United Nations principles for responsible investment, which commits us to incorporating ESG principles in our investment analysis and reporting framework.
We expect to formally adopt the SASB and TCFD reporting frameworks this year when we publish our updated corporate social responsibility report.
Turning to Slide 6 and our results for the quarter.
Our fourth quarter results benefited from the ongoing deferral of medical care which drove continued strong health margins.
Our performance was also boosted by a particularly robust alternative investment earnings.
Operating earnings per share were up 17%.
Our book value per diluted share excluding AOCI was up 8%.
During the quarter, we saw continued improvement in several key metrics.
However, the wave of COVID late in the fourth quarter created a headwind to certain sales and agent metrics.
Premium collections remained strong across both divisions, but reflect the impact from weaker health sales in recent periods.
Expenses were higher in the quarter and higher than we signaled on previous calls, driven primarily by the acceleration of spending on growth initiatives.
This was a conscious decision.
The strength of our business and cash flow in 2020 enabled us to capitalize on opportunities to support the continued growth of our franchise beyond the pandemic.
We saw this as an opportunity to build capabilities for future growth and differentiation.
Paul will provide more details.
Fee income was down, reflecting solid growth in fee revenue, offset by spending related to the development and marketing of myHealthPolicy.com.
Our capital and liquidity positions remained solid.
We issued $150 million in subordinated debt in November and ended the quarter with an RBC ratio of 411% with $388 million in cash at the holding company.
Turning to our growth scorecard on Slide 7.
Three of our five metrics were up year-over-year.
Life sales were up 6% for the quarter and 12% for the full year, fueled by both continued strong direct-to-consumer growth and a sharp increase in sales from our exclusive field agents.
Collected life premiums were up 3%, reflecting solid growth in NAP in recent quarters and the continued strong persistency of our customer base.
Collective health premiums were down 4.7%, largely resulting from the impact of softer in-person health sales in recent quarters.
Annuity collected premiums were up 6% for the quarter, reversing the trend in recent quarters.
Client assets under management grew 18% to nearly $1.8 billion.
Of this growth, approximately half was driven by new client assets.
Fee revenue was up a healthy 19% to $36 million, reflecting growth in third-party sales and growth within our broker-dealer and registered investment advisor.
Health sales remained challenged, down 22% over the prior year, driven by a 29% decline in Medicare supplement sales.
As we've discussed previously, we're in the midst of a secular shift away from Medicare supplement toward Medicare Advantage.
Helping customers navigate the complex Medicare landscape has been a core strength of our exclusive field agents.
Our approach to the shift in consumer preferences is to leverage the strength of both our field agents and our new digital health marketplace to capture incremental Medicare Advantage sales.
At the same time, we will continue to maintain a strong presence in the Medicare supplement market, which consistently delivers a compelling loss ratio and provides a meaningful contribution to our health margin.
It's also a key differentiator.
Very few peer companies manufacture and sell Medicare plans.
As a reminder, Medicare supplement sales are reflected in the new annualized premium, while Medicare Advantage sales are reflected in the fee revenue.
Turning to our Consumer division on Slide 8.
Sales of life insurance remained strong, up 17% for the quarter and up 19% for the full year.
Direct-to-consumer life sales, which comprised about half of our total life sales, were up 10%.
Life sales generated by our exclusive field agents were up 26% supported by leads shared from our direct-to-consumer channel.
This cross-channel dynamic has resulted in improved productivity metrics, such as lead conversion rates and customer acquisition costs.
Again, this underscores the value of our unified distribution model as growth in one channel is able to feed growth in the other.
As I mentioned earlier, we are working to create the same dynamic on the health side of our consumer business.
During this year's Medicare annual enrollment period, consumers were able to purchase Medicare products from us online or from one of 2,800 tele-sales and local exclusive field agents certified to sell Medicare plans.
With the launch of myHealthPolicy.com marketplace, we created pathways for our tele-agents to refer consumers to local agents and for field agents to refer consumers to a tele-agent or the platform itself.
As a result, our Medicare Advantage policies sold in the fourth quarter increased 3% over the prior year and total third-party policies were up 5%.
myHealthPolicy.com accounted for 14% of our third-party health sales in the quarter.
Our producing agent count was down 3%, which makes our sales momentum and productivity even more impressive.
Due to the resurgence of the pandemic, COVID-related quarantines kept a number of our exclusive field agents and clients from engaging in face-to-face appointments.
COVID restrictions also remain more stringent in the areas of the country where our agents are more concentrated.
