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CNO FINANCIAL GROUP, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this section, we review the consolidated financial condition of CNO and its consolidated results of operations for the years endedDecember 31, 2022 , 2021 and 2020 and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the consolidated financial statements and notes included in this Form 10-K.
OVERVIEW
We are a holding company for a group of insurance companies operating throughoutthe United States that develop, market and administer health insurance, annuity, individual life insurance and other insurance and financial services products. We focus on serving middle-income pre-retiree and retired Americans, which we believe are attractive, underserved, high growth markets. We sell our products through exclusive agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing. We view our operations as three insurance product lines (annuity, health and life) and the investment and fee income segments. Our segments are aligned based on their common characteristics, comparability of profit margins and the way management makes operating decisions and assesses the performance of the business. Our insurance product line segments (annuity, health and life) include marketing, underwriting and administration of the policies our insurance subsidiaries sell. The business written in each of the three product categories through all of our insurance subsidiaries is aggregated allowing management and investors to assess the performance of each product category. When analyzing profitability of these segments, we use insurance product margin as the measure of profitability, which is: (i) insurance policy income; and (ii) net investment income allocated to the insurance product lines; less (i) insurance policy benefits and interest credited to policyholders; and (ii) amortization, non-deferred commissions and advertising expense. Net investment income is allocated to the product lines using the book yield of investments backing the block of business, which is applied to the average insurance liabilities, net of insurance intangibles, for the block in each period. Income from insurance products is the sum of the insurance margins of the annuity, health and life product lines, less expenses allocated to the insurance lines. It excludes the income from our fee income business, investment income not allocated to product lines, net expenses not allocated to product lines (primarily holding company expenses) and income taxes. Management believes insurance product margin and income from insurance products help provide a better understanding of the business and a more meaningful analysis of the results of our insurance product lines.
We market our products through the Consumer and Worksite Divisions that reflect
the customers served by the Company.
The Consumer Division serves individual consumers, engaging with them on the phone, virtually, online, face-to-face with agents, or through a combination of sales channels. This structure unifies consumer capabilities into a single division and integrates the strength of our agent sales forces with one of the largest direct-to-consumer insurance businesses with proven experience in advertising, web/digital and call center support. The Worksite Division focuses on worksite and group sales for businesses, associations, and other membership groups, interacting with customers at their place of employment and virtually. With a separate Worksite Division, we are bringing a sharper focus to this high-growth business while further capitalizing on the strength of our acquisitions of WBD andDirectPath . Sales in the Worksite Division have been particularly adversely impacted by the COVID-19 pandemic given the challenges of interacting with customers at their place of employment. The Worksite Division is increasing its recruiting efforts to rebuild its agent force which was adversely impacted by the COVID-19 pandemic. The Consumer and Worksite Divisions are primarily focused on marketing insurance products, several types of which are sold in both divisions and underwritten in the same manner. Sales of group underwritten policies are currently not significant, but are expected to increase within the Worksite Division. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability of this segment is the total net investment income not allocated to the insurance products. Investment income not allocated to product lines represents net investment income less: (i) equity returns credited to policyholder account balances; (ii) the investment income allocated to our product lines; (iii) interest expense on notes payable and investment borrowings; (iv) expenses related to the funding agreement-backed note ("FABN") program; 48 -------------------------------------------------------------------------------- Table of Contents and (v) certain expenses related to benefit plans that are offset by special-purpose investment income. Investment income not allocated to product lines includes investment income on investments in excess of amounts allocated to product lines, investments held by our holding companies, the spread we earn from our FHLB investment borrowing and FABN programs and variable components of investment income (including call and prepayment income, adjustments to returns on structured securities due to cash flow changes, income (loss) from Company-owned life insurance ("COLI") and alternative investment income not allocated to product lines), net of interest expense on corporate debt. The spread earned from our FHLB investment borrowing and FABN programs includes the investment income on the matched assets less: (i) interest on investment borrowings related to the FHLB investment borrowing program; (ii) interest credited on funding agreements; and (iii) amortization of deferred acquisition costs related to the FABN program. Our fee income segment includes the earnings generated from sales of third-party insurance products, services provided by WBD (our on-line benefit administration firm), Optavise (a national provider of year-round technology-driven employee benefits management services) and the operations of our broker/dealer and registered investment advisor.
Expenses not allocated to product lines include the expenses of our corporate
operations, excluding interest expense on debt.
49 -------------------------------------------------------------------------------- Table of Contents The following summarizes our earnings for the three years endingDecember 31, 2022 (dollars in millions, except per share data): 2022 2021 2020 Insurance product margin Annuity margin$ 161.1 $ 270.3 $ 296.7 Health margin 477.3 493.0 459.8 Life margin 172.9 150.4 165.0 Total insurance product margin 811.3 913.7 921.5 Allocated expenses (596.6) (566.5) (557.7) Income from insurance products 214.7 347.2 363.8 Fee income 23.7 19.4 16.7 Investment income not allocated to product lines 159.5 184.5 167.1 Expenses not allocated to product lines (40.8) (80.5) (83.8) Operating earnings before taxes 357.1 470.6 463.8 Income tax expense on operating income (83.2) (105.0) (101.5) Net operating income (a) 273.9 365.6 362.3
Net realized investment gains (losses) from sales,
impairments and change in allowance for credit losses (net
of related amortization)
(58.8) 34.8 (31.1)
Net change in market value of investments recognized in
earnings
(73.2) (17.4) (2.7)
Fair value changes related to agent deferred compensation
plan
48.9 8.9 (16.3) Fair value changes in embedded derivative liabilities (net of related amortization) 247.2 67.2 (79.1) Other (3.9) 3.6 9.7 Net non-operating income (loss) before taxes 160.2 97.1 (119.5) Income tax expense (benefit): On non-operating income (loss) 37.3 21.7 (25.0)
Valuation allowance for deferred tax assets and other tax
items
- - (34.0) Net non-operating income (loss) 122.9 75.4 (60.5) Net income$ 396.8 $ 441.0 $ 301.8 Per diluted share: Net operating income$ 2.33 $ 2.79 $ 2.53 Net non-operating income (loss) 1.04 .57 (.42) Net income$ 3.37 $ 3.36 $ 2.11 50
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(a)Management believes that an analysis of net income applicable to common stock
before: (i) net realized investment gains (losses) from sales, impairments and
change in allowance for credit losses, net of related amortization and taxes;
(ii) net change in market value of investments recognized in earnings, net of
taxes; (iii) fair value changes due to fluctuations in the interest rates used
to discount embedded derivative liabilities related to our fixed indexed
annuities, net of related amortization and taxes; (iv) fair value changes
related to the agent deferred compensation plan, net of taxes; (v) changes in
the valuation allowance for deferred tax assets and other tax items; and (vi)
other non-operating items consisting primarily of earnings attributable to VIEs
("net operating income", a non-GAAP financial measure) is important to evaluate
the financial performance of the company, and is a key measure commonly used in
the life insurance industry. Management uses this measure to evaluate
performance because the items excluded from net operating income can be affected
by events that are unrelated to the Company's underlying fundamentals. The table
above reconciles the non-GAAP measure to the corresponding GAAP measure.
In addition, management uses these non-GAAP financial measures in its budgeting
process, financial analysis of segment performance and in assessing the
allocation of resources. We believe these non-GAAP financial measures enhance an
investor's understanding of our financial performance and allows them to make
more informed judgments about the Company as a whole. These measures also
highlight operating trends that might not otherwise be apparent. However, net
operating income is not a measurement of financial performance under GAAP and
should not be considered as an alternative to cash flow from operating
activities, as measures of liquidity, or as an alternative to net income as
measures of our operating performance or any other measures of performance
derived in accordance with GAAP. In addition, net operating income should not be
construed as an inference that our future results will be unaffected by unusual
or non-recurring items. Net operating income has limitations as an analytical
tool, and you should not consider such measure either in isolation or as a
substitute for analyzing our results as reported under GAAP. Our definition and
calculation of net operating income are not necessarily comparable to other
similarly titled measures used by other companies due to different methods of
calculation. Also, as we adopt the new accounting standard related to targeted
improvements to the accounting for long-duration insurance contracts effective
January 1, 2023 , we will be updating our method of determining non-operating
earnings for our fixed indexed annuities to better identify the volatile
non-economic impacts of that line of business. This should result in fixed
indexed annuity margins which more closely reflect the true economics of the
business.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of various assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Management has made estimates in the past that we believed to be appropriate but were subsequently revised to reflect actual experience. If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition could be materially affected. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. We continually evaluate the information used to make these estimates as our business and the economic environment change. The use of estimates is pervasive throughout our financial statements. The accounting policies and estimates we consider most critical are summarized below. Additional information on our accounting policies is included in the note to our consolidated financial statements entitled "Summary of Significant Accounting Policies". The accounting policies and estimates described herein relate to the accounting standards in effect throughDecember 31, 2022 . The new guidance related to targeted improvements to the accounting for long-duration insurance contracts became effective onJanuary 1, 2023 , and will significantly change how we account for long-duration insurance contracts, including updating assumptions used to measure the liabilities for traditional life and limited-payment insurance contracts, accounting for market-risk benefits and changing the manner in which the balances related to the present value of future profits and deferred acquisition costs are amortized. Refer to the note to the consolidated financial statements entitled "Summary of Significant Accounting Policies - Recently Issued Accounting Standards - Pending Accounting Standards" for additional information on these changes.
Investment Valuation
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date and, therefore, represents an exit price, not an entry
price. We carry
51 -------------------------------------------------------------------------------- Table of Contents certain assets and liabilities at fair value on a recurring basis, including fixed maturities, equity securities, trading securities, investments held by VIEs, derivatives, separate account assets and embedded derivatives related to fixed indexed annuity products. We carry our COLI, which is invested in a series of mutual funds, at its cash surrender value which approximates fair value. In addition, we disclose fair value for certain financial instruments, including mortgage loans, policy loans, cash and cash equivalents, insurance liabilities for interest-sensitive products and funding agreements, investment borrowings, notes payable and borrowings related to VIEs. The degree of judgment utilized in measuring the fair value of financial instruments is largely dependent on the level to which pricing is based on observable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. Financial instruments with readily available active quoted prices would be considered to have fair values based on the highest level of observable inputs, and little judgment would be utilized in measuring fair value. Financial instruments that rarely trade would often have fair value based on a lower level of observable inputs, and more judgment would be utilized in measuring fair value. We categorize our financial instruments carried at fair value into a three-level hierarchy based on the observability of inputs. The three-level hierarchy for fair value measurements is described in the note to the consolidated financial statements entitled "Fair Value Measurements."
The following summarizes investments on our consolidated balance sheet carried
at fair value by pricing source and fair value hierarchy level as of
Quoted prices
in active
markets for
identical Significant Significant
assets observable
inputs unobservable inputs
(Level 1) (Level 2) (Level 3) Total fair value
Priced by third-party pricing
services $ 59.6 $ 21,310.3 $ - $ 21,369.9
Priced by independent broker
quotations - 112.0 233.3 345.3
Priced by matrices - .8 - .8
Priced by other methods (a) - 13.1 120.1 133.2
Total $ 59.6 $ 21,436.2 $ 353.4 $ 21,849.2
Percent of total .3 % 98.1 % 1.6 % 100.0 %
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(a) Represents primarily securities benchmarked to comparable securities to
determine fair value.
When an available for sale fixed maturity security's fair value is below the
amortized cost, the security is considered impaired. If a portion of the decline
is due to credit-related factors, we separate the credit loss component of the
impairment from the amount related to all other factors. The credit loss
component is recorded as an allowance and reported in net investment gains
(losses) (limited to the difference between estimated fair value and amortized
cost). The impairment related to all other factors (non-credit factors) is
reported in accumulated other comprehensive income (loss) along with unrealized
gains (losses) related to fixed maturity investments, available for sale, net of
tax and related adjustments. The allowance is adjusted for any additional credit
losses and subsequent recoveries. When recognizing an allowance associated with
a credit loss, the cost basis is not adjusted. When we determine a security is
uncollectable, the remaining amortized cost will be written off.
In determining the credit loss component, we discount the estimated cash flows
on a security by security basis. We consider the impact of macroeconomic
conditions on inputs used to measure the amount of credit loss. For most
structured securities, cash flow estimates are based on bond-specific facts and
circumstances that may include collateral characteristics, expectations of
delinquency and default rates, loss severity, prepayment speeds and structural
support, including overcollateralization, excess spread, subordination and
guarantees. For corporate bonds, cash flow estimates are derived by considering
asset type, rating, time to maturity, and applying an expected loss rate.
If we intend to sell an impaired fixed maturity security, available for sale, or
identify an impaired fixed maturity security, available for sale, for which is
it more likely than not we will be required to sell before anticipated recovery,
the difference between the fair value and the amortized cost is included in net
investment gains (losses) and the fair value becomes the new amortized cost. The
new cost basis is not adjusted for any subsequent recoveries in fair value.
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Future events may occur, or additional information may become available, which
may necessitate future realized losses in our portfolio. Significant losses
could have a material adverse effect on our consolidated financial statements in
future periods.
For more information on our investment portfolio and our critical accounting
estimates related to investments, see the note to our consolidated financial
statements entitled "Investments".
