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CNO FINANCIAL GROUP, INC. – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this section, we review the consolidated financial condition of CNO atSeptember 30, 2021 , and its consolidated results of operations for the nine months endedSeptember 30, 2021 and 2020, and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the accompanying consolidated financial statements and notes. Results for interim periods are not necessarily indicative of the results that may be expected for a full year, especially when considering the net favorable mortality/morbidity impacts associated with the COVID-19 pandemic and the strong investment income results from alternative investments that we have experienced in the first three quarters of 2021. For additional forward-looking information and risks related to the impact of the pandemic refer to "Liquidity and Capital Resources - Potential Future Impacts of COVID-19 Pandemic" included in Management's Discussion and Analysis of Financial Condition. We continue to closely monitor developments relating to COVID-19 and assess its impact on our business, policyholders, agents and associates. Depending on the duration and severity of new variants of COVID-19, we foresee the potential for some adverse impacts related to, among other things, near-term sales results, insurance product margin, net investment income, invested assets, regulatory capital, liabilities for insurance products, deferred acquisition costs, the present value of future profits, and income tax assets, although the full extent to which COVID-19 impacts financial results remains uncertain. Operationally, we implemented our business continuity plans and took other precautions, such as employee business travel restrictions and remote work arrangements which, to date, have enabled us to support the health and wellness of our agents and associates, while maintaining our critical business processes, customer service levels, relationships with key vendors, financial reporting systems, internal controls over financial reporting and disclosure controls and procedures. In addition, we implemented additional cybersecurity precautions as a result of our remote working environment. We also introduced financial support programs for our exclusive agents who have seen their businesses disrupted, and their livelihoods challenged, and we deployed enhanced technology tools and training for such agents to allow them to serve consumers through virtual consultations and digital insurance applications. While we have implemented risk management and contingency plans and taken other precautions with respect to the COVID-19 pandemic, such measures may not adequately protect our business from the full impacts of the pandemic. Currently, most of our employees are working remotely. An extended period of remote work arrangements could strain our business continuity plans, introduce additional operational risk, including but not limited to cybersecurity risks, and impair our ability to effectively manage our business. In addition, the pandemic and its impact on the economy and financial markets could materially adversely affect our business, results of operations, investment portfolio or financial condition. We will continue reviewing accounting estimates, asset valuations and various financial scenarios for capital and liquidity; however, in light of evolving health, economic, governmental, social, and other factors, there remains uncertainty over the ultimate impact of COVID-19 and actions taken in response to it on our business, results of operations, investment portfolio and financial condition.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by CNO with theSEC , press releases, presentations by CNO or its management or oral statements) relative to markets for CNO's products and trends in CNO's operations or financial results, as well as other statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as "anticipate," "believe," "plan," "estimate," "expect," "project," "intend," "may," "will," "would," "contemplate," "possible," "attempt," "seek," "should," "could," "goal," "target," "on track," "comfortable with," "optimistic," "guidance," "outlook" and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or they state other "forward-looking" information based on currently available information. The "Risk Factors" section of our 2020 Annual Report on Form 10-K provides examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking 57 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
statements. Assumptions and other important factors that could cause our actual
results to differ materially from those anticipated in our forward-looking
statements include, among other things:
•the ongoing COVID-19 pandemic and the resulting financial market, economic and other impacts, including the deferral of healthcare by policyholders and the potential for increased claim costs in the future as a result, could adversely affect our business, results of operations, financial condition and liquidity; •general economic, market and political conditions and uncertainties, including the performance and fluctuations of the financial markets which may affect the value of our investments as well as our ability to raise capital or refinance existing indebtedness and the cost of doing so;
•potential continuation of low interest rate environment negatively impacting
our results of operations, financial position and cash flow;
•changes to future investment earnings may diminish the value of our invested assets and negatively impact our profitability, our financial condition and our liquidity;
•the ultimate outcome of lawsuits filed against us and other legal and
regulatory proceedings to which we are subject;
•our ability to make anticipated changes to certain non-guaranteed elements of
our life insurance products;
•our ability to obtain adequate and timely rate increases on our health
products, including our long-term care business;
•the receipt of any required regulatory approvals for dividend and surplus
debenture interest payments from our insurance subsidiaries;
•mortality, morbidity, the increased cost and usage of health care services, persistency, the adequacy of our previous reserve estimates, changes in the health care market and other factors which may affect the profitability of our insurance products;
•changes in our assumptions related to deferred acquisition costs or the present
value of future profits;
•the recoverability of our deferred tax assets and the effect of potential
ownership changes and tax rate changes on their value;
•our assumption that the positions we take on our tax return filings will not be
successfully challenged by the Internal Revenue Service;
•changes in accounting principles and the interpretation thereof;
•our ability to continue to satisfy the financial ratio and balance requirements
and other covenants of our debt agreements;
•performance and valuation of our investments, including the impact of realized
losses (including other-than-temporary impairment charges);
•our ability to identify products and markets in which we can compete
effectively against competitors with greater market share, higher ratings,
greater financial resources and stronger brand recognition;
•our ability to generate sufficient liquidity to meet our debt service
obligations and other cash needs;
•changes in capital deployment opportunities;
•our ability to maintain effective controls over financial reporting;
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•our ability to continue to recruit and retain productive agents and
distribution partners;
•customer response to new products, distribution channels and marketing
initiatives;
•our ability to maintain the financial strength ratings of CNO and our insurance company subsidiaries as well as the impact of our ratings on our business, our ability to access capital, and the cost of capital; •regulatory changes or actions, including: those relating to regulation of the financial affairs of our insurance companies, such as the calculation of risk-based capital and minimum capital requirements, and payment of dividends and surplus debenture interest to us; regulation of the sale, underwriting and pricing of products; and health care regulation affecting health insurance products;
•changes in the Federal income tax laws and regulations which may affect or
eliminate the relative tax advantages of some of our products or affect the
value of our deferred tax assets;
•availability and effectiveness of reinsurance arrangements, as well as the
impact of any defaults or failure of reinsurers to perform;
•the performance of third party service providers and potential difficulties
arising from outsourcing arrangements;
•the growth rate of sales, collected premiums, annuity deposits and assets;
•interruption in telecommunication, information technology or other operational
systems or failure to maintain the security, confidentiality or privacy of
sensitive data on such systems;
•events of terrorism, cyber-attacks, natural disasters or other catastrophic events, including losses from a disease pandemic or potential adverse impacts from global warming;
•ineffectiveness of risk management policies and procedures in identifying,
monitoring and managing risks; and
•the risk factors or uncertainties listed from time to time in our filings with
the
Other factors and assumptions not identified above are also relevant to the
forward-looking statements, and if they prove incorrect, could also cause actual
results to differ materially from those projected.
