CNO Financial Group, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
CNO is a holding company for U.S. insurance businesses offering health, annuity, individual life and related products, primarily to middle-income pre-retirees and retirees. Products are distributed through exclusive agents, independent producers and direct marketing. The filing covers the three and nine months ended September 30, 2021; financial statements are unaudited.
Operating segments comprise annuity, health, life, investment and fee revenue. CNO acquired employee-benefits services provider DirectPath in February 2021 for approximately $50 million, funded with holding-company cash.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenues | $968.3 million | $1,013.5 million | $3,047.4 million | $2,744.9 million |
| Income before taxes | $128.0 million | $166.4 million | $419.6 million | $200.8 million |
| Net income | $99.8 million | $129.2 million | $325.2 million | $190.0 million |
| Diluted EPS | $0.77 | $0.91 | $2.44 | $1.32 |
| Net operating income | $92.8 million | $112.6 million | $257.1 million | $276.3 million |
| Operating earnings before tax | $119.3 million | $145.3 million | $331.8 million | $353.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $479.0 million | $541.8 million |
Q3 net margin was approximately 10.3%, compared with 12.7% in Q3 2020. Nine-month net margin was approximately 10.7%, compared with 6.9% in the prior-year period. Nine-month net operating income declined despite higher GAAP net income, reflecting unusually favorable non-operating items and a $34.0 million CARES Act tax benefit in 2020.
- Insurance product margin: $223.6 million in Q3 and $659.9 million for nine months, compared with $244.8 million and $690.9 million, respectively, in 2020.
- Segment margins: Q3 annuity margin was $52.5 million, health margin $117.9 million and life margin $53.2 million. Nine-month margins were $176.4 million, $363.5 million and $120.0 million, respectively.
- Fee income: Net fee income increased to $16.5 million for nine months from $13.8 million, primarily due to DirectPath and broker-dealer growth.
- Investments: Total investments were $28.3 billion at September 30, 2021, including $24.1 billion of fixed maturities available for sale. Approximately 95.3% of fixed-maturity fair value was rated NAIC 1 or 2.
- Liquidity: Unrestricted cash was $742.1 million and total cash, including cash held by variable interest entities, was $812.6 million at quarter-end. Holding-company unrestricted cash was $366.4 million, with a stated minimum liquidity target of $150 million.
- Capital: Shareholders’ equity was $5.23 billion, down from $5.48 billion at December 31, 2020. Book value per common share was $42.11, or $26.58 excluding accumulated other comprehensive income.
- Debt: Direct corporate obligations were $1.14 billion, consisting principally of $500 million senior notes due 2025, $500 million senior notes due 2029 and $150 million subordinated debentures due 2060. FHLB investment borrowings were $1.74 billion, collateralized by investments with a fair value of $2.2 billion.
- Regulatory capital: Estimated consolidated statutory RBC ratio was 388% at September 30, 2021, compared with 411% at December 31, 2020. Management’s long-term target range is 375% to 400%.
Material changes versus the prior comparable period
- Q3 2021 net income declined 23% and diluted EPS declined 15% year over year, primarily reflecting lower insurance product margin and less favorable investment-related results.
- Nine-month net income increased 71% year over year, but the comparison benefited from the $34.0 million CARES Act tax benefit recognized in 2020 and a $152.2 million unfavorable net non-operating result in 2020.
- Health margin increased for the nine-month period to $363.5 million from $334.6 million, while annuity margin decreased to $176.4 million from $228.6 million and life margin decreased to $120.0 million from $127.7 million.
- COVID-19-related deferred medical care favorably affected health margins by approximately $95 million during the first nine months of 2021, while COVID-19 mortality adversely affected life margins by approximately $33 million.
- DirectPath increased fee revenue and expenses following its February 2021 acquisition. Nine-month unallocated expenses included $12.8 million of legal and regulatory items and $2.5 million of DirectPath transaction expenses.
- CNO repurchased 12.5 million shares for $302.4 million during the first nine months and had $466.9 million of remaining repurchase authorization at September 30. The quarterly dividend was increased to $0.13 per share from $0.12.
- Accumulated other comprehensive income declined to $1.93 billion from $2.19 billion, primarily because of lower unrealized investment gains.
Guidance, outlook, risks and unusual items
- Management expected modest fourth-quarter growth in health and life sales and total collected premiums compared with Q4 2020. Fourth-quarter insurance product margin was expected to receive a modest net favorable COVID-19 impact, but at more moderate levels.
- Management expected investment income allocated to product lines to be relatively flat in Q4, with asset growth offset by lower yields. Net investment income not allocated to product lines was expected to decline because of weaker alternative-investment conditions in Q3, which are generally reported with a lag.
- Management expected higher fourth-quarter fee income and generally comparable expenses, excluding specified legal, regulatory and DirectPath transaction items. It also stated that it expected to maintain the quarterly dividend, target RBC levels, debt-to-capital ratios and minimum holding-company liquidity.
- COVID-19 remains a material uncertainty affecting sales, mortality, morbidity, persistency, medical utilization, investment income, asset valuations, capital, reserves, deferred acquisition costs and tax assets. Deferred care could result in higher future health claims.
- The NAIC’s new bond factors, effective December 31, 2021, were estimated to reduce the RBC ratio by approximately 16 percentage points, or approximately $80 million of capital. Management intended to manage toward the low end of its target RBC range.
- The company’s long-duration insurance accounting is subject to significant actuarial and valuation estimates. New long-duration contract accounting guidance is scheduled for adoption on January 1, 2023; the filing states that the impact has not yet been determined.
- Legal and regulatory matters include ongoing litigation involving Wilmington Trust, KPMG and Platinum-related reinsurance transactions, as well as regulatory examinations concerning unclaimed property and death-record matching. Management did not believe currently pending matters were probable of having a material adverse effect, but stated that outcomes remain difficult to predict.
- The company had $234.7 million of unfunded commitments to limited partnerships and hedge funds. Its consolidated variable-interest-entity investments were primarily below-investment-grade corporate loans and had related borrowings of $1.15 billion.
Important facts for investors to verify
- Whether COVID-19-related favorable health claims experience reverses and produces higher future claims, and whether mortality pressure on life products persists.
- The sustainability of net operating income excluding unusual investment, tax, derivative and legal items.
- The effect of lower interest rates and reinvestment yields on insurance product margins and investment income.
- The impact of the NAIC bond-factor changes on RBC ratios, capital deployment and dividend capacity.
- Holding-company liquidity, future subsidiary dividends and compliance with debt covenants, including the 35% debt-to-capital limit.
- Credit performance of the investment portfolio, including below-investment-grade securities, structured securities, VIE assets and mortgage loans.
- Potential outcomes and financial exposure from pending litigation, regulatory examinations and tax audits.
- The eventual balance-sheet and earnings impact of the long-duration insurance accounting standard effective January 1, 2023.