Present Value of Future Profits and Deferred Acquisition Costs
In conjunction with the implementation of fresh start accounting, we eliminated the historical balances of our Predecessor's deferred acquisition costs and the present value of future profits and replaced them with the present value of future profits as calculated on the Effective Date. The value assigned to the right to receive future cash flows from contracts existing at the Effective Date is referred to as the present value of future profits. The balance of this account is amortized, evaluated for recovery, and adjusted for the impact of unrealized gains (losses) in the same manner as the deferred acquisition costs described below. We expect to amortize the balance of the present value of future profits as ofDecember 31, 2022 as follows: 11 percent in 2023, 11 percent in 2024, 9 percent in 2025, 8 percent in 2026 and 7 percent in 2027. Deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts. For interest-sensitive life or annuity products, we amortize these costs in relation to the estimated gross profits using the interest rate credited to the underlying policies. For other products, we generally amortize these costs in relation to future anticipated premium revenue using the projected investment earnings rate. Insurance acquisition costs are amortized to expense over the lives of the underlying policies in relation to future anticipated premiums or gross profits. The insurance acquisition costs for policies other than interest-sensitive life and annuity products are amortized with interest (using the projected investment earnings rate) over the estimated premium-paying period of the policies, in a manner which recognizes amortization expense in proportion to each year's premium income. The insurance acquisition costs for interest-sensitive life and annuity products are amortized with interest (using the interest rate credited to the underlying policy) in proportion to estimated gross profits. The interest, mortality, morbidity and persistency assumptions used to amortize insurance acquisition costs are consistent with those assumptions used to estimate liabilities for insurance products. For interest-sensitive life and annuity products, these assumptions are reviewed on a regular basis. When actual profits or our current best estimates of future profits are different from previous estimates, we adjust cumulative amortization of insurance acquisition costs to maintain amortization expense as a constant percentage of gross profits over the entire life of the policies. When we realize a gain or loss on investments backing our interest-sensitive life or annuity products, we adjust the amortization of insurance acquisition costs to reflect the change in estimated gross profits from the products due to the gain or loss realized and the effect on future investment yields. We increased (decreased) amortization expense for such changes by$(3.4) million ,$1.7 million and$(2.4) million during the years endedDecember 31, 2022 , 2021 and 2020, respectively. We also adjust insurance acquisition costs for the change in amortization that would have been recorded if fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Such adjustments are commonly referred to as "shadow adjustments" and may include adjustments to: (i) deferred acquisition costs; (ii) the present value of future profits; (iii) loss recognition reserves; and (iv) income taxes. We include the impact of this adjustment in accumulated other comprehensive income (loss) within shareholders' equity. The total pre-tax impact of such adjustments on accumulated other comprehensive income (loss) was a decrease of$339.9 million atDecember 31, 2022 . The total pre-tax impact of such adjustments on accumulated other comprehensive income atDecember 31, 2021 was a decrease of$454.0 million (including$165.0 million for premium deficiencies that would exist on certain blocks of business if unrealized gains on the assets backing such products had been realized and the proceeds from our sales of such assets were invested at then current yields). AtDecember 31, 2022 , the balance of insurance acquisition costs was$2.1 billion . The recoverability of this amount is dependent on the future profitability of the related business. Each year, we evaluate the recoverability of the unamortized balance of insurance acquisition costs. These evaluations are performed to determine whether estimates of the present value of future cash flows, in combination with the related liability for insurance products, will support the unamortized balance. These future cash flows are based on our best estimate of future premium income, less benefits and expenses. The present value of these cash flows, plus the related balance of liabilities for insurance products, is then compared with the unamortized balance of insurance acquisition costs. In the event of a deficiency, such amount would be charged to amortization expense. If the 53 -------------------------------------------------------------------------------- Table of Contents deficiency exceeds the balance of insurance acquisition costs, a premium deficiency reserve is established for the excess. The determination of future cash flows involves significant judgment. Revisions to the assumptions which determine such cash flows could have a significant adverse effect on our results of operations and financial position. The table presented below summarizes our estimates of cumulative adjustments to insurance acquisition costs or premium deficiency reserves (when the deficiency exceeds the balance of insurance acquisition costs) resulting from hypothetical revisions to certain assumptions. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. We have assumed that revisions to assumptions resulting in the adjustments summarized below would occur equally among policy types, ages and durations within each product classification. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. In addition, the impact of actual adjustments would reflect the net effect of all changes in assumptions during the period.
Estimated adjustment to income
before income taxes based on
Change in assumptions
revisions to certain assumptions
(dollars in millions)
Interest-sensitive life products:
5% increase to assumed mortality $(11)
5% decrease to assumed mortality 11
15% increase to assumed expenses (4)
15% decrease to assumed expenses 4
10 basis point decrease to assumed spread (a) (4)
10 basis point increase to assumed spread (a) 4
20% increase to assumed lapses (2)
20% decrease to assumed lapses 2
Fixed indexed and fixed interest annuity products:
20% increase to assumed surrenders
(1) 20% decrease to assumed surrenders 1 15% increase to assumed expenses (1) 15% decrease to assumed expenses 1 10 basis point decrease to assumed spread (a) (12) 10 basis point increase to assumed spread (a) 12
Other than interest-sensitive life and annuity products (b):
Level new money rates for investment earnings rate
5
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(a)Spread reduction calculated by lowering earned rates 10 basis points while keeping credited rates unchanged. (b)We have excluded the effect of reasonably likely changes in lapse, surrender and expense assumptions for policies other than interest-sensitive life and annuity products. The following hypothetical scenarios illustrate the sensitivity of changes in interest rates to our products based on our 2022 comprehensive actuarial review (including the impacts of the changes on insurance acquisition costs, premium deficiency reserves and the valuation of the embedded derivatives related to our fixed indexed products): •The first hypothetical scenario assumes immediate and permanent reductions to current interest rate spreads on interest-sensitive products. We estimate that a pre-tax charge of approximately$29 million would occur if we increased credited rates related to our interest-sensitive life and annuity products immediately and permanently by 10 basis points (or an equivalent increase to the amount allocated to the cost of options for our fixed indexed annuity products) with no change to assumed earned rates. •The second scenario assumes that new money rates decrease to an overall average of 3.00 percent immediately and remain at that level indefinitely on non-interest sensitive products. We estimate that this scenario would result in a 54 -------------------------------------------------------------------------------- Table of Contents pre-tax charge of$6 million on our life contingent payout annuity block and reduce future margins on non-interest sensitive products by approximately$338 million . •The third scenario assumes that new money rates decrease to an overall average of 2.00 percent immediately and remain at that level indefinitely on non-interest sensitive products. We estimate that this scenario would result in a pre-tax charge of approximately$17 million on our life contingent payout annuity block and reduce the future margins on non-interest sensitive products by approximately$591 million . Although the hypothetical revisions described in the scenarios summarized above are not currently required or anticipated, we believe similar changes could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. We have assumed that revisions to assumptions resulting in such adjustments would occur equally among policy types, ages and durations within each product classification. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from such estimates. In addition, the impact of actual adjustments would reflect the net effect of all changes in assumptions during the period.
The following summarizes the persistency of our major blocks of insurance
business summarized by line of business:
Years ended December 31,
2022 2021 2020
Annuity:
Fixed indexed annuities (1) 83.9 % 84.8 % 85.1 %
Fixed interest annuities (1) 90.9 % 90.9 % 91.5 %
Other annuities (2) 95.7 % 96.8 % 94.1 %
Health:
Supplemental health (3) 88.2 % 88.8 % 88.7 %
Medicare supplement (3) 82.1 % 82.6 % 83.4 %
Long-term care (3) 91.0 % 87.7 % 91.5 %
Life:
Traditional life (3) 84.0 % 84.8 % 85.7 %
Interest-sensitive life (3) 88.8 % 88.7 % 88.7 %
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(1) Based on the total amount of death benefits, surrenders values and partial
withdrawals divided by the average account value.
(2) Based on total reserves released at death divided by average account value.
(3) Based on number of inforce policies.
Liabilities for Insurance Products - reserves for the future payment of
long-term care policy claims
We calculate and maintain reserves for the future payment of claims to our
policyholders based on actuarial assumptions. For all our insurance products, we
establish an active life reserve, a liability for due and unpaid claims, claims
in the course of settlement and incurred but not reported claims. In addition,
for our health insurance business, we establish a reserve for the present value
of amounts not yet due on claims. Many factors can affect these reserves and
liabilities, such as economic and social conditions, inflation, hospital and
pharmaceutical costs, changes in doctrines of legal liability and
extra-contractual damage awards. Therefore, our reserves and liabilities are
necessarily based on numerous estimates and assumptions as well as historical
experience. Establishing reserves is an uncertain process, and it is possible
that actual claims will materially exceed our reserves and have a material
adverse effect on our results of operations and financial condition. For
example, our long-term care policy claims may be paid over a long period of time
and, therefore, loss estimates have a higher degree of uncertainty.
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The following summarizes the components of the reserves related to our long-term
care business:
2022 2021
(Dollars in millions)
Amounts classified as future policy benefits:
Active life reserves $ 3,932.1
Reserves for the present value of amounts not yet due on
claims
1,360.3
1,320.8
Amounts classified as liability for policy and contract
claims:
Liability for due and unpaid claims, claims in the course
of settlement and incurred but not reported claims
154.4
158.4
Total 5,446.8
5,394.5
Reinsurance receivables 2,769.8
2,766.7
Long-term care reserves, net of reinsurance receivables
The significant assumptions used to calculate the active life reserves include morbidity, persistency and investment yields. These assumptions are determined at the issuance date and generally do not change over the life of the policy unless a premium deficiency exists. The significant assumptions used to calculate the reserves for the present value of amounts not yet due on claims include future benefit payments, interest rates and claim continuance patterns. Interest rates are used to determine the present value of the future benefit payments and are based on the investment yield of assets supporting the reserves. Claim continuance assumptions are estimates of the expected period of time that claim payments will continue before termination due to recovery, death or attainment of policy maximum benefits. These estimates are based on historical claim experience for similar policy and coverage types. Our estimates of benefit payments, interest rates and claim continuance are reviewed regularly and updated to consider current portfolio investment yields and recent claims experience. The significant assumptions used to calculate the liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims are based on historical claim payment patterns and include assumptions related to the number of claims and the size and timing of claim payments. These assumptions are updated quarterly to reflect the most current information regarding claim payment patterns. In order to determine the accuracy of our prior estimates, we calculate the total redundancy (deficiency) of our prior claim reserve estimates. The 2021 claim reserve redundancy for long-term care claim reserves, as measured atDecember 31, 2022 , was approximately$61 million . Estimates of unpaid losses related to long-term care business have a higher degree of uncertainty than estimates for our other products due to the range of ultimate duration of these claims and the resulting variability in their cost (in addition to the variations in the lag time in reporting claims). Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results.
Income Taxes
Our income tax expense includes deferred income taxes arising from temporary
differences between the financial reporting and tax bases of assets and
liabilities and NOLs. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply in the years in which temporary differences
are expected to be recovered or paid. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in earnings in the period when
the changes are enacted.
A reduction of the net carrying amount of deferred tax assets by establishing a
valuation allowance is required if, based on the available evidence, it is more
likely than not that such assets will not be realized. In assessing the need for
a valuation allowance, all available evidence, both positive and negative, shall
be considered to determine whether, based on the weight of that evidence, a
valuation allowance for deferred tax assets is needed. This assessment requires
significant judgment and considers, among other matters, the nature, frequency
and severity of current and cumulative losses, forecasts of future
profitability, the duration of carryforward periods, our experience with
operating loss and tax credit carryforwards expiring unused, and tax planning
strategies.
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We evaluate the need to establish a valuation allowance for our deferred income
tax assets on an ongoing basis using a deferred tax valuation model. Our model
is adjusted to reflect changes in our projections of future taxable income
including changes resulting from the Tax Reform Act, investment strategies, the
impact of the sale or reinsurance of business, the recapture of business
previously ceded, tax planning strategies and the COVID-19 pandemic. Our
estimates of future taxable income are based on evidence we consider to be
objectively verifiable. At December 31, 2022 , our projection of future taxable
income for purposes of determining the valuation allowance is based on our
estimates of such future taxable income through the date our NOLs expire. Such
estimates are subject to the risks and uncertainties associated with the
COVID-19 pandemic and the extent to which actual impacts differ from the
assumptions used in our deferred tax valuation model. Based on our assessment,
we have concluded that it is more likely than not that all our deferred tax
assets of $1,157.5 million will be realized through future taxable earnings.
Recovery of our deferred tax asset is dependent on achieving the level of future
taxable income projected in our deferred tax valuation model and failure to do
so could result in an increase in the valuation allowance in a future
period. Any future increase in the valuation allowance may result in additional
income tax expense and reduce shareholders' equity, and such an increase could
have a significant impact upon our earnings in the future.
The Code limits the extent to which losses realized by a non-life entity (or
entities) may offset income from a life insurance company (or companies) to the
lesser of: (i) 35 percent of the income of the life insurance company; or (ii)
35 percent of the total loss of the non-life entities (including NOLs of the
non-life entities). There is no similar limitation on the extent to which losses
realized by a life insurance entity (or entities) may offset income from a
non-life entity (or entities).
We have $0.8 billion of federal NOLs as of December 31, 2022 , as summarized
below (dollars in millions):
Net operating loss
Year of expiration carryforwards
2023 $ 203.7
2025 85.2
2026 149.9
2027 10.8
2028 80.3
2029 213.2
2030 .3
2031 .2
2032 44.4
2033 .6
2034 .9
2035 .8
Total federal non-life NOLs $ 790.3
Our life NOLs were fully utilized in 2020. Our non-life NOLs can be used to
offset 35 percent of life insurance company taxable income and 100 percent of
non-life company taxable income until all non-life NOLs are utilized or expire.
