CNO Financial Group, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
CNO is a holding company for U.S. insurance subsidiaries offering health insurance, annuities, individual life insurance and related financial services. Its target market is middle-income pre-retirees and retirees, with distribution through exclusive agents, independent producers and direct marketing. The filing covers the three and six months ended June 30, 2023. Interim financial statements are unaudited, and 2022 amounts were recast following adoption of ASU 2018-12, the long-duration insurance contract accounting standard, effective January 1, 2023.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $1,022.8 million | $855.0 million | $2,028.8 million | $1,697.9 million |
| Income before income taxes | $96.1 million | $299.8 million | $95.1 million | $540.1 million |
| Net income | $73.7 million | $233.3 million | $72.9 million | $416.7 million |
| Diluted EPS | $0.64 | $1.99 | $0.63 | $3.50 |
| Net operating income | $62.3 million | $135.1 million | $120.9 million | $199.6 million |
| Operating earnings per diluted share | $0.54 | $1.15 | $1.04 | $1.68 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $223.4 million | $167.0 million |
Total revenues increased primarily because policyholder and other special-purpose portfolio investment income was substantially better than in 2022, reflecting changes in market values of options supporting indexed products. This benefit was more than offset in earnings by higher insurance policy benefits, interest expense and operating expenses.
- Six-month insurance policy income was $1,253.8 million, compared with $1,250.6 million in the prior-year period.
- Six-month net investment income was $742.7 million, compared with $432.1 million in the prior-year period.
- Six-month investment losses were $49.9 million, compared with $81.5 million in 2022. The 2023 amount included $36.4 million of realized investment losses and an $11.4 million increase in investment credit-loss allowances.
- Six-month insurance policy benefits increased to $1,175.6 million from $636.1 million, while interest expense increased to $112.3 million from $51.6 million.
- As of June 30, total assets were $34.1 billion and shareholders’ equity was $2.0 billion, compared with $33.1 billion and $1.8 billion, respectively, at December 31, 2022.
- Unrestricted cash was $457.7 million; cash including amounts held by consolidated variable-interest entities was $561.9 million.
Operating performance and material changes
| Operating measure | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Annuity margin | $57.1 million | $60.1 million | $114.4 million | $116.0 million |
| Health margin | $108.2 million | $125.4 million | $224.7 million | $240.7 million |
| Life margin | $57.9 million | $70.2 million | $105.3 million | $106.2 million |
| Total insurance product margin | $223.2 million | $255.7 million | $444.4 million | $462.9 million |
- Health margin declined because of unfavorable claims experience in Medicare supplement and long-term care. Supplemental health margin improved to $123.2 million for the first six months, but Medicare supplement margin declined to $58.4 million and long-term care margin declined to $43.1 million.
- Life margin was reduced by the absence of a favorable Q2 2022 reduction in traditional life claim liabilities related to a backlog of claims in settlement. Interest-sensitive life margin improved because of favorable mortality and block growth.
- Fixed indexed annuity margin was relatively stable at $94.1 million for the first six months versus $93.2 million in 2022. Growth in the block was offset by spread compression and increased surrenders of higher-spread products.
- Collected premiums from annuity and interest-sensitive life products declined 2.8% for the first six months to $891.2 million. Fixed indexed annuity collections declined 12% to $674.9 million, while fixed interest annuity collections increased 183% to $92.7 million.
- Management reported a 2023 expense-ratio expectation of 19.0% to 19.4%, unchanged despite elevated first-half expenses.
Liquidity, debt and capital
- Direct corporate obligations were $1.14 billion, consisting primarily of $500 million of senior notes due 2025, $500 million of senior notes due 2029 and $150 million of subordinated debentures due 2060.
- No amounts were outstanding under the $250 million revolving credit facility. The company reported no scheduled repayments of direct corporate obligations until May 2025.
- FHLB investment borrowings were $1.84 billion, collateralized by investments with an estimated fair value of $2.3 billion. Borrowing costs increased materially because of higher variable interest rates.
- Holding companies held $176 million of unrestricted cash and cash equivalents at June 30, 2023, above the $150 million minimum target.
- Estimated consolidated statutory RBC was 386%, above the 375% target and 350% minimum reflected in the company’s risk appetite statement.
- Corporate debt-to-total-capital was 36.3%; excluding accumulated other comprehensive loss, the ratio was 23.4%, below the company’s stated 25% to 28% target range.
- Book value per common share was $17.56, while book value excluding accumulated other comprehensive loss was $32.81.
Guidance, outlook and unusual items
- Management reduced 2023 operating earnings guidance to $2.65-$2.85 per diluted share from $2.80-$3.00, citing lower alternative investment income and elevated long-term care and Medicare supplement claims.
- Expected 2023 holding-company excess cash flow increased to $180-$200 million from the previous $170-$200 million range.
- CNO is seeking approval to form a wholly owned Bermuda captive reinsurer to cede a portion of in-force fixed indexed annuity business and all new fixed indexed annuity business written after the reinsurance agreement begins.
- The company adopted ASU 2018-12, which materially changed long-duration contract measurement, market risk benefit accounting, deferred acquisition cost amortization and disclosures. Comparisons with 2022 should therefore be read using the recast figures.
- In May 2023, the quarterly dividend increased to $0.15 per share from $0.14. The company repurchased approximately 2.0 million shares for $45.1 million in the first six months and had $641.8 million of remaining repurchase authorization at June 30.
- The company began a sale-leaseback program in June 2023 that reduced statutory non-admitted assets by $43 million and increased adjusted capital; under GAAP, the transactions were recorded as financing arrangements.
Principal risks and contingencies
- Results remain sensitive to interest rates, equity markets, credit losses, investment valuations, realized investment losses and market risk benefits associated with indexed annuity guarantees.
- Long-term care and Medicare supplement profitability depends on mortality, morbidity, claims utilization and the timing and approval of health insurance rate increases.
- Insurance subsidiaries require regulatory approval for certain dividends and surplus debenture interest payments. Future cash flows to the holding company could be constrained by subsidiary performance, regulatory actions or capital needs.
- Reinsurance counterparties may fail to perform, leaving CNO liable for ceded obligations and potentially reducing earnings, liquidity or RBC.
- The company has ongoing litigation, including the Wilmington, KPMG, Platinum-related and Burnett matters. Management does not believe probable losses after existing provisions will materially affect consolidated results, but states that outcomes and potential losses beyond accrued amounts cannot be reasonably estimated in certain cases.
- CNO holds $564.6 million of investments in limited partnerships and hedge funds with $430.7 million of unfunded commitments. Consolidated variable-interest entities held approximately $948.2 million of primarily below-investment-grade corporate loans and had $1.0 billion of related borrowings.
- The company concluded that its disclosure controls were effective as of June 30, 2023 and reported no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether Medicare supplement and long-term care claims experience moderates as management expects and whether the reduced 2023 operating EPS guidance is achieved.
- The effect of higher interest rates on investment income, FHLB borrowing costs, policyholder behavior, surrenders and market risk benefit valuations.
- Progress and regulatory approval of the proposed Bermuda captive reinsurance transaction, including its effect on capital, liquidity and future earnings.
- The credit performance and fair-value recovery of the fixed-maturity portfolio, including $2.71 billion of gross unrealized losses and $66.1 million of credit-loss allowances at June 30, 2023.
- The company’s ability to maintain holding-company liquidity, receive required subsidiary dividends and comply with debt covenants.
- Potential outcomes of pending litigation, regulatory examinations and the IRS examination of 2016-2018 tax returns.