Earnings Call Transcript - CNO Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the CNO Financial Group Second Quarter 2021 Earnings Call. All participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. I will now hand the conference over to Jennifer Childe, Vice President of Investor Relations. Please go ahead.

Jennifer Childe, Vice President of Investor Relations

Thank you, operator. Good morning and thank you all for joining us on CNO Financial Group's second quarter 2021 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 6. 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 to be 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 presentations, we will be making performance comparisons and unless otherwise specified, any comparisons made will be referring to changes between the second quarter of 2020 and the second quarter of 2021. And with that, I'll turn it over to Gary.

Gary Bhojwani, CEO

Good morning everyone and thank you for joining us. Turning to Slide 4, we reported operating earnings per share of $0.66, which represents 20% growth over the prior period or 60% growth excluding significant items in both periods. Sales activity remains strong and we have exceeded pre-pandemic levels in a number of areas. Total Life and Health NAP was up 35% over the second quarter of 2020 and up 10% relative to 2019 levels. Our results also benefited from ongoing deferral of medical care, which boosted our health margins, solid alternative investment performance, and continued share repurchase activity. Premium collections remain strong and our underlying margins excluding COVID impacts performed well as expected. Our capital and liquidity remain conservatively positioned. We ended the quarter with an RBC ratio of 409% and $336 million in cash at the holding company while also returning $105 million to shareholders through a combination of share repurchases and dividends. We continue to execute well against our strategic priorities, specifically successfully implementing our strategic transformation that we initiated in January 2020, growing the business profitably, launching new products and services, expanding to the right to slightly younger, wealthier consumers within the middle-income market, and deploying excess capital to its highest and best use. Turning to Slide 5 and our Growth Scorecard, as was the case for six consecutive quarters prior to the pandemic, all five of our scorecard metrics were up year-over-year. Life sales remained strong, fueled by continued momentum in both our direct-to-consumer and exclusive field agent channels. Overall health sales were up almost 90% over the prior period, which reflected the first full quarter of the pandemic when stay-at-home restrictions were first instituted. Total collected life and health premiums were up 1%. 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 42% year-over-year, relative to the second quarter of 2019, annuity collected premiums were up 1%. Client assets in brokerage and advisory grew 33% year-over-year to $2.6 billion fueled by new accounts, which were up 13%, net client asset inflows, and market value appreciation. Sequentially, client assets grew 8%, fee revenue was up 50% year-over-year to $31 million, reflecting growth in third-party sales growth within our broker-dealer and registered investment advisor and the inclusion of DirectPath results. Turning to our Consumer Division on Slide 6. We continue to leverage our cross-channel sales program. Our hybrid sales and service model, which involves virtual engagement with our local field exclusive field agents, has led to significant improvements in lead conversion rates, customer acquisition costs, and sales production. Life and health sales were up 32% over the prior period and 19% over the same period in 2019. Life sales climbed 8% for the quarter to over $50 million, reflecting the sixth consecutive quarter of year-over-year growth. Direct-to-consumer life sales were level with the record production in the prior period. Life sales generated by our exclusive field agents were up 23% and comprised over 40% of our total life sales. Leads from our direct-to-consumer business supported this growth. Within our health product line, supplemental health and long-term care sales saw healthy growth over both the second quarter of 2020 and the second quarter of 2019. These results benefited from initiatives that enable our products to be sold through multiple channels. Our third-party Medicare Advantage policy sales were up 20% in the second quarter. Medicare supplement sales remain challenged. Med Supp sales were up modestly over the first quarter. However, as discussed in