Q3 2025 Earnings Call: Contradictions Emerge on D2C Sales Growth, Fee Services Exit Impact, and ROE Targets

Date of Call: November 04, 2025

Financials Results

• EPS: $1.29 per diluted share, up 16% YOY

Guidance:

• Operating EPS narrowed to $3.75 to $3.85 (same midpoint).
• Operating ROE target for 2027 increased to +200 bps vs prior target, with ~50 bps incremental improvement from the Bermuda treaty and fee-services exit emerging over next 5 quarters.
• Excess cash flow to holding company raised to $365M–$385M (from $200M–$250M).
• Expect an expense ratio ~19% and effective tax rate 22%–22.5%.
• Q4 fee income ~$2M below Q4'24; Worksite fee services exit charges of ~$15M–$20M to be reported in nonoperating income.

Business Commentary:

* Strong Financial Performance and Sales Growth: - CNO Financial Group reported operating earnings per diluted share of $1.29, up 16% year-on-year, with record total new annualized premiums of $125 million, up 26%. - The growth was attributed to consistent execution, strategic planning, and a focus on expanding product offerings and distribution channels.

• Strategic Moves to Enhance ROE:
• The company implemented two strategic actions expected to improve operating ROE by 50 basis points through 2027: executing a second Bermuda treaty and changing Worksite Division's fee services business.

• The long-term benefits from these actions include improved capital efficiency and alignment with core growth areas.

• Consumer Division Performance:

• The Consumer Division achieved 12th consecutive quarter of sustained growth, with Life and Health NAP up 27% and record direct-to-consumer life insurance sales up 56%.

• Growth was driven by process enhancements, diversified marketing strategies, and partnerships that complement existing capabilities.

• Worksite Division Operational Improvements:

• The Worksite Division reported record sales for the seventh consecutive quarter, with Worksite Life and Health NAP up 20%.
• Strategic measures such as geographic expansion and investments in training and sales tools contributed significantly to this growth.

Sentiment Analysis:

Overall Tone: Positive

• "CNO once again delivered a strong quarter"; operating EPS $1.29, up 16%; record new annualized premiums $125M, up 26%; management raised excess cash flow guidance to $365M–$385M and increased the 2027 ROE improvement target to 200 bps, despite a $96.7M impairment and planned $15M–$20M exit charges.

Q&A:

• Question from Ryan Krueger (Keefe, Bruyette, & Woods): My first question was on the really strong D2C sales. Can you give us a little bit more color on how much new partnerships are contributing and kind of how to think about those relative to your D2C volumes, excluding these newer partnerships?
  Response: Partnerships (selected, e.g., Hispanic market) contributed meaningfully to Q3 D2C growth, some of which was a partner-driven pull-forward of ad spend — growth should continue but Q4 likely softer versus Q3.

• Question from Ryan Krueger (Keefe, Bruyette, & Woods): Is the current roughly $20 million annual earnings loss from the services business, does that flow through the fee income line from a reporting standpoint?
  Response: Yes — the ~$20M annualized pretax loss has been recorded in the fee income segment and exiting that business should improve the fee-income segment by about $20M annually.

• Question from John Barnidge (Piper Sandler): How do you view the opportunity? Just kind of following up on the comments about actively exploring additional transactions. The total addressable market for remaining health life and long-term care liabilities that could be available to Bermuda.
  Response: We are actively exploring additional cessions to Bermuda, including life business for diversification, but management declined to provide quantitative details.

• Question from John Barnidge (Piper Sandler): And my follow-up, once DirectPath and Web Benefits Design fully wrapped up in the first half of '26, does it seem reasonable that the direct expense ratio should fall given that, that wasn't necessarily a profitable business?
  Response: Yes — the ~$20M annualized impact includes the associated expenses, so exiting the fee services business should reduce the expense ratio accordingly.

• Question from Joel Hurwitz (Dowling & Partners): Paul, on the assumption review, any ongoing earnings benefits from the updates and any statutory impacts?
  Response: GAAP go-forward benefit is about $2M per quarter in Supplemental Health; there are no statutory impacts from the unlocking/assumption updates.

• Question from Joel Hurwitz (Dowling & Partners): How much of your Worksite insurance business is linked to these platforms that you're shutting down? And then in terms of that $20 million of a GAAP loss, is that equivalent to sort of what the cash impact was from those businesses?
  Response: Minimal disruption expected to Worksite insurance sales from exiting fee services; the $20M pretax GAAP loss is a reasonable proxy for the cash impact.

• Question from Wilma Jackson Burdis (Raymond James): Is there any way you could help us think a little bit more through the forward cash benefit or impact from the Supplemental Health business? And maybe if you can talk about the portion of that business that will be going through that sub?
  Response: Ceding new Supplemental Health business reduces cash strain and will generate additional cash flows, but management did not provide specific numeric details.

• Question from Wilma Jackson Burdis (Raymond James): Is the $20 million freed up from the fee services business? Is that going to also be a cash impact?
  Response: Yes — the expenses supporting the fee services business are real cash outflows and exiting the business should free up roughly the ~$20M annual cash impact.

• Question from Francis Matten (BMO Capital Markets): I had one more on the Bermuda transaction and more around the uses of kind of the additional cash flow you're seeing this year. Is something you're kind of planning to earmark for shareholder returns next year? Or are there incremental investments in the business and growth or capabilities that you're planning to make?
  Response: Management will balance uses: measured share repurchases plus continued investment in sales growth and a 3‑year tech modernization program; Q3 repurchase levels are indicative of go-forward cadence.