All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by the foregoing cautionary statement. Our forward-looking statements speak only as of the date made. We assume no obligation to update or to publicly announce the results of any revisions to any of the forward-looking statements to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements.
The reporting of risk-based capital ("RBC") measures is not intended for the
purpose of ranking any insurance company or for use in connection with any
marketing, advertising or promotional activities.
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 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 revenue 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. 59 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ Our insurance product line segments (including 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 insurance 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, 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 and industry-leading direct-to-consumer business 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. By creating a dedicated Worksite Division, we are bringing a sharper focus to this high-growth business while further capitalizing on the strength of our recent 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. In addition, 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; and (iv) 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 average insurance liabilities, investments held by our holding companies, the spread we earn from the FHLB investment borrowing program 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. Our fee and other revenue segment includes the earnings generated from sales of third-party insurance products, services provided by WBD (our on-line benefit administration firm),DirectPath (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.
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The following summarizes our earnings for the three and nine months ending
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Insurance product margin
Annuity margin $ 52.5 $ 45.3 $ 176.4 $ 228.6
Health margin 117.9 152.2 363.5 334.6
Life margin 53.2 47.3 120.0 127.7
Total insurance product margin 223.6 244.8 659.9 690.9
Allocated expenses (140.5) (130.3) (423.2) (395.0)
Income from insurance products 83.1 114.5
236.7 295.9
Fee income 2.6 .8 16.5 13.8 Investment income not allocated to product lines 50.9 43.7 141.7 109.3 Expenses not allocated to product lines (17.3) (13.7) (63.1) (66.0) Operating earnings before taxes 119.3 145.3 331.8 353.0 Income tax expense on operating income (26.5) (32.7) (74.7) (76.7) Net operating income (a) 92.8 112.6 257.1 276.3 Net realized investment gains (losses) from sales, impairments and change in allowance for credit losses (net of related amortization) 2.2 7.7 30.1 (43.7) Net change in market value of investments recognized in earnings (4.6) 8.5 (5.3) (8.7) Fair value changes related to agent deferred compensation plan - - 13.2 (13.2) Fair value changes in embedded derivative liabilities (net of related amortization) 10.9 (1.6)
48.1 (95.4)
Other .2 6.5 1.7 8.8 Net non-operating income (loss) before taxes 8.7 21.1 87.8 (152.2) Income tax (expense) benefit: On non-operating income (loss) (1.7) (4.5) (19.7) 31.9 Valuation allowance for deferred tax assets and other tax items - - - 34.0 Net non-operating income (loss) 7.0 16.6 68.1 (86.3) Net income$ 99.8 $ 129.2 $ 325.2 $ 190.0 Per diluted share Net operating income$ .72 $ .79 $ 1.93 $ 1.92 Net non-operating income (loss) .05 .12 .51 (.60) Net income$ .77 $ .91 $ 2.44 $ 1.32 61
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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 index
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 of taxes ("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 fundamental
performance. The table above reconciles the non-GAAP measures 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 a measure 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.
CRITICAL ACCOUNTING POLICIES
Refer to "Critical Accounting Policies" in our 2020 Annual Report on Form 10-K
for information on our other accounting policies that we consider critical in
preparing our consolidated financial statements.
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CHANGES IN ACTUARIAL ASSUMPTIONS IN THE SECOND QUARTER OF 2020
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 index annuities which had a favorable impact on pre-tax earnings of$91.5 million . The significant impacts of such changes in assumptions recognized in the second quarter of 2020 are summarized below and impact the comparison of our insurance margins by product between the first nine months of 2021 and the first nine months of 2020 (dollars in millions): Line of business Fixed index Fixed interest Interest- annuities annuities sensitive life Total Favorable (unfavorable) Impacts of an average new money rate assumption of 4 percent Insurance policy benefits$ (5.0) $ -$ (7.4) $ (12.4) Amortization of insurance intangibles (25.6) (9.4) 1.8 (33.2) Subtotal (30.6) (9.4) (5.6) (45.6) Impacts of changes in future option costs Insurance policy benefits 104.8 - - 104.8 Amortization of insurance intangibles (13.3) - - (13.3) Subtotal 91.5 - - 91.5 Impact on pre-tax income$ 60.9 $
(9.4)$ (5.6) $ 45.9 63
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RESULTS OF OPERATIONS
The following tables and narratives summarize the operating results of our
segments (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Insurance product margin
Annuity:
Insurance policy income $ 5.8 $ 4.3 $ 15.5 $ 14.4
Net investment income 115.5 115.6 346.1 349.6
Insurance policy benefits (16.2) (20.1) (23.7) 82.1
Interest credited (38.1) (42.4) (113.7) (128.0)
Amortization and non-deferred commissions (14.5) (12.1) (47.8) (89.5)
Annuity margin 52.5 45.3 176.4 228.6
Health:
Insurance policy income 414.4 421.4 1,246.3 1,276.9 Net investment income 72.2 70.9 215.3 211.4 Insurance policy benefits (325.4) (295.5) (955.3) (1,008.3) Amortization and non-deferred commissions (43.3) (44.6) (142.8) (145.4) Health margin 117.9 152.2 363.5 334.6
Life:
Insurance policy income 210.4 202.6 631.7 591.0 Net investment income 36.4 35.2 108.3 104.2 Insurance policy benefits (141.3) (143.3) (454.4) (423.0) Interest credited (11.1) (11.4) (32.7) (32.6) Amortization and non-deferred commissions (21.4) (21.6) (64.9) (61.5) Advertising expense (19.8) (14.2) (68.0) (50.4) Life margin 53.2 47.3 120.0 127.7 Total insurance product margin 223.6 244.8 659.9 690.9 Allocated expenses: Branch office expenses (14.8) (13.5) (49.5) (47.5) Other allocated expenses (125.7) (116.8) (373.7) (347.5) Income from insurance products 83.1 114.5 236.7 295.9 Fee income 2.6 .8 16.5 13.8 Investment income not allocated to product lines 50.9 43.7 141.7 109.3 Expenses not allocated to product lines (17.3) (13.7) (63.1) (66.0) Operating earnings before taxes 119.3 145.3 331.8 353.0 Income tax expense on operating income (26.5) (32.7) (74.7) (76.7) Net operating income$ 92.8 $ 112.6 $ 257.1 $ 276.3 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 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, 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. 64 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ 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; and (iv) 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 average insurance liabilities, investments held by our holding companies, the spread we earn from the FHLB investment borrowing program 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.
