Business Context and Reporting Period
CNO Financial Group, Inc. filed its Form 10-K for the fiscal year ended December 31, 2021. CNO is a U.S. insurance holding company serving middle-income pre-retirees and retirees through annuity, health, life, investment and fee-based businesses. Products are distributed through exclusive agents, independent producers, direct marketing and worksite channels under the Bankers Life, Washington National and Colonial Penn brands.
At year-end, CNO reported approximately $36.2 billion of assets, $5.3 billion of shareholders’ equity and $26.1 billion of insurance product liabilities. The fourth quarter of 2021 produced revenue of $1.075 billion and net income of $115.8 million, or $0.93 diluted earnings per share.
Financial Performance and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenues | $4.122 billion | $3.821 billion | Up 7.9% |
| Net income | $441.0 million | $301.8 million | Up 46.1% |
| Diluted EPS | $3.36 | $2.11 | Up 59.2% |
| Net operating income | $365.6 million | $362.3 million | Up 0.9% |
| Operating earnings before taxes | $470.6 million | $463.8 million | Up 1.5% |
| Operating cash flow | $598.3 million | $735.5 million | Down 18.7% |
| Free cash flow to holding companies | $380 million | Not clearly provided in source | Not clearly provided |
GAAP net income margin was approximately 10.7%, compared with approximately 7.9% in 2020. Net operating income, a non-GAAP measure, excludes investment gains and losses, market-value changes in embedded derivatives and the agent deferred compensation plan, certain tax items and other non-operating items.
- Insurance product margin: $913.7 million, compared with $921.5 million in 2020.
- Annuity margin: $270.3 million, down from $296.7 million. Fixed index annuity margin declined to $223.4 million from $250.8 million, despite a favorable $25.1 million actuarial assumption update.
- Health margin: $493.0 million, up from $459.8 million. Supplemental health margin increased to $202.8 million; Medicare supplement margin declined to $164.0 million; long-term care margin increased to $126.2 million.
- Life margin: $150.4 million, down from $165.0 million, primarily reflecting COVID-19 mortality and higher traditional life advertising costs.
- Premium collections: $3.956 billion, up from $3.696 billion. Annuity collections rose 20% to $1.400 billion; health collections declined 2% to $1.660 billion; life collections rose 7% to $896 million.
- Net investment income: $1.421 billion, up from $1.223 billion. Investment income not allocated to product lines was $184.5 million, compared with $167.1 million.
- Net realized investment gains: $19.1 million, compared with a $36.2 million loss in 2020. Net non-operating income was $75.4 million, compared with a $60.5 million loss in 2020.
Balance Sheet, Debt and Liquidity
- Total assets increased to $36.204 billion from $35.340 billion. Total shareholders’ equity declined to $5.260 billion from $5.484 billion, mainly because accumulated other comprehensive income declined by $239.0 million.
- Total investments were $28.926 billion, including $24.805 billion of available-for-sale fixed maturities. Approximately 92% of fixed maturity securities were investment grade by external ratings; 8% were below investment grade.
- Direct corporate debt principal was $1.150 billion: $500 million of 5.25% senior notes due 2025, $500 million of 5.25% senior notes due 2029 and $150 million of 5.125% subordinated debentures due 2060. Carrying value, net of issuance costs, was $1.137 billion.
- Estimated 2022 cash required to service direct corporate debt was $60.8 million. No borrowings were outstanding under the $250 million revolving credit facility at year-end.
- Holding company unrestricted cash and cash equivalents were $198.7 million, plus $49.9 million of exchange-traded fixed-income funds. Management expected to manage holding company liquidity closer to a $150 million minimum target in 2022.
- Corporate debt-to-total-capitalization was 17.8%, or 25.6% excluding accumulated other comprehensive income. The revolving-credit covenant limit was 35.0%; the reported covenant ratio was 22.5%.