previous quarters, our market is experiencing a secular shift away from Medicare supplement and towards Medicare Advantage. We continue to invest in both our Medicare Supplement and Medicare Advantage offerings to ensure we are well positioned to meet our customers' needs and preferences. Consistent with the first quarter, roughly 50% of our Consumer Division life and health sales were completed virtually. Consumers selecting to engage virtually held steady even as communities reopened and vaccination rates increased. This is a profound change in how we connect with consumers and further validates the transformation we initiated in January of 2020. It will continue to have significant implications for our business going forward. Among other things, this change expands our agents' ability to interact with customers across a broader geographic area. As I mentioned, annuity collected premiums were up 42% as compared to the prior year and up 1% versus 2019. The number of new annuity accounts grew 16% and the average annuity policy size rose 14%. Our portfolio of index annuity products continues to be well received by our middle-market consumers. Our recently launched guaranteed lifetime income annuity plus was a key contributor to our second quarter annuity sales growth force. Of course, we continue to maintain strict pricing discipline on our annuities to balance sales growth and profitability. Participation rates and other terms are reviewed regularly to reflect current macroeconomic conditions. Client assets in brokerage and advisory grew 33% year-over-year and 8% sequentially to $2.6 billion. Combined with our annuity account values, we now manage $12.7 billion of assets for our clients. This fundamentally shifted the relationship we have with our customer base. Unlike some insurance products, which can be transactional in nature, investment products tend to create deeper and longer-lasting customer relationships. We continue to reap the benefits of the shift in the agent recruiting strategy that we initiated several years ago. We now rely more heavily on targeted recruiting approaches, including personal referrals. 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. Relative to the year-ago period, our producing agent count increased 7%. Sequentially, our producing agent count was down slightly, but overall our agent force remained stable. Our securities licensed registered agent force was up 6%. Improvements in agent productivity have become a more important driver of our sales growth than agent count in recent quarters, and we have significant runway for future growth. Turning to Slide 7, in our Worksite Division, worksite sales were up sharply in the second quarter as compared to the year-ago period. We expect to approach 2019 sales levels when access to workplaces improves. Ongoing pilots and programs to target new employer groups, offer new services, and capture new business continue to progress. Retention of our existing customers also remains strong, with continued stable levels of employee persistency. Our producing agent count was up 15% year-over-year and 7% sequentially. Recall that we slowed our agent recruiting during the pandemic due to workplace restrictions. As a result, agent count remains down nearly 40% from pre-COVID levels. To help boost recruitment and support a return to pre-COVID production levels, we are rolling out a field agent referral program. This program is designed similarly to our successful Consumer Division program. Relative to 2019 levels, our veteran agent count is up 7%. Retention productivity levels among our veteran agents who have been with us for more than three years remain very strong. These agents have been the driving force behind our recent sales momentum and are expected to be instrumental in helping to rebuild our overall agent force. Fee revenue generated from our business has more than doubled in the quarter due to the DirectPath acquisition. Feedback has been strong surrounding the unique combination of products and services we can now bring to the worksite market. We are realizing early cross-sell successes between Web Benefits Design and DirectPath, and the pipeline continues to grow. Along with strong client retention, these businesses also generated double-digit increases over both 2020 and 2019 in various metrics. Turning to Slide 8, our robust free cash flow enabled us to return $105 million to shareholders in the second quarter, including $87 million in share buybacks. We also raised our dividend 8% in May, marking the ninth consecutive annual increase. 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. And with that, I'll turn it over to Paul.