Summary of Operating Results: Net operating income was
third quarter of 2021, down from
and was
million
Insurance product margin was$223.6 million in the third quarter of 2021, compared to$244.8 million in the third quarter of 2020, and was$659.9 million in the first nine months of 2021, compared to$690.9 million in the first nine months of 2020. Insurance product margin has been significantly impacted by the COVID-19 pandemic. Our life margin reflected adverse mortality related to increased deaths caused by COVID-19 of approximately$3 million and$9 million in the third quarters of 2021 and 2020, respectively, and$33 million and$23 million in the first nine months of 2021 and 2020, respectively. Our health margin reflected favorable COVID-19 impacts driven by the deferral of health care of approximately$25 million and$58 million in the third quarters of 2021 and 2020, respectively, and$95 million and$62 million in the first nine months of 2021 and 2020, respectively. In addition, insurance product margin for the nine months endedSeptember 30, 2020 , was favorably impacted by$45.9 million related to changes in our actuarial assumptions as further described above under the caption "Changes in Actuarial Assumptions in the Second Quarter of 2020".
The fee income segment is summarized below (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Fee revenue $ 28.0 $ 19.9 $ 91.4 $ 69.4
Operating costs and expenses (25.4) (19.1) (74.9) (55.6)
Net fee income $ 2.6 $ .8 $ 16.5 $ 13.8
The higher fee revenue and expenses in the three and nine months ending
September 30, 2021 is primarily due to the activity associated with DirectPath
which was acquired in the first quarter of 2021 and growth in our broker-dealer
business. Net fee income in the third quarter of 2020 reflected higher expenses,
relative to fee income, that were related to our initiative to sell third-party
Medicare Advantage policies through direct to consumer channels.
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 amount of interest
expense on investment borrowings.
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Allocated expenses in the 2021 periods include higher variable expenses related
to sales production. Certain costs in the 2020 periods 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 the nine months ended
September 30, 2020 . Both allocated and unallocated expenses include higher
incentive compensation expense related to business outperformance in the first
nine months of 2021. Expenses not allocated to product lines in the first nine
months of 2021 include $12.8 million of significant items related to legal and
regulatory matters and $2.5 million of transaction expenses related to the
acquisition of DirectPath . In the nine months ended September 30, 2020 , $23.5
million of legal and regulatory matters related to an increase to our liability
for claims and interest pursuant to the Global Resolution Agreement.
The following summarizes total unallocated expenses adjusted for the significant
items summarized above (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Expenses not allocated to product lines $ 17.3 $ 13.7 $ 63.1 $ 66.0
Net expenses related to significant legal and
regulatory matters (3.0) - (12.8) (23.5)
Transaction expenses related to acquisition of
DirectPath - - (2.5) -
Adjusted total $ 14.3 $ 13.7 $ 47.8 $ 42.5
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Margin from Annuity Products (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Annuity margin:
Fixed index annuities
Insurance policy income $ 3.3 $ 2.5 $ 9.6 $ 8.4
Net investment income 86.3 83.1 256.1 248.1
Insurance policy benefits (9.8) (11.5) (4.4) 91.6
Interest credited (24.8) (27.6) (73.1) (82.1)
Amortization and non-deferred commissions (12.6) (9.9) (42.2) (73.3)
Margin from fixed index annuities $ 42.4 $ 36.6 $ 146.0 $ 192.7
Average net insurance liabilities $ 7,881.9 $ 7,173.9 $ 7,663.4 $ 7,050.5
Margin/average net insurance liabilities 2.15 % 2.04 % 2.54 % 3.64 %
Fixed interest annuities
Insurance policy income $ .3 $ .2 $ .6 $ .6
Net investment income 23.0 25.7 71.1 80.6
Insurance policy benefits (.2) (.4) (.7) (.5)
Interest credited (12.7) (14.2) (38.7) (43.5)
Amortization and non-deferred commissions (1.8) (2.1) (5.4) (15.9)
Margin from fixed interest annuities $ 8.6 $ 9.2 $ 26.9 $ 21.3
Average net insurance liabilities $ 1,856.3 $ 2,041.6 $ 1,902.4 $ 2,092.0
Margin/average net insurance liabilities 1.85 % 1.80 % 1.89 % 1.36 %
Other annuities
Insurance policy income $ 2.2 $ 1.6 5.3 $ 5.4
Net investment income 6.2 6.8 18.9 20.9
Insurance policy benefits (6.2) (8.2) (18.6) (9.0)
Interest credited (.6) (.6) (1.9) (2.4)
Amortization and non-deferred commissions (.1) (.1) (.2) (.3)
Margin from other annuities $ 1.5 $ (.5) $ 3.5 $ 14.6
Average net insurance liabilities $ 501.6 $ 524.0 $ 506.9 $ 536.3
Margin/average net insurance liabilities 1.20 % (.38) % .92 % 3.63 %
Total annuity margin $ 52.5 $ 45.3 $ 176.4 $ 228.6
Average net insurance liabilities $ 10,239.8 $ 9,739.5 $ 10,072.7 $ 9,678.8
Margin/average net insurance liabilities 2.05 % 1.86 % 2.34 % 3.15 %
Margin from fixed index annuities was $42.4 million in the third quarter of 2021
compared to $36.6 million in the third quarter of 2020, and was $146.0 million
in the first nine months of 2021 compared to $192.7 million in the first nine
months of 2020. The margin in the first nine months of 2020 reflects the
favorable impact of $60.9 million related to the actuarial assumption changes
previously discussed. Excluding such favorable impact in the first nine months
of 2020, the margin from fixed index annuities increased $5.8 million and $14.2
million in the three and nine months ended September 30, 2021 , respectively,
compared to the same periods in 2020 driven primarily by growth in the block.
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 $7,881.9 million and $7,173.9 million in the third
quarters of 2021 and 2020, respectively, and were $7,663.4 million and $7,050.5
million in the first nine months of 2021 and 2020, respectively, driven by
deposits and reinvested returns in excess of withdrawals in periods subsequent
to the third quarter of 2020. The increase in net insurance liabilities results
in higher net investment income allocated, however, such increase was
substantially offset by lower earned yields. The earned yield was 4.38 percent
in the
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third quarter of 2021 down from 4.63 percent in the third quarter of 2020, and
was 4.46 percent in the first nine months of 2021 down from 4.69 percent in the
first nine months of 2020. We believe the margin on fixed index annuities was
favorably (unfavorably) impacted by approximately $1 million and $4 million in
the three and nine months ended September 30, 2021 , respectively, and by
approximately $(7) million and $(3) million in the three and nine months ended
September 30, 2020 , primarily due to persistency impacts indirectly related to
the pandemic.
Net investment income and interest credited exclude the change in market values
of the underlying options supporting the fixed index annuity products and
corresponding offsetting amount credited to policyholder account balances. Such
amounts were $6.3 million and $39.3 million in the third quarters of 2021 and
2020, respectively, and were $112.3 million and $(35.7) million in the first
nine months of 2021 and 2020, respectively.
