CNO Financial Group, Inc. — 2022 Q1 Form 10-Q Summary
Business context and reporting period
CNO is a holding company for U.S. insurance businesses serving primarily middle-income pre-retirees and retirees through health, annuity, individual life and related products. Its principal segments are annuity, health, life, investment and fee income. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenues | $842.9 million | $1,006.0 million | Down $163.1 million |
| Income before taxes | $149.3 million | $190.0 million | Down $40.7 million |
| Net income | $112.3 million | $147.4 million | Down $35.1 million |
| Diluted EPS | $0.93 | $1.08 | Down $0.15 |
| Net operating income | $51.1 million | $75.2 million | Down $24.1 million |
| Operating earnings before taxes | $68.0 million | $96.9 million | Down $28.9 million |
| Net cash from operating activities | $56.4 million | $89.4 million | Down $33.0 million |
GAAP net income margin was approximately 13.3% in Q1 2022 versus approximately 14.6% in Q1 2021. Insurance product margin was $189.2 million, down from $209.7 million. Annuity margin declined to $44.6 million from $57.9 million, health margin was essentially flat at $124.8 million versus $124.7 million, and life margin declined to $19.8 million from $27.1 million. Fee income increased to $9.9 million from $7.3 million.
At March 31, 2022, total assets were $35.5 billion, shareholders’ equity was $3.7 billion and unrestricted cash and cash equivalents were $546.0 million. Total corporate notes payable were $1.14 billion, investment borrowings were $1.64 billion and borrowings related to variable interest entities were $1.13 billion. No amounts were outstanding under the $250 million revolving credit facility.
Cash and cash equivalents, including amounts held by variable interest entities, declined to $594.0 million from $731.7 million at December 31, 2021. Net cash used in investing activities was $1.01 billion, primarily reflecting $3.00 billion of investment purchases. Financing activities provided $816.2 million, including $1.39 billion of deposit-product receipts.
Material changes versus the prior comparable period
- Revenue and earnings declined primarily because policyholder and other special-purpose portfolio investment income fell to a loss of $69.3 million from income of $55.5 million, and total investment losses increased to $32.7 million from $2.8 million.
- Net investment losses included a $30.7 million increase in allowances for credit losses, compared with a $9.6 million favorable change in Q1 2021.
- Net operating income decreased 32%, reflecting a $15 million decline in investment income not allocated to product lines, approximately $10 million of unfavorable market-volatility impacts on fixed-index annuities, a $6 million reduction in favorable COVID-19 effects and $6 million of higher non-deferrable advertising costs.
- COVID-19-related mortality adversely affected life margins by approximately $16 million in Q1 2022, compared with $19 million in Q1 2021. Deferred healthcare utilization favorably affected health margins by approximately $32 million, compared with $40 million in the prior-year quarter; management expects this benefit to taper.
- Accumulated other comprehensive income declined to $380.5 million from $1.95 billion, primarily because of a $1.57 billion after-tax other comprehensive loss driven by unrealized investment losses. Book value per common share declined to $31.48 from $43.69, while book value excluding accumulated other comprehensive income increased to $28.24 from $27.52.
- The company repurchased approximately 4.1 million shares for $100.0 million under its repurchase program and had $266.9 million of remaining authorization at March 31, 2022. The quarterly dividend was $0.13 per share; in May 2022 it was increased to $0.14.
Guidance, outlook, commentary and risks
Management expects continued positive sales momentum in annualized premiums, collected premiums and fee revenue; net favorable COVID-19 effects on insurance margins that taper during 2022; relatively flat investment income allocated to product lines; lower unallocated investment income as alternative-investment returns moderate; higher fee-income earnings; modestly higher expenses excluding certain prior-year legal, regulatory and transaction costs; and a higher effective tax rate due primarily to state taxes. Management expects 2022 free cash flow to be below the $380 million generated in 2021.
Market volatility, including lower equity markets, higher equity volatility and higher interest rates, reduced the fixed-index annuity margin by approximately $10 million in Q1 2022. The company expects directionally similar adverse effects if volatility persists.
Estimated consolidated statutory RBC was 365% at March 31, 2022, below the 375% target by approximately $50 million of capital. Holding-company liquidity was $192.3 million, above the $150 million minimum target. Insurance subsidiaries paid $69.6 million of dividends to the holding company during the quarter, although future dividends may require regulatory approval.
The company expects adoption of the revised long-duration insurance accounting standard in the first quarter of 2023 to significantly affect financial position, results, disclosures, systems and controls. Preliminary estimates indicate a transition-date decrease in accumulated other comprehensive income of approximately $1.8 billion to $2.2 billion and a decrease in retained earnings of approximately $100 million to $200 million.
Principal risks include investment losses and credit deterioration, interest-rate and market volatility, policyholder mortality and morbidity, normalization of deferred healthcare, long-term-care claims and rate increases, reinsurer credit risk, regulatory restrictions on subsidiary dividends, tax-asset recoverability, litigation and regulatory proceedings, debt covenant compliance, liquidity, cybersecurity and operational disruptions. The company is also involved in litigation related to the Beechwood Re and Platinum matters; management does not currently believe probable losses, after existing provisions, will materially affect consolidated results, but outcomes remain uncertain.
Most important facts for investors to verify
- Whether COVID-19-related favorable health claims experience and adverse mortality trends normalize as management expects.
- The sustainability of alternative-investment returns and the resulting decline in unallocated investment income.
- Future realized or credit-related investment losses, including the $647.0 million of gross unrealized losses on available-for-sale fixed maturities at March 31, 2022.
- The company’s ability to restore RBC to its 375% target while maintaining at least $150 million of holding-company liquidity.
- The ultimate transition effects of long-duration insurance accounting in 2023, including the estimated impacts on accumulated other comprehensive income and retained earnings.
- Regulatory approval and availability of future insurance-subsidiary dividends, as well as the company’s ability to meet corporate debt-service obligations.
- Developments in the Beechwood Re, Wilmington, KPMG and Platinum-related legal proceedings and any related reinsurance or asset-recovery exposure.