CNO Financial Group, Inc. annual report, FY2022

CNO Financial Group, Inc. — 2022 Form 10-K Summary

Business context and reporting period

CNO Financial Group is a U.S. insurance holding company serving middle-income pre-retirees and retirees. Its principal businesses are annuity, health and life insurance, investment management and fee-based benefits services. Products are distributed through exclusive agents, independent producers, direct marketing and the Consumer and Worksite divisions.

The filing covers the fiscal year ended December 31, 2022, including fourth-quarter results. The company reported approximately 3,400 employees, $33.3 billion of total assets and $1.4 billion of shareholders’ equity at year-end.

Key financial metrics

Metric	2022	2021	Change
GAAP revenues	$3,576.8 million	$4,122.2 million	Down 13.2%
Net income	$396.8 million	$441.0 million	Down 10.0%
Diluted EPS	$3.37	$3.36	Essentially flat
Net operating income	$273.9 million	$365.6 million	Down 25.1%
Net operating income per diluted share	$2.33	$2.79	Down 16.5%
Net cash from operating activities	$495.4 million	$598.3 million	Down 17.2%
Premium collections	$4,124.8 million	$3,955.7 million	Up 4.3%

GAAP net income benefited from $122.9 million of net non-operating income, including $247.2 million of favorable fair-value changes in fixed indexed annuity embedded derivative liabilities. This was partly offset by $58.8 million of net realized investment losses and $73.2 million of unfavorable investment-market-value changes.

Total insurance product margin was $811.3 million, compared with $913.7 million in 2021. Annuity margin declined to $161.1 million from $270.3 million; health margin declined to $477.3 million from $493.0 million; and life margin increased to $172.9 million from $150.4 million. The filing does not present a consolidated GAAP operating margin percentage.

Fee income increased to $23.7 million from $19.4 million, while investment income not allocated to product lines declined to $159.5 million from $184.5 million.

Balance sheet, debt and liquidity

Total assets were $33.34 billion, down from $36.20 billion, primarily reflecting lower fair values for fixed-maturity investments.
Total investments were $24.34 billion, including $20.35 billion of available-for-sale fixed maturities and $1.41 billion of mortgage loans.
Accumulated other comprehensive loss was $2.09 billion, compared with accumulated other comprehensive income of $1.95 billion in 2021, largely due to unrealized fixed-income investment losses from higher interest rates.
GAAP shareholders’ equity declined to $1.40 billion from $5.26 billion. Book value per common share was $12.25; excluding accumulated other comprehensive income or loss, book value was $30.56 per share.
Direct corporate obligations were $1.15 billion of principal, consisting of $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. The carrying amount of notes payable was $1.14 billion.
No amounts were drawn under the $250 million revolving credit facility. The company reported a 21.6% debt-to-total-capitalization ratio under the credit agreement versus a 35.0% maximum and consolidated net worth of $3.49 billion versus a $2.69 billion minimum.
Holding-company unrestricted cash and investments were $167.1 million, above the company’s $150 million minimum target. Free cash flow to the holding company was $178 million.
Insurance subsidiaries paid $129 million of dividends, net of capital contributions, to the holding company in 2022. Future dividends may require regulatory approval because of subsidiary earned-surplus limitations.
The estimated consolidated statutory RBC ratio was 384%, above the company’s 375% target and 350% risk-appetite minimum. Statutory capital and surplus were $1.85 billion.

Material changes versus prior comparable periods

Annuity premium collections increased 14.6% to $1.60 billion, driven primarily by fixed indexed annuities, while fixed interest annuity collections also increased.
Health premium collections declined 3.1% to $1.61 billion. Medicare supplement collections fell to $651.6 million from $707.5 million, partly reflecting a shift toward Medicare Advantage products sold for third-party insurers.
Life premium collections increased 1.8% to $911.8 million.
Fixed indexed annuity margin fell by $104.8 million to $118.6 million. Management attributed the 2022 margin pressure primarily to higher interest rates, lower equity markets and related market effects.
Supplemental health margin increased to $233.6 million from $202.8 million, while Medicare supplement margin declined to $145.8 million from $164.0 million. Long-term care margin declined to $97.9 million from $126.2 million.
Life margin increased to $172.9 million from $150.4 million, although traditional life results included approximately $15 million of additional COVID-19-related mortality claims and higher advertising expense.
COVID-19 adversely affected 2022 life margin by an estimated $21 million but favorably affected health margin by approximately $102 million. Management cautioned that favorable health claims experience may not continue.
Net investment income declined to $1.02 billion from $1.42 billion, primarily because of losses on options supporting indexed products and other special-purpose portfolios.
The company repurchased 7.6 million shares for $180.0 million, compared with $402.4 million in 2021, and declared $65.0 million of common dividends. Remaining repurchase authorization was $186.9 million.
Fourth-quarter 2022 revenue was $973.6 million and net income was $43.4 million, compared with fourth-quarter 2021 revenue of $1.07 billion and net income of $115.8 million.