Margin from fixed interest annuities was $8.6 million in the third quarter of
2021 compared to $9.2 million in the third quarter of 2020, and was $26.9
million in the first nine months of 2021 compared to $21.3 million in the first
nine months of 2020. The margin in the first nine months of 2020 reflects the
unfavorable impact of $9.4 million related to the actuarial assumption changes
previously discussed. Excluding such unfavorable impact in the first nine months
of 2020, the margin from fixed interest annuities decreased $.6 million and $3.8
million in the three and nine months ended September 30, 2021 , respectively,
compared to the same periods in 2020 driven primarily by a reduction in the size
of the block. Average net insurance liabilities were $1,856.3 million in the
third quarter of 2021 compared to $2,041.6 million in the third quarter of 2020,
and were $1,902.4 million in the first nine months of 2021 compared to $2,092.0
million in the first nine months of 2020, 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 decreased to
4.96 percent in the third quarter of 2021 from 5.04 percent in the third quarter
of 2020, and to 4.98 percent in the first nine months of 2021 from 5.14 percent
in the first nine months of 2020, reflecting lower market yields.
Margin from other annuities was $1.5 million in the third quarter of 2021
compared to $(.5) million in the third quarter of 2020, and was $3.5 million in
the first nine months of 2021 compared to $14.6 million in the first nine months
of 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. Such mortality was higher in the third quarter of
2021, compared to the same period in 2020. Unusually high mortality in the first
nine months of 2020 (unrelated to COVID-19) resulted in higher earnings in that
period.
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Margin from
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Health margin:
Supplemental health
Insurance policy income $ 171.2 $ 169.2 $ 511.0 $ 508.8
Net investment income 36.9 35.5 109.3 105.3
Insurance policy benefits (127.8) (125.8) (385.0) (396.8)
Amortization and non-deferred commissions (29.4) (27.8) (86.5) (83.6)
Margin from supplemental health $ 50.9 $ 51.1 $ 148.8 $ 133.7
Margin/insurance policy income 30 % 30 % 29 % 26 %
Medicare supplement
Insurance policy income $ 177.4 $ 186.1 $ 538.1 $ 568.7
Net investment income 1.3 1.2 3.9 3.6
Insurance policy benefits (129.7) (102.0) (372.7) (375.3)
Amortization and non-deferred commissions (11.7) (13.6) (48.1) (52.0)
Margin from Medicare supplement $ 37.3 $ 71.7 $ 121.2 $ 145.0
Margin/insurance policy income 21 % 39 % 23 % 25 %
Long-term care margin
Insurance policy income $ 65.8 $ 66.1 $ 197.2 $ 199.4
Net investment income 34.0 34.2 102.1 102.5
Insurance policy benefits (67.9) (67.7) (197.6) (236.2)
Amortization and non-deferred commissions (2.2) (3.2) (8.2) (9.8)
Margin from long-term care $ 29.7 $ 29.4 $ 93.5 $ 55.9
Margin/insurance policy income 45 % 44 % 47 % 28 %
Total health margin $ 117.9 $ 152.2 $ 363.5 $ 334.6
Margin/insurance policy income 28 % 36 %
29 % 26 %
Margin from supplemental health business was$50.9 million in the third quarter of 2021, down .4 percent from the third quarter of 2020, and was$148.8 million in the first nine months of 2021, up 11 percent from the first nine months of 2020. The margin as a percentage of insurance policy income was 30 percent in both the third quarters of 2021 and 2020, and was 29 percent in the first nine months of 2021 compared to 26 percent in the first nine months of 2020. Insurance policy benefits in the first nine months of 2021 reflected better claims experience than expected which is attributable to policyholders deferring health care during the pandemic which is expected to normalize in future periods. We estimate that the supplemental health margin in the three and nine months endedSeptember 30, 2021 was favorably impacted by approximately$8 million and$16 million , respectively, relative to our expectations and previous experience prior to COVID-19. Our margin on the supplemental health business in the three and nine months endedSeptember 30, 2020 , was favorably impacted by approximately$6 million and$2 million , respectively, reflecting favorable claim experience, 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 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 69 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ 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$37.3 million and$71.7 million in the third quarters of 2021 and 2020, respectively, and$121.2 million and$145.0 million in the first nine months of 2021 and 2020, respectively. The margin on the Medicare supplement business in the 2021 and 2020 periods reflect favorable claim experience. Such favorable claim experience is primarily attributable to policyholders deferring health care during the pandemic and with respect to our Medicare supplement business decreased from$11 million in the second quarter of 2021 to$3 million in the third quarter of 2021. We expect claim experience to normalize over time and the deferral of care may lead to higher claim costs in future periods. Based on actual claims incurred and persistency relative to our expectations and previous experience prior to COVID-19, we estimate that the Medicare supplement margin was favorably impacted by approximately$3 million and$23 million in the three and nine months endedSeptember 30, 2021 , respectively, and by approximately$36 million and$41 million in the three and nine months endedSeptember 30, 2020 , respectively. Insurance policy income was$177.4 million in the third quarter of 2021, down 4.7 percent from the third quarter of 2020 and was$538.1 million in the first nine months of 2021, down 5.4 percent from the first nine months of 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 ensure we are well-positioned to meet our customers' needs and preferences. 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$29.7 million in the third quarter of 2021, up 1.0 percent from the third quarter of 2020, and was$93.5 million in the first nine months of 2021, up 67 percent from the first nine months of 2020. The margin as a percentage of insurance policy income increased to 45 percent in the third quarter of 2021 compared to 44 percent in the third quarter of 2020, and to 47 percent in the first nine months of 2021 compared to 28 percent in the first nine months of 2020. The margin in both the 2021 and 2020 periods benefited from lower claims incurred attributable to policyholders deferring health care during the pandemic which is expected to normalize in future periods. In addition, an increase in policyholder deaths attributable to the pandemic resulted in higher than expected reserve releases. Based on actual claims incurred and persistency relative to our expectations and previous experience prior to COVID-19, we estimate that the long-term care margin was favorably impacted by approximately$14 million and$56 million in the three and nine months endedSeptember 30, 2021 , respectively, and by approximately$16 million and$19 million in the three and nine months endedSeptember 30, 2020 , respectively. 70 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Margin from Life Products (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Life margin:
Interest-sensitive life
Insurance policy income $ 42.3 $ 40.1 $ 124.5 $ 118.4
Net investment income 12.6 11.9 37.4 35.3
Insurance policy benefits (17.4) (16.0) (60.1) (54.9)
Interest credited (10.9) (11.2) (32.2) (32.1)
Amortization and non-deferred commissions (6.6) (6.9) (18.6) (19.1)
Margin from interest-sensitive life $ 20.0 $ 17.9 $ 51.0 $ 47.6
Average net insurance liabilities $ 983.8 $ 926.7 $ 969.5 $ 913.4
Interest margin $ 1.7 $ .7 $ 5.2 $ 3.2
Interest margin/average net insurance liabilities .69 % .30 % .72 % .47 %
Underwriting margin $ 18.3 $ 17.2 $ 45.8 $ 44.4
Underwriting margin/insurance policy income 43 % 43 % 37 % 38 %
Traditional life
Insurance policy income $ 168.1 $ 162.5 $ 507.2 $ 472.6
Net investment income 23.8 23.3 70.9 68.9
Insurance policy benefits (123.9) (127.3) (394.3) (368.1)
Interest credited (.2) (.2) (.5) (.5)
Amortization and non-deferred commissions (14.9) (14.7) (46.3) (42.4)
Advertising expense (19.7) (14.2) (68.0) (50.4)
Margin from traditional life $ 33.2 $ 29.4 $ 69.0 $ 80.1
Margin/insurance policy income 20 % 18 % 14 % 17 %
Margin excluding advertising expense/insurance policy
income 31 % 27 % 27 % 28 %
Total life margin $ 53.2 $ 47.3 $ 120.0 $ 127.7
Margin from interest-sensitive life business was $20.0 million in the third
quarter of 2021, up 12 percent from the third quarter of 2020, and was $51.0
million in the first nine months of 2021, up 7.1 percent from the first nine
months of 2020. The margin in the first nine months of 2020 reflects the
unfavorable impact of $5.6 million related to the actuarial assumption changes
previously discussed. Excluding such unfavorable impact in the first nine months
of 2020, the margin from interest-sensitive life business decreased by $2.2
million in the nine months ended September 30, 2021 , compared to the same period
in 2020. We estimate that the unfavorable impact from death claims related to
COVID-19 on the margin of this block of business was approximately $1 million
and $12 million in the three and nine months ended September 30, 2021 ,
respectively, and approximately $3 million and $4 million in the three and nine
months ended September 30, 2020 . In addition, sales in recent periods have
resulted in the growth in this block of business.
