CNO Financial Group, Inc. Q2 FY2023 Earnings Call

Good morning, and welcome to the CNO Financial Group Second Quarter 2023 Earnings Call. My name is Candy, and I will be your moderator for today. I would now like to hand the conference call over to our host Adam Auvil. Please go ahead.

Good morning, and thank you for joining us on CNO Financial Group's Second Quarter 2023 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 the 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. 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 GAAP measures, which should not be considered as substitutes for the most directly comparable GAAP measures. You'll find a reconciliation of 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 2023 and second quarter 2022. And with that, I'll turn the call over to Gary.

Thanks, Adam. Good morning, everyone, and thank you for joining us. We delivered a solid performance in the second quarter. Operating earnings were $0.54 per share. The fundamentals of our business remain sound, including double-digit sales production across multiple product categories, a strengthened capital position, and strong free cash flow generation. Another quarter of strong new money rates drove continued improvement on the earned yield on investments allocated to insurance products. Variable investment income improved sequentially. Elevated health claims impacted results in the quarter. We expect this to moderate in the second half of the year. Paul will touch on this during his remarks. Both our Consumer and Worksite divisions once again delivered strong sales production and agent results in the quarter. Total new annualized premium was up 11%. We reported double-digit sales growth in field life sales, Medicare supplement, supplemental health, and the worksite insurance sales. Capital and liquidity improved and remained above target levels even after returning $47 million to shareholders. This demonstrates the strong cash flow generation of the enterprise. Our high-quality investment portfolio continues to produce stable core investment income. Book value, excluding AOCI, was up to $32.34 per share. Turning to slide five and our growth scorecard. Life and Health production was strong in the quarter and client assets in our broker-dealer and advisory services were up nicely. Our broad product portfolio and balanced business model continue to provide strength, stability, and resilience to our overall results. I'll discuss each division in the next two slides. Beginning with the Consumer division on slide six. Sales production was strong, continuing the growth momentum from the first quarter. Life and health NAP was up 9%. Life production was up 7%. Field life sales were up 20%, demonstrating the strength of our captive agent distribution and broad product portfolio to quickly respond to evolving customer needs. Our D2C life channel was down 1% on a strong comparable, but contributed to overall life sales growth through shared lead generation. One-third of field life sales in this quarter originated from a D2C customer lead. This illustrates the value of our integrated distribution model. During the second quarter, we also implemented accelerated underwriting on our simplified life product to address a growing market demand. This real-time underwriting solution gives customers an instant decision on their application as they sit across the kitchen table from their agents. We expect roughly 60% of our underwritten life business to be eligible for this new process. Health NAP was up 12% in the quarter, driven by strong sales growth in Medicare Supplement and supplemental health. Medicare supplement was up 29% as consumers gravitated towards these plans, continuing this positive trend from the last several quarters. Our new more competitive Medicare supplement plans continue to perform well with customers, and we have experienced the balancing of our Medicare product sales as a result. As a reminder, we offer two types of Medicare products in our portfolio: Medicare supplement products that we manufacture and a broad offering of third-party Medicare Advantage and Part D prescription drug plans for which we collect fees. By offering both Medicare Supplement and Medicare Advantage products, we can provide more coverage options for customers to choose from and respond immediately to shifts in the healthcare preferences of our middle-market consumers. Supplemental health plans were up 12%, the fourth consecutive quarter of double-digit growth. This product continues to benefit