Paul McDonough, CFO

Thanks, Gary, and good morning everyone. Turning to the financial highlights. On Slide 9, operating earnings per share were up 20% year-over-year and up 60% excluding significant items. The results for the quarter reflect solid underlying insurance margins, ongoing net favorable COVID-related impacts, strong alternative investment performance, and continued disciplined capital management. Over the last four quarters, we have deployed $337 million of excess capital on share repurchases, reducing weighted average shares outstanding by 7%. Return on equity improved by 90 basis points in the 12 months ending June 30, 2021, compared to the prior year period. Some of the expenses allocated to products are not allocated to products. Excluding significant items, expenses increased by about $6 million sequentially, driven by incentive compensation accrual adjustments related to earnings outperformance in the first half of the year. The increase in expenses over the prior year period also reflects lower agency management expenses in 2020 due to COVID-related restrictions and the June 30, 2020 conclusion of a transition services agreement related to the long-term care reinsurance transaction completed in 2018. In general, our expenses continue to reflect both discipline and operational efficiency on one hand and continued targeted growth investments on the other hand. Turning to Slide 10, the insurance product margin in the second quarter was up $17 million or 8%, excluding significant items. Net COVID impacts were $21 million favorable in the quarter, as compared to $6 million unfavorable in the prior year period. Excluding COVID impacts, margins in the quarter remained solid and stable across the product portfolio. The net favorable COVID impacts in the quarter reflect continued favorable claims experience in our health care products, particularly impacting Medicare supplement and long-term care due primarily to continued deferral of care. This was partially offset by the unfavorable impact of COVID-related mortality in our life products. The favorable COVID impact in the quarter exceeded our expectations, as the outlook we provided on our April earnings call assumed that health care claims would begin to normalize in the second quarter, including an initial spike in claims due to pent-up demand that did not materialize in the quarter. Regarding our annuity margin, recall that in the second quarter of 2020, we saw favorable mortality in our other annuities block unrelated to COVID, which translated to $10 million of positive impacts. As we noted at the time, this resulted from a handful of terminations on large structured settlement policies, which we expect from time to time in this block, but not on a regular basis. Turning to Slide 11, investment income allocated to products was essentially flat in the period, as growth in the net liabilities and related assets was mostly offset by a decline in yield. Investment income not allocated to products, where the variable components of investment income flow through, increased by $40 million reflecting a solid gain in the current period and our alternative investment portfolio, and a loss on that portfolio in the prior year period. Recall that we report our alternative investments on a quarter lag. Our new money rate of 3.38% for the quarter was lower sequentially, reflecting a continuation of our up-in-quality bias from the first quarter and continued spread tightening in general, partially offset by higher average underlying treasury rates in the second quarter versus the first quarter. Our new investments comprised $1.1 billion of assets, with an average rating of single A and an average duration of 16 years. This higher level of new investment reflected the reinvestment of maturing assets and a higher level of prepayment activity in the period. Our new investments are summarized in more detail on Slides 22 and 23 of the earnings presentation. Turning to Slide 12, at quarter end, our invested assets totaled $28 billion, up 8% year-over-year, with approximately 96% of our fixed maturity portfolio being investment grade rated, with an average rating of single A. This allocation to single A rated holdings is up 200 basis points sequentially. The BBB allocation comprised 39.4% of our fixed income maturities, down 140 basis points both year-over-year and sequentially. We are actively managing our BBB portfolio to optimize our risk-adjusted returns, to the extent suitable and attractive opportunities develop. Over time, we may balance our recent up-in-quality bias with a modest increase in allocation to alternatives, asset-backed securities, CLOs, or investment-grade emerging market securities. Turning to Slide 13, we continue to generate strong free cash flow to the holding company in the second quarter, with excess cash flow of $114 million, or 128% of operating income for the quarter, and $432 million, or 119% of operating income on a trailing 12 month basis. Turning to Slide 14, at quarter end, our consolidated RBC ratio is 409%, which represents approximately $45 million of excess capital relative to the high end of our target range of 375% to 400%. Our Holdco liquidity at quarter end was $336 million, which represents $186 million of excess capital relative to our target minimum Holdco liquidity of $150 million. Even after returning $105 million of capital to shareholders in the quarter, our excess capital grew by approximately $22 million from March 31 to June 30 of this year. This primarily reflects the strength of our operating results in the quarter and the recent up-in-quality bias in our investment portfolio. Turning to Slide 15, while uncertainty related to COVID continues, we believe it is very unlikely that any future COVID scenario would cause our capital and liquidity to fall below our target levels. For that reason, we are no longer running a formal adverse case scenario, as we had been doing through the first quarter of this year. Instead, we are updating a single base case scenario or forecast with upside and downside risks to that forecast. In our most recent forecast, we expect a continuation of the sales momentum we've seen in the past five quarters. We expect a modest net favorable COVID-related mortality and morbidity impact on our insurance product margin for the balance of 2021 and a modest net unfavorable impact in 2022. This assumes that COVID deaths do not worsen in the second half of this year and that health care claims begin to normalize after a brief spike beginning in the third quarter, due to pent-up demand from the deferral of care. When and if a spike actually occurs and when our health product claims actually normalize is highly uncertain. So far, we have seen some intra-quarter volatility in our health claims during the pandemic but nothing that has persisted long enough to establish a trend. On the mortality side impacting our life products, the number of COVID deaths we will see for the next several quarters is also uncertain, given the recent rise in infections largely from the delta variant and the potential for material impacts from additional variants. Certainly, one of the biggest risks to our forecast is how exactly COVID will evolve from here. But again, we believe, however it evolves, it represents an earnings event for us, favorable or unfavorable, but not a capital or liquidity concern. Assuming no shift in interest rates, we expect net investment income allocated to products to remain relatively flat in this base forecast, 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. In general, we expect alternative investments to revert to a mean annualized return of between 7% and 8% at some point and over the long term, but actual results will certainly be more variable, with likely more upside potential than downside in the near term, given the current economic outlook. We expect fee income to be modestly favorable to the prior 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 DirectPath will also contribute to fee income. We expect some of our quarterly allocated and unallocated expenses, excluding significant items, for the balance of the year to be generally consistent with levels reported in the first quarter of this year, allowing for some quarterly volatility. And finally, as COVID-related uncertainty diminishes, which it certainly will at some point, we expect to manage our capital and liquidity closer to target levels, reducing our excess capital over time.