Liabilities for Insurance Products
AtDecember 31, 2022 , the total balance of our liabilities for insurance products was$27.4 billion . These liabilities are generally payable over an extended period of time and the profitability of the related products is dependent on the pricing of the products and other factors. Liabilities for insurance products are calculated using management's best judgments, based on our past experience and standard actuarial tables, of mortality, morbidity, lapse rates, investment experience and expense levels. Differences between our expectations when we sold these products and our actual experience could result in future losses. We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. We establish liabilities for annuity and interest-sensitive life products and funding agreements equal to the 57 -------------------------------------------------------------------------------- Table of Contents accumulated policy account values, which include an accumulation of deposit payments plus credited interest, less withdrawals and the amounts assessed against the policyholder through the end of the period. In addition, policyholder account values for certain interest-sensitive life products are impacted by our assumptions related to changes of certain NGEs that we are allowed to make under the terms of the policy, such as cost of insurance charges, expense loads, credited interest rates and policyholder bonuses. The options attributed to the policyholder related to our fixed indexed annuity products are accounted for as embedded derivatives. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results. 58 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
The following tables and narratives summarize the operating results of our
segments (dollars in millions):
2022 2021 2020 Insurance product margin Annuity: Insurance policy income$ 23.1 $ 19.6 $ 18.8 Net investment income 466.8 462.4 465.1 Insurance policy benefits (124.3) 14.5 93.7 Interest credited (178.1) (149.1) (170.6) Amortization and non-deferred commissions (26.4) (77.1) (110.3) Annuity margin 161.1 270.3 296.7 Health: Insurance policy income 1,617.3 1,661.5 1,699.5 Net investment income 287.6 287.7 282.3 Insurance policy benefits (1,241.0) (1,266.3) (1,329.7) Amortization and non-deferred commissions (186.6) (189.9) (192.3) Health margin 477.3 493.0 459.8 Life: Insurance policy income 859.4 842.3 793.0 Net investment income 146.2 144.7 139.6 Insurance policy benefits (585.2) (613.5) (570.0) Interest credited (47.4) (44.4) (44.5) Amortization and non-deferred commissions (105.8) (88.9) (87.1) Advertising expense (94.3) (89.8) (66.0) Life margin 172.9 150.4 165.0 Total insurance product margin 811.3 913.7 921.5 Allocated expenses: Branch office expenses (62.3) (62.5) (65.0) Other allocated expenses (534.3) (504.0) (492.7) Income from insurance products 214.7 347.2
363.8
Fee income 23.7 19.4
16.7
Investment income not allocated to product lines 159.5 184.5
167.1
Expenses not allocated to product lines (40.8) (80.5) (83.8) Operating earnings before taxes 357.1 470.6
463.8
Income tax expense on operating income (83.2) (105.0) (101.5) Net operating income$ 273.9 $ 365.6 $ 362.3 59
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General: CNO is the top tier holding company for a group of insurance companies operating throughoutthe United States that develop, market and administer health insurance, annuity, individual life insurance and other insurance and financial services products. We view our operations by segments, which consist of insurance product lines. These products are distributed by our two divisions. The Consumer Division serves individual consumers, engaging with them on the phone, virtually, online, face-to-face with agents, or through a combination of sales channels. The Worksite Division focuses on worksite and group sales for businesses, associations, and other membership groups, interacting with customers at their place of employment and virtually. Insurance product margin is management's measure of the profitability of its annuity, health and life product lines' performance and consists of insurance policy income plus allocated investment income less insurance policy benefits, interest credited, commissions, advertising expense and amortization of acquisition costs. Income from insurance products is the sum of the insurance margins of the annuity, health and life product lines, less expenses allocated to the insurance lines. It excludes the income from our fee income business, investment income not allocated to product lines, net expenses not allocated to product lines (primarily holding company expenses) and income taxes. Management believes insurance product margin and income from insurance products help provide a better understanding of the business and a more meaningful analysis of the results of our insurance product lines. Investment income is allocated to the product lines using the book yield of investments backing the block of business, which is applied to the average insurance liabilities, net of insurance intangibles, for the block in each period. Investment income not allocated to product lines represents net investment income less: (i) equity returns credited to policyholder account balances; (ii) the investment income allocated to our product lines; (iii) interest expense on notes payable and investment borrowings; (iv) expenses related to the FABN program; and (v) certain expenses related to benefit plans that are offset by special-purpose investment income. Investment income not allocated to product lines includes investment income on investments in excess of amounts allocated to product lines, investments held by our holding companies, the spread we earn from our FHLB investment borrowing and FABN programs and variable components of investment income (including call and prepayment income, adjustments to returns on structured securities due to cash flow changes, income (loss) from COLI and alternative investment income not allocated to product lines), net of interest expense on corporate debt. Changes in Actuarial Assumptions: We update the assumptions and experience underlying the expected gross margins for policies accounted for as investment contracts annually in the fourth quarter of each year. In addition, we also review and update our assumptions on a more frequent basis to the extent current conditions or circumstances warrant changes that could be significant to our operating results. The impacts of these unlocking exercises have had a significant impact on our earnings. In the fourth quarter of 2022, we performed our annual comprehensive review of actuarial assumptions, including, but not limited to, mortality rates, surrender rates, earned rates, credited rates and expenses. This review resulted in a favorable impact to the fixed indexed annuity and fixed interest annuity margins of$.4 million and$.7 million , respectively, and an unfavorable impact to the interest-sensitive life margin of$2.7 million . The primary impact on the fixed indexed annuity margin related to higher earned rates and future option costs. Such future option costs represent the estimated cost we will incur to purchase a series of options that back the index credited to the policyholder. When the earned rates increase, the future option costs also increase. For 2021, we performed our annual comprehensive review of actuarial assumptions in the fourth quarter of 2021, including, but not limited to, mortality rates, policyholder behavior assumptions, earned rates, credited rates and expenses. This review resulted in a favorable impact to the fixed indexed annuity and fixed interest annuity margins of$25.1 million and$1.8 million , respectively, and an unfavorable impact to the interest-sensitive life margin of$1.0 million . The primary impact on the fixed indexed annuity margin related to lower earned rates and future option costs. Such future option costs represent the estimated cost we will incur to purchase a series of options that back the index credited to the policyholder. When the earned rates decrease, we are permitted (subject to policy minimums) to decrease this benefit, lowering the option costs. In the second quarter of 2020, our expectation regarding future new money interest rates changed and we performed an actuarial unlocking exercise to reflect our assumption that average new money rates would remain flat at 4 percent for the long-term. This change and the related impacts to persistency assumptions had a$45.6 million unfavorable impact on pre-tax earnings. As part of the actuarial unlocking exercise, we also changed our assumptions related to the future option costs we incur in providing benefits on fixed indexed annuities which had a favorable impact on pre-tax earnings of$91.5 million . These future option costs represent the estimated cost we will incur to purchase a series of annual forward options over the duration of the policy that back the potential return based on a percentage of the amount of increase in the value of the appropriate index. When interest rates decrease, we are permitted (subject to policy minimums) to decrease this benefit, 60 -------------------------------------------------------------------------------- Table of Contents lowering the option costs. The magnitude of the offsetting impacts of the change in new money rate and the change in future option costs had significantly different impacts on our results in 2020. These results are consistent with the different accounting requirements for insurance intangibles and the embedded derivatives related to the future option budgets for our fixed indexed annuity products. The actuarial unlocking exercise completed in the second quarter of 2020 did not replace our comprehensive annual review of all assumptions for our insurance products, which we completed in the fourth quarter of 2020. In the fourth quarter of 2020, we updated various assumptions including, but not limited to, earned rates and persistency which favorably impacted our annuity margins by$16.1 million and unfavorably impacted our life margin by$4.3 million .
The following tables summarize the impacts of our unlocking exercises in 2022,
2021 and 2020 (dollars in millions):
Insurance Amortization
policy of insurance
Line of business benefits intangibles Total
2022
Fixed indexed annuities (32.8) 33.2 .4
Fixed interest annuities - .7 .7
Interest-sensitive life (1.4) (1.3) (2.7)
Favorable (unfavorable) impact on pre-tax
operating income $ (34.2) $ 32.6 $ (1.6)
2021
Fixed indexed annuities $ 40.7 $ (15.6) $ 25.1
Fixed interest annuities - 1.8 1.8
Interest-sensitive life (.9) (.1) (1.0)
Favorable (unfavorable) impact on pre-tax
operating income $ 39.8 $ (13.9) $ 25.9
2020
Fixed indexed annuities:
Second quarter unlocking:
Impact of change in new money rate
assumptions $ (5.0) $ (25.6) $ (30.6)
Impact of change in future option costs 104.8 (13.3) 91.5
Total second quarter unlocking impacts 99.8 (38.9) 60.9
Fourth quarter annual unlocking impacts 24.5 (7.7) 16.8
Total unlocking impacts for fixed indexed
annuities 124.3 (46.6) 77.7
Fixed interest annuities:
Second quarter unlocking:
Impact of change in new money rate
assumptions - (9.4) (9.4)
Fourth quarter annual unlocking impacts - (.7) (.7)
Total unlocking impacts for fixed interest
annuities - (10.1) (10.1)
Interest-sensitive life:
Second quarter unlocking:
Impact of change in new money rate
assumptions (7.4) 1.8 (5.6)
Fourth quarter annual unlocking impacts (1.8) (2.5) (4.3)
Total unlocking impacts for
interest-sensitive life (9.2) (.7) (9.9)
Favorable (unfavorable) impact on pre-tax
operating income $ 115.1 $ (57.4) $ 57.7
61
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Impact of COVID-19 on Insurance Product Margin: Insurance product margin has been significantly impacted by the COVID-19 pandemic. Our life margin reflected adverse mortality as a result of increased deaths related to COVID-19 of approximately$21 million ,$53 million and$38 million in 2022, 2021 and 2020, respectively. Our health margins compare favorably to the margins experienced prior to the COVID-19 pandemic. We estimate the favorable impacts on our health margins due to COVID-19 to be approximately$102 million ,$130 million and$97 million in 2022, 2021 and 2020, respectively. Our annuity margin reflected a favorable (unfavorable) net COVID-19 impact of approximately$1 million ,$5 million and$(4) million in 2022, 2021 and 2020, respectively, primarily due to persistency impacts indirectly related to the pandemic.
Summary of Operating Results: Net operating income was
compared to
Insurance product margin in 2022, 2021 and 2020 was significantly impacted by: (i) changes in our actuarial assumptions as further described above under the caption "Changes in Actuarial Assumptions"; and (ii) pandemic-related impacts including lower health claims, net of higher mortality claims, as further described above under the caption "Impact of COVID-19 on Insurance Product Margin". In addition, the margin from fixed indexed annuities in 2022 and 2021 was favorably (unfavorably) impacted by$(62) million and$4 million , respectively, due to market conditions (primarily higher interest rates and lower equity markets) in 2022 as compared to 2021. Expenses allocated to insurance products were$596.6 million ,$566.5 million and$557.7 million in 2022, 2021 and 2020, respectively. Such higher expenses in 2022, as compared to 2021, primarily reflect our continued investment in growth initiatives. Allocated expenses in 2021, as compared to 2020, included higher variable expenses related to sales production. Certain costs in 2020 were allocated to a transition services agreement with a third party that was completed in the third quarter of 2020, favorably impacting allocated expenses in 2020.