from growth in our producing agent compensation. Annuity account values were up 4% year-over-year. Annuity collected premiums for the quarter were the third highest ever posted for this product line, which is significant given the tough comparable. Persistency remains within expected ranges. Additionally, we have experienced a modest shift towards fixed interest plans due to the higher interest rate environment. As noted previously, our captive distribution model and the long-term relationships our agents build with customers provide stability to this block. Client assets in brokerage and advisory were up 14% year-over-year to a new high of $2.9 billion. We increased net inflows in new accounts, which strengthened the quarter's strong returns that our customers captured from improved market conditions in the quarter. When combined with our annuity account values, our clients entrust us with more than $14 billion of their assets. Our diverse and integrated distribution model remains a differentiator for CNO. We marry a virtual connection with our established in-person agent force who serve more than 230 communities nationwide. We market nationally and complete the last mile of the sale locally. The strength of our agent force remains a key enabler of sales growth in the Consumer division. Agent recruiting is a leading indicator of future sales growth, and we were very pleased with our performance in the quarter. Recruiting was up 27%, which represents our best overall recruiting quarter since late 2020. This recruiting momentum has led to growth in our producing agent count, which was up 8%. Based on this trend, we expect the agent force to continue to grow in the second half of the year. Veteran agent retention and productivity remain strong. Our registered agent count increased by 3% from the prior year. As economic uncertainty persists, demand for securities professionals remains high; this is especially critical for middle-income consumers. Expanding our bench of registered agents is key to how we serve our middle market with both insurance and financial protection products. Turning to slide seven in our worksite division performance. Life and Health insurance sales were up 31% this quarter, exceeding pre-pandemic sales levels for the first time. This is the 9th consecutive quarter of worksite insurance sales growth. As a reminder, immediately prior to the onset of the pandemic, our worksite business posted record sales production with eight consecutive quarters of growth prior to the first quarter of 2020. Achieving this result marks a significant milestone in the return to growth trajectory for our worksite division. Importantly, sales from new broker relationships positively contributed to sales performance in the quarter. Expanding our broker sales pipeline remains a strategic initiative for both our national and regional worksite markets. We recently launched several pilots designed to increase broker engagement. We are very pleased with the early results. Key indicators of the health of our worksite business continue to trend positively in the quarter. Retention of our existing employer customers was strong. Employee persistency within these employer groups was stable, and collected premiums within these employer groups were also safe. Total producing agent counts were up 32%, and agent productivity remained strong. Among our first-year agents, producing agent counts were up 94%, and productivity in that cohort was up 64%. As a reminder, agents must reach a certain level of production to be considered a producing agent. Our successful worksite agent referral program and enhancements to our new agents onboarding program are credited for driving these meaningful agent productivity gains. Product refreshment remains an important component to accelerating worksite growth. In early June, we introduced a new accident insurance product available for both individual and worksite sales. Sales in the first month are off to a solid start, representing nearly 10% of the total NAP in the quarter. As I shared last quarter, we are squarely focused on three strategic worksite growth priorities as we look to the second half of 2023 and beyond: continuing the integration of our worksite capabilities under a single optimized brand, expanding distribution capabilities in our national and regional employer markets through new broker relationships and strategic alliances, and accelerating momentum in agent recruiting to grow producing agent counts. And with that, I'll turn it over to Paul.

