CNO Financial Group, Inc. — 2024 First-Quarter Form 10-Q
Business context and reporting period
CNO is an insurance holding company serving primarily 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 the Consumer and Worksite divisions. The filing covers the unaudited three months ended March 31, 2024, compared with the same period in 2023.
Financial performance and condition
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenues | $1,156.5 million | $1,006.0 million |
| Income before taxes | $146.2 million | $(1.0) million |
| Net income | $112.3 million | $(0.8) million |
| Diluted earnings per share | $1.01 | $(0.01) |
| Net operating income | $57.5 million; $0.52 per diluted share | $58.6 million; $0.51 per diluted share |
| Operating earnings before taxes | $74.8 million | $76.4 million |
| Operating cash flow | $94.6 million | $81.9 million |
| Shareholders’ equity at period end | $2,367.7 million | $2,215.6 million at December 31, 2023 |
- Insurance product margin increased to $229.6 million from $221.2 million. Health margin rose to $123.0 million and life margin to $54.6 million, while annuity margin declined to $52.0 million.
- Total net investment income increased 2.5% to $257.6 million, supported by portfolio growth and higher yields, but included unfavorable mark-to-market impacts of $24.3 million, compared with $9.4 million in the prior-year quarter.
- Net income benefited materially from non-operating items, including a $64.0 million pre-tax favorable change in the fair value of embedded derivative liabilities and market risk benefits, compared with a $65.1 million unfavorable change in Q1 2023.
- Total investments were $26.2 billion at March 31, 2024. Fixed maturities available for sale had a fair value of $21.6 billion and gross unrealized losses of $2.4 billion, with $39.0 million of allowances for credit losses. Management reported no fixed maturity investments in default.
- Unrestricted consolidated cash was $566.3 million; holding companies held $222.8 million of unrestricted cash, above the $150 million minimum target. Consolidated cash, including cash held by variable interest entities, was $649.8 million at quarter end.
- Direct corporate obligations were $1.141 billion, including $500 million of senior notes due May 2025 and $500 million due May 2029. There were no borrowings under the $250 million revolving credit facility. FHLB investment borrowings were $2.189 billion and were collateralized by investments with a fair value of $2.7 billion.
- The estimated consolidated statutory RBC ratio was 391%, above the 375% target and 350% minimum risk-appetite level, but down from 402% at December 31, 2023.
Material changes versus the prior comparable period
- Revenue increased $150.5 million, primarily due to substantially higher net investment income from policyholder and special-purpose portfolios, lower investment losses, and favorable market-value changes related to annuity derivatives.
- GAAP earnings improved sharply from a small loss to $112.3 million of net income, mainly because derivative and market-value effects reversed from unfavorable to favorable.
- Net operating income declined modestly by $1.1 million. Higher insurance product margin was offset by lower fee income, lower unallocated investment income and higher expenses.
- Fee income declined to $11.3 million from $15.5 million, primarily reflecting less favorable persistency assumptions and higher agent renewal commissions on third-party product sales.
- Collected premiums from annuity and interest-sensitive life products increased 5.8% to $453.8 million, driven primarily by higher fixed indexed annuity collections.
- Fixed indexed annuity margin declined to $43.4 million from $46.5 million due to higher surrender-related amortization and reserve impacts and spread compression, partly offset by block growth and higher yields.
- Operating cash flow improved, but total cash and cash equivalents declined by $239.2 million, principally because of financing outflows, including variable-interest-entity borrowings and share repurchases.
- The company repurchased 1.5 million shares for $40.0 million during the quarter and had $481.8 million of remaining repurchase authorization. The quarterly dividend was increased from $0.15 to $0.16 per share in May 2024.
Guidance, outlook, risks and unusual items
- Management maintained 2024 operating earnings guidance of $3.10 to $3.30 per diluted share, excluding significant items, but expects results near the lower end because of weaker alternative-investment returns in Q1.
- 2024 guidance also remained unchanged for an expense ratio of 18.8% to 19.2% and excess holding-company cash flow of $140 million to $200 million.
- Management continues to target a 375% consolidated RBC ratio, at least $150 million of holding-company liquidity and debt to total capital, excluding accumulated other comprehensive loss, of 25% to 28%.
- Alternative investments were adversely affected by mark-to-market losses on real-estate partnerships in the higher-rate environment. The company stated that the underlying properties have investment-grade tenants, long-term leases and stable property-level cash flows.
- Effective January 1, 2024, a tax accounting method change produced a $987 million tax-reporting loss, generating additional federal and state NOLs. Management concluded that its $894.0 million deferred tax asset was more likely than not realizable; failure to achieve projected taxable income could require a valuation allowance and reduce equity.
- Insurance results remain sensitive to mortality, morbidity, health-care costs, policy persistency, surrender activity, interest rates, equity markets, investment credit losses, reinsurance performance and the adequacy of reserves and rate increases, particularly for long-term care and health products.
- Pending litigation and regulatory examinations include the PPVA/PGS matter and the Burnett class action. Management does not currently believe pending matters are probable of producing a material adverse effect, but states that outcomes and potential losses beyond recorded provisions cannot be reasonably estimated in some cases.
- Holding-company liquidity depends substantially on dividends and other payments from regulated insurance subsidiaries, some of which require prior regulatory approval because of negative earned surplus. An adverse change in subsidiary capital, earnings or regulatory conditions could restrict upstream cash.
Most important facts for investors to verify
- Whether operating earnings trend toward the lower end of the $3.10–$3.30 full-year guidance range and whether alternative-investment returns normalize.
- The sustainability of the 391% RBC ratio, subsidiary dividend approvals and holding-company liquidity above the $150 million target.
- Credit migration, defaults and future realized losses in the $21.6 billion fixed-maturity portfolio, including its $2.4 billion of gross unrealized losses and exposure to structured securities.
- Whether fixed indexed annuity surrender activity, spread compression and derivative fair-value volatility continue to pressure annuity margins and GAAP earnings.
- Realization of the $894.0 million deferred tax asset, utilization limits on NOLs and the outcome of the IRS examination of 2016–2018 tax returns.
- Developments in material litigation, regulatory examinations, reinsurance recoveries and long-term-care claims and rate actions.