The fee income segment is summarized below (dollars in millions):
2022 2021 2020 Fee revenue$ 169.3 $ 147.6 $ 106.0 Operating costs and expenses (145.6) (128.2) (89.3) Net fee income$ 23.7 $ 19.4 $ 16.7 The increase in fee revenue in 2022 is primarily due to the growth related to the sales of third party products in recent periods and changes to our revenue recognition assumptions reflecting favorable policy persistency. Such revenue in 2022 was partially offset by higher expenses related to our businesses that provide benefits administration and employee benefits management services. Net fee income in 2021 reflects additional expenses due to the activity of Optavise and additional expenses related to selling third-party Medicare Advantage policies. Investment income not allocated to product lines generally fluctuates from period to period based on the level of prepayment income (including call premiums) and trading account income; the performance of our alternative investments (which are typically reported a quarter in arrears); the earnings related to the investments underlying our COLI; and the spread we earn from our FHLB investment borrowing and FABN programs. 62 -------------------------------------------------------------------------------- Table of Contents Expenses not allocated to product lines includes certain significant items listed in the table below. Expenses not allocated to product lines as adjusted for such significant items are summarized below (dollars in millions): 2022 2021 2020 Expenses not allocated to product lines$ 40.8 $ 80.5 $ 83.8 Experience refund related to a reinsurance agreement (a) 22.5 - - Net expenses related to significant legal and regulatory matters - (12.8) (23.5) Charge related to asset impairments - - (3.7) Transaction expenses related to acquisition of DirectPath - (2.5) - Adjusted total$ 63.3 $ 65.2 $ 56.6 _______________ (a) Under the terms of the reinsurance agreement to cede a substantial portion of our legacy long-term care block, we are entitled to receive an experience refund of up to$22.5 million if certain rate increases are approved and implemented. As ofJune 30, 2022 , all requirements to earn the maximum experience refund had been met and the refund had been recognized. Pursuant to the terms of the coinsurance agreement, the refund is payable in the second half of 2023. 63
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Margin from Annuity Products (dollars in millions):
2022 2021 2020
Annuity margin:
Fixed indexed annuities
Insurance policy income $ 14.5 $ 12.8 $ 11.3
Net investment income 360.7 343.9 332.1
Insurance policy benefits (106.2) 33.7 108.8
Interest credited (130.1) (95.7) (110.1)
Amortization and non-deferred commissions (20.3) (71.3)
(91.3)
Margin from fixed indexed annuities
$ 250.8 Average net insurance liabilities$ 8,480.5 $ 7,771.8 $ 7,123.4 Margin/average net insurance liabilities 1.40 % 2.87 % 3.52 % Fixed interest annuities Insurance policy income$ .8 $ .8 $ .9 Net investment income 83.0 93.6 105.6 Insurance policy benefits (1.0) (1.1) (.6) Interest credited (45.7) (50.9) (57.4) Amortization and non-deferred commissions (5.7) (5.4)
(18.7)
Margin from fixed interest annuities
$ 29.8 Average net insurance liabilities$ 1,701.8 $ 1,880.1 $ 2,069.1 Margin/average net insurance liabilities 1.85 % 1.97 % 1.44 % Other annuities Insurance policy income$ 7.8 $ 6.0 $ 6.6 Net investment income 23.1 24.9 27.4 Insurance policy benefits (17.1) (18.1) (14.5) Interest credited (2.3) (2.5) (3.1) Amortization and non-deferred commissions (.4) (.4)
(.3)
Margin from other annuities$ 11.1 $ 9.9 $ 16.1 Average net insurance liabilities$ 479.3 $ 504.1 $ 531.7 Margin/average net insurance liabilities 2.32 % 1.96 % 3.03 % Total annuity margin$ 161.1 $ 270.3 $ 296.7 Average net insurance liabilities$ 10,661.6 $ 10,156.0 $ 9,724.2 Margin/average net insurance liabilities 1.51 % 2.66 %
3.05 %
Margin from fixed indexed annuities was$118.6 million in 2022, compared to$223.4 million in 2021 and$250.8 million in 2020. The margin excluding the favorable impacts of the actuarial assumption changes previously discussed was$118.2 million ,$198.3 million and$173.1 million in 2022, 2021 and 2020, respectively. The margin from fixed indexed annuities in 2022 and 2021 was favorably (unfavorably) impacted by$(62) million and$4 million , respectively, due to market conditions (primarily higher interest rates and lower equity markets) in 2022 as compared to 2021. Average net insurance liabilities (total insurance liabilities less: (i) amounts related to reinsured business; (ii) deferred acquisition costs; (iii) present value of future profits; and (iv) the value of unexpired options credited to insurance liabilities) were$8,480.5 million ,$7,771.8 million and$7,123.4 million in 2022, 2021 and 2020, respectively, driven by deposits and reinvested returns in excess of withdrawals. The increase in net insurance liabilities results in higher net investment income allocated, however, the earned yield was 4.25 percent in 2022, down from 4.42 percent in 2021 and 4.66 percent in 2020, reflecting lower portfolio yields, as higher yielding investments mature. We believe the margin on fixed indexed annuities was favorably (unfavorably) impacted by approximately$(1) million ,$6 million and$(3) million in 2022, 2021 and 2020, respectively, primarily due to persistency impacts indirectly related to the pandemic. 64 -------------------------------------------------------------------------------- Table of Contents Net investment income and interest credited exclude the change in market values of the underlying options supporting the fixed indexed annuity products and corresponding offsetting amount credited to policyholder account balances. Such amounts were$(181.3) million ,$195.5 million and$32.3 million in 2022, 2021 and 2020, respectively. Margin from fixed interest annuities was$31.4 million in 2022, compared to$37.0 million in 2021 and$29.8 million in 2020. The margin in 2022, 2021 and 2020 reflects the favorable (unfavorable) impact of the actuarial assumption changes previously discussed totaling$.7 million ,$1.8 million and$(10.1) million , respectively. Excluding such favorable (unfavorable) impacts, the margin from fixed interest annuities was$30.7 million ,$35.2 million and$39.9 million in 2022, 2021 and 2020, respectively. The decrease in margins primarily relates to the reduction in the size of the block and lower yields on investments. Average net insurance liabilities were$1,701.8 million ,$1,880.1 million and$2,069.1 million in 2022, 2021 and 2020, respectively, driven by withdrawals in excess of deposits and reinvested returns. The decrease in net insurance liabilities results in lower net investment income allocated. The earned yield was 4.88 percent in 2022, down from 4.98 percent in 2021 and 5.10 percent in 2020, reflecting lower portfolio yields, as higher yielding investments mature. Margin from other annuities was$11.1 million in 2022, compared to$9.9 million in 2021 and$16.1 million in 2020. The margin on this relatively small block of business is sensitive to annuitant mortality related to contracts with life contingencies. An increase in mortality in this block will result in a decrease in insurance liabilities and insurance policy benefits. Unusually high mortality in 2020 (unrelated to COVID-19) resulted in higher earnings. We believe the margin from other annuities reflected favorable (unfavorable) COVID-19 impacts of approximately$2 million ,$(1) million and$(1) million in 2022, 2021 and 2020, respectively.
Margin from
2022 2021 2020
Health margin:
Supplemental health
Insurance policy income $ 694.3 $ 683.8 $ 679.4
Net investment income 151.6 146.6 140.9
Insurance policy benefits (491.3) (509.7) (520.9)
Amortization and non-deferred commissions (121.0) (117.9) (112.7)
Margin from supplemental health
$ 233.6 $ 202.8 $
186.7
Margin/insurance policy income 34 % 30 % 27 % Medicare supplement Insurance policy income$ 657.8 $ 714.1 $ 754.7 Net investment income 5.3 5.1 4.9 Insurance policy benefits (460.1) (493.5) (505.0)
Amortization and non-deferred commissions (57.2) (61.7) (66.3)
Margin from Medicare supplement
$ 145.8 $ 164.0 $
188.3
Margin/insurance policy income 22 % 23 % 25 % Long-term care Insurance policy income$ 265.2 $ 263.6 $ 265.4 Net investment income 130.7 136.0 136.5 Insurance policy benefits (289.6) (263.1) (303.8)
Amortization and non-deferred commissions (8.4) (10.3) (13.3)
Margin from long-term care
$ 97.9 $ 126.2 $
84.8
Margin/insurance policy income 37 % 48 % 32 % Total health margin$ 477.3 $ 493.0 $
459.8
Margin/insurance policy income 30 % 30 %
27 %
Margin from supplemental health business was$233.6 million in 2022, compared to$202.8 million in 2021 and$186.7 million in 2020. The margin as a percentage of insurance policy income was 34% in 2022, compared to 30% in 2021 and 27% in 2020. The supplemental health margin continues to compare favorably to the margins experienced prior to the COVID-19 pandemic. We estimate the favorable impacts due to COVID-19 on the supplemental health margin in 2022, 2021 and 2020 were approximately$43 million ,$26 million and$11 million , respectively, relative to our expectations and previous experience prior to COVID-19. Claim experience will fluctuate from period to period and there is no assurance that such favorable impacts will continue. The supplemental health margin was also favorably impacted by$3 million in 2022 due to a refinement to our claim reserve loss adjustment expense assumption as a result of a recently completed loss adjustment expense 65 -------------------------------------------------------------------------------- Table of Contents study. The favorable claims experience in 2020 was partially offset by higher persistency resulting in a lower release of reserves. Such higher persistency primarily resulted from regulatory mandates and the Company's policy which delayed the lapsation of policies due to the non-payment of premiums during the early months of the COVID-19 pandemic. Our supplemental health products (including specified disease, accident and hospital indemnity products) generally provide fixed or limited benefits. For example, payments under cancer insurance policies are generally made directly to, or at the direction of, the policyholder following diagnosis of, or treatment for, a covered type of cancer. Approximately three-fourths of our supplemental health policies inforce (based on policy count) are sold with return of premium or cash value riders. The return of premium rider generally provides that after a policy has been inforce for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, without interest, less the aggregate amount of all claims incurred under the policy. The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned. Accordingly, the net cash flows from these products generally result in the accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases which is a component of insurance policy benefits) which will be paid out as benefits in later policy years (reflected in our earnings as reserve decreases which offset the recording of benefit payments). As the policies age, insurance policy benefits will typically increase, but the increase in benefits will be partially offset by investment income earned on the accumulated assets. Margin from Medicare supplement business was$145.8 million in 2022, compared to$164.0 million in 2021 and$188.3 million in 2020. The margins on the Medicare supplement business continued to compare favorably to the margins experienced prior to the COVID-19 pandemic. We estimate that the favorable impacts due to COVID-19 (based on actual claims incurred and persistency relative to our expectations and previous experience prior to COVID-19) on the Medicare supplement margin were approximately$15 million ,$32 million and$50 million in 2022, 2021 and 2020, respectively. Claim experience will fluctuate from period to period and there is no assurance that such favorable impacts will continue. Insurance policy income was$657.8 million in 2022, compared to$714.1 million in 2021 and$754.7 million in 2020, reflecting lower sales in recent periods partially offset by premium rate increases. We have experienced a shift in the sale of Medicare supplement policies to the sale of Medicare Advantage policies. We receive fee income when Medicare Advantage policies of other providers are sold, which is recorded in our Fee income segment. We continue to invest in both our Medicare supplement products and Medicare Advantage distribution to meet our customers' needs and preferences. For example, we launched a new competitive Medicare supplement product in 2022. Medicare supplement business consists of both individual and group policies. Government regulations generally require we attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefits reserves which is a component of Insurance policy benefits) of not less than 65 percent on individual products and not less than 75 percent on group products. The ratio is determined after three years from the original issuance of the policy and over the lifetime of the policy and measured in accordance with statutory accounting principles. Since the insurance product liabilities we establish for Medicare supplement business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Changes to our estimates are reflected in Insurance policy benefits in the period the change is determined. Margin from Long-term care products was$97.9 million in 2022, compared to$126.2 million in 2021 and$84.8 million in 2020. The margin as a percentage of insurance policy income was 37% in 2022, compared to 48% in 2021 and 32% in 2020. The margins in 2022, 2021 and 2020 continued to compare favorably to the margins experienced prior to the COVID-19 pandemic. In addition, an increase in policyholder deaths attributable to the pandemic has resulted in higher than expected reserve releases. We estimate the favorable impacts due to COVID-19 (based on actual claims incurred and persistency relative to our expectations and previous experience prior to COVID-19) on the long-term care margin were approximately$44 million ,$72 million and$36 million in 2022, 2021 and 2020, respectively. Claim experience will fluctuate from period to period and there is no assurance that such favorable impacts will continue. In addition, the margin has been impacted by the more profitable business currently being sold and the run-off of less profitable older long-term care business. 66 -------------------------------------------------------------------------------- Table of Contents Margin from Life Products (dollars in millions): 2022 2021 2020 Life margin: Interest-sensitive life Insurance policy income$ 174.6 $ 167.1 $ 158.8 Net investment income 51.9 50.2 47.4 Insurance policy benefits (75.2) (82.6) (76.1) Interest credited (46.7) (43.7) (43.8) Amortization and non-deferred commissions (30.9) (25.3) (28.2) Margin from interest-sensitive life$ 73.7 $ 65.7 $ 58.1 Average net insurance liabilities$ 1,023.1 $ 976.4 $ 920.0 Interest margin$ 5.2 $ 6.5 $ 3.6 Interest margin/average net insurance liabilities .51 % .67 % .39 % Underwriting margin$ 68.5 $ 59.2 $ 54.5 Underwriting margin/insurance policy income 39 % 35 % 34 % Traditional life Insurance policy income$ 684.8 $ 675.2 $ 634.2 Net investment income 94.3 94.5 92.2 Insurance policy benefits (510.0) (530.9) (493.9) Interest credited (.7) (.7) (.7) Amortization and non-deferred commissions (74.9) (63.6) (58.9) Advertising expense (94.3) (89.8) (66.0) Margin from traditional life$ 99.2 $ 84.7 $ 106.9 Margin/insurance policy income 14 % 13 % 17 % Margin excluding advertising expense/insurance policy income 28 % 26 % 27 % Total life margin$ 172.9 $ 150.4 $ 165.0 Margin from interest-sensitive life business was$73.7 million in 2022, compared to$65.7 million in 2021 and$58.1 million in 2020. The margin in 2022, 2021 and 2020 reflects the unfavorable impact of the actuarial assumption changes previously discussed totaling$2.7 million ,$1.0 million and$9.9 million , respectively. Excluding such unfavorable impacts, the margin from interest-sensitive life business was$76.4 million ,$66.7 million and$68.0 million , respectively. The change in margins reflects the mortality we experienced related to COVID-19; partially offset by growth in the block due to sales in recent periods. We estimate that the unfavorable impact from death claims related to COVID-19 on the margin of this block of business was approximately$6 million ,$16 million and$9 million in 2022, 2021 and 2020, respectively. The interest margin was$5.2 million in 2022, compared to$6.5 million in 2021 and$3.6 million in 2020. Net investment income was higher in 2022, compared to 2021 and 2020. The increase in average net insurance liabilities results in higher net investment income allocated, which is partially offset by lower earned yields. The earned yield was 5.07 percent in 2022, down from 5.14 percent in 2021 and 5.15 percent 2020. Interest credited to policyholders may be changed annually but is subject to minimum guaranteed rates and, as a result, any reduction in our earned rate may not be fully reflected in the rate credited to policyholders. Net investment income and interest credited excludes the change in market values of the underlying options supporting the fixed indexed life products and corresponding offsetting amount credited to policyholder account balances. Such amounts were$(24.0) million ,$24.3 million and$5.5 million in 2022, 2021 and 2020, respectively. Margin from traditional life business was$99.2 million in 2022, compared to$84.7 million in 2021 and$106.9 million in 2020. Insurance policy income was$684.8 million in 2022, compared to$675.2 million in 2021 and$634.2 million in 2020, reflecting new sales and persistency in the block. Insurance policy benefits were$510.0 million in 2022, compared to$530.9 million in 2021 and$493.9 million in 2020. We estimate that the impact from death claims related to COVID-19 increased insurance policy benefits by approximately$15 million ,$37 million and$29 million in 2022, 2021 and 2020, respectively. In 67 -------------------------------------------------------------------------------- Table of Contents addition, amortization was higher in 2022, as compared to 2021, primarily related to higher deferred acquisition costs in recent periods due to strong sales, including sales of our direct-to-consumer products through third party distributors. Advertising expense was$94.3 million in 2022, compared to$89.8 million in 2021 and$66.0 million in 2020. The demand and cost of television advertising can fluctuate from period to period. We are disciplined with our marketing expenditures and will increase or decrease our marketing spend depending on prices or other factors.