Thanks, Gary, and good morning, everyone. Moving on to the financial highlights on slide eight. Operating earnings during the period showed continued growth in average net insurance liabilities, owing to business expansion, improvements in the earned yield on assets supporting those liabilities, resulting from enhanced new money rates over the past few quarters that have surpassed the portfolio yield, and consistent management of expenses. We anticipate these positive trends will persist. However, elevated health claims affecting our long-term care and net sub margins, favorable LDTI impacts from the previous year in our life margin, and a decrease in variable income from alternative investments and bond prepayment activity partially offset these trends during the quarter. From a capital vantage point, we generated robust free cash flow, executed $30 million in share repurchases, and increased both RBC and holdco liquidity compared to March 31, demonstrating our disciplined capital management. Moving on to slide nine. The insurance product margin decreased during the quarter, influenced by several factors. First, we saw increased health claims in our long-term care and Medicare supplement sectors. Importantly, these claim levels remain within the range of our pre-COVID claims experience. Nonetheless, we expect a moderation in these claims during the second half of the year based on leading indicators, and consequently, we have maintained our outlook. Second, in the second quarter last year, there was an unusually significant reduction in claim liabilities in our traditional life business due to the resolution of a claims backlog. These claim payments positively impacted the change in the liability for future policy benefits calculated under LDTI by approximately $10 million, which is the main reason for the negative variance in the second quarter of '23 compared to the second quarter of '22. The margin currently is more aligned with our expected run rate. Third, the margin in our other annuities business fluctuates based on mortality experience, which was more favorable in the prior year. Our long-term outlook for all product lines remains positive. Moving on to slide 10. The new money raised in the quarter was 6.32%, up from 5.53% in the same period last year and nearly flat compared to 6.34% in the first quarter of this year. This marks the fifth consecutive quarter where new money rates have exceeded the average yield on our allocated investments, which increased to 4.65% this quarter, a rise of 11 basis points year-over-year and three basis points from the previous quarter. This represents the fourth consecutive quarter of sequential improvement and year-over-year growth in net yield. The rise in yield, alongside growth in net insurance liabilities and the assets backing them, contributed to a 5.4% increase in net investment income allocated to products. Meanwhile, investment income that is not allocated to products decreased during the quarter due to a drop in income from alternative investments and from call and prepayment activities. These income sources are inherently volatile, especially alternative investments, which exceeded our long-term expectations in the second quarter last year but fell short in the second quarter this year. Our new investments this quarter included approximately $590 million in assets, with an average rating of AA- and an average duration of just under seven years. More details regarding these investments can be found on slides 21 and 22 of the presentation. Turning to slide 11. About 97% of our fixed maturity portfolio at the end of the quarter was rated investment-grade, with an average rating of A, demonstrating our commitment to improving quality over recent quarters. Over the last year, the allocation to securities rated single A or higher has increased by 470 basis points, while the BBB allocation has decreased by 330 basis points, and the high-yield allocation is down by 140 basis points. Last quarter, we provided further insights into our commercial real estate portfolio, which continues to perform well. We have again included performance metrics for these investments on slides 23 and 24. Moving to slide 12. We concluded the quarter with a consolidated RBC ratio of 386% and Holdco liquidity of $176 million, both of which improved compared to March 31 of this year and are comfortably above our targets of 375% and $150 million. Part of the enhanced capital position stems from a sale leaseback program that led to a $43 million reduction in non-admitted assets and a corresponding increase in total adjusted capital during the quarter. In slide 13, due to lower alternative investments in the first half and increased long-term care and Medicare supplement claims in the second quarter, we are revising our full-year 2023 operating earnings per share forecast to a range of $2.65 to $2.85. There are no changes to our other earnings-related guidance; we still expect the full-year expense ratio to range between 19.0% and 19.4% and an effective tax rate between 23.0% and 24.8%. Regarding capital, we reaffirm our target consolidated RBC ratio of 325%, a minimum Holdco liquidity of $150 million, and a target leverage of 25% to 28%. We are adjusting our anticipated full-year excess cash flow to the Holdco to a range of $180 million to $200 million, increasing the lower end by $10 million while keeping the upper end unchanged. Concerning our planned establishment of a captive Bermuda reinsurance company in the third quarter, we are still navigating the regulatory approval process and will provide an update once that is finalized and the treaty is effective. Now I’ll turn it back to Gary.

