CNO Financial Group, Inc. annual report, FY2023

CNO Financial Group, Inc. — 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023; filed February 23, 2024. The filing reports annual results, with unaudited fourth-quarter data also provided. CNO is an insurance holding company serving middle-income pre-retirees and retirees through annuity, health, life, investment and fee-income businesses.

Business Context and Key Financial Metrics

Total assets were $35.1 billion, shareholders’ equity was $2.2 billion, and insurance product liabilities were $27.9 billion at December 31, 2023.
Annual revenues were $4.15 billion, compared with $3.58 billion in 2022 and $4.12 billion in 2021.
GAAP net income was $276.5 million, or $2.40 diluted EPS, compared with $630.6 million, or $5.36 diluted EPS, in 2022.
Net operating income, a non-GAAP measure, was $356.1 million, or $3.09 diluted EPS, compared with $360.4 million, or $3.06 diluted EPS, in 2022.
Operating earnings before taxes were $459.5 million, versus $466.7 million in 2022. The effective tax rate was 22.5%.
Net cash provided by operating activities was $582.9 million, compared with $495.4 million in 2022. Ending cash and cash equivalents, including amounts held by variable interest entities, were $889.0 million.
Total premium collections were $4.10 billion, down from $4.12 billion in 2022. Annuity collections were $1.58 billion, health collections were $1.58 billion and life collections were $937.0 million.
Total insurance product margin was $959.0 million, compared with $936.5 million in 2022. Annuity margin was $235.0 million, health margin was $494.3 million and life margin was $229.7 million.
Net investment income was $1.50 billion, compared with $1.02 billion in 2022. Net investment losses were $69.0 million, compared with net investment losses of $135.4 million in 2022.
The investment portfolio totaled $26.1 billion; fixed maturities and mortgage loans represented approximately 90% of invested assets. Fixed maturities were 94% investment grade by estimated fair value.
Direct corporate obligations had a principal amount of $1.15 billion, consisting of $500 million of 5.250% Senior Notes due 2025, $500 million of 5.250% Senior Notes due 2029 and $150 million of 5.125% subordinated debentures due 2060. The $250 million revolving credit facility was undrawn.
Holding-company unrestricted cash and cash equivalents were $255.6 million, above the stated $150 million minimum target. Free cash flow was $311 million.
The estimated consolidated statutory RBC ratio was 402%, up from 384% at year-end 2022 and above the company’s 375% target.

Fourth-Quarter 2023 Results

Fourth-quarter revenue was $1.17 billion, compared with $973.6 million in the fourth quarter of 2022.
Fourth-quarter net income was $36.3 million, or $0.32 diluted EPS, compared with $38.0 million, or $0.33 diluted EPS, in the prior-year quarter.
Fourth-quarter income before taxes was $46.1 million. The filing does not present fourth-quarter net operating income as a separate quarterly measure in the provided text.

Material Changes Versus the Prior Comparable Period

GAAP net income declined by approximately 56%, primarily because 2022 benefited from substantially favorable fair-value changes in embedded derivative liabilities and market risk benefits. In 2023, these items produced a $29.9 million net loss versus a $440.2 million net gain in 2022.
Net operating income declined modestly, reflecting lower investment income not allocated to product lines, higher expenses and weaker health margins, partly offset by higher life and annuity margins and fee income.
Health margin declined to $494.3 million from $504.4 million. Supplemental health improved materially, but Medicare supplement and long-term care margins declined due to block runoff and less favorable claims experience.
Life margin increased to $229.7 million from $205.2 million, led by higher interest-sensitive life margin and growth in the business block.
Annuity margin increased to $235.0 million from $226.9 million. Fixed indexed annuity margin benefited from a $9.4 million favorable actuarial review impact but experienced spread compression and increased surrenders of higher-spread products.
The fourth-quarter comprehensive actuarial review produced a $33.9 million favorable impact on insurance product margins, including favorable impacts of $41.9 million for supplemental health, partly offset by unfavorable impacts for Medicare supplement, long-term care and traditional life.
Operating cash flow increased to $582.9 million from $495.4 million, while investment cash outflows declined to $872.3 million from $1.78 billion.
Shareholders’ equity increased to $2.22 billion from $1.77 billion, principally due to net income and a $380.5 million improvement in accumulated other comprehensive income, partly offset by $165.1 million of share repurchases and $67.9 million of dividends.
CNO repurchased 6.6 million shares for $165.1 million in 2023 and had $521.8 million of remaining repurchase authorization at year-end. Dividends declared increased to $0.59 per common share from $0.55 per share in 2022.