Investment Income Not Allocated to Product Lines (dollars in millions):
2022 2021 2020
Net investment income $ 1,015.9 $ 1,420.7 $ 1,222.5
Allocated to product lines:
Annuity (466.8) (462.4) (465.1)
Health (287.6) (287.7) (282.3)
Life (146.2) (144.7) (139.6)
Equity returns credited to policyholder account balances 205.3
(219.8) (37.8)
Amounts allocated to product lines and credited to
policyholder account balances
(695.3) (1,114.6) (924.8)
Amount related to variable interest entities and other
non-operating items
(48.5) (30.5) (39.2) Interest expense on debt (62.5) (62.4) (55.2) Interest expense on investment borrowings from FHLB (33.5) (9.8) (21.2) Expenses related to FABN program (30.0) (2.3) -
Less amounts credited to deferred compensation plans
(offsetting investment income)
13.4 (16.6) (15.0) Total adjustments (161.1) (121.6) (130.6) Investment income not allocated to product lines$ 159.5
The above table reconciles net investment income to investment income not allocated to product lines. Such amount will generally fluctuate from period to period based on the level of prepayment income (including call premiums) and trading account income; the performance of our alternative investments (which are typically reported a quarter in arrears); the earnings related to the investments underlying our COLI; and the spread we earn from our FHLB investment borrowing and FABN programs.
Net Non-Operating Income (Loss):
The following summarizes our net non-operating income (loss) for the three years
ended
2022 2021 2020
Net realized investment gains (losses) from sales,
impairments and change in allowance for credit losses (net
of related amortization)
$ (58.8)
Net change in market value of investments recognized in
earnings
(73.2) (17.4) (2.7)
Fair value changes related to agent deferred compensation
plan
48.9 8.9 (16.3)
Fair value changes in embedded derivative liabilities (net
of related amortization)
247.2 67.2 (79.1) Other (3.9) 3.6 9.7 Net non-operating income (loss) before taxes$ 160.2
Net realized investment losses, net of related amortization, were$58.8 million in 2022, including the unfavorable change in the allowance for credit losses of$52.6 million which were recorded in earnings. Net realized investment gains, net of related amortization, were$34.8 million in 2021, including the favorable change in the allowance for credit losses of$12.2 million . Net realized investment losses, net of related amortization, were$31.1 million in 2020, including an unfavorable change in the allowance for credit losses and other-than-temporary impairment losses of$18.5 million . 68 -------------------------------------------------------------------------------- Table of Contents During 2022, 2021 and 2020, we recognized a decrease in earnings of$73.2 million ,$17.4 million and$2.7 million , respectively, due to the net change in market value of investments recognized in earnings. The change in value will fluctuate from period to period based on market conditions. During 2022, 2021 and 2020, we recognized an increase (decrease) in earnings of$48.9 million ,$8.9 million and$(16.3) million , respectively, for the mark-to-market change in the agent deferred compensation plan liability which was impacted by changes in the underlying actuarial assumptions used to value the liability. We recognize the mark-to-market change in the estimated value of this liability through earnings as assumptions change. During 2022, 2021 and 2020, we recognized an increase (decrease) in earnings of$247.2 million ,$67.2 million and$(79.1) million , respectively, resulting from changes in the estimated fair value of embedded derivative liabilities related to our fixed indexed annuities, net of related amortization. Such amounts include the impacts of changes in market interest rates used to determine the derivative's estimated fair value. The discount rate is based on risk-free rates (U.S. Treasury rates for similar durations) adjusted for our non-performance risk and risk margins for non-capital market inputs. The increase inU.S. Treasury rates in 2022 and 2021 was the primary factor for the decrease in estimated fair value of the embedded derivative liabilities. SuchU.S. Treasury rates decreased in 2020 which was the primary factor for the increase in estimated fair value. In 2022, other non-operating items include a one-time restructuring charge of$7.1 million primarily related to an early retirement program. The program reduced our headcount by 2 percent and is expected to reduce run-rate expenses by approximately$10 million . Other non-operating items also include earnings attributable to VIEs that we are required to consolidate, net of affiliated amounts. Such earnings are not indicative of, and are unrelated to, the Company's underlying fundamentals. Also, other non-operating items in 2020 include the net revenue earned pursuant to a transition services agreement representing the difference between the fees we receive from Wilton Re and the overhead costs incurred to provide such services under the agreement in connection with the completion of a long-term care reinsurance transaction inSeptember 2018 . 69 -------------------------------------------------------------------------------- Table of Contents PREMIUM COLLECTIONS In accordance with GAAP, insurance policy income in our consolidated statement of operations consists of premiums earned for traditional insurance policies that have life contingencies or morbidity features. For annuity and interest-sensitive life contracts, premiums collected are not reported as revenues, but as deposits to insurance liabilities. We recognize revenues for these products over time in the form of investment income and surrender or other charges. Agents, insurance brokers and marketing organizations who market our products and prospective purchasers of our products use the financial strength ratings of our insurance subsidiaries as an important factor in determining whether to market or purchase. Ratings have the most impact on our Worksite sales of supplemental health and life products since such ratings are often an important factor considered by employers. The current financial strength ratings of our primary insurance subsidiaries from AM Best, Fitch, Moody's and S&P are "A", "A-", "A3" and "A-", respectively. For a description of these ratings and additional information on our ratings, see "Consolidated Financial Condition - Financial Strength Ratings of our Insurance Subsidiaries." We set premium rates on our health insurance policies based on facts and circumstances known at the time we issue the policies using assumptions about numerous variables, including but not limited to, the actuarial probability of a policyholder incurring a claim, the probable size of the claim, and the interest rate earned on our investment of premiums. We also consider historical claims information, industry statistics, the rates of our competitors and other factors. If our actual claims experience is less favorable than we anticipated and we are unable to raise our premium rates, our financial results may be adversely affected. We generally cannot raise our health insurance premiums in any state until we obtain the approval of the state insurance regulator. We review the adequacy of our premium rates regularly and file for rate increases on our products when we believe such rates are too low. It is likely that we will not be able to obtain approval for all requested premium rate increases. If such requests are denied in one or more states, our net income may decrease. If such requests are approved, increased premium rates may reduce the volume of our new sales and may cause existing policyholders to lapse their policies. If the healthier policyholders allow their policies to lapse, this would reduce our premium income and profitability in the future. 70 -------------------------------------------------------------------------------- Table of Contents Total premium collections were as follows (dollars in millions): 2022 2021
2020
Premiums collected by product: Annuities: Fixed indexed (first-year)$ 1,509.2 $ 1,347.8 $ 1,121.7 Fixed indexed (renewal) .3 .3 .4 Subtotal - fixed indexed annuities 1,509.5 1,348.1 1,122.1 Fixed interest (first-year) 83.7 40.4 33.5 Fixed interest (renewal) 3.7 5.0 3.8 Subtotal - fixed interest annuities 87.4 45.4 37.3 Other annuities (first-year) 7.7 6.9 5.6 Total annuities 1,604.6 1,400.4 1,165.0 Health: Supplemental health (first-year) 73.2 67.9 72.7 Supplemental health (renewal) 619.7 620.1 604.5 Subtotal - supplemental health 692.9 688.0 677.2 Medicare supplement (first-year) 34.2 40.3 54.2 Medicare supplement (renewal) 617.4 667.2 696.3 Subtotal - Medicare supplement 651.6 707.5 750.5 Long-term care (first-year) 20.8 20.7 18.3 Long-term care (renewal) 243.1 243.3 245.6 Subtotal - long-term care 263.9 264.0 263.9 Total health 1,608.4 1,659.5 1,691.6 Life insurance: Interest-sensitive (first-year) 42.1 41.5 44.3 Interest-sensitive (renewal) 185.8 177.9 162.2 Subtotal - interest-sensitive 227.9 219.4 206.5 Traditional (first-year) 151.0 163.9 136.9 Traditional (renewal) 532.9 512.5 496.2 Subtotal - traditional 683.9 676.4 633.1 Total life insurance 911.8 895.8 839.6 Collections on annuity, health and life products: Total first-year premium collections 1,921.9 1,729.4 1,487.2 Total renewal premium collections 2,202.9 2,226.3 2,209.0 Total collections on insurance products$ 4,124.8 $
3,955.7
Annuities include fixed indexed, fixed interest and other annuities sold to the senior market. Annuity collections were$1,604.6 million in 2022, compared to$1,400.4 million in 2021 and$1,165.0 million in 2020. The increase in premium collections from our fixed indexed products in 2022 and 2021, was primarily due to the general stock market performance which made these products attractive to certain customers. We have proactively managed the participation rates on our fixed indexed products in order to balance sales growth and profitability during periods of low interest rates. The increase in premium collections from our fixed indexed products in 2021, as compared to 2020, primarily reflected our pricing discipline and market conditions existing after the pandemic began. Premium collections from our fixed interest products reflect consumer preference for fixed indexed products.
Health products include supplemental health, Medicare supplement and long-term
care products.
71 -------------------------------------------------------------------------------- Table of Contents Premiums collected on supplemental health products (including specified disease, accident and hospital indemnity insurance products) were$692.9 million in 2022, compared to$688.0 million in 2021 and$677.2 million in 2020. Such increases are primarily due to new sales and steady persistency. Collected premiums on Medicare supplement policies were$651.6 million ,$707.5 million and$750.5 million in 2022, 2021 and 2020, respectively. The decreases reflect lower sales in recent periods partially offset by premium rate increases. We have experienced a shift in the sale of Medicare supplement policies to the sale of Medicare Advantage policies. We receive fee income when Medicare Advantage policies of other providers are sold, which is recorded in our Fee income segment. We continue to invest in both our Medicare supplement products and Medicare Advantage distribution to ensure we are well-positioned to meet our customers' needs and preferences. For example, we launched a new competitive Medicare supplement product in 2022. Life products include interest-sensitive and traditional life products. Life premiums were$911.8 million ,$895.8 million and$839.6 million in 2022, 2021 and 2020, respectively. Premiums collected reflect both recent sales activity and steady persistency. INVESTMENTS Our investment strategy is to: (i) provide largely stable investment income from a diversified high quality fixed income portfolio; (ii) mitigate the effect of changing interest rates through active asset/liability management; (iii) provide liquidity to meet our cash obligations to policyholders and others; and (iv) maximize total return through active strategic asset allocation and investment management. Consistent with this strategy, investments in fixed maturity securities and mortgage loans made up 90 percent of our$24.3 billion investment portfolio atDecember 31, 2022 . The remainder of the invested assets was trading securities, investments held by VIEs, COLI, equity securities, policy loans and other invested assets.
The following table summarizes the composition of our investment portfolio as of
Carrying value Percent of total investments
Fixed maturities, available for sale $ 20,353.4 84 %
Equity securities 135.3 1
Mortgage loans 1,411.9 6
Policy loans 121.6 -
Trading securities 207.9 1
Investments held by variable interest
entities 1,077.6 4
Company-owned life insurance 199.1 1
Other invested assets 835.6 3
Total investments $ 24,342.4 100 %
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The following table summarizes investment yields earned over the past three
years on the investments allocated to our product lines. General account
investments exclude the value of options.
2022 2021 2020
(dollars in millions)
Weighted average investments at amortized cost
allocated to product lines $ 19,661.2 $ 18,877.0 $ 18,093.0
Allocated investment income 900.6 894.8 887.0
Average yield on allocated investments 4.58 % 4.74 % 4.90 %
Insurance statutes regulate the types of investments that our insurance
subsidiaries are permitted to make and limit the amount of funds that may be
used for any one type of investment. In addition, we have internal management
compliance limits on various exposures and activities which are typically more
restrictive than insurance statutes. In light of these statutes and regulations
and our business and investment strategy, we generally seek to invest in United
States government and government-agency securities and corporate securities
rated investment grade by established nationally recognized rating organizations
or in securities of comparable investment quality, if not rated.