Thanks, Paul. Last month, we published our fourth annual corporate social responsibility report, which highlighted six focus areas that are most relevant to our business and the recent progress on our commitments. As I shared before, the core of our business is helping people. It's one every day. For that reason, corporate responsibility is embedded in our day-to-day operations. Our success as a company is tied directly to the well-being of our associates, agents, customers, and communities. I invite you to download our report to learn more about our program and commitments. You can find it on our website. As we look to the second half of 2023, I am pleased by our continued strong sales production and the progress we've made against our strategic priorities. Our capital position, liquidity, and the cash flow-generating power of the company remain robust. We thank you for your support and interest in CNO Financial Group. We will now open it up for questions.

Thank you, Gary. Our first question comes from Erik Bass of Autonomous. Your line is now open. Please go ahead.

Hi, thank you. Can you provide some more color on what drove the elevated LTC Med subclaims this quarter? And what the leading indicators you're seeing that give you confidence that health and LTC claims are going to return to a more normal level next quarter?

Sure. Erik, it's Paul. So the driver was simply an increase in new claimants in the quarter. And the leading indicators that we're referring to are number one, just the fact that we're sitting here on August 1. And so we've seen July plans for the first month of the quarter, and those have trended favorably in both long-term care and MedSup. And then with respect to long-term care, we have a reliable leading indicator in the form of calls that come into our customer service call center from policyholders or from family members of policyholders inquiring about how to make a claim as they contemplate making a claim at some point in the future. And those calls are trending favorably as well.

Got it. That's helpful. I mean, I guess, what caused the surprise this quarter then? Because I would have thought you would see similar leading indicators that would have flagged, kind of an increase in potential activity?

Yes. I think it's a question, Erik, as to when we have the leading indicator and the reliance that we put on it. So we're sharing current information, and we're always incorporating into the financials that we're filing each quarter, the most recent information and our best estimate. I guess I'd emphasize one other thing, Erik, and that is that long-term care, obviously, and really all of our products are a long duration in nature. And I think it's a little bit dangerous to read too much into a single quarter. I will say that long-term care has performed extremely well over the last few years. I would emphasize that even in the second quarter where claims were a bit elevated relative to our expectations. They were still below pre-COVID levels, and our view of the economics of this business over the long term hasn't changed. We continue to feel really good about the business.

It makes sense. And if I could just sneak in one more. I just want to follow up on your comments on the Bermuda captive, should we take that 3Q close as still realistic and still the goal? And is there any change in your view on freeing up the $150 million to $200 million of capital in that inception?

Erik, this is Gary. I'll take that one. Just a couple of comments I'd like to make about Bermuda. There's no question in our mind that participating in Bermuda and being a member of that community would be good for CNO. We believe in the value of it, which is why we continue to work on it. So we absolutely see that there's value for CNO and our shareholders. Second, we're eager to join the Bermuda community. We think we would be good citizens. And we think we have value to add in being part of that community. And third, being good citizens and being valuable in that community also means that we respect the deliberations and the process that the Bermuda Monetary Authority is going through. We fully expect a successful conclusion. We certainly hope for that, and we believe we've met all the requirements, but we want to be respectful of their process, their deliberations, and their analysis, which is why you're seeing us refrain from making specific comments. We think that's the best course of action at this time. We want to make sure we give the Bermuda Monetary Authority every opportunity to do their job and continue to interact with us in good faith, which they have. We've enjoyed the interactions, and we continue to feel very good about them. But we're going to refrain from any more specific commentary until they complete their deliberations.

Okay, got it. Thank you.

Thank you. Our next question comes from the line of John Barnidge of Piper Sandler. Your line is now open. Please go ahead.

Good morning, and thank you. My question is around expenses. Were there any one-time expenses in the first-half of the year related to Bermuda that persist in the balance of '23? Or maybe asked differently, they will no longer be present that we should be thinking about run rate?

John, it's Paul. Certainly, we've had some expenses relating to the work we're doing to form the Bermuda company, and that would not persist in terms of start-up expenses. Having said that, there are run rate expenses associated with operating in Bermuda that will be incremental to the run rate prior to Bermuda. And that's incorporated in our expense ratio guidance for the full year. This isn't directly responsive to your question, but in the same sort of context, I would say that in the first half, there were somewhat elevated litigation expenses, particularly related to the ongoing litigation, which we expect will diminish in the second half.

Great. Thank you very much. And then my next question will be on product. Any new product introduction we should be thinking about for the pipeline for that, the commentary on like 60% under that simplified life. Can you maybe talk about, is that going to have increased conversion from velocity of processing versus paper and non-accelerated underwriting and under-penetrated market?