As a reminder, to be counted as producing, our agents need to sell at least one policy each month.
Our total exclusive agent count, which includes our field and tele-sales agents was actually up 3% for the full year.
We continue to grow the number of securities licensed financial representatives, which is core to how we are evolving our field force and changing the relationship with our clients.
Turning to Slide 9 and our Worksite division.
Collected premiums remained strong as the profile of our existing employer groups has translated to continued healthy levels of employee persistency.
We saw continued sequential improvement in our Worksite sales in the fourth quarter with sales up 61% over the third quarter.
Relative to the year ago period, however, sales were down 41%.
Given recent increases in COVID infection rates across the country and workplaces opening up more slowly, we continue to expect a steeper recovery path in the Worksite business.
We launched a new group product in the fourth quarter called monthly income protection group term life.
This is a unique group life product that is designed to replace monthly income rather than paying a lump sum death benefit.
Web Benefits Design delivered solid results in 4Q, including a 3% increase in the average per employee per month charge.
WBD cross-selling activities drove 5% of overall NAP in the quarter.
The division will be co-managed by current Worksite President, Mike Hurd and by DirectPath, Chairman and CEO, Mike Byers.
Both will report to me and Mike Byers will join our executive leadership team.
Turning to Slide 10.
We returned $117 million to shareholders in the fourth quarter, including $100 million in share buybacks.
For the full year, we deployed $263 million on buybacks at an average price of $18.17.
Our capital allocation strategy remains consistent.
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.
It's worth noting that most of our organic investments in the fourth quarter flowed through our income statement as operating expenses rather than as capital expenditures.
These investments remain mission-critical to our future success.
Paul will provide more color in his remarks.
Turning to Slide 11.
Over the past two years, we've also been making minority investments in various InsurTech and FinTech companies.
Through CNO ventures, we seek to generate attractive returns, develop relationships, source and track opportunities, and ultimately invest in various companies that are disrupting the insurance and financial space.
We fully expect these investments to stand on their own merits and deliver attractive returns.
They also serve as important vehicles for us to collaborate and innovate.
We seek out companies that are strategically relevant, particularly those we can partner with, to help us improve our digital engagement with consumers, accelerate our speed to market with new products and services and/or enhance our technology.
To date, we have invested a total of $21 million in five companies, including HealthCare.com, Human API and Kindur.
We expect to complete a few similar transactions per year.
The portfolio will remain small relative to our total invested assets, but impactful in other ways.
Turning to the financial highlights on Slide 12.
Operating earnings per share were up 17% in the fourth quarter and up 21% excluding significant items, benefiting from favorable health insurance product margins, driven by continued customer deferral of care related to COVID and by strong net investment income, resulting from significant outperformance of our alternative investments.
Earnings per share also benefited from our share repurchases, which reduced our fourth quarter weighted average share count by 7%.
We deployed $100 million of excess capital on share repurchases in the fourth quarter and $263 million for the full year.
Partially offsetting the increase in insurance product margin and investment income in the quarter was an increase in expenses and a decrease in fee income, both driven by our decision to fast track spending on growth initiatives in the second half of 2020 in the context of accelerating trends relating to all things virtual and digital and supported by strong earnings in the period.
These initiatives included spending related to myHealthPolicy.com, which flows through as an expense in our fee income line as it relates to activities supporting our fee revenue.
Other examples of growth initiatives in the period include spending on virtual sales and service capabilities, market access, data analytics and various initiatives designed to improve our policyholder customer experience.
All of these investments flowed through our income statement on the expenses allocated to products line.
In the 12 months ended December 31, 2020, we generated operating return on equity excluding significant items of 12%, which compares to 10.4% in the prior year period.
The favorable impact was driven by our lower initial portfolio rates, which manifested from asset turnover in the annuity portfolio in the third quarter of 2020.
Those lower rates drove a favorable adjustment to the embedded derivative reserve related to our fixed index annuities.
Separately, as part of the assumption update, we lowered the new money rate assumption to 3.5% in 2021 and 3.75% in 2022, but that did not create material unlocking impacts.
Turning to Slide 13 and our product level results.
Our overall margin in the fourth quarter was up $30 million or 15%.
Excluding significant items, it was up $9 million or 4%.
This included a net favorable COVID impact of $18 million, driven by the deferral of care in our healthcare products and reflects modest spread compression in our annuity product and generally stable results in our life and health products ex-COVID.
Turning to Slide 14 and our investment results.