Fixed Maturities, Available for Sale
The following table summarizes the carrying values and gross unrealized losses
of our fixed maturity securities, available for sale, by category as of
Percent of
Percent of Gross gross
fixed unrealized unrealized
Carrying value maturities losses losses
States and political
subdivisions $ 2,388.5 11.7 % $ 476.8 15.5 %
Commercial mortgage-backed
securities 2,222.4 10.9 272.3 8.9
Banks 1,747.4 8.6 266.8 8.7
Non-agency residential
mortgage-backed securities 1,548.5 7.6 191.9 6.3
Asset-backed securities 1,287.0 6.3 149.4 4.9
Utilities 1,163.9 5.7 180.4 5.9
Insurance 1,140.2 5.6 208.9 6.8
Healthcare/pharmaceuticals 1,030.1 5.1 215.5 7.0
Brokerage 938.8 4.6 151.8 4.9
Collateralized loan obligations 785.9 3.9 39.6 1.3
Technology 774.2 3.8 166.3 5.4
Food/beverage 680.1 3.3 88.7 2.9
Energy 519.7 2.6 52.7 1.7
Cable/media 441.1 2.2 89.0 2.9
Real estate/REITs 386.8 1.9 51.7 1.7
Transportation 363.6 1.8 44.7 1.5
Telecom 322.8 1.6 36.9 1.2
Capital goods 279.7 1.4 38.4 1.2
Chemicals 268.9 1.3 41.4 1.4
Other 2,063.8 10.1 303.7 9.9
Total fixed maturities,
available for sale $ 20,353.4 100.0 % $ 3,066.9 100.0 %
73
-------------------------------------------------------------------------------- Table of Contents The following table summarizes the gross unrealized losses of our fixed maturity securities, available for sale, by category and ratings category as ofDecember 31, 2022 (dollars in millions): Investment grade Below-investment grade Total gross B+ and unrealized AAA/AA/A BBB BB below losses States and political subdivisions$ 465.6 $ 10.4 $ -$ .8 $ 476.8 Commercial mortgage-backed securities 206.2 47.9 16.5 1.7 272.3 Banks 137.6 128.6 .6 - 266.8 Healthcare/pharmaceuticals 147.2 64.2 2.9 1.2 215.5 Insurance 102.3 102.8 3.2 .6 208.9 Non-agency residential mortgage-backed securities 99.4 74.9 1.2 16.4 191.9 Utilities 98.3 80.1 1.9 .1 180.4 Technology 96.8 62.9 6.0 .6 166.3 Brokerage 73.2 75.6 1.9 1.1 151.8 Asset-backed securities 48.2 81.9 18.0 1.3 149.4 Cable/media 12.0 70.1 3.7 3.2 89.0 Food/beverage 20.0 67.0 1.2 .5 88.7 Energy 7.9 40.9 3.9 - 52.7 Real estate/REITs 29.8 21.1 .8 - 51.7 Transportation 16.5 27.7 .1 .4 44.7 Chemicals 3.4 36.5 .7 .8 41.4 Consumer products 21.7 13.8 2.8 1.4 39.7 Collateralized loan obligations 34.0 5.6 - - 39.6 Capital goods 18.3 18.6 1.2 .3 38.4 Telecom .2 36.7 - - 36.9 Retail 22.2 11.2 3.3 - 36.7 Autos 4.6 21.1 1.7 .4 27.8 Aerospace/defense 6.5 19.5 - .4 26.4 Building materials 5.4 19.5 1.0 .2 26.1 Metals and mining 3.2 13.4 .8 - 17.4 Paper .7 12.4 .1 .4 13.6 United States Treasury securities and obligations ofUnited States government corporations and agencies 13.0 - - - 13.0 Entertainment/hotels 5.6 4.3 .6 1.7 12.2 Foreign governments 4.9 6.4 - - 11.3 Business services - 1.6 .7 .3 2.6 Other 69.6 6.5 .7 .1 76.9 Total fixed maturities, available for sale$ 1,774.3 $ 1,183.2 $ 75.5 $ 33.9 $ 3,066.9 74
-------------------------------------------------------------------------------- Table of Contents Investment ratings are assigned the second lowest rating by Nationally Recognized Statistical Rating Organizations (Moody's, S&P or Fitch), or if not rated by such firms, the rating assigned by the NAIC. NAIC designations of "1" or "2" include fixed maturities generally rated investment grade (rated "Baa3" or higher by Moody's or rated "BBB-" or higher by S&P and Fitch). NAIC designations of "3" through "6" are referred to as below-investment grade (which generally are rated "Ba1" or lower by Moody's or rated "BB+" or lower by S&P and Fitch). References to investment grade or below-investment grade throughout our consolidated financial statements are determined as described above. The following table sets forth fixed maturity investments atDecember 31, 2022 , classified by ratings (dollars in millions): Estimated fair value Percent of fixed Investment rating Amortized cost Amount maturities AAA$ 2,099.9 $ 1,975.0 10 % AA 3,587.4 3,052.9 15 A 7,484.3 6,402.7 32 BBB+ 2,393.1 2,101.7 10 BBB 3,984.8 3,452.0 17 BBB- 2,424.3 2,050.6 10 Investment grade 21,973.8 19,034.9 94 BB+ 237.9 209.4 1 BB 216.1 197.0 1 BB- 279.0 246.9 1 B+ and below 677.4 665.2 3 Below-investment grade 1,410.4 1,318.5 6 Total fixed maturity securities$ 23,384.2 $ 20,353.4 100 % We continually evaluate the creditworthiness of each issuer whose securities we hold. We pay special attention to large investments, investments which have significant risk characteristics and to those securities whose fair values have declined materially for reasons other than changes in general market conditions. We evaluate the realizable value of the investment, the specific condition of the issuer and the issuer's ability to comply with the material terms of the security. We review the historical and recent operational results and financial position of the issuer, information about its industry, information about factors affecting the issuer's performance and other information. 40|86 Advisors employs experienced securities analysts in a broad variety of specialty areas who compile and review such data. During 2022, we recognized net investment losses of$135.4 million , which were comprised of: (i)$9.6 million of net losses from the sales of investments; (ii)$11.2 million of losses related to equity securities, including the change in fair value; (iii) the decrease in fair value of certain other invested assets and fixed maturity investments with embedded derivatives of$45.9 million ; (iv) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of$16.1 million ; and (v) an increase in the allowance for credit losses of$52.6 million . During 2022, we sold$1,651.5 million of fixed maturity investments which resulted in gross realized investment losses (before income taxes) of$104.0 million . Securities are generally sold at a loss following unforeseen issue-specific events or conditions or shifts in perceived relative values. These reasons include but are not limited to: (i) changes in the investment environment; (ii) expectation that the market value could deteriorate; (iii) our desire to reduce our exposure to an asset class, an issuer or an industry; (iv) prospective or actual changes in credit quality; or (v) changes in expected portfolio cash flows. Our investment portfolio is subject to the risk of declines in realizable value. However, we attempt to mitigate this risk through the diversification and active management of our portfolio. The Company reports accrued investment income separately from fixed maturities, available for sale, and has elected not to measure an allowance for credit losses for accrued investment income. Accrued investment income is written off through net investment income at the time the issuer of the bond defaults or is expected to default on payments. As ofDecember 31, 2022 , we had fixed maturity securities with an amortized cost and fair value of$1.0 million and nil, respectively, that were in substantive default (i.e., in default due to nonpayment of interest or principal). There were no other investments about which we had serious doubts as to the recoverability of the carrying value of the investment. 75 -------------------------------------------------------------------------------- Table of Contents Other Investments AtDecember 31, 2022 , we held commercial mortgage loan investments with an amortized cost of$1,232.2 million (or 5.1 percent of total invested assets) and a fair value of$1,082.9 million . Our commercial mortgage loan portfolio is primarily comprised of large commercial mortgage loans. Approximately 16 percent, 10 percent, 7 percent and 7 percent of the commercial mortgage loan balance were on properties located inCalifornia, Maryland ,Wisconsin andGeorgia , respectively. No other state comprised greater than six percent of the mortgage loan balance. AtDecember 31, 2022 , there were no commercial mortgage loans in process of foreclosure.
At
amortized cost of
noncurrent with a carrying value of
carrying value of
The allowance for credit losses related to mortgage loans was$8.0 million atDecember 31, 2022 , and increased (decreased)$2.4 million ,$(6.2) million and$5.1 million in 2022, 2021 and 2020, respectively. The following table shows the distribution of our commercial mortgage loan portfolio by property type as ofDecember 31, 2022 (dollars in millions): Number of loans Amortized cost Multi-family 24 $ 382.4 Industrial 37 300.8 Office building 26 216.4 Retail 46 195.6 Other 16 137.0 Total commercial mortgage loans 149$ 1,232.2
The following table shows our commercial mortgage loan portfolio by loan size as
of
Number of loans Amortized
cost
Under$5 million 61 $
163.4
$5 million but less than$10 million 41
285.7
$10 million but less than$20 million 35
479.0
Over$20 million 12
304.1
Total commercial mortgage loans 149 $
1,232.2
The following table summarizes the distribution of maturities of our commercial
mortgage loans as of
Number of loans Amortized cost
2023 2 $ 22.1
2024 8 79.3
2025 14 70.4
2026 9 68.2
2027 13 90.5
after 2027 103 901.7
Total commercial mortgage loans 149 $ 1,232.2
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The following table provides the amortized cost by year of origination and
estimated fair value of our outstanding commercial mortgage loans and the
underlying collateral as of
Estimated fair
value
Total
Loan-to-value ratio (a) 2022 2021 2020 2019 2018 Prior amortized cost Mortgage loans Collateral
Less than 60% $ 234.1 $ 114.7 $ 43.5 $ 75.4 $ 66.5 $ 476.3 $ 1,010.5 $ 889.8 $ 4,027.6
60% to less than 70% 47.2 13.2 - - 8.2 45.0 113.6 104.7 170.7
70% to less than 80% 33.0 22.6 - - - - 55.6 47.2 72.3
80% to less than 90% - - - - - 42.5 42.5 34.5 52.0
90% or greater - - - - - 10.0 10.0 6.7 10.7
Total $ 314.3 $ 150.5 $ 43.5 $ 75.4 $ 74.7 $ 573.8 $ 1,232.2 $ 1,082.9 $ 4,333.3
________________
(a)Loan-to-value ratios are calculated as the ratio of: (i) the amortized cost
of the commercial mortgage loans; to (ii) the estimated fair value of the
underlying collateral.
AtDecember 31, 2022 , we held$207.9 million of trading securities. We carry trading securities at estimated fair value; changes in fair value are reflected in the statement of operations. Our trading securities include: (i) investments purchased with the intent of selling in the near term to generate income; and (ii) certain fixed maturity securities containing embedded derivatives for which we have elected the fair value option. Investment income from trading securities backing certain insurance liabilities is substantially offset by the change in insurance policy benefits related to certain products and agreements. Other invested assets include options backing our fixed indexed annuity and life insurance products, COLI, FHLB common stock and certain nontraditional investments, including investments in limited partnerships, hedge funds and real estate investments held for sale. AtDecember 31, 2022 , we held investments with an amortized cost of$1,134.2 million and an estimated fair value of$1,077.6 million related to VIEs that we are required to consolidate. The investment portfolio held by the VIEs is primarily comprised of commercial bank loans, the borrowers for which are almost entirely rated below-investment grade. Refer to the note to the consolidated financial statements entitled "Investments in Variable Interest Entities" for additional information on these investments.
LIQUIDITY AND CAPITAL RESOURCES
2023 Outlook
Prior to the sharp rise in interest rates inthe United States in 2022, interest rates had been at or near historically low levels. We expect that a continued level of higher interest rates will benefit our operating results over time. We continuously monitor current market conditions and the impact to our business from potential changes in overall economic growth. We are also subject to financial impacts associated with changes in the equity markets and the credit cycle. We are in the process of preparing a filing to seek approval for the formation of a wholly-ownedBermuda captive reinsurance company for the purpose of ceding a portion of our inforce fixed indexed annuity business and the majority of new fixed indexed annuity business written after the inception of the reinsurance agreement. This arrangement would allow us to increase the capital efficiency of the business while retaining all of the economic benefits of the block. In addition, it would allow us to realize the same benefits as a number of peer companies who have adopted similar arrangements. We do not anticipate assuming any unaffiliated business or seeking any third party capital for our wholly-ownedBermuda captive reinsurance company. Under our current plan, if approved by our regulators, we would expect to initiate a reinsurance treaty in the third quarter of 2023. The new guidance related to targeted improvements to the accounting for long-duration insurance contracts became effective onJanuary 1, 2023 , and will significantly change how we account for long-duration insurance contracts, including updating assumptions used to measure the liabilities for traditional life and limited-payment insurance contracts, accounting for market-risk benefits and changing the manner in which the balances related to the present value of future profits and deferred acquisition costs are amortized. Concurrent with the adoption of this new guidance, we are updating the method of determining 77 -------------------------------------------------------------------------------- Table of Contents non-operating earnings for our fixed indexed annuities to better identify the volatile non-economic impacts of that line of business. Based on our current estimates, we expect the new standard to have the following pre-tax impacts to the insurance margins reported under the previous guidance: an increase of$45 million to$65 million in 2021; and an increase of$35 million to$55 million in 2022. In addition, we expect the refinement to the method that we use to determine non-operating earnings for our fixed indexed annuity business to result in an increase (decrease) to pre-tax insurance margin on this business of approximately$(5) million and$60 million in 2021 and 2022, respectively. With respect to 2023, we expect operating earnings per diluted share under the new guidance (and reflecting the refinement described above) to be in the range of$2.80 to$3.00 , excluding any significant items in the year.
With respect to excess cash flow in 2023, we expect cash flow to the holding
company to be in the range of
Changes in the Consolidated Balance Sheet
Changes in our consolidated balance sheet betweenDecember 31, 2022 andDecember 31, 2021 , primarily reflect: (i) our net income for 2022; (ii) changes in the fair value of our fixed maturity securities, available for sale; (iii) payments to repurchase common stock of$180.0 million ; and (iv) the issuance of$900 million of funding agreements inJanuary 2022 .
Our capital structure as of
follows (dollars in millions):
December 31,
2022 December 31, 2021
Total capital:
Corporate notes payable $ 1,138.8 $ 1,137.3
Shareholders' equity:
Common stock 1.1 1.2
Additional paid-in capital 2,033.8
2,184.2
Accumulated other comprehensive income (2,093.1)
1,947.1
Retained earnings 1,459.0
1,127.2
Total shareholders' equity 1,400.8
5,259.7
Total capital $ 2,539.6 $ 6,397.0
The following table summarizes certain financial ratios as of and for the years
ended
2022 December 31, 2021
Book value per common share $
12.25 $ 43.69
Book value per common share, excluding accumulated other
comprehensive income (loss) (a)
30.56 27.52 Debt to total capital ratios: Corporate debt to total capital 44.8 % 17.8 %
Corporate debt to total capital, excluding accumulated other
comprehensive income (loss) (a)
24.6 % 25.6 %
_____________________
(a)This non-GAAP measure differs from the corresponding GAAP measure presented
immediately above, because accumulated other comprehensive income (loss) has
been excluded from the value of capital used to determine this
measure. Management believes this non-GAAP measure is useful because it removes
the volatility that arises from changes in accumulated other comprehensive
income (loss). Such volatility is often caused by changes in the estimated fair
value of our investment portfolio resulting from changes in general market
interest rates rather than the business decisions made by management. However,
this measure does not replace the corresponding GAAP measure.