Guidance, outlook, risks and unusual items

Management expects sustained higher interest rates to benefit operating results over time, although results remain sensitive to equity markets, credit conditions, investment losses and policyholder behavior.

For 2023, management guided to operating earnings per diluted share of $2.80 to $3.00 under the new long-duration insurance accounting standard, excluding significant items.
Management expects 2023 excess cash flow to the holding company of $170 million to $200 million.
CNO is preparing a regulatory filing to form a wholly owned Bermuda captive reinsurer for a portion of its in-force fixed indexed annuity business and most new fixed indexed annuity business. If approved, management expected the treaty to begin in the third quarter of 2023.
Long-duration insurance accounting changes became effective January 1, 2023. The company estimated a transition-date reduction of approximately $2.08 billion in accumulated other comprehensive income and a reduction of approximately $130 million in retained earnings, although final impacts could differ materially.
The accounting change is expected to materially affect liabilities, deferred acquisition cost amortization, market-risk benefits, earnings patterns, disclosures and shareholders’ equity.
2022 included a $22.5 million experience refund related to a long-term care reinsurance agreement, payable in the second half of 2023, and a $7.1 million restructuring charge related primarily to an early-retirement program.
Material risks include interest-rate volatility, investment and credit losses, unrealized losses in the fixed-income portfolio, policy surrenders, mortality and morbidity experience, long-term care reserve adequacy, inflation, inability to obtain regulatory rate increases, reinsurer credit risk, litigation, regulatory restrictions on subsidiary dividends, cybersecurity and operational disruptions.
The company had $27.4 billion of insurance-product liabilities and estimated undiscounted future insurance-liability cash payments of $54.7 billion. Actual payments may differ substantially from estimates.
Reinsurance receivables were $4.24 billion, with significant concentration among the seven largest reinsurers. CNO remains liable to policyholders if reinsurers fail to perform.
Fixed-maturity securities had $3.07 billion of gross unrealized losses and $56.0 million of credit-loss allowances at year-end. Structured securities represented 29.6% of fixed-maturity fair value, and below-investment-grade securities represented 6.0% of the fixed-maturity portfolio on an amortized-cost basis.
Pending litigation and regulatory matters include the Wilmington, KPMG, Platinum-related and Burnett matters. Management did not believe probable losses, after existing provisions, would materially affect consolidated financial condition, results or cash flows, but stated that outcomes cannot be predicted with certainty.

Most important facts for investors to verify

Reconcile GAAP net income with net operating income and assess the sustainability of the $247.2 million favorable embedded-derivative fair-value impact.
Evaluate the effect of the 2023 long-duration insurance accounting adoption on retained earnings, accumulated other comprehensive income, insurance reserves, deferred acquisition costs and future earnings volatility.
Monitor fixed indexed annuity margins, new sales, surrender rates, option costs and the proposed Bermuda captive reinsurance transaction.
Assess the quality and duration of the $24.3 billion investment portfolio, including unrealized losses, structured securities, below-investment-grade assets, commercial real estate exposure and credit-loss allowances.
Verify holding-company cash generation, regulatory approval of subsidiary dividends, debt refinancing needs related to the $500 million of 2025 notes and compliance with debt covenants.
Review long-term care reserve adequacy, pending rate-increase approvals, statutory premium-deficiency reserves and the concentration and collectability of reinsurance receivables.
Determine whether favorable COVID-19-related health claims experience reverses and whether mortality, inflation, medical costs or policyholder persistency create adverse reserve development.
Review the status and potential exposure of pending litigation, regulatory investigations, tax audits and the company’s $790.3 million of federal net operating losses.