CNO (CNO) Q3 2025: ROE Target Raised to 200bps on Bermuda Treaty and Fee Services Exit
CNO Financial Group’s third quarter marked a decisive strategic shift, with management doubling down on core insurance while exiting underperforming fee services and deepening Bermuda reinsurance utilization. The company’s record new annualized premium growth and improved capital returns signal a business increasingly focused on scalable, repeatable insurance profitability. Forward guidance now embeds higher ROE ambitions, but the full impact of these structural changes will emerge gradually through 2026.
Summary
- Fee Services Exit Unlocks Profitability: CNO’s decision to exit its loss-making worksite fee services business sharpens focus on core insurance.
- Bermuda Reinsurance Deepening: The second Bermuda treaty cedes $1.8B in reserves and expands capital flexibility for future growth.
- ROE Ambitions Raised: Management now targets a 200bps improvement in operating ROE by 2027, up from 150bps.
Performance Analysis
CNO delivered a quarter defined by broad-based insurance sales momentum and visible capital discipline. Record new annualized premiums reached $125 million, up 26% year-over-year, with both consumer and worksite divisions reporting double-digit growth. Insurance product margins expanded across all major lines, supported by favorable actuarial assumption updates and continued investment yield improvement. The expense ratio trended lower, aided by ongoing cost focus and the pending exit of the fee services segment.
Distribution productivity and channel diversification are proving to be durable levers. Direct-to-consumer (D2C) life sales surged 56%, driven by technology and process enhancements, as well as a deliberate pivot away from TV advertising toward digital and third-party partnerships. Worksite insurance sales notched their seventh consecutive quarter of record growth, with geographic expansion and agent productivity initiatives delivering outsized results. Meanwhile, annuity and advisory account values set new highs, reflecting the stability of captive distribution and the trust of a growing client base.
- Insurance Margin Expansion: Operating earnings benefited from favorable product margins and a $41.3 million actuarial gain, highlighting disciplined risk management.
- Capital Return Acceleration: $76 million returned to shareholders in Q3, with buybacks supported by robust holding company liquidity.
- Distribution Leverage: Agent productivity and retention remain key drivers, with producing agent count up for the 11th straight quarter.
The quarter’s financial cadence underscores CNO’s ability to generate repeatable earnings, even as it pivots away from non-core, loss-making businesses.
Executive Commentary
"We remain focused on growing earnings and improving profitability. To do so, we have taken action on two items that we expect will accelerate operating ROE improvement through 2027 by an additional 50 basis points. First, the execution of a second Bermuda treaty and second changes to our worksite divisions fee services business."
Gary Bujwani, Chief Executive Officer
"We expect this exit decision, together with the new Bermuda Treaty, will improve operating return on equity starting in 4Q25, with the full effects emerging over the next five quarters through year-end 2026. The bulk of the ROE improvement relates to the exit of worksite fee services and stems from the elimination of pre-tax operating losses previously associated with the fee income segment."
Paul McDonough, Chief Financial Officer
Strategic Positioning
1. Core Insurance Focus Intensifies
CNO’s exit from the fee services business marks a clear retreat to its core insurance competencies. The fee services segment, representing less than 1% of revenue and a $20 million annual pre-tax loss, failed to deliver anticipated cross-sell or customer acquisition synergies. Management’s willingness to take a $96.7 million impairment and restructure around insurance signals a disciplined approach to capital allocation and a focus on earnings quality.
2. Reinsurance Leverage via Bermuda Platform
The second Bermuda reinsurance treaty cedes $1.8 billion in supplemental health reserves and 50% of new business to the Bermuda affiliate. This move not only frees up capital but also diversifies risk across product lines. Management is actively exploring additional cessions, particularly in life, to further optimize capital and support growth in underserved middle-income markets. The Bermuda platform is now a structural pillar for both capital flexibility and regulatory arbitrage.