Gary Bhojwani, CEO

Thank you, Paul. We are pleased with the healthy results we've generated this quarter and in the first half of the year. The strength of our diversified business model and the steady execution of our strategic priorities and organizational transformation underpin that success. The consumer division has met or exceeded pre-pandemic performance and our Worksite Division is making meaningful progress. As we enter the second half of the year, we remain squarely focused on maintaining our growth momentum, building upon our competitive advantages, and managing the business to optimize profitability, cash flows, and long-term value for our shareholders. We thank you for your support and interest in CNO. Please continue to take care of your health, including vaccinations for those that are eligible. Stay healthy and stay safe. We will now open it up for questions.

Operator, Operator

Our first question comes from Colin Johnson with B. Riley Securities.

Colin Johnson, Analyst

Just first wondering, given that deferral of care had contributed favorably in the quarter, despite the fact that maybe coming in the quarter, we expected that to abate as things reopen further. If you have any insight as to maybe why that might have been taking place. Why we would have been seeing a slower resumption of care than otherwise expected on the part of the consumer?

Gary Bhojwani, CEO

Yes, Colin, thank you for the question. The short answer is we've got a bunch of theories. I don't know if we have anything that I would point to as being hard and fast, but I'm happy to share with you some of the theories we've heard and seen. First is, some consumers are still afraid to go back to see their doctors. Some consumers have conditions they would have otherwise sought care for, but those conditions have passed. Some of the consumers that would have gone to see doctors have unfortunately passed. There are a variety of other factors. The short answer from our perspective is that we haven't seen anything that clearly explains what's happening. We know that fewer people are seeking health care and our health care claims results benefit from that, but we’ve seen more theories than we can address comprehensively.

Colin Johnson, Analyst

Okay, thanks, that's helpful. And then, looking at new annualized premium. I think this is the second quarter now that we're at about half of the Life and Health NAP digital. Do you think that number presents a longer-term equilibrium percentage, so to speak, or do you think there might be more room to the upside with respect to that?

