CNO Financial Group, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
CNO is a holding company for U.S. insurance subsidiaries serving middle-income pre-retirees and retirees through health, annuity, individual life and related products. Distribution uses exclusive agents, independent producers and direct marketing. The filing covers the quarter and six months ended June 30, 2021; financial statements are unaudited.
Operations are reported through annuity, health, life, investment and fee-income activities. CNO acquired DirectPath, a technology-driven employee benefits services provider, in February 2021 for approximately $50 million, funded with holding-company cash.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenues | $1,073.1 million | $1,014.2 million | $2,079.1 million | $1,731.4 million |
| Income before taxes | $101.6 million | $105.4 million | $291.6 million | $34.4 million |
| Net income | $78.0 million | $82.0 million | $225.4 million | $60.8 million |
| Diluted EPS | $0.58 | $0.57 | $1.67 | $0.42 |
| Net operating income | $89.1 million | $79.4 million | $164.3 million | $163.7 million |
| Operating earnings before taxes | $115.6 million | $102.2 million | $212.5 million | $207.7 million |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $238.3 million | $325.0 million |
Q2 net income declined 5% year over year despite higher revenue, while six-month net income increased substantially, primarily because the 2020 period included substantial credit-loss provisions and a $34.0 million CARES Act tax benefit. Net operating income, a non-GAAP measure, was broadly stable for the first six months and increased in Q2.
- Six-month insurance policy income was $1,262.9 million versus $1,254.0 million.
- Six-month general-account net investment income rose to $564.8 million from $512.0 million.
- Six-month net realized investment gains were $28.5 million versus a $71.7 million loss in 2020.
- Six-month total insurance product margin was $436.3 million versus $446.1 million. Health margin rose to $245.6 million from $182.4 million; annuity margin fell to $123.9 million from $183.3 million; life margin fell to $66.8 million from $80.4 million.
- Six-month fee income increased to $63.4 million from $49.5 million, primarily reflecting DirectPath, broker-dealer growth and higher third-party insurance sales.
Financial position, debt and liquidity
| Balance-sheet item | June 30, 2021 | December 31, 2020 |
|---|---|---|
| Total assets | $35,519.7 million | $35,339.9 million |
| Total investments | $28,059.6 million | $27,584.3 million |
| Unrestricted cash and equivalents | $652.5 million | $937.8 million |
| Total shareholders’ equity | $5,324.0 million | $5,484.2 million |
| Direct corporate obligations | $1,136.9 million | $1,136.2 million |
| Investment borrowings | $1,641.5 million | $1,642.5 million |
| VIE borrowings | $1,151.6 million | $1,151.8 million |
Combined unrestricted and VIE cash ended at $714.8 million, down from $991.9 million at year-end. Holding companies held $336.4 million of unrestricted cash and equivalents and target a minimum of $150 million of holding-company liquidity. There were no borrowings under the revolving credit facility, and no scheduled direct corporate debt maturities occur until May 2025.
Corporate debt-to-total-capital was 17.6%, versus 17.2% at year-end; excluding accumulated other comprehensive income, the ratio was 25.5%. The estimated consolidated statutory RBC ratio was 409%, compared with 411% at December 31, 2020, against a long-term target range of 375% to 400%.
During the first six months, CNO generated $215 million of holding-company free cash flow, repurchased 7.6 million shares for $187.4 million and declared $33.5 million of dividends. The quarterly dividend was increased to $0.13 per share from $0.12. Remaining repurchase authorization was $581.9 million at June 30, 2021.
Material changes versus the prior comparable period
- Revenue increased 5.8% in Q2 and 20.1% for the first six months, while six-month income before taxes increased sharply from the depressed 2020 comparison.
- Health margins benefited from deferred medical care during the pandemic; management estimates COVID-19 favorably affected health margins by approximately $70 million in the first six months of 2021.
- Life margins reflected approximately $30 million of adverse COVID-19 mortality impacts in the first six months.
- Q2 and six-month 2021 results were affected by lower credit-loss provisions than in 2020. The fixed-maturity credit-loss allowance declined to $2.3 million from $10.8 million at June 30, 2020; VIE credit-loss allowances also declined materially.
- The 2020 comparison included a $34.0 million tax benefit from CARES Act NOL carrybacks. CNO received an additional $80 million IRS refund in July 2021.
- Common shares outstanding declined to 129.1 million at June 30, 2021 from 135.3 million at year-end 2020, primarily due to repurchases.
- Accumulated other comprehensive income declined to $1,995.5 million from $2,186.1 million, primarily reflecting changes in unrealized investment gains.
Guidance, outlook, risks and unusual items
- Management expects investment income allocated to product lines to be relatively flat in the second half of 2021, assuming no shift in interest rates. Alternative-investment returns are expected to revert toward a mean annualized return of 7% to 8%, although returns could be higher under the current economic outlook.
- Fee-income earnings are expected to be modestly favorable in 2021 versus 2020. Second-half expenses are expected to be comparable to first-quarter 2021 levels, excluding certain legal, regulatory and DirectPath transaction items.
- Management expects to maintain target RBC levels, debt-to-capital ratios, the quarterly dividend and modest share-repurchase capacity, but these expectations depend on market, regulatory and operating conditions.
- COVID-19 remains a significant uncertainty. Management expects health claims to normalize and potentially increase after deferred care resumes; it estimated a modest net favorable effect on total insurance product margin for the remainder of 2021 but a modest net unfavorable effect in 2022.
- The investment portfolio included $23.8 billion of available-for-sale fixed maturities, 95.5% of which were classified as investment grade by NAIC designations. Below-investment-grade securities represented 4.5% of fair value under NAIC classification.
- Key risks include low interest rates, investment-credit deterioration, mortality and morbidity changes, health-care utilization, reinsurance counterparty risk, regulatory restrictions on subsidiary dividends, tax-asset recoverability, litigation, cybersecurity and debt-covenant compliance.
- Pending long-duration insurance-contract accounting guidance is effective January 1, 2023; the filing states that the impact has not yet been determined.
- Material legal matters include claims involving Wilmington Trust, KPMG and Platinum-related reinsurance transactions. Management does not currently believe the ultimate liabilities, after existing provisions, will materially affect consolidated results, but cannot reasonably estimate potential losses beyond accrued amounts.
Important facts for investors to verify
- Whether deferred health-care utilization reverses as expected and affects health, long-term-care and Medicare supplement margins.
- The sustainability of alternative-investment income and the stated 7% to 8% normalized return assumption.
- The effect of interest rates, credit migration and unrealized investment losses on earnings, accumulated other comprehensive income, capital and liquidity.
- Whether the 409% RBC ratio remains above target requirements after the NAIC bond-factor changes expected to reduce the ratio by approximately 16 percentage points.
- Regulatory approval and availability of future dividends from insurance subsidiaries to the holding company.
- Progress and eventual accounting impact of the January 2023 long-duration-contract standard.
- Developments in the Wilmington Trust, KPMG and Platinum-related litigation, as well as the IRS examination of 2016–2018 tax returns.
- The pace and funding of additional share repurchases relative to free cash flow, capital needs and holding-company liquidity.