The interest margin was $1.7 million and $.7 million in the third quarters of
2021 and 2020, respectively, and was $5.2 million and $3.2 million in the first
nine months of 2021 and 2020, respectively. Net investment income in the 2021
periods was slightly higher than the 2020 periods. The increase in average net
insurance liabilities results in higher net investment income allocated. The
earned yield was 5.12 percent and 5.14 percent in the third quarters of 2021 and
2020, respectively, and was 5.14 percent and 5.15 percent in the first nine
months of 2021 and 2020, respectively. 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 exclude the change in market values
of the underlying options supporting the fixed index life products and
corresponding offsetting amount credited to policyholder account balances. Such
amounts
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were
respectively, and were
of 2021 and 2020, respectively.
Margin from traditional life business was$33.2 million in the third quarter of 2021, up 13 percent from the third quarter of 2020, and was$69.0 million in the first nine months of 2021, down 14 percent from the first nine months of 2020. Insurance policy income was$168.1 million in the third quarter of 2021, up 3.4 percent from the third quarter of 2020, and was$507.2 million in the first nine months of 2021, up 7.3 percent from the first nine months of 2020, reflecting new sales and persistency in the block. Insurance policy benefits were$123.9 million in the third quarter of 2021, down 2.7 percent from the same period in 2020, and were$394.3 million in the first nine months of 2021, up 7.1 percent from the first nine months of 2020 due to growth in the block as well as unfavorable mortality from COVID-19. We estimate that the impact from death claims related to COVID-19 increased insurance policy benefits by approximately$2 million and$21 million in the three and nine months endedSeptember 30, 2021 , respectively, and approximately$6 million and$19 million in the three and nine months endedSeptember 30, 2020 . Allocated net investment income in the 2021 periods was higher than the 2020 periods, as the growth in the block was partially offset by lower average investment yields in the 2021 periods. Advertising expense was$19.7 million in the third quarter of 2021, up$5.5 million from the comparable period in 2020, and was$68.0 million in the first nine months of 2021, up$17.6 million from the comparable period in 2020. The demand and cost of television advertising can fluctuate from period to period. We are disciplined with our marketing expenditures and will increase or decrease our marketing spend depending on prices or other factors. Collected Premiums From Annuity and Interest-Sensitive Life Products (dollars in millions): Three months ended Nine months ended September 30, September 30, 2021 2020 2021 2020 Collected premiums from annuity and interest-sensitive life products: Annuities$ 333.3 $ 285.1 $ 1,003.0 $ 820.0 Interest-sensitive life 54.4 50.0 163.5 154.4 Total collected premiums from annuity and interest-sensitive life products$ 387.7
Collected premiums from annuity and interest-sensitive products increased 16
percent in the third quarter of 2021 compared to the third quarter of 2020, and
20 percent in the first nine months of 2021 compared to the first nine months of
2020, primarily due to higher premium collections from fixed index annuity
products.
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Investment Income Not Allocated to Product Lines (dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Net investment income $ 308.2 $ 343.5 $ 1,025.6 $ 831.9
Allocated to product lines:
Annuity (115.5) (115.6) (346.1) (349.6)
Health (72.2) (70.9) (215.3) (211.4)
Life (36.4) (35.2) (108.3) (104.2)
Equity returns credited to policyholder account
balances (7.2) (46.0) (125.8) 39.8
Amounts allocated to product lines and credited to
policyholder account balances
(231.3) (267.7) (795.5) (625.4)
Amount related to variable interest entities and other
non-operating items
(7.1) (9.8) (22.9) (31.0) Interest expense on debt (15.6) (13.6) (46.7) (40.8) Interest expense on investment borrowings (2.3) (3.4) (7.5) (18.3)
Less amounts credited to deferred compensation plans
(offsetting investment income)
(1.0) (5.3) (11.3) (7.1) Total adjustments (26.0) (32.1) (88.4) (97.2)
Investment income not allocated to product lines
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 amount of interest expense on investment borrowings.
Net Non-Operating Income (Loss):
The following summarizes our net non-operating income (loss) for the three and
nine months ending
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Net realized investment gains (losses) from sales,
impairments and change in allowance for credit losses
(net of related amortization)
$ 2.2 $
7.7
Net change in market value of investments recognized
in earnings
(4.6) 8.5 (5.3) (8.7) Fair value changes related to agent deferred compensation plan - - 13.2 (13.2)
Fair value changes in embedded derivative liabilities
(net of related amortization)
10.9 (1.6) 48.1 (95.4) Other .2 6.5 1.7 8.8 Net non-operating income (loss) before taxes$ 8.7 $
21.1
Net realized investment gains, net of related amortization, in the three and nine months endedSeptember 30, 2021 , were$2.2 million and$30.1 million , respectively, including the favorable (unfavorable) change in the allowance for credit losses of($1.4) million and$13.9 million , respectively, which were recorded in earnings. Net realized investment gains (losses), net of related amortization, in the three and nine months endedSeptember 30, 2020 were$7.7 million and$(43.7) million , respectively, including an (increase) decrease in the allowance for credit losses and other-than-temporary impairment losses of$8.1 million and$(31.4) million , respectively. 73 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ The change in market value of investments recognized in earnings was an increase (decrease) of$(4.6) million and$8.5 million in the third quarters of 2021 and 2020, respectively, and$(5.3) million and$(8.7) million in the first nine months of 2021 and 2020, respectively. The change in value will fluctuate from period to period based on market conditions. During the first nine months of 2021 and 2020, we recognized an increase (decrease) in earnings of$13.2 million and$(13.2) 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. The fair value changes in embedded derivative liabilities related to our fixed index annuities (net of related amortization) increased (decreased) earnings by$10.9 million and$(1.6) million in the third quarters of 2021 and 2020, respectively, and$48.1 million and$(95.4) million in the first nine months of 2021 and 2020, respectively. 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 the 2021 periods was the primary factor in the change in estimated fair value of the embedded derivative liabilities while suchU.S. Treasury rates decreased in the 2020 periods.