Gary Bhojwani, CEO

I think there is more room to the upside on that. The one thing I want to be transparent about is that some of this depends on how you define it. So, let's say you're sitting in some city in Iowa and you buy a policy from an agent who is also in Iowa, but that interaction takes place over a Zoom call, and you complete the paperwork via email. If the agent is there locally, there to answer questions and is happy to meet you at your kitchen table, but you happen to do all of this digitally, was that a digital relationship? I share that with you because we are watching this evolve much more quickly than we expected, but the bottom line for all of our shareholders is we expect an increasing number of interactions to take place virtually, but not to the exclusion of that in-person interaction. At some level, I want our consumers to interact with our agents in person because that's one of our differentiating characteristics. That's one of the things that we can do that others cannot; we can do both. So, I want consumers that want some of both, but the short answer is we expect that the number of digital interactions will continue to grow.

Colin Johnson, Analyst

Thank you. And just as a follow-on. So, if the number of digital sales potentially rises, do you think that could have any sort of positive impact on operating expenses - digital sales versus one in person?

Gary Bhojwani, CEO

I think over time it will, given agents should be able to increase the productivity they can cover a broader geographic area, and so that should definitely help us. I want to emphasize the overtime point because it's important to remember that in the near term, we're investing in certain technologies and training. So, it will take time for all of this to work its way through. Paul, do you want to add anything?

Paul McDonough, CFO

The only thing I'd say is that I think we're at a position now where as we continue to grow the business and sustain that growth over time, we'll get better operating leverage from our expense base, which has the potential to grow earnings and improve ROE.

Operator, Operator

Your next question comes from the line of Hung-Fai Lee with Dowling and Partners.

Hung-Fai Lee, Analyst

A question for Paul, looking at the annuity earnings and margin specifically for fixed index annuities, they were very strong in the quarter. Just wondering, was there some sort of going-to-market benefits running through the numbers for this quarter and if so, can you provide some color in terms of what the normalized margin would be for the FIA?

Paul McDonough, CFO

Sure. Good morning Hung-Fai. So, the sequential improvement in the annuities margin is reflective of market conditions creating favorable option impacts. Just to drill down a bit, higher equities, lower treasuries, and lower volatility created a situation where the value of the option assets increases in value more in the embedded derivative reserves. Just to be clear, this is really an accounting phenomenon, if you will. We would expect the favorable trends to moderate depending on market conditions. In terms of longer-term run rate trends, I would just point to our disclosure over the last couple of years, and I think if you look at that there is a noticeable underlying run rate.

Hung-Fai Lee, Analyst

My second question is related to your fee revenue growth, which was very impressive, up 50% year-over-year. Can you provide some color in terms of what's driving that growth and how much was from adding DirectPath versus the growth of your existing fee-based business?

Paul McDonough, CFO

Yes, the biggest driver is DirectPath, but we are also seeing growth in the fee revenue related to distribution of Medicare Advantage and from WBD.

Hung-Fai Lee, Analyst

As we think about, normally first quarter and fourth quarter tend to be your higher fee revenue quarters, and that used to be kind of $30 million-ish. So now because in the second quarter, you're at $30 million. How should we think about seasonality?

Paul McDonough, CFO

I think you should continue to expect the seasonality will follow the annual enrollment period, which is skewed into Q3 and Q4, because remember the Medicare Advantage policies we sell during the annual enrollment period shelf this fee income.

Hung-Fai Lee, Analyst

But so is the $30 million now come to the new run rate going forward - low seasonality quarters?

Gary Bhojwani, CEO

Yes, certainly Q2 of this year includes a full quarter of DirectPath, WBD, and MA distribution.

Operator, Operator

Your next question comes from the line of Zach Byer with Autonomous Research.

Erik Bass, Analyst

First, do you have an estimate for the RBC ratio impact of adopting the NAIC's new C1 factors and will you make any changes to your RBC target range as a result of this?