78
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Contractual Obligations
The Company's significant contractual obligations as of
as follows (dollars in millions):
Payment due in
Total 2023 2024-2025 2026-2027 Thereafter
Insurance liabilities (a) $ 54,745.0 $ 3,564.4 $ 7,585.7 $ 6,622.7 $ 36,972.2
Notes payable (b) 1,680.8 60.8 608.6 68.2 943.2
Investment borrowings (c) 1,805.3 299.1 937.1 569.1 -
Borrowings related to variable
interest
entities (d) 1,301.5 249.4 598.4 308.4 145.3
Postretirement plans (e) 261.8 8.1 16.8 17.8 219.1
Operating leases 51.3 22.4 21.6 6.7 .6
Commitments to purchase/fund
investments 441.2 441.2 - - -
Other contractual commitments (f) 520.2 123.9 197.7 193.1 5.5
Total $ 60,807.1 $ 4,769.3 $ 9,965.9 $ 7,786.0 $ 38,285.9
________________
(a) These cash flows represent our estimates of the payments we expect to make to our policyholders, without consideration of future premiums or reinsurance recoveries. These estimates are based on numerous assumptions (depending on the product type) related to mortality, morbidity, lapses, withdrawals, future premiums, future deposits, interest rates on investments, credited rates, expenses and other factors which affect our future payments. The cash flows presented are undiscounted for interest. As a result, total outflows for all years exceed the corresponding liabilities of$27.4 billion included in our consolidated balance sheet as ofDecember 31, 2022 . As such payments are based on numerous assumptions, the actual payments may vary significantly from the amounts shown.
In estimating the payments we expect to make to our policyholders, we considered
the following:
•For products such as immediate annuities and structured settlement annuities without life contingencies, the payment obligation is fixed and determinable based on the terms of the policy. •For products such as universal life, ordinary life, long-term care, supplemental health and deferred annuities, the future payments are not due until the occurrence of an insurable event (such as death or disability) or a triggering event (such as a surrender or partial withdrawal). We estimated these payments using actuarial models based on historical experience and our expectation of the future payment patterns which is consistent with the assumptions used in our loss recognition testing for these blocks of business. •For short-term insurance products such as Medicare supplement insurance, the future payments relate only to amounts necessary to settle all outstanding claims, including those that have been incurred but not reported as of the balance sheet date. We estimated these payments based on our historical experience and our expectation of future payment patterns which is consistent with the assumptions used in our loss recognition testing for these blocks of business. •The average interest rate we assumed would be credited to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding the effect of credited rates attributable to variable or fixed indexed products) over the term of the contracts was 4.4 percent.
(b) Includes projected interest payments based on interest rates, as
applicable, as of
financial statements entitled "Notes Payable - Direct Corporate Obligations" for
additional information on notes payable.
(c) These borrowings represent collateralized borrowings from the FHLB and
projected interest payments on such borrowings.
(d) These borrowings represent the securities issued by VIEs and include
projected interest payments based on interest rates, as applicable, as of
79 -------------------------------------------------------------------------------- Table of Contents (e) Includes benefits expected to be paid pursuant to our deferred compensation plan and postretirement plans based on numerous actuarial assumptions and interest credited at 5.25 percent.
(f) Includes obligations to third parties for information technology services,
software maintenance and license agreements and consulting services.
It is possible that the ultimate outcomes of various uncertainties could affect our liquidity in future periods. For example, the following events could have a material adverse effect on our cash flows:
•An adverse decision in pending or future litigation.
•An inability to obtain rate increases on certain of our insurance products.
•Worse than anticipated claims experience.
•Lower than expected dividends and/or surplus debenture interest payments from our insurance subsidiaries (resulting from inadequate earnings or capital or regulatory requirements).
•An inability to meet and/or maintain the covenants in our Revolving Credit
Agreement.
•A significant increase in policy surrender levels.
•A significant increase in investment defaults.
•An inability of our reinsurers to meet their financial obligations.
While we actively manage the relationship between the duration and cash flows of our invested assets and the estimated duration and cash flows of benefit payments arising from contract liabilities, there could be significant variations in the timing of such cash flows. Although we believe our current estimates properly project future claim experience, if these estimates prove to be wrong, and our experience worsens (as it did in some prior periods), our future liquidity could be adversely affected.
Liquidity for Insurance Operations
Our insurance companies generally receive adequate cash flows from premium collections and investment income to meet their obligations. Life insurance, long-term care and supplemental health insurance and annuity liabilities are generally long-term in nature. Life and annuity policyholders may, however, withdraw funds or surrender their policies, subject to any applicable penalty provisions; there are generally no withdrawal or surrender benefits for long-term care insurance. We actively manage the relationship between the duration of our invested assets and the estimated duration of benefit payments arising from contract liabilities. Three of the Company's insurance subsidiaries (Bankers Life, Washington National and Colonial Penn) are members of the FHLB. As members of the FHLB, our insurance subsidiaries have the ability to borrow on a collateralized basis from the FHLB. We are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings. AtDecember 31, 2022 , the carrying value of the FHLB common stock was$75.2 million . As ofDecember 31, 2022 , collateralized borrowings from the FHLB totaled$1.6 billion and the proceeds were used to purchase matched variable rate fixed maturity securities. The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet. The borrowings are collateralized by investments with an estimated fair value of$2.2 billion atDecember 31, 2022 , which are maintained in custodial accounts for the benefit of the FHLB. In the third quarter of 2021, Bankers Life established a FABN program pursuant to which Bankers Life may issue funding agreements to aDelaware statutory trust organized in series (the "Trust") to generate spread-based earnings. The maximum aggregate principal amount of funding agreements permitted to be outstanding at any one time under the FABN program is$3 billion . InOctober 2021 , Bankers Life issued a funding agreement to a series of the Trust in an aggregate principal amount of$500 million . InJanuary 2022 , Bankers Life issued two additional funding agreements, each to a series of the Trust, totaling$900 million . The activity related to the funding agreements is reported in investment income not allocated to product lines. 80
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State laws generally give state insurance regulatory agencies broad authority to protect policyholders in their jurisdictions. Regulators have used this authority in the past to restrict the ability of our insurance subsidiaries to pay any dividends or other amounts without prior approval. We cannot be assured that the regulators will not seek to assert greater supervision and control over our insurance subsidiaries' businesses and financial affairs. Our estimated consolidated statutory RBC ratio was 384 percent atDecember 31, 2022 , compared to 386 percent atDecember 31, 2021 . In 2022, our estimated consolidated statutory operating earnings were$264 million and insurance company dividends (net of capital contributions) of$129 million were paid to the holding company. Our RBC ratio atDecember 31, 2022 , exceeded our targeted statutory RBC ratio of 375 percent and the minimum 350 percent that is reflected in our risk appetite statement that we share and discuss with rating agencies and insurance regulators. We believe that the 375 percent RBC ratio target continues to adequately support our financial strength and credit ratings. During 2022, the financial statements of three of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities reflected asset adequacy or premium deficiency reserves. Total asset adequacy and premium deficiency reserves for Bankers Life,Washington National andBankers Conseco Life Insurance Company were$50.0 million ,$134.5 million and$34.5 million , respectively, atDecember 31, 2022 . Due to differences between statutory and GAAP insurance liabilities, we were not required to recognize a similar asset adequacy or premium deficiency reserve in our consolidated financial statements prepared in accordance with GAAP. The determination of the need for and amount of asset adequacy or premium deficiency reserves is subject to numerous actuarial assumptions and state requirements. Our insurance subsidiaries transfer exposure to certain risk to others through reinsurance arrangements. When we obtain reinsurance, we are still liable for those transferred risks in the event the reinsurer defaults on its obligations. The failure, insolvency, inability or unwillingness of one or more of the Company's reinsurers to perform in accordance with the terms of its reinsurance agreement could negatively impact our earnings or financial position and our consolidated statutory RBC ratio.
Financial Strength Ratings of our Insurance Subsidiaries
Financial strength ratings provided by AM Best, Fitch, Moody's and S&P are the rating agency's opinions of the ability of our insurance subsidiaries to pay policyholder claims and obligations when due. OnFebruary 1, 2023 , AM Best affirmed its "A" financial strength ratings of our primary insurance subsidiaries and the outlook for these ratings is stable. The "A" rating is assigned to companies that have an excellent ability, in AM Best's opinion, to meet their ongoing obligations to policyholders. AM Best ratings for the industry currently range from "A++ (Superior)" to "F (In Liquidation)" and some companies are not rated. An "A++" rating indicates a superior ability to meet ongoing obligations to policyholders. AM Best has sixteen possible ratings. There are two ratings above the "A" rating of our primary insurance subsidiaries and thirteen ratings that are below that rating. OnNovember 21, 2022 , Fitch affirmed its "A-" financial strength ratings of our primary insurance subsidiaries and revised the outlook for these ratings to positive from stable. An insurer rated "A", in Fitch's opinion, indicates a low expectation of ceased or interrupted payments and indicates strong capacity to meet policyholder and contract obligations. This capacity may, nonetheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher ratings. Fitch ratings for the industry range from "AAA Exceptionally Strong " to "C Distressed" and some companies are not rated. Pluses and minuses show the relative standing within a category. Fitch has nineteen possible ratings. There are six ratings above the "A-" rating of our primary insurance subsidiaries and twelve ratings that are below that rating. Moody's most recently reviewed its "A3" financial strength ratings of our primary insurance subsidiaries onMay 5, 2022 . The outlook for these ratings remains stable. Moody's financial strength ratings range from "Aaa" to "C". These ratings may be supplemented with numbers "1", "2", or "3" to show relative standing within a category. In Moody's view, an insurer rated "A" offers good financial security, however, certain elements may be present which suggests a susceptibility to impairment sometime in the future. Moody's has twenty-one possible ratings. There are six ratings above the "A3" rating of our primary insurance subsidiaries and fourteen ratings that are below that rating. S&P most recently reviewed its "A-" financial strength ratings of our primary insurance subsidiaries onJuly 15, 2022 . The outlook for these ratings is stable. S&P financial strength ratings range from "AAA" to "R" and some companies are not rated. An insurer rated "A", in S&P's opinion, has strong financial security characteristics, but is somewhat more likely to be affected by adverse business conditions than are insurers with higher ratings. Pluses and minuses show the relative standing 81 -------------------------------------------------------------------------------- Table of Contents within a category. S&P has twenty-one possible ratings. There are six ratings above the "A-" rating of our primary insurance subsidiaries and fourteen ratings that are below that rating. Rating agencies have increased the frequency and scope of their credit reviews and requested additional information from the companies that they rate, including us. They may also adjust upward the capital and other requirements employed in their rating models for maintenance of certain ratings levels. We cannot predict what actions rating agencies may take, or what actions we may take in response. Accordingly, downgrades and outlook revisions related to us or the life insurance industry may occur in the future at any time and without notice by any rating agency. These could increase policy surrenders and withdrawals, adversely affect relationships with our distribution channels, reduce new sales, reduce our ability to borrow and increase our future borrowing costs.