Investment income allocated to products was essentially flat in the period as the favorable impact of the 4% increase in net insurance liabilities was largely offset by a 19 basis point year-over-year decline in the average yield on those investments to 4.83%.
Sequentially, the average yield declined five basis points consistent with our prior guidance.
Investment income not allocated to products increased $32 million year-over-year to $58 million driven by strong alternative investment performance.
This translates to an annualized return on our alternative investments of 24% as compared to a mean expectation of between $7 million and 8%, reflecting outperformance driven by private equity realizations and strong private equity -- excuse me, private credit results.
Our new money rate of 3.58% was down 50 basis points both year-over-year and sequentially with the sequential change driven primarily by tighter credit spreads.
Turning to Slide 15.
At quarter end, our invested assets were $27 billion, up 9% year-over-year.
Approximately 95% of our fixed maturity portfolio is investment-grade rated with an average rating of single A. The BBB allocation comprised 42% of our investment-grade holdings, up slightly from the prior quarter.
Turning to Slide 16.
We continue to generate strong free cash flow to the holding company in the fourth quarter with excess cash flow of $122 million or 142% of operating income this quarter and $387 million or 107% of operating income on a trailing 12-month basis.
Turning to Slide 17.
At quarter end, our consolidated RBC ratio was 411%, down from 428% at September 30.
This represents approximately $55 million of excess capital relative to the high end of our targeted range of 375% to 400%.
Our Holdco liquidity at quarter end was $388 million, which represents $238 million of excess capital relative to our target minimum Holdco liquidity of $150 million or approximately $185 million of excess net of the capital deployed this quarter on the DirectPath transaction.
We had intentionally maintained a more conservative posture in the context of ongoing COVID-related uncertainty.
Turning to Slide 18 and our outlook for the remainder of the year.
We continue to run base and adverse case scenarios that are generally aligned with certain rating agency assumptions regarding COVID-19 infection rates, death rates and related economic impacts.
From a top-line perspective, in our base case, we expect the continuation of the positive momentum that we experienced in the second half of 2020.
From an earnings perspective, we expect two sets of headwinds in '21 relative to 2020.
The first relates to COVID where we expect to trend toward more normal claims experience in our healthcare products as consumers and healthcare providers continue to become more accustomed to COVID-related protocols and/or as the benefits of vaccines take hold.
In our base case, we expect this will translate to net mortality and morbidity impacts that are modestly favorable in the first half, modestly unfavorable in the second half and neutral for the full year.
It's also worth noting that the decline in sales in 2020 due to COVID will reduce insured product margin in 2021 and beyond, all else equal.
The second set of earnings headwinds in 2021 relate to investment income, particularly a potential for reduced income from alternative investments and from opportunistic trading as compared to significant outperformance in 2020.
Lastly, continued pressure from low interest rates generally, which has lately been coupled with tighter spreads, will continue to pressure earnings.
We expect this will translate to flat net investment income allocated to products within our insurance product margin as growth in the asset base will likely be offset by a decline in the yield on those assets.
These headwinds notwithstanding we expect a modest offset from a slight decline in expenses, mostly in the second half of the year as we continue to drive operational efficiencies, while also continuing to invest in growth initiatives.
Regarding free cash flow and excess capital, we exhausted our life NOLs in 2020, which will put modest pressure on our free cash flow conversion rate in 2021.
Nevertheless, still healthy levels of free cash flow generation in our base case scenario on top of our excess capital position at year end 2020 should result in share repurchase capacity, exceeding our actual share repurchase activity in 2020.
Importantly, even in our adverse case, which is intended to capture scenarios far out in the tail, we expect to be able to manage RBC Holdco liquidity and debt leverage within our targeted levels, pay our dividends to shareholders and still had a modest amount of share repurchase capacity, albeit at much reduced levels compared to our base case.
Turning to Slide 20 -- to Slide 19.
2020 was an incredibly challenging year on many fronts.
Our pandemic response and financial results demonstrated the resilience of our organization and proved that we can emerge from the crisis even stronger while continuing to support our associates, agents, customers and communities.
There's no question that difficult and uncertain conditions remain.
In many respects, we have less visibility into 2021 than we had in 2020.
The lack of short-term clarity should not detract from the long-term view of our prospects.
Our franchise remains strong and our financial position is robust.
Longer term I couldn't be more optimistic about the future of this company and our ability to capitalize on the opportunity before us.
Please continue to stay healthy and safe.

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qtrly book value per share was $40.54, up 28% from 4q19.

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