3. Distribution Productivity and Channel Diversification
Agent productivity and channel mix are central to growth. CNO’s D2C life business, now 72% sourced from non-TV leads, benefited from targeted partnerships and digital expansion, including outreach to Hispanic markets. Worksite insurance continues to scale via geographic expansion and enhanced agent tools, with productivity up 15% and recruiting up 5%. These initiatives are delivering sustained double-digit sales growth and expanding CNO’s addressable market.
4. Technology Modernization and Operational Efficiency
Technology investments are translating into tangible sales and underwriting gains. Accelerated underwriting for simplified life products delivered an 89% instant decision rate, up 11%. Ongoing tech modernization projects are expected to further enhance customer experience and operational leverage, supporting both top-line growth and margin expansion.
5. Capital Allocation and Shareholder Returns
Capital return remains a priority but is now balanced with reinvestment in growth and technology. Elevated holding company cash from reinsurance actions will be deployed judiciously, with share repurchase levels expected to moderate in favor of strategic investments that drive long-term ROE improvement.
Key Considerations
CNO’s Q3 was defined by active portfolio management, disciplined capital allocation, and a willingness to make hard calls on underperforming assets. The company is now positioned with a cleaner, more focused business model and a capital base designed for scalable insurance growth.
Key Considerations:
- Fee Services Exit Drives Immediate Earnings Lift: The elimination of a $20 million annual loss will directly benefit operating results and ROE.
- Bermuda Reinsurance as a Structural Lever: Ongoing cessions expand capital flexibility and risk diversification across product lines.
- Distribution Model Resilience: Sustained agent productivity and digital channel growth mitigate cyclicality and support premium expansion.
- Technology Investment Underpins Underwriting Speed: Accelerated decisioning and digital enhancements are differentiating CNO in the middle-income market.
- ROE Target Now More Ambitious: Management’s 200bps improvement goal sets a higher bar for capital efficiency and margin discipline through 2027.
Risks
Execution risk remains around the wind-down of fee services and the realization of projected ROE gains from Bermuda treaties. Competitive intensity in digital distribution and potential regulatory shifts in reinsurance structures could pressure future margins. Additionally, the Medicare supplement business is exposed to claim trend volatility and rate filing acceptance, while inorganic growth strategy is now under heightened internal scrutiny following recent impairments.
Forward Outlook
For Q4 2025, CNO guided to:
- Operating earnings per share in the narrowed range of $3.75 to $3.85
- Expense ratio around 19%, down from the previous range
For full-year 2025, management raised excess cash flow guidance to $365 million to $385 million and increased the 2027 operating ROE improvement target to 200bps.
Management highlighted several factors that will shape results:
- Fee services exit and Bermuda treaty benefits will phase in through 2026
- Distribution productivity and digital channel mix remain key to sustaining premium growth
Takeaways
CNO’s Q3 2025 signals a business in strategic transition, with sharper focus on core insurance growth, disciplined capital deployment, and a willingness to course-correct when investments underperform.
- Structural Simplification Pays Off: Exiting fee services and leveraging Bermuda reinsurance position CNO for higher, more sustainable ROE.
- Distribution and Technology Drive Growth: Channel diversification and underwriting automation are delivering measurable sales and margin gains.
- Future Watchpoints: Monitor execution on capital redeployment, further reinsurance cessions, and the pace of agent and digital channel productivity as key levers for outperformance.
Conclusion
CNO’s third quarter marks a pivotal step toward a more focused, capital-efficient insurance business, with structural changes now embedded in forward guidance. Investors should track the pace of ROE improvement, capital redeployment, and the durability of insurance sales momentum as leading indicators of long-term value creation.
Industry Read-Through
CNO’s decisive exit from fee-based ancillary services and increased reliance on Bermuda reinsurance reflect broader industry trends favoring business model simplification and capital optimization. Insurers with underperforming non-core segments are likely to face investor pressure to streamline, while the use of offshore reinsurance platforms for regulatory and capital management is set to expand. Channel diversification and technology-driven underwriting are emerging as competitive necessities for growth in middle-market life and health insurance. The sector should expect continued scrutiny of capital allocation discipline and inorganic growth strategies, especially where past acquisitions have underdelivered.