Other non-operating items 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.
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LIQUIDITY AND CAPITAL RESOURCES
Potential Future Impacts of COVID-19 Pandemic
We expect the potential impact of the pandemic on our future results will be largely driven by three things which are already impacting our business, but the duration and severity of which are currently unknown:
•the impact of the COVID-19 environment on the sales of some of our insurance
products;
•changes in mortality, morbidity, and persistency (or lapse rates) impacting
insurance product margin; and
•general economic impacts, driving: (i) potential impacts on net investment income due to changes in interest rates; (ii) the potential for credit deterioration and its impact on invested assets and capital; and (iii) potential impacts to reserves and deferred acquisition costs resulting from changes in interest rates, equity valuations, and market volatility. While uncertainty continues related to how the COVID-19 pandemic will impact our results and the continued economic impact it will have, based on annual stress testing, most recently completed inSeptember 2021 , including a stress test scenario that simulates adverse pandemic-like conditions, we believe it is very unlikely that any currently plausible future COVID-19 pandemic scenario would cause the capital of our insurance subsidiaries or our holding company liquidity to fall below our target levels. Accordingly, in our quarterly re-forecast, consistent with our practice following the second quarter of 2021, we are modeling a single base case scenario or forecast and are no longer modeling a formal adverse case scenario, as we had done in previous periods. Both our annual stress testing and our quarterly re-forecast models are dynamic as higher or lower risk assumptions may be applied from time to time. We most recently updated our quarterly re-forecast inOctober 2021 . Our modeling incorporates many assumptions and actual conditions in future periods may differ materially from the assumptions used in our model. The COVID-19 pandemic has impacted our consolidated sales volumes. In 2020, our sales of health and life insurance products (measured by new annualized premiums) across both our Consumer and Worksite Divisions decreased by 6 percent compared to 2019. Such consolidated sales of health and life insurance products in the nine months endedSeptember 30, 2021 were up 12 percent compared to the same period in 2020 and were up 7 percent compared to the first nine months of 2019 reflecting positive sales momentum that we have experienced over the past five quarters. We currently expect modest growth in the total sales of health and life insurance products as well as total collected premiums from our health, life and annuity products in the fourth quarter of 2021 compared to the same period in 2020. In the nine months endedSeptember 30, 2021 , our Consumer Division life sales (new annualized premiums) increased by 13 percent compared to the same period in 2020. Sales of health products also increased by 10 percent in the first nine months of 2021 compared to the same period in 2020. Collected premiums from our annuity products increased 22 percent in the first nine months of 2021 compared to the same period in 2020. As the economy has partially reopened and our customers and agents have become more accustomed to virtual transactions, overall sales in the Consumer Division have improved and are approaching or exceeding pre-pandemic levels. Similar to other insurance companies selling insurance products at the workplace, sales within our Worksite Division have been significantly below pre-pandemic levels. In the first nine months of 2021, our Worksite Division life and health sales (new annualized premiums) increased 12 percent compared to the same period in 2020 but were down 36 percent from the first nine months of 2019. With respect to changes in mortality and morbidity, we currently estimate that COVID-19 could have a modestly net favorable impact on total insurance product margin in the fourth quarter of 2021 but at more moderated levels than we have recently experienced. However, there remains significant uncertainty as to what may actually occur, including impacts from variants of the virus as we enter into 2022. In the first nine months of 2021, our margin on life insurance products reflected an estimated$33 million of adverse mortality impact related to COVID-19. While higher mortality claims unfavorably impacted our life product margins, our health product margins have generally benefited due to lower claims experience. We estimate the COVID-19 environment favorably impacted our health margins by approximately$95 million in the first nine months of 2021, primarily due to consumers deferring medical care treatments. We expect this trend to revert to normal over time. Such 75 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
deferral of care and possible long-term health complications from COVID-19 may
lead to higher life and health claim costs in future periods.
Regarding our investment portfolio, the pandemic scenario of our annual stress testing assumes the potential for adverse impacts from a pandemic, including impacts on credit migration, default levels, net investment income and capital. We believe our earnings over the long-term will be impacted by the continuation of the low interest rate environment. We expect investment income allocated to product lines to be relatively flat in the fourth quarter of 2021, compared to the same period in 2020, as growth in invested assets is offset by lower yields which reflects both the lower interest rate environment and our up-in-quality shift in asset allocation. We expect net investment income not allocated to product lines to be lower in the fourth quarter of 2021, as compared to recent quarters, given the market conditions in the third quarter of 2021 which impact the performance of our alternative investments (which are typically reported a quarter in arrears). We also expect earnings from our fee income segment to be higher in the fourth quarter of 2021 compared to both the third quarter of 2021 and the fourth quarter of 2020. Total quarterly expenses allocated and not allocated to product lines in the fourth quarter of 2021 are expected to be generally comparable to recent quarters, excluding certain significant items related to legal and regulatory matters and transaction expenses related to the acquisition ofDirectPath .
While uncertainty related to COVID-19 continues, we do not expect that any
potential scenario would jeopardize our ability to:
•maintain our target RBC levels, debt to capital ratios and minimum holding
company liquidity; and
•maintain our quarterly dividend to shareholders.
There are many modeling scenarios which could result in materially different
projected outcomes from those used in our modeling and, accordingly, our
modeling does not constitute the only outcome resulting from the COVID-19
pandemic which could affect our business, results of operations, financial
condition and liquidity. Similarly, given the unprecedented nature of the
COVID-19 pandemic, the assumptions used in our modeling are based on assumed
facts which are inherently unpredictable, are subject to change, and have been
difficult to predict accurately in prior periods. The outcome generated by the
application of updated assumptions may be materially different from those
described above. If the impact of the COVID-19 pandemic is ultimately worse than
contemplated by our modeling, the impact to our business, results of operations,
financial condition and liquidity could be significantly different than
described above.
