CNO Financial Group, Inc. quarterly report, Q2 FY2022

CNO Financial Group, Inc. — Form 10-Q Summary

Business context and reporting period

CNO is a U.S. insurance holding company serving middle-income pre-retirees and retirees through health, annuity, individual life and related products. Products are distributed through exclusive agents, independent producers, direct marketing and worksite channels. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared primarily with the corresponding 2021 periods.

Key financial metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenues	$855.0 million	$1,073.1 million	$1,697.9 million	$2,079.1 million
Income before taxes	$175.4 million	$101.6 million	$324.7 million	$291.6 million
Net income	$136.1 million	$78.0 million	$248.4 million	$225.4 million
Diluted EPS	$1.16	$0.58	$2.08	$1.67
Net operating income	$100.1 million	$89.1 million	$151.2 million	$164.3 million
Net cash from operating activities	Not separately presented	Not separately presented	$167.0 million	$238.3 million

Q2 net income increased despite lower revenue, primarily reflecting lower insurance policy benefits, favorable fair-value changes in fixed-index annuity embedded derivatives and a lower comparison base. Six-month net income also increased, while net operating income declined.

Insurance policy income was $625.6 million in Q2 and $1.251 billion for the first six months, down from $630.5 million and $1.263 billion, respectively.
Net investment income from general account assets increased to $317.7 million in Q2 and $595.2 million year to date, but income from policyholder and special-purpose portfolios was a loss of $93.8 million in Q2 and $163.1 million year to date.
Total investment gains and losses shifted to losses of $48.8 million in Q2 and $81.5 million year to date, compared with gains of $31.3 million and $28.5 million in the prior-year periods. The six-month loss included a $54.4 million increase in investment credit-loss allowances.
Insurance product margin was $207.3 million in Q2 and $396.5 million year to date, down from $226.6 million and $436.3 million. Annuity margin declined to $37.1 million and $81.7 million; health margin declined to $113.4 million and $238.2 million; life margin increased to $56.8 million and $76.6 million.
Collected premiums from annuity and interest-sensitive life products increased 23% in Q2 and 18% year to date, driven primarily by fixed-index annuity collections.

Financial position, liquidity and debt

Total assets were $33.84 billion at June 30, 2022, down from $36.20 billion at December 31, 2021. Total shareholders’ equity declined to $2.21 billion from $5.26 billion, largely because accumulated other comprehensive income shifted from $1.95 billion of income to $1.17 billion of loss as investment values declined.
Unrestricted cash was $567.2 million; total cash including cash held by variable interest entities was $619.4 million. Six-month investing cash use was $1.23 billion, partially offset by $951.0 million of financing cash inflows.
Direct corporate obligations were $1.138 billion, consisting principally of $500 million of senior notes due 2025, $500 million due 2029 and $150 million of subordinated debentures due 2060. No amounts were outstanding under the $250 million revolving credit agreement, and no scheduled corporate debt repayments occur before May 2025.
FHLB investment borrowings were $1.64 billion, collateralized by investments with an estimated fair value of $2.0 billion. Borrowings related to consolidated VIEs were $1.126 billion.
Holding company liquidity was $140.9 million, below the $150 million minimum target but above risk-tolerance thresholds. The estimated consolidated statutory RBC ratio was 360%, below the 375% target but above the 350% minimum reflected in the company’s risk appetite.
Corporate debt-to-total-capital was 34.0% on a GAAP basis and 25.2% excluding accumulated other comprehensive income or loss.

Material changes versus the prior comparable period

Net income rose 74% in Q2 and 10% for the first six months, while net operating income increased 12% in Q2 but decreased 8% year to date.
Revenue declined 20% in Q2 and 18% year to date, primarily because of unfavorable market-value movements in options and policyholder portfolios.
Market volatility reduced fixed-index annuity margin by approximately $26 million in Q2 and $36 million for the first six months. Higher interest rates and lower equity markets also produced significant unrealized investment losses through other comprehensive income.
Q2 insurance policy benefits declined to $340.2 million from $657.4 million; six-month benefits declined to $686.9 million from $1.117 billion. The 2021 comparison included more adverse COVID-19 mortality.
Net operating income benefited from a $22.5 million experience refund related to a reinsurance agreement, recognized after all requirements for the maximum refund were met. Payment is expected in the second half of 2023.
The company repurchased 6.6 million shares for $160.0 million during the first six months and had $206.9 million of remaining repurchase authorization at June 30. The quarterly dividend was increased to $0.14 per share from $0.13.

Guidance, outlook, risks and unusual items

Management expected continued positive sales momentum, including new annualized premiums, collected premiums and fee revenue. It expected favorable COVID-19 effects on insurance margins to continue but taper, investment income allocated to products to be flat to slightly higher, unallocated investment income to decline from elevated 2021 levels, fee-income earnings to increase and expenses to be modestly higher excluding significant items. The 2022 effective tax rate was expected to be higher, primarily because of higher state taxes. Management expected free cash flow to be below the $380 million generated in 2021.

The company estimated that favorable COVID-19 effects supported health margins in the first six months by approximately $53 million and supported long-term-care margins by approximately $27 million; management cautioned that these benefits may not continue.
Investment portfolios were exposed to rising rates, spread widening, equity-market volatility, credit deterioration and potential future realized losses. Fixed maturities had $1.979 billion of gross unrealized losses and $54.2 million of credit-loss allowances at June 30.
Approximately 95.6% of fixed-maturity fair value was classified as investment grade under NAIC designations 1 and 2. Management reported no fixed-maturity investments in default at June 30.
Adoption of the long-duration insurance accounting standard in the first quarter of 2023 is expected to materially affect financial position, results, disclosures, systems and controls. The preliminary estimated transition impact included a $1.8 billion to $2.2 billion reduction in accumulated other comprehensive income and a $100 million to $200 million reduction in retained earnings.
Risks include COVID-19 and healthcare utilization, mortality and morbidity, interest rates, investment performance, reinsurance counterparty risk, regulatory restrictions on subsidiary dividends, litigation, tax-asset recoverability, debt covenants, ratings, cybersecurity and the ability to maintain adequate liquidity and capital.
The company is involved in several legal proceedings, including matters related to the former Beechwood/Platinum reinsurance transactions and a putative class action involving whole-life policies. Management did not believe a material loss was probable based on information available, but stated that outcomes remain difficult to predict.

Important facts investors should verify

Whether market volatility and higher interest rates continue to pressure fixed-index annuity margins and investment valuations.
The sustainability of favorable COVID-19-related health and long-term-care claims experience as those effects taper.
Progress toward the 375% RBC target and $150 million holding-company liquidity target, including the effect of dividends, buybacks and new business capital strain.
The final transition effects and implementation risks associated with the long-duration insurance accounting standard in 2023.
Credit performance of the fixed-maturity portfolio, VIE investments and reinsurance recoverables, including future allowance requirements or realized losses.
Potential cash-flow effects from litigation, regulatory matters, tax audits and the timing of the $22.5 million reinsurance experience-refund receipt.