Guidance, Outlook and Management Commentary

For 2024, management expects operating earnings per diluted share of $3.10 to $3.30, excluding significant items.
The 2024 expense ratio is expected to be 18.8% to 19.2%, compared with 19.4% in 2023.
Management expects a significant improvement in investment income not allocated to product lines, assuming higher alternative-investment returns, and expects fee income to be slightly lower than in 2023 with significant seasonal recognition in the fourth quarter.
The effective tax rate is expected to remain approximately 23%. Excess cash flow to the holding company is expected to be $140 million to $200 million.
Management intends to maintain a consolidated RBC ratio of 375%, minimum holding-company liquidity of $150 million and debt-to-total-capital, excluding accumulated other comprehensive income or loss, of 25% to 28%.
In 2023, CNO formed CNO Bermuda Re and entered into a modified coinsurance agreement covering approximately $6.2 billion of fixed indexed annuity statutory reserves, in addition to new business. CDOC contributed $265.0 million to capitalize CNO Bermuda Re. The Bermuda subsidiary cannot generally pay dividends or make capital distributions during its first five years without BMA approval.
Management states that current holding-company cash flows and other sources are expected to meet debt service and corporate obligations, but emphasizes dependence on regulatory approvals, insurance subsidiary dividends, market conditions, claims, policy surrenders, investment performance and reinsurer solvency.

Risks, Contingencies and Unusual Items

Results are sensitive to interest rates, investment spreads, credit losses, market volatility, structured-security prepayments, policy surrenders and the fair value of embedded derivatives and market risk benefits.
The company had approximately $2.31 billion of gross unrealized losses on available-for-sale fixed maturities at year-end, although management stated it did not intend to sell the affected securities and did not expect to be required to sell them before recovery.
Approximately $4.4 billion of insurance liabilities could be surrendered without penalty. Higher surrenders could require asset sales at losses and accelerate deferred acquisition cost amortization.
Long-term care and health profitability depends on claims experience and regulatory approval of rate increases. Three U.S. insurance subsidiaries reported statutory asset adequacy or premium deficiency reserves totaling $239.0 million, although no comparable GAAP reserve was required.
CNO remains exposed to reinsurer default because ceded risks remain its primary obligation to policyholders. Reinsurance receivables were $4.04 billion, with significant concentration among several large reinsurers.
The company is dependent on dividends and other payments from regulated insurance subsidiaries. In 2023, U.S. insurance subsidiaries paid $526.5 million in dividends to CDOC, but future payments may require regulatory approval.
The company has $500 million of senior notes maturing in May 2025 and expects approximately $60.8 million of cash interest and other debt-service payments during 2024.
Federal tax NOLs totaled $367.2 million, and net deferred tax assets totaled $937.1 million. Realization depends on future taxable income; an ownership change under Section 382 or weaker earnings could reduce the value of these assets.
CNO is involved in litigation, regulatory examinations and investigations in the ordinary course of business. Management does not believe currently pending matters are probable of materially affecting consolidated results after existing provisions, but states that outcomes are inherently uncertain.
CNO adopted ASU 2018-12 for long-duration insurance contracts effective January 1, 2023. The adoption reduced transition-date total equity by $2.21 billion and materially changed reserve, deferred acquisition cost, market risk benefit and accumulated other comprehensive income presentation.
No cybersecurity incident had materially affected the company’s strategy, results of operations or financial condition as of the filing date, but management identifies cybersecurity, privacy and third-party technology risks as material ongoing exposures.

Most Important Facts for Investors to Verify

Reconcile GAAP net income of $276.5 million with net operating income of $356.1 million and assess the sustainability of excluded fair-value and investment items.
Review the 2024 operating EPS guidance, excess-cash-flow range and assumptions regarding alternative-investment returns, credit migration and organic growth.
Evaluate the company’s ability to refinance or repay the $500 million of notes due in May 2025 without reducing insurance subsidiary capital or dividends.
Assess the quality, duration, unrealized-loss exposure and below-investment-grade concentration of the investment portfolio, including structured securities and VIE investments.
Monitor Medicare supplement and long-term care claims, morbidity, persistency and regulatory rate approvals, which materially affect health margins and reserves.
Review the CNO Bermuda Re transaction, capital and liquidity maintenance obligations, regulatory restrictions and potential recapture risk.
Validate the assumptions supporting the $937.1 million deferred tax asset and the continued availability of $367.2 million of federal NOLs.
Review the detailed litigation, regulatory and reinsurance disclosures for potential liabilities exceeding recorded provisions.