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Our capital structure as of
follows (dollars in millions):
September 30,
2021 December 31, 2020
Total capital:
Corporate notes payable $ 1,137.0 $ 1,136.2
Shareholders' equity:
Common stock 1.2 1.3
Additional paid-in capital 2,274.6 2,544.5
Accumulated other comprehensive income 1,929.7 2,186.1
Retained earnings 1,027.4 752.3
Total shareholders' equity 5,232.9 5,484.2
Total capital $ 6,369.9 $ 6,620.4
The following table summarizes certain financial ratios as of and for the nine
months ended September 30, 2021 and as of and for the year ended December 31,
2020 :
September 30,
2021 December 31, 2020
Book value per common share $
42.11 $ 40.54
Book value per common share, excluding accumulated other
comprehensive income (a)
26.58 24.38 Debt to total capital ratios: Corporate debt to total capital 17.8 % 17.2 %
Corporate debt to total capital, excluding accumulated other
comprehensive income (a)
25.6 % 25.6 %
_____________________
(a)This non-GAAP measure differs from the corresponding GAAP measure presented immediately above, because accumulated other comprehensive income 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. 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.
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 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. AtSeptember 30, 2021 , the carrying value of the FHLB common stock was$75.4 million . As ofSeptember 30, 2021 , collateralized borrowings from the FHLB totaled$1.7 billion and the proceeds were used to purchase 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 atSeptember 30, 2021 , which are maintained in custodial accounts for the benefit of the FHLB. In the third quarter of 2021, Bankers Life established a funding agreement-backed notes program (the "FABN Program") pursuant to which Bankers Life may issue funding agreements to a special purpose trust (the "Trust") to generate spread-based earnings. The maximum aggregate principal amount permitted to be outstanding at any one time under the FABN Program is 77 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________$3 billion . OnOctober 7, 2021 , Bankers Life issued a funding agreement to the Trust in an aggregate principal amount of$500 million . We expect the FABN Program to provide 100 basis points of annualized pre-tax spread income on the notional amount of the funding agreements outstanding which is net of the expense associated with the program. The activity related to the funding agreements will be reported in investment income not allocated to product lines. 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 388 percent atSeptember 30, 2021 , compared to 409 percent atJune 30, 2021 , and 411 percent atDecember 31, 2020 . In the first nine months of 2021, our estimated consolidated statutory operating earnings were$201 million and insurance company dividends of$328.3 million were paid to the holding company. Our targeted statutory RBC ratio remains in the 375 percent to 400 percent range over the long-term. During the third quarter of 2021, we intentionally deployed excess capital in our insurance subsidiaries to the holding company in the form of dividends consistent with our targeted RBC ratio range. InJune 2021 , among other things, theNational Association of Insurance Commissioners (the "NAIC") adopted new bond factors to be used in the RBC ratio calculation effectiveDecember 31, 2021 . The estimated impact of these changes, based on our investment portfolio atSeptember 30, 2021 , is a reduction in the RBC ratio of approximately 16 percentage points (which is equivalent to approximately$80 million of capital). We currently do not expect to reduce the target range of our statutory RBC ratio, but intend to manage toward the low end of the 375 percent to 400 percent range. 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 byMoody's Investor Services, Inc. ("Moody's"),AM Best Company ("AM Best"), Fitch Ratings ("Fitch") and S&P are the rating agency's opinions of the ability of our insurance subsidiaries to pay policyholder claims and obligations when due. OnSeptember 28, 2021 , Moody's affirmed its "A3" financial strength ratings of our primary insurance subsidiaries. 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. OnJanuary 28, 2021 , AM Best affirmed its "A-" financial strength ratings of our primary insurance subsidiaries and revised the outlook for these rating to positive from 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 three ratings above the "A-" rating of our primary insurance subsidiaries and twelve ratings that are below that rating. OnDecember 17, 2020 , Fitch affirmed its "A-" financial strength ratings of our primary insurance subsidiaries. The outlook for these ratings remains 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. 78 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ OnJune 21, 2019 , S&P upgraded the financial strength ratings of our primary insurance subsidiaries to "A-" from "BBB+" and 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 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 the rating agency 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
AtSeptember 30, 2021 , CNO,CDOC, Inc. ("CDOC", our wholly owned subsidiary and the immediate parent ofWashington National and Conseco Life Insurance Company of Texas ("CLTX")) and our other non-insurance subsidiaries held unrestricted cash and cash equivalents of$366.4 million . We expect to maintain a minimum of$150 million of holding company liquidity. In the fourth quarter of 2021, we expect to manage our liquidity levels closer to our minimum target level of$150 million . 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|86Advisors, Inc. , which receives fees from the insurance subsidiaries for investment services, andCNO Services, LLC which receives fees from the insurance subsidiaries for providing administrative services. The agreements between our insurance subsidiaries andCNO Services, LLC and 40|86Advisors, Inc. , respectively, were previously approved by the domestic insurance regulator for each insurance company, and any payments thereunder do not require further regulatory approval. 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 the first nine months of 2021, our insurance subsidiaries paid dividends toCDOC totaling$328.3 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 require prior written notice to theTexas state insurance department). The estimated RBC ratio of CLTX was 331 percent atSeptember 30, 2021 .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 state insurance department. Dividends 79 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ and other payments from our non-insurance subsidiaries, including 40|86Advisors, Inc. andCNO Services, LLC , 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. AtSeptember 30, 2021 , the subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions): Subsidiaries of CLTX Earned surplus (deficit) Additional information Bankers Life $ 205.4 (a) Colonial Penn (404.9) (b) ____________________ (a)Bankers Life paid dividends of$225.0 million to CLTX in the first nine months of 2021. Bankers Life may pay dividends without regulatory approval or 30 days 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. AtSeptember 30, 2021 , there are no amounts outstanding under our Revolving Credit Agreement and there are no scheduled repayments of our direct corporate obligations untilMay 2025 . The Company amended and restated the Revolving Credit Agreement onJuly 16, 2021 , as further described in the note to the consolidated financial statements entitled "Notes Payable - Direct Corporate Obligations". 