Gary Bhojwani, CEO

Good morning, Erik. So the impact of the new C1 factors as of June 30, pro forma all else equal, is about 16 points on our RBC, which translates to about $80 million of capital. There are some things that we could do in the investment portfolio to arbitrage the new risk factors, which could improve the 16 basis points by a couple of points. As to how we think about it, I think it's evolving. I've seen some speculation in the analyst community that some companies will simply reduce their target RBCs. We're in the process of doing some analysis with our internal capital models to drive how we're thinking about it. So I'd like to come back to this question on a future call as to whether we'll formally reduce our target RBC by some amount, either the entire adjusted 16 or something less than that. I also think it will be helpful to continue our dialogue with the rating agencies to better understand how they think about it. So more to come on this, but that's the pro forma all else equal impact.

Erik Bass, Analyst

And then maybe moving kind of sales and earnings. I mean your sales obviously had a nice recovery. And as you noted, are back to pre-pandemic levels in the consumer business. Are you now at a level of sales where the in-force block is growing for most products? And if so, should this start to translate into faster organic earnings growth?

Gary Bhojwani, CEO

Yes. So we're at a point where the in-force block has been relatively flat, looking backwards. However, I think we're now at a point with our expense base and with our growth profile where as we continue to grow that business sustainably, we certainly think that we will begin to get better operating leverage going forward.

Operator, Operator

Next question comes from the line of John Barnidge with Piper Sandler.

John Barnidge, Analyst

Yes, thank you for the opportunity. You're at $183 million in buybacks for the year, clearly a good cadence, but down from last quarter. The stock declined obviously a little bit. Can you talk about how you're thinking about capital return a little bit more on the balance of the year?

Gary Bhojwani, CEO

Yes, sure. John, this is Gary. Thanks for the question. I'll give you some high-level thoughts and then if Paul wants to share any more details, I'll let him speak then. So, for those of you who have been long-term participants in this call, some of this is going to be a repeat of what you've heard from me before in terms of my thought process. But I would just remind you of a few factors. Number one, we don't have any incentive to hold excess capital. If you look at our incentive comp plans and everything else, we have no incentive to hold excess capital. We have historically, at least since I've been in the chair of CEO, which I think I am going on my 15th to 16th quarter now, declined to provide specific guidance, but instead talked about our capacity and then asked all of our shareholders and analysts to judge us by our actions, not our words. During the time I've been CEO, we bought back stock every single quarter except one; and with the benefit of hindsight, everyone realizes that the one quarter we didn’t was to fund the LTC transaction. So again, I ask you to judge us by our actions, not our words, in terms of where we are right now. I think about this quarter in particular and even the first half of the year as a really simple way. I really like where we're positioned in terms of our capital. I like the fact that given all the uncertainty with COVID, we're still conservatively positioned. I like the fact that despite that, we were able to invest in growth. We made some investments in terms of certain technologies and abilities, as well as the DirectPath acquisition. And despite that, in both quarters of 2021, we were able to return a nice amount of money—$100 million and $87 million to our shareholders in the first and second quarter, respectively. As to the specific amounts in any given quarter, one of the things that factors into this analysis is how we think about price. Not surprisingly, management believes that the intrinsic value is well above the GAAP book value, but that doesn't change the reality that when we buy shares at 95% of book value versus 80% of book value, the benefit is different. I think our long-term shareholders would prefer to see us buy more stock when it's at 80% of book than at 95% of book not because of any commentary on the belief in the company, but just because of the accounting treatment and how it benefits us. So, I think what you saw happen from Q1 to Q2, when the stock was trading lower, we will buy more; when the stock is trading higher, we will buy less. And I want to emphasize, that's not a commentary on our view of the intrinsic value of the firm, rather, it's a simple recognition of the accounting treatment. The greater the discount to book, i.e., the cheaper the stock is, the more we'll buy; so I wouldn't read into that small delta of $13 million between Q1 and Q2 as anything meaningful. It's nothing more than an acknowledgment of where the stock is trading.

Paul McDonough, CFO

Yes, I think that captures it.

Gary Bhojwani, CEO

Okay, got you John.

John Barnidge, Analyst

And then the follow-up. Fair to say claims tailwind persisted to a greater level than initially expected. Can you talk about maybe how each month in the quarter progressed and how you're thinking about it running into the third quarter?