• Question from Francis Matten (BMO Capital Markets): On the revised or raised ROE target, just on the cadence of that, should we think about more of a step-up next year since a big driver is just the divestiture of the fee business and then maybe a smaller step in 2027?
  Response: ROE uplift begins in 4Q'25 but the material benefit occurs through 2026–27; the incremental ~50 bps from these actions largely plays out in 2026–27.

• Question from Suneet Kamath (Jefferies): On consumer producing agent count being largely flat, are you running into a tough comp and will that pressure consumer NAP?
  Response: Management expects continued growth despite tougher comps, emphasizing productivity over agent-count growth and anticipating recruitment benefits as labor markets soften.

• Question from Suneet Kamath (Jefferies): On the impairments and exits, does this change how you think about inorganic growth as a use of capital?
  Response: Leadership will be more disciplined and learnings from these investments will inform future M&A decisions, though past minority investments have succeeded; board-level review forthcoming.

• Question from Suneet Kamath (Jefferies): Should we think about reinsuring in‑force business cadence as maybe one deal a year?
  Response: Yes — that's a reasonable expectation: measured, limited additional cessions (roughly one deal per year) until the company reaches the right balance; not seeking to cede 100%.

Contradiction Point 1

Direct-to-Consumer Sales Growth and Strategy

It involves the explanation of the growth in direct-to-consumer (D2C) sales and the strategy behind it, which impacts the company's sales efforts and investor perceptions.

Can you elaborate on the strong D2C sales and the impact of new partnerships? - Ryan Krueger (Keefe, Bruyette, & Woods)

2025Q3: We are very selective about who we work with. For example, we partner with someone to help us tap into the Hispanic market. This growth is due to shifting from television advertising. Some advertising dollars were pulled forward, so Q4 might be lower, but growth should continue. - Gary Bhojwani(CEO)

What details can you provide on the momentum in web/digital direct-to-consumer sales? What strategies will sustain this momentum? - Ryan Joel Krueger (Keefe, Bruyette, & Woods)

2025Q2: Web and digital sales were up 39% versus the prior year and represented nearly 1/3 of direct-to-consumer sales. The shift is driven by a change in consumer behavior with declining TV volumes and increasing digital engagement. The momentum is expected to continue over the long term, but there will be ups and downs from quarter to quarter. - Gary Bhojwani(CEO)

Contradiction Point 2

Fee Services Exit and Earnings Impact

It involves the financial implications of exiting the fee services business, which directly impacts earnings and investor expectations.

Once DirectPath and Web Benefits Design are completed, will the direct expense ratio fall? - John Barnidge (Piper Sandler & Co.)

2025Q3: On an annualized basis, we expect approximately $20 million of pretax GAAP earnings improvement. - Paul McDonough(CFO)

With the raised ROE target, is a step-up expected next year and are there other factors? - Francis Matten (BMO Capital Markets Equity Research)

2025Q2: On an annualized basis, we expect approximately $20 million of pretax GAAP earnings improvement. - Paul Harrington McDonough(CFO)

Contradiction Point 3

Fee Income and Exit Impact

It involves the impact of exiting the fee services business on CNO Financial Group's financials, which is crucial for investor expectations regarding future earnings and cash flow.

What portion of your Worksite insurance business is connected to fee-based platforms, and does the $20 million GAAP loss represent a cash impact? - Joel Hurwitz (Dowling & Partners Securities, LLC)

2025Q3: The $20 million pretax GAAP earnings is a reasonable proxy for cash flow. There are no significant cash flow delays versus accruals. - Gary Bhojwani(CEO) and Paul McDonough(CFO)

Will the reversal of Medicare Advantage fee income occur within a single year or over multiple years? - John Barnidge (Piper Sandler)

2025Q1: Our guidance hasn't changed; we expect fee income to be a bit lower than last year, but not significantly. - Paul McDonough(CFO)

Contradiction Point 4

ROE Target and Improvement Factors

It involves expectations regarding the return on equity (ROE) target and the factors contributing to its improvement, which are critical for understanding the company's financial strategy and performance.

Regarding the raised ROE target, is an increase expected next year, and are there other factors? - Francis Matten (BMO Capital Markets Equity Research)

2025Q3: Initially, 150 bps through 2027. Benefits from fee services exit and Bermuda treaty begin in Q4, with material impact in 2026 and 2027. - Paul McDonough(CFO)

What initiatives are driving the improvement in your 50 bps ROE target this year? - Wilma Burdis (Raymond James & Associates, Inc.)

2025Q1: Multiple factors contribute, including expense management, business growth, and higher interest rates. We expect continued ROE improvement. - Paul McDonough(CFO)

Contradiction Point 5

Exit Timing and Impact of Fee Services

It involves the timing and financial impact of exiting the fee services business, which has implications for the company's financial performance and strategic direction.

Will the direct expense ratio decline after DirectPath and Web Benefits Design are completed? - John Barnidge (Piper Sandler & Co.)

2025Q3: We expect to exit the supplemental health and fee services businesses during the fourth quarter of this year. - Paul McDonough(CFO)

Can you elaborate on the Bermuda opportunities you're evaluating? - Ryan Krueger (Keefe, Bruyette & Woods)

2024Q4: We expect to exit the supplemental health and fee services businesses in the fourth quarter of 2025. - Paul McDonough(CFO)