- The estimated consolidated statutory RBC ratio was 386%, down from 411%. Management established an approximate 375% target. Insurance subsidiaries paid $328.3 million of dividends to CDOC in 2021, subject to regulatory limitations.
Material Changes Versus Prior Comparable Period
- GAAP net income increased materially because 2021 benefited from positive investment gains, favorable changes in fixed-index annuity embedded derivative valuations and no valuation allowance benefit comparable to 2020.
- Net operating income was broadly stable because favorable health claims experience and investment income offset lower annuity and life margins.
- COVID-19 adversely affected life margins by approximately $53 million but favorably affected health margins by approximately $130 million, primarily because of deferred medical care. Management expects these effects to taper and health claims to normalize.
- Worksite health and life sales increased 13% from 2020 but remained 35% below 2019 levels, indicating continuing pandemic-related distribution pressure.
- Fee income increased to $19.4 million from $16.7 million, primarily due to the February 2021 acquisition of DirectPath, higher third-party product sales and broker-dealer growth.
- CNO repurchased 16.6 million shares for $402.4 million and declared $66.1 million of common stock dividends. Remaining repurchase authority was $366.9 million at year-end.
- In January 2022, Bankers Life issued an additional $900 million of funding agreements under its funding agreement-backed note program, after issuing $500 million in October 2021.
Outlook, Management Commentary, Risks and Unusual Items
- Management expected positive 2022 momentum in new annualized premiums, collected premiums and fee revenue, despite agent recruiting challenges and continued Worksite recovery efforts.
- Investment income allocated to product lines was expected to be relatively flat in 2022 as asset growth offsets lower yields. Unallocated investment income was expected to decline from elevated 2021 levels, while fee income was expected to increase.
- Management expected 2022 free cash flow to be below $380 million because of less favorable COVID-19 margin effects, lower alternative investment returns, capital strain from new business and funding agreement issuance.
- Management stated that stress testing indicated currently plausible COVID-19 scenarios were unlikely to reduce insurance subsidiary capital or holding company liquidity below target levels, but acknowledged that model assumptions are uncertain.
- Principal risks include COVID-19 mortality and delayed-care claims, low interest rates and spread compression, investment credit and valuation losses, policy surrenders, inadequate insurance reserves, reinsurance counterparty risk, regulatory approval of rate increases and dividends, litigation, cybersecurity and outsourcing failures, competition and rating downgrades.
- Long-term care remains a material actuarial exposure. Net long-term care reserves were $2.628 billion at year-end, and future rate increases require regulatory approval.
- The company expects adoption of the FASB long-duration insurance accounting standard on January 1, 2023 to have a material effect on financial statements and disclosures, particularly accumulated other comprehensive income and the pattern of future profit emergence.
- Significant 2021 items included $12.8 million of legal and regulatory expenses, $2.5 million of DirectPath transaction expenses, a $25.9 million favorable actuarial assumption update to operating income and $67.2 million of favorable fair-value changes in embedded derivative liabilities.
Investor Verification Checklist
- Verify the sustainability of 2021 health margins, particularly the estimated $130 million favorable COVID-19 effect and the risk of deferred-care claims emerging in later periods.
- Reconcile GAAP net income with net operating income and assess the recurring versus market-sensitive components of 2021 earnings.
- Monitor annuity and life spreads, crediting-rate floors, surrender activity and the $1.724 billion fair value of fixed-index annuity embedded derivative liabilities.
- Assess holding company liquidity, regulatory approval of future subsidiary dividends, the 2025 $500 million debt maturity and compliance with revolving-credit covenants.
- Review long-term care reserve adequacy, approved and pending rate increases, reinsurance recoverables and the financial condition of major reinsurers.
- Evaluate the impact of the 2023 long-duration insurance accounting standard, including the expected effect on accumulated other comprehensive income and reported earnings patterns.
- Track Worksite sales recovery, agent recruiting, DirectPath integration and the planned $900 million funding agreement issuance disclosed after year-end.