John, this is Gary. Thanks for the question. We believe, and I think this is a common wisdom in the industry, that quicker decisioning usually results in better sales because you have a reduced likelihood of buyers backing out or losing interest. And it also helps you a little bit from a competitive perspective. So we look forward to continuing to deploy these types of processes and technologies to continue to make the decision faster. And then, of course, there are efficiencies on our end; the more we can do this in an automated way and the less we can handle paper, the better our expense ratios are going to be. So there's a win-win all the way around if we can continue to bring more and more of our business under this type of automated decision process. So that's definitely the goal. It takes time. We've got systems that have been around for a long time, so it takes time to do this, but we remain focused on that. So that's kind of on the process, if you will. I don't know if I can call that a new product, but that's certainly a new process and we'll continue to do that. In terms of product, you saw the results on our Medicare Supplement. We're very pleased with how that continues to play. We think there's continued opportunity there for us to continue to grow that. We've got some new products we've launched in worksite, so we'll continue to do that. I think if we can do one or two new products a year, I would be thrilled with that. We have to navigate that as we move forward. But I've been pretty pleased with the work that our folks have done, and we'll continue to do that. So you should expect to continue to see us working on that. I point to some of the sales and recruitment success we've had directly emanating from that. More agents just want to join us when they know we remain committed to building more products and improving our processes, and more consumers get interested. So we'll continue to do that, absolutely.

Thank you.

Thank you. Our next question comes from the line of Brian Kruger of Stifel. Your line is now open. Please go ahead.

Hi, thanks, good morning. On long-term care, was there any commonality in the higher new claims incidents in the quarter, whether it be by issue year or any commonality or did you just see a broad-based increase in incidents this quarter?

Good morning, Brian, it's Paul. So nothing specific that was called out as we went through the analysis internally. So I think it's fair to say it was more broadly based.

Brian, if I could just interject. I just want to, I guess, draw more attention to a comment Paul made earlier about the importance of looking at this type of claims data on a much broader perspective. Honestly, we just don't get that worked up over a quarter-to-quarter movement. It just doesn't tell us that much. It takes much more time, and we're not seeing anything here that gives us that kind of concern. I just want to emphasize the long-term nature of claims that I understand that when we release quarterly results, people want to try and extrapolate that or at least understand if there's something to be extrapolated. We just don't see it.

Understood. And then a separate question on fee income and fee revenue. Can you just give us a little more perspective on the seasonality there and kind of what we should expect from I think, 2Q and 3Q are typically lower than the first quarter and the fourth quarter, but does any help you could provide there?

Brian, it's Paul again. That's exactly right. So that's really the first point. The second point is that we've had some mix shift away from MedAdvantage back to that MedSup in the wake of introducing the new MediSup product in the second half of last year. So in the quarter, that was another contributor.

Thank you.

Thank you. Our next question comes from the line of Wilma Burdis of Raymond James. Your line is now open. Please go ahead.

Hey, good morning. I guess first question, how do you think about pricing for Medicare supplement heading into 2024? And if Medicare Advantage writers end up increasing their pricing for 2024, would that benefit your revenue given you sell third-party products there?

I will address the question at a high level and then Paul can provide more details. Since we operate on a fee basis, an increase in pricing would be beneficial for us. I think that aspect is clear. As for the likelihood of that happening, I'm not entirely sure if that was your main inquiry.

Gary, maybe I could provide some perspective that I think would be responsive Wilma. So in terms of how we think about pricing, MedSup in '24, I think that was the question. We'll do what we always do, which is to look at the claims experience and that informs the rate increases that we file around this time of year, every year. One of the nice things about this product is we have this annual opportunity. This year, there's an additional dynamic I think, that's fair to reference, and that's the approval of what kind of four. Through curve for Medicare claims, the Alzheimer's treatment. It's guesswork at this point to know how that will impact claims. But I think directionally it will and so we'll incorporate some assumption about that in our rate filing for ‘24.

Could you provide some insight on the potential uses for the $150 million to $200 million of capital once you have more clarity on the situation in Bermuda?

Sure. So we'll deploy excess capital the way that we always have, which is to try to put it to its highest and best use. Historically, on the margin that has resulted in share repurchase, so I suspect at least some portion of that gets deployed in that way.

Okay, thank you.

Thank you. Our next question comes from the line of Scott Heleniak of RBC Capital. Your line is now open. Please go ahead.

Yes, good morning. Yes, I just had a quick question on the guidance. It sounds like it mostly reflects lower VII assumptions. But is there anything more we should be thinking about expected run rates of the different segments, life, annuity health in the back half of the year? I know you mentioned that health claims should settle down versus the first half of the year. But is there anything else that we should be considering or looking at in the different segment units versus the first-half?