Liquidity of the Holding Companies
Availability and Sources and Uses of Holding Company Liquidity; Limitations on
Ability of Insurance Subsidiaries to Make Dividend and Surplus Debenture
Interest Payments to the Holding Companies; Limitations on Holding Company
Activities
CNO andCDOC are holding companies with no business operations of their own; they depend on their operating subsidiaries for cash to make principal and interest payments on debt, and to pay administrative expenses and income taxes. CNO andCDOC receive cash from insurance subsidiaries, consisting of dividends and distributions, interest payments on surplus debentures and tax-sharing payments, as well as cash from non-insurance subsidiaries consisting of dividends, distributions, loans and advances. The principal non-insurance subsidiaries that provide cash to CNO andCDOC are 40|86 Advisors, which receives fees from the insurance subsidiaries for investment services, andCNO Services, LLC ("CNO Services") which receives fees from the insurance subsidiaries for providing administrative services. The agreements between our insurance subsidiaries andCNO Services and 40|86 Advisors, respectively, were previously approved by the domestic insurance regulator for each insurance company, and any payments thereunder do not require further regulatory approval. AtDecember 31, 2022 , CNO,CDOC and our other non-insurance subsidiaries held$167.1 million of unrestricted cash and investments which were comprised of: (i) unrestricted cash and cash equivalents of$130.5 million ; and (ii) exchange-traded funds that invest in fixed income securities of$36.6 million . Our holding company liquidity of$167.1 million was above our minimum target level of$150 million . The following table sets forth the aggregate amount of dividends (net of capital contributions) and other distributions that our insurance subsidiaries paid to our non-insurance subsidiaries in each of the last three fiscal years (dollars in millions): Years ended December 31, 2022 2021 2020 Dividends (net of contributions) from insurance subsidiaries$ 129.0 $ 328.3 $ 294.1 Surplus debenture interest 58.8 55.4 57.4 Fees for services provided pursuant to service agreements 124.0 117.8 111.7 Total dividends and other distributions paid by insurance subsidiaries$ 311.8 $ 501.5 $ 463.2 The ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations and is based on the financial statements of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities, which differ from GAAP. These regulations generally permit dividends to be paid from statutory earned surplus of the insurance company without regulatory approval for any 12-month period in amounts equal to the greater of (or in some states, the lesser of): (i) statutory net gain from operations or net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the preceding year. However, as each of the immediate insurance subsidiaries ofCDOC has significant negative earned surplus, any dividend payments from the insurance subsidiaries require the prior approval of the director or commissioner of the applicable state insurance department. In 2022, our insurance subsidiaries paid dividends toCDOC totaling$143.6 million . We expect to receive regulatory approval for future dividends from our subsidiaries, but there can be no assurance that such payments will be approved or that the financial condition of our insurance subsidiaries will not change, making future approvals less likely.CDOC holds surplus debentures from CLTX with an aggregate principal amount of$749.6 million . Interest payments on those surplus debentures do not require additional approval provided the RBC ratio of CLTX exceeds 100 percent (but do 82 -------------------------------------------------------------------------------- Table of Contents require prior written notice to theTexas Department of Insurance ). The estimated RBC ratio of CLTX was 340 percent atDecember 31, 2022 .CDOC also holds a surplus debenture from Colonial Penn with a principal balance of$160.0 million . Interest payments on that surplus debenture require prior approval by thePennsylvania Insurance Department . Dividends and other payments from our non-insurance subsidiaries, including 40|86 Advisors andCNO Services , to CNO orCDOC do not require approval by any regulatory authority or other third party. However, insurance regulators may prohibit payments by our insurance subsidiaries to parent companies if they determine that such payments could be adverse to our policyholders or contractholders. The insurance subsidiaries ofCDOC receive funds to pay dividends primarily from: (i) the earnings of their direct businesses; (ii) tax sharing payments received from subsidiaries (if applicable); and (iii) with respect to CLTX, dividends received from subsidiaries. AtDecember 31, 2022 , the subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions): Subsidiaries of CLTX Earned surplus (deficit) Additional information Bankers Life $ 374.1 (a) Colonial Penn (454.6) (b) ____________________ (a)Bankers Life paid dividends of$65.0 million to CLTX in 2022. Bankers Life may pay dividends without regulatory approval or prior notice for any 12-month period if such dividends are less than the greater of: (i) statutory net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the preceding year. Dividends in excess of these levels require 30 days prior notice. (b)The deficit is primarily due to transactions which occurred several years ago, including a tax planning transaction and the fee paid to recapture a block of business previously ceded to an unaffiliated insurer. A significant deterioration in the financial condition, earnings or cash flow of the material subsidiaries of CNO orCDOC for any reason could hinder such subsidiaries' ability to pay cash dividends or other disbursements to CNO and/orCDOC , which, in turn, could limit CNO's ability to meet debt service requirements and satisfy other financial obligations. In addition, we may choose to retain capital in our insurance subsidiaries or to contribute additional capital to our insurance subsidiaries to maintain or strengthen their surplus or fund reinsurance transactions, and these decisions could limit the amount available at our top tier insurance subsidiaries to pay dividends to the holding companies. In 2022,CDOC made a capital contribution of$14.6 million to CLTX. OnJuly 16, 2021 , the Company entered into a second amendment and restatement agreement (the "Second Amendment Agreement") with respect to its Revolving Credit Agreement. The Second Amendment Agreement, among other things, (i) revised the debt to total capitalization ratio to exclude hybrid securities from the calculation, except to the extent that the aggregate amount outstanding of all such hybrid securities exceeds an amount equal to 15% of total capitalization, (ii) reduced the net equity proceeds prong of the minimum consolidated net worth covenant from 50% to 25%, (iii) removed the aggregate RBC ratio covenant and (iv) extended the maturity date of the revolving credit facility toJuly 16, 2026 . The Second Amendment Agreement continues to contain certain other restrictive covenants with which the Company must comply. The interest rate applicable to loans under the Second Amendment Agreement continues to be calculated as the eurodollar rate or the base rate, at the Company's option, plus a margin based on the Company's unsecured debt rating. The margins under the Second Amendment Agreement continue to range from 1.375% to 2.125%, in the case of loans at the eurodollar rate, and 0.375% to 1.125%, in the case of loans at the base rate. The commitment fee under the Second Amendment Agreement continues to be based on the Company's unsecured debt rating and the Second Amendment Agreement includes updated LIBOR fallback provisions. There were no amounts outstanding under the Revolving Credit Agreement atDecember 31, 2022 . 83
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The scheduled principal and interest payments on our direct corporate
obligations are as follows (dollars in millions):
Principal Interest (a) 2023 $ -$ 60.8 2024 - 60.8 2025 500.0 (b) 47.8 2026 - (c) 34.3 2027 - 33.9 2028 and thereafter 650.0 (d) 293.2$ 1,150.0 $ 530.8
_________________________
(a)Based on interest rates as of
(b)Such amount represents our 5.250% Notes due 2025.
(c)The maturity date of the Revolving Credit Agreement is
(d)Such amount includes
Debentures.
Free cash flow is a measure of holding company liquidity and is calculated as: (i) dividends, management fees and surplus debenture interest payments received from our subsidiaries; plus (ii) earnings on corporate investments; less (iii) interest expense, corporate expenses and net tax payments. In 2022, we generated$178 million of such free cash flow. The Company expects to deploy its free cash flow into investments to accelerate profitable growth, common stock dividends and share repurchases. The amount and timing of future share repurchases (if any) will be based on business and market conditions and other factors including, but not limited to, available free cash flow, the current price of our common stock and investment opportunities. In 2022, we repurchased 7.6 million shares of common stock for$180.0 million under our securities repurchase program. The Company had remaining repurchase authority of$186.9 million as ofDecember 31, 2022 . In 2022, 2021 and 2020, dividends declared on common stock totaled$65.0 million ($0.55 per common share),$66.1 million ($0.51 per common share) and$67.4 million ($0.47 per common share), respectively. InMay 2022 , the Company increased its quarterly common stock dividend to$0.14 per share from$0.13 per share. OnFebruary 1, 2023 , AM Best affirmed its "bbb" rating on our issuer credit and senior unsecured debt and the outlook for these ratings is stable. In AM Best's view, a company rated "bbb" has an adequate ability to meet the terms of its obligations; however, the issuer is more susceptible to changes in economic or other conditions. Pluses and minuses show the relative standing within a category. AM Best has a total of 22 possible ratings ranging from "aaa (Exceptional)" to "d (In default)". There are eight ratings above CNO's "bbb" rating and thirteen ratings that are below its rating. OnNovember 21, 2022 , Fitch affirmed its "BBB-" rating on our senior unsecured debt. Fitch also affirmed CNO's long term issue default rating of "BBB" and revised the outlook for this rating to positive from stable. In Fitch's view, an obligation rated "BBB" indicates that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity. Pluses and minuses show the relative standing within a category. Fitch has a total of 21 possible ratings ranging from "AAA" to "D". There are nine ratings above CNO's "BBB-" rating and eleven ratings that are below its rating. Moody's most recently reviewed its "Baa3" rating on our senior unsecured debt onMay 5, 2022 . The outlook for these ratings remains stable. In Moody's view, obligations rated "Baa" are subject to moderate credit risk and may possess certain speculative characteristics. A rating is supplemented with numerical modifiers "1", "2" or "3" to show the relative standing within a category. Moody's has a total of 21 possible ratings ranging from "Aaa" to "C". There are nine ratings above CNO's "Baa3" rating and eleven ratings that are below its rating. S&P most recently reviewed its "BBB-" rating on our senior unsecured debt onJuly 15, 2022 . The outlook for these ratings is stable. In S&P's view, an obligation rated "BBB" exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. Pluses and minuses show the relative standing within a category. S&P has a total of 22 possible ratings ranging from "AAA (Extremely Strong)" to "D (Payment Default)". There are nine ratings above CNO's "BBB-" rating and twelve ratings that are below its rating. 84 -------------------------------------------------------------------------------- Table of Contents Outlook We believe that the existing cash available to the holding company, the cash flows to be generated from operations and other transactions will be sufficient to allow us to meet our debt service obligations, pay corporate expenses and satisfy other financial obligations. However, our cash flow is affected by a variety of factors, many of which are outside of our control, including insurance regulatory issues, competition, financial markets and other general business conditions. We cannot provide assurance that we will possess sufficient income and liquidity to meet all of our debt service requirements and other holding company obligations. For additional discussion regarding the liquidity and other risks that we face, see "Risk Factors".
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Our spread-based insurance business is subject to several inherent risks arising from movements in interest rates, especially if we fail to anticipate or respond to such movements. First, interest rate changes can cause compression of our net spread between interest earned on investments and interest credited on customer deposits, thereby adversely affecting our results. Second, if interest rate changes produce an unanticipated increase in surrenders of our spread-based products, we may be forced to sell invested assets at a loss in order to fund such surrenders. Many of our products include surrender charges, market interest rate adjustments or other features to encourage persistency; however, atDecember 31, 2022 , approximately$4.5 billion of our total insurance liabilities could be surrendered by the policyholder without penalty. Finally, changes in interest rates can have significant effects on our investment portfolio. We use asset/liability management strategies that are designed to mitigate the effect of interest rate changes on our profitability. However, there can be no assurance that management will be successful in implementing such strategies and sustaining adequate investment spreads. We seek to invest our assets allocated to our insurance products in a manner that will fund future obligations to policyholders and meet profitability objectives, subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) have similar cash flow characteristics with the liabilities they support; (ii) are diversified (including by types of obligors); and (iii) are predominantly investment-grade in quality. Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and risk, investment income and total investment return through active strategic asset allocation and investment management. Accordingly, we may sell securities at a gain or a loss to enhance the projected total return of the portfolio as market opportunities change, to reflect changing perceptions of risk, or to better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities. The profitability of many of our products depends on the spread between the interest earned on investments and the rates credited on our insurance liabilities. In addition, changes in competition and other factors, including the level of surrenders and withdrawals, may limit our ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As ofDecember 31, 2022 , approximately 14 percent of our insurance liabilities had interest rates that may be reset annually; 49 percent had a fixed explicit interest rate for the duration of the contract; 34 percent are fixed indexed products where the income earned is subject to a participation rate that typically may be changed annually; and the remainder had no explicit interest rates. The following table summarizes the distribution of annuity and universal life account values, net of amounts ceded, by guaranteed interest crediting rates as ofDecember 31, 2022 (dollars in millions): Guaranteed Fixed indexed Fixed interest Universal rate annuities annuities life Total > 5.0% to 6.0% $ - $ .2$ 7.5 $ 7.7 > 4.0% to 5.0% - 22.9 241.8 264.7 > 3.0% to 4.0% 12.6 520.6 34.4 567.6 > 2.0% to 3.0% 475.6 578.0 277.6 1,331.2 > 1.0% to 2.0% 1,342.4 127.1 32.9 1,502.4 1.0% and under 7,661.7 421.1 598.6 8,681.4$ 9,492.3 $ 1,669.9 $ 1,192.8 $ 12,355.0 Weighted average 1.13 % 2.65 % 2.33 % 1.45 % 85
-------------------------------------------------------------------------------- Table of Contents AtDecember 31, 2022 ,$2.7 billion and$.3 billion of our annuity and universal life account values, respectively, net of amounts ceded, were at minimum guaranteed crediting rates. The weighted average crediting rates atDecember 31, 2022 , related to such annuity and universal life account values, that were at the minimum guaranteed crediting rate were 2.11 percent and 4.49 percent, respectively. AtDecember 31, 2022 , the weighted average yield, computed on the cost basis of investments allocated to our product lines, was approximately 4.6 percent, and the average interest rate credited or accruing to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding the effect of credited rates attributable to variable or fixed indexed products) was 4.4 percent. Such 4.4 percent rate includes interest credited to annuity and universal life products as well as the rates assumed in our calculations of reserves for health and traditional life products which are set based on investment yields at policy issuance and are locked-in in accordance with current accounting requirements. Refer to "Part 1 - Item 1A. Risk Factors - A prolonged low interest rate environment may negatively impact our results of operations, financial position and cash flows" for additional information on interest rate risks. We simulate the cash flows expected from our existing insurance business under various interest rate scenarios. These simulations help us to measure the potential gain or loss in fair value of our interest rate-sensitive investments and to manage the relationship between the interest sensitivity of our assets and liabilities. When the estimated durations of assets and liabilities are similar, absent other factors, a change in the value of assets related to changes in interest rates should be largely offset by a change in the value of liabilities. AtDecember 31, 2022 , the estimated duration of our fixed income securities (as modified to reflect estimated prepayments and call premiums) and the estimated duration of our insurance liabilities were approximately 8.3 years and 8.4 years, respectively. We estimate that our fixed maturity securities and short-term investments (net of corresponding changes in insurance acquisition costs or loss recognition reserves) would decline in fair value by approximately$600 million if interest rates were to increase by 10 percent from their levels atDecember 31, 2022 . Our simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time.
We are subject to the risk that our investments will decline in value if
interest rates continue to rise.
The Company is subject to risk resulting from fluctuations in market prices of our equity securities. In general, these investments have more year-to-year price variability than our fixed maturity investments. However, returns over longer time frames have been consistently higher. We manage this risk by limiting our equity securities to a relatively small portion of our total investments.
Our investment in options backing our equity-linked products is closely matched
with our obligation to fixed indexed annuity holders. Fair value changes
associated with that investment are substantially offset by an increase or
decrease in the amounts added to policyholder account liabilities for fixed
indexed products.
Inflation
Inflation rates may impact the financial statements and operating results in several areas. Inflation influences interest rates, which in turn impact the fair value of the investment portfolio and yields on new investments. Inflation also impacts a portion of our insurance policy benefits affected by increased medical coverage costs. Operating expenses, including payrolls, are impacted to a certain degree by the inflation rate. Refer to "Part I - Item 1A. Risk Factors - High inflation levels could have adverse consequences for us, the insurance industry and theU.S. economy generally" for additional information on inflation.
OLD REPUBLIC INTERNATIONAL CORP – 10-K – Management Analysis of Financial Position and Results of Operations ($ in Millions, Except Share Data)
United Fire Group, Inc. Declares a Common Stock Quarterly Cash Dividend of $0.16 per Share
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