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 the first nine months of 2021, we generated$382 million of such free cash flow. The Company is committed to deploying 100 percent of 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 the first nine months of 2021, we repurchased 12.5 million shares of common stock for$302.4 million under our securities repurchase program. InMay 2021 , the Company's Board of Directors approved an additional$500.0 million to repurchase the Company's outstanding shares of common stock. The Company had remaining repurchase authority of$466.9 million as ofSeptember 30, 2021 . In the first quarter of 2021, the Company purchasedDirectPath (as further described in the note to the consolidated financial statements entitled "Business and Basis of Presentation") utilizing$51 million of holding company liquidity. In the first nine months of 2021, dividends declared on common stock totaled$50.1 million ($0.38 per common share). InMay 2021 , the Company increased its quarterly common stock dividend to$0.13 per share from$0.12 per share. OnSeptember 28, 2021 , Moody's affirmed its "Baa3" rating on our senior unsecured debt. 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 80 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ 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. OnJanuary 28, 2021 , AM Best affirmed its "bbb-" issuer credit and senior unsecured debt ratings and revised the outlook for these ratings to positive from 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 nine ratings above CNO's "bbb-" rating and twelve ratings that are below its rating. OnDecember 17, 2020 , Fitch affirmed its "BBB-" rating on our senior unsecured debt. The outlook for these ratings remains 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. OnJune 21, 2019 , S&P upgraded our senior unsecured debt rating to "BBB-" from "BB+" and 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. 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. 81 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
INVESTMENTS
At
unrealized losses, allowance for credit losses and estimated fair value of fixed
maturities, available for sale, were as follows (dollars in millions):
Gross Gross Estimated
Amortized unrealized unrealized Allowance for fair
cost gains losses credit losses value
Investment grade (a):
Corporate securities $ 12,231.6 $ 2,240.2 $ (19.7) $ (3.2) $ 14,448.9
United States Treasury securities and
obligations of United States government
corporations and agencies 165.3 50.6 (.8) - 215.1
States and political subdivisions 2,527.0 339.4 (3.0) - 2,863.4
Foreign governments 83.0 12.6 (.8) (.1) 94.7
Asset-backed securities 887.5 44.9 (.2) - 932.2
Agency residential mortgage-backed securities 40.7 4.6 - - 45.3
Non-agency residential mortgage-backed
securities 940.4 34.4 (1.4) - 973.4
Collateralized loan obligations 509.3 2.8 (.5) - 511.6
Commercial mortgage-backed securities 1,951.3 102.4 (3.1) - 2,050.6
Total investment grade fixed maturities,
available for sale 19,336.1 2,831.9 (29.5) (3.3) 22,135.2
Below-investment grade (a) (b):
Corporate securities 777.9 55.2 (.8) (2.1) 830.2
States and political subdivisions 12.5 - - - 12.5
Asset-backed securities 101.3 2.4 (.9) - 102.8
Non-agency residential mortgage-backed
securities 820.6 135.6 - - 956.2
Collateralized loan obligations 13.1 - (.1) - 13.0
Commercial mortgage-backed securities 89.5 3.0 (.4) - 92.1
Total below-investment grade fixed maturities,
available for sale 1,814.9 196.2 (2.2) (2.1) 2,006.8
Total fixed maturities, available for sale
_______________
(a)Investment ratings are assigned the second lowest rating by Nationally
Recognized Statistical Rating Organizations ("NRSROs") (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.
(b) Certain structured securities rated below-investment grade by NRSROs may be
assigned a NAIC 1 or NAIC 2 designation based on the cost basis of the security
relative to estimated recoverable amounts as determined by the NAIC. Refer to
the table below for a summary of our fixed maturity securities, available for
sale, by NAIC designations.
82
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
___________________
The NAIC evaluates the fixed maturity investments of insurers for regulatory and
capital assessment purposes and assigns securities to one of six credit quality
categories called NAIC designations, which are used by insurers when preparing
their annual statements based on statutory accounting principles. The NAIC
designations are generally similar to the credit quality designations of the
NRSROs for marketable fixed maturity securities, except for certain structured
securities. However, certain structured securities rated below investment grade
by the NRSROs can be assigned NAIC 1 or NAIC 2 designations depending on the
cost basis of the holding relative to estimated recoverable amounts as
determined by the NAIC. The following summarizes the NAIC designations and NRSRO
equivalent ratings:
NAIC Designation NRSRO Equivalent Rating
1 AAA/AA/A
2 BBB
3 BB
4 B
5 CCC and lower
6 In or near default
A summary of our fixed maturity securities, available for sale, by NAIC
designations (or for fixed maturity securities held by non-regulated entities,
based on NRSRO ratings) as of September 30, 2021 is as follows (dollars in
millions):
Estimated fair Percentage of total
NAIC designation Amortized cost value estimated fair value
1 $ 12,022.1 $ 13,597.3 56.3 %
2 8,062.2 9,408.3 39.0
Total NAIC 1 and 2 (investment
grade) 20,084.3 23,005.6 95.3
3 768.4 835.0 3.5
4 265.6 269.5 1.1
5 31.7 31.9 .1
6 1.0 - -
Total NAIC 3, 4, 5 and 6
(below-investment grade) 1,066.7 1,136.4 4.7
Total $ 21,151.0 $ 24,142.0 100.0 %
83
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
___________________
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
fixed Gross unrealized unrealized
Carrying value maturities losses losses
States and political
subdivisions $ 2,875.9 11.9 % $ 3.0 9.5 %
Commercial mortgage-backed
securities 2,142.7 8.9 3.5 11.0
Non-agency residential
mortgage-backed securities 1,929.6 8.0 1.4 4.5
Insurance 1,715.3 7.1 2.6 8.3
Banks 1,631.8 6.8 1.3 4.2
Utilities 1,581.7 6.5 2.0 6.3
Healthcare/pharmaceuticals 1,565.8 6.5 2.9 9.3
Food/beverage 1,043.3 4.3 1.2 3.6
Asset-backed securities 1,035.0 4.3 1.1 3.4
Technology 970.1 4.0 3.8 12.1
Brokerage 960.9 4.0 1.0 3.1
Energy 824.6 3.4 .4 1.2
Cable/media 558.8 2.3 1.3 4.2
Collateralized loan
obligations 524.6 2.2 .6 1.9
Transportation 517.3 2.1 - -
Telecom 510.6 2.1 .1 .3
Capital goods 464.7 1.9 - -
Real estate/REITs 451.2 1.9 .1 .3
Chemicals 398.6 1.7 .4 1.1
Aerospace/defense 276.8 1.1 .2 .6
Retail 259.4 1.1 1.7 5.3
Other 1,903.3 7.9 3.1 9.8
Total fixed maturities,
available for sale $ 24,142.0 100.0 % $ 31.7 100.0 %
AtSeptember 30, 2021 , the amortized cost of the Company's below-investment grade fixed maturity securities, available for sale, was$1,814.9 million , or 8.6 percent of the Company's fixed maturity portfolio (or$1,066.7 million , or 5.0 percent, of the Company's fixed maturity portfolio measured on credit quality ratings assigned by the NAIC). The estimated fair value of the below-investment grade portfolio was$2,006.8 million , or 111 percent of the amortized cost. Below-investment grade corporate debt securities typically have different characteristics than investment grade corporate debt securities. Based on historical performance, probability of default by the borrower is significantly greater for below-investment grade corporate debt securities and in many cases severity of loss is relatively greater as such securities are generally unsecured