Good morning, Scott, it's Paul. I’d like to offer some insights on our forecast for the second half of the year, in conjunction with our first-half results and updated EPS guidance. The primary factor influencing this is income from alternative investments, which was relatively low during the first half. We expect it to align more with long-term expectations in the second half for several reasons. First, we report on a one-quarter lag, and because equities have generally done well lately, credit spreads have tightened, and volatility has decreased, all of which typically favor our alternative portfolio. Additionally, some recent underperformance can be attributed to specific results in our portfolio, largely due to investments that had exceptional performances in 2021 and 2022 but have since retracted somewhat. We have taken measures to lessen exposure in those areas, positioning ourselves well for the second half. Secondly, regarding health claims, as you've highlighted and we've previously discussed. The Life margin tends to be lower in the first quarter seasonally, so we expect an improvement in the second half compared to the first. Moreover, our advertising expenses are usually greater in the first half than in the second, and we anticipate that trend to persist this year. Additionally, our net investment income tied to products has been improving, and this trend should continue as yields on the allocated portfolio rise with higher new money rates, positively impacting margins across our products. Lastly, you can expect our expenses to keep trending downwards, partly due to timing related to run rate expenses. The elevated litigation expenses mainly from Beach Road in the first half are projected to decrease in the second half. Overall, we are maintaining a disciplined approach to expenses. It's really a combination of these factors that shapes our outlook for the second half and the entire year.

Okay, that's really helpful detail. Regarding the investment income, it seems you're feeling more optimistic about Q3 compared to Q2 in terms of the reported numbers. While I don't expect the exact figure, you are anticipating some sequential improvement, correct?

Yes, this is Eric Johnson. In the second quarter, we saw some improvement compared to the first quarter, although it still isn't where I would like it to be in the long term. There will definitely be fluctuations between quarters; however, we saw positive trends in real estate, infrastructure, hedge funds, and private equity, which Paul mentioned has historically performed well for us. We faced some challenges this quarter, which was unexpected, especially since this area has typically done very well for us. Our older portfolio has characteristics of a carry book, generating healthy cash dividends. However, it's been impacted recently by changes in the yield curve and Fed actions that have affected asset valuations. We’re nearing the end of this cycle, which aligns with Paul's earlier remarks about a potentially better second half of the year. The portfolio is consistently generating cash dividends on time and even exceeding our expectations. Overall, while the previous quarters have been challenging, I am optimistic about the future. Additionally, our total general account book yield has increased by 12 to 13 basis points year-to-date. I believe this will benefit us greatly going forward, as Paul noted. I hope this information has been useful.

Could you discuss the mortality trends you are observing in the life insurance sector for this quarter compared to recent quarterly averages? How do these trends relate to the mortality patterns you were seeing before COVID? Can you provide additional details?

Sure. The mortality assumption in our life products is that it's a little bit worse than pre-COVID, and the context for that is the assumption that COVID has translated to an endemic state, which still creates some amount of excess mortality. So that's the basic assumption that hasn't changed since we most recently revisited it back in the fourth quarter of last year. Our experience in the second quarter was a little bit better than that, not materially, but to the plus side of our long-term expectations.

Thanks. I wanted to start with the health margin. I understand your points regarding long-term care, and we need to consider this over an extended timeframe. However, focusing on the MedSup segment, it seems that the margin has been lower than where it was for the past two quarters. Additionally, some health insurance companies have mentioned higher utilization among older individuals. I wanted to explore that further and see how you might be affected by the trends mentioned by some of the HMO companies and what steps can be taken to improve the situation.

We experienced elevated claims activity in MedSup during the quarter, likely influenced by trends observed by other companies. However, based on our experience in July, we anticipate this to moderate. Additionally, our MedSup portfolio has been shrinking due to a decrease in MedSup sales over recent years. This trend began to reverse with the introduction of a new product late last year. Nonetheless, for the past couple of years, including the second quarter, this decline accounts for more than half of the decrease in margin from one quarter to the next.