Paul McDonough, CFO

Yes, John, it's Paul. I'd say broadly speaking, there has been some volatility from month-to-month over the course of the pandemic. Going back a year, you might have a month where it's up and then the next month it's down, but it's been relatively stable. There is certainly not any persistent trend up towards more normal levels. As we said in our outlook for the third quarter in a row, we think things will begin to trend up towards more normal levels next quarter. If our base case assumption holds that we don't see another spike in material spikes in infections and deaths, I think that's a reasonable expectation. If we do see another spike in infections and deaths, it's probably not, but it also doesn't necessarily mean that we will have the same behavior by consumers that we've seen so far. In other words, there is a possible scenario where deaths spike again and you have the mortality impact, but the consumer says, you know what, I need to get back to my doctor’s office and may begin doing that. So, I just want to emphasize that how things actually evolve is very uncertain, and I wouldn't pretend to know exactly what that may look like.

Gary Bhojwani, CEO

John, this is Gary. The only thing I'd add to that is, what we're hearing from us is that we don't know. We've been surprised, as Paul indicated, for the third quarter in a row. We thought claims would come back, and they didn't; so we simply don't know. But we keep trying to send the signal to take a conservative position because we feel like that’s our obligation to communicate that we think it will come back next quarter. The reality is, especially because we've been wrong for three quarters in a row.

Paul McDonough, CFO

I wouldn't even know how to give you odds on the likelihood that it actually is going to come back. We just don't know, but we're trying to be as conservative as we can.

John Barnidge, Analyst

That's helpful. I get it, it's like a ping-pong ball. You have all these assumptions, and they've been a variable in how it's going to land further on one side or the other based on an average. So I appreciate that. That’s all from my questions. Best of luck.

Operator, Operator

Your next question comes from the line of Ryan Krueger with KBW.

Ryan Krueger, Analyst

I was hoping you could talk a little bit about recruiting trends. Some of your peers have talked about some challenges in terms of recruiting due to tight labor conditions. I know you've also been shifting away from some aspects of recruiting. So, I was just hoping for some commentary there.

Gary Bhojwani, CEO

Yes, thanks for the question, Ryan. I've been involved in a handful of other groups both within the insurance industry and other industries with other business leaders. I don't know a CEO out there right now who is not worried about the ability to get labor. Every single CEO I've talked to, regardless of the industry, has expressed concerns over the tightness of the labor market and how difficult it is to get help. We are absolutely no exception in that regard. One could argue that some of that trend is even more difficult for us because remember our agents work on a commission basis—they will not make money if they don't sell anything. Now, we have support programs in place but those difficulties are absolutely impacting our business. Frankly, we got very lucky a couple of years ago. We started to make a move to de-emphasize just the raw number of recruits and instead focus on more targeted recruiting, thinking it would benefit our productivity and tenure even if we didn't grow the topline in terms of agent count too much. We're staying consistent with our strategy; I think that strategy is really good in this environment. Again, just out of pure luck, we started down that path a few years ago, so we’re well into that. We’re going to stay on that path. You'll see us continue to emphasize productivity. Of course, we do need to grow agents, but I'm less focused on that and more focused on productivity and tenure. If you look at our numbers, you can see that on both of those metrics, we've done a reasonable job, and we'll continue to do that, but the environment will continue to be challenging, no question about it.

Paul McDonough, CFO

Good morning. Yes. The persistency really across our product portfolio through the pandemic has been relatively stable, with some volatility here and there driving pluses and minuses on the margin. But by and large, it remains relatively consistent with pre-COVID experience.

Operator, Operator

At this time, there are no further questions. I'll turn the call back over to Jennifer Childe for closing remarks.

Jennifer Childe, Vice President of Investor Relations

Thanks very much for your participation in the call and we look forward to speaking with you again soon.

Operator, Operator

Thank you, ladies and gentlemen, you may now disconnect.