CNO Financial Group, Inc. — 2019 Form 10-K Summary
Business context and reporting period
CNO is a U.S. insurance holding company serving middle-income pre-retiree and retired consumers through Bankers Life, Washington National and Colonial Penn, with career-agent, independent-producer and direct-marketing channels. Products include health insurance, annuities, individual life insurance and long-term care insurance. The filing covers the fiscal year ended December 31, 2019; quarterly data show fourth-quarter results but the filing is an annual report, not a standalone Q4 filing.
At year-end, CNO reported $33.6 billion of assets, $4.7 billion of shareholders’ equity and approximately 3,300 employees. The company acquired Web Benefits Design Corporation for $66.7 million in cash plus a potential $15.0 million earn-out; the business was included in Washington National.
Key financial metrics
| Metric | 2019 | 2018 | Change/comment |
|---|---|---|---|
| Total revenues | $4,015.8 million | $4,313.5 million | Declined primarily because 2018 included significant reinsurance-related gains |
| Net income (loss) | $409.4 million | $(315.0) million | Returned to profitability |
| Diluted EPS | $2.61 | $(1.90) | Improved materially |
| Net operating income | $290.0 million | $303.1 million | Declined 4.3%; non-GAAP |
| Pre-tax operating earnings | $368.3 million | $381.2 million | Declined 3.4%; non-GAAP |
| Net cash from operating activities | $696.7 million | $317.8 million | Improved substantially |
| Premium collections | $3,825.8 million | $3,785.1 million | Increased 1.1% |
| Net investment income | $1,362.9 million | $1,306.2 million | Increased 4.3% |
| Shareholders’ equity | $4,677.0 million | $3,370.9 million | Increased primarily from investment-market gains |
Net income margin was approximately 10.2% of revenue in 2019, compared with a negative margin in 2018. The effective tax rate was negative 49.3%, reflecting the release of a $193.7 million deferred-tax valuation allowance in the fourth quarter.
Premium collections were led by annuities at $1,306.4 million, health products at $1,708.2 million and life products at $811.2 million. Fixed-index annuity collections increased to $1,242.0 million from $1,113.1 million in 2018.
Segment performance and material changes
- Bankers Life: Premium collections increased 5.5% to $2,793.0 million, driven primarily by fixed-index annuities. Pre-tax operating earnings fell to $300.7 million from $340.6 million. Long-term care benefit ratios deteriorated to 121.7% from 119.0%.
- Washington National: Premium collections rose 2.6% to $711.0 million, supported by supplemental health and life products. Pre-tax operating earnings declined to $111.2 million from $121.9 million. Supplemental-health benefit ratios improved to 78.8% from 79.5%.
- Colonial Penn: Premium collections increased 3.4% to $308.3 million, while pre-tax operating earnings declined slightly to $14.3 million from $14.8 million. Higher marketing spending continued to weigh on new-business earnings.
- Long-term care in run-off: Premium collections fell to $13.5 million from $145.8 million following the 2018 cession of legacy long-term care business. Pre-tax operating earnings declined to $12.0 million from $22.9 million.
- Corporate operations: The pre-tax operating loss improved to $69.9 million from $119.0 million, but included higher one-time expenses related to restructuring and technology initiatives.
The September 2018 reinsurance transaction that ceded legacy long-term care policies to Wilton Re produced a $704.2 million pre-tax loss in 2018; there was no comparable charge in 2019. The transaction materially reduced CNO’s exposure to the ceded block but did not eliminate long-term care risk in retained blocks.
Cash flow, debt and liquidity
- Operating cash flow was $696.7 million. Investing activities used $555.6 million, and financing activities used $143.0 million, resulting in a $1.9 million decrease in cash and cash equivalents.
- CNO held $186.7 million of unrestricted cash and cash equivalents at the holding-company level. Management stated that available cash and expected operating cash flows should be sufficient for debt service and other obligations, while cautioning that liquidity depends on regulatory approvals, subsidiary earnings, markets and other factors.
- Direct corporate debt was $1,000.0 million principal, consisting of $500.0 million of 5.25% senior notes due 2025 and $500.0 million of 5.25% senior notes due 2029. Carrying value was $989.1 million. Interest and principal-related cash service was expected to be approximately $53 million in 2020.
- The $250.0 million revolving credit facility had no borrowings at year-end. CNO’s debt-to-total-capital ratio was 17.5%, and its estimated consolidated statutory RBC ratio was 408%, above the 250% credit-agreement requirement.
- Insurance subsidiaries paid $186.3 million of dividends to CDOC in 2019, but future distributions require regulatory approval in certain cases and may be constrained by capital, RBC or policyholder-protection considerations.
- CNO generated approximately $287 million of holding-company free cash flow, repurchased 15.4 million shares for $252.3 million and declared $67.2 million of common dividends, or $0.43 per share. Remaining repurchase authority was $532.3 million.
Guidance, outlook, risks and unusual items
- Management did not provide a single consolidated earnings forecast in the provided filing text. It stated that the new operating model is expected to reduce run-rate expenses by approximately $11 million annually beginning in 2021, while a technology partnership is expected to generate approximately $20 million of savings over five years, reaching up to $8 million annually by 2024.
- In January 2020, CNO announced a reorganization into Consumer and Worksite divisions, centralizing selected functions and changing future segment reporting. A pre-tax charge of approximately $14 million was recognized in fourth-quarter 2019, primarily for severance and technology-partnership costs.
- Fourth-quarter 2019 net income was $278.0 million, including a $170.6 million tax benefit. The tax benefit primarily reflected release of the remaining $193.7 million deferred-tax valuation allowance after a tax-planning strategy increased projected taxable income.
- The 2019 actuarial review reduced reserves by $1.4 million and increased amortization by $12.2 million at Bankers Life; Washington National recorded a $2.2 million decrease in amortization, partly offset by a $1.4 million reserve increase.
- Low interest rates could compress investment spreads, reduce reinvestment yields and increase reserve, acquisition-cost or premium-deficiency charges. Management’s sensitivity analysis estimated a $29 million pre-tax charge and a $341 million reduction in future margins if new-money rates declined approximately 100 basis points and remained there.
- Long-term care remains a material risk because of morbidity, persistency, mortality, rate-approval and interest-rate assumptions. Retained long-term care reserves were $2.5 billion net of reinsurance, and management noted that margins in certain blocks are relatively thin.
- Other risks include investment credit losses, policy surrenders, reinsurer credit exposure, regulatory limits on dividends and rate increases, litigation and regulatory investigations, cybersecurity and outsourcing risks, competition, and potential limitations on the use of approximately $2.5 billion of federal NOLs.
Most important facts for investors to verify
- Whether operating earnings stabilize despite lower interest rates, continued long-term care claims pressure and declining investment yields.
- The sustainability and quality of the $193.7 million tax valuation-allowance release and the company’s taxable-income assumptions supporting deferred-tax assets.
- Actual cash available at the holding company, regulatory approval of future subsidiary dividends and compliance with debt covenants.
- Progress and realized savings from the Consumer/Worksite reorganization and technology partnership.
- Future long-term care morbidity, persistency, rate increases and reserve adequacy, including the effect of the 2022 long-duration-contract accounting standard.
- Credit quality, valuation and liquidity of the investment portfolio, including $1.8 billion of below-investment-grade fixed maturities, $5.8 billion of structured securities and approximately $1.6 billion of FHLB borrowings.
- Resolution and potential financial exposure from litigation and regulatory matters related to legacy reinsurance arrangements, unclaimed property and insurance sales or claims practices.