Okay. Got it. And then I guess on the expense ratio. I think it's been running close to 20% in the first half. And so if you're sticking with your kind of '19 to 19.4%, that would mean something closer to 18, I guess, for the second half. And is that the right way to think about it? And then are there sort of discrete things that you're doing to bring the expense ratio down? I get that some of the Beachwood will fall off, but it seems like it's got to be a little bit better than full-year guidance just to kind of get you to where you want to land.

Yes. So all of those observations are absolutely correct. We nevertheless feel good about the forecast for the reasons that I've talked about. The expenses are trending favorably. They were lower this quarter than they were a year ago. And there's some timing first-half versus second-half just on run rate expenses. And then the other things that I mentioned, we expect will drive us to an expense ratio for the full year in the range of our outlook.

Got it. If I could ask one more question regarding the investment losses, which have been about $20 million over the last two quarters. I'm curious about the situation there. Are you liquidating to improve quality, or could you provide some further details on that?

Yes, I can make just a couple of comments. And then Eric, I'd turn it over to you. So the biggest driver of the realized loss in the quarter was we sold some First Republic bonds. But Eric, if you want to provide some more color beyond that?

Yes. Taking the first half of the year as a whole, there's about three factors that work. One would be, as Paul mentioned, probably about 30% to 35% would relate to the First Republic that's in the rearview mirror. Another 30% to 35% would relate to some up in yield and up in quality opportunities that we had, particularly during the first quarter, where we were able to rotate up in quality and up in book yield at the same time, where the kind of the payback period on the loss would be two, three, four years of future investment. So pretty quick return on the loss out of corporates into agencies was very easily done during the early part of the year. And then the residual, like 20% to 30% would relate basically just to kind of the ongoing portfolio pruning that you're doing all the time to pick away at migrating credits that feel good about, as you did say you bowsom. So one part opportunistic, one part of problem and one part just normal maintenance would be a way of thinking about it.

Got it, thank you.

Good morning. Paul, I hear what you said about looking at July data being favorable for long-term care claims. But even with the 2Q being elevated, I think you said it's still below pre-pandemic levels. And so I guess my question is, isn't it reasonable to assume you're more likely to revert to this level or higher, if I think about steady state over the next several quarters? Or do you think there's some reason why you'll have a permanent benefit on the loss ratio with this product?

Good morning, Tom, it's Paul. So I think reasonable people could certainly disagree on this. We're all sort of just making guesses. But our view is that the claims will settle in over the long term. It's something better than pre-COVID just because I think some behaviors have actually changed in terms of how people interact with the healthcare system. So that's a long-term view. We'll see if it proves correct or not. And then in the near term, just the near-term indicators would suggest that the third quarter will look a lot better than the second quarter.

Got you. Regarding the changes with the new LDTI accounting, do you expect a long-term improvement in long-term care claim trends, or is the current reserving based on assumptions similar to pre-pandemic levels?

We review our assumptions regularly in the fourth quarter under HGAAP and LDTI, and we did not make any significant changes to our assumptions in the most recent fourth quarter. I'm looking at Karen DeToro on the screen here. Karen, do you agree? Yes. Does that make sense, Tom? Does that address your question? Perhaps I'm not fully grasping your question.

No. That does. No, yes. So long-term, you haven't really changed the long-term assumptions. So to the extent that if there were to be favorability that should be, we'll call it, an earnings benefit on a go-forward basis. Is that fair, Paul?

Well, we didn't significantly change the assumptions in the fourth quarter of this year as compared to the fourth quarter of last year. I think our assumptions are a little bit different now than they were before March of 2020.

As there are no additional questions right at this time, I'd like to turn the conference call back over to Adam Auvil for closing remarks.

Thank you, Operator, and thank you all for participating in today's call. Please reach out to our Investor Relations team if you have any further questions. Have a great rest of your day.

Ladies and gentlemen, this concludes today's CNO Financial Group Second Quarter 2023 Earnings Call. Thank you for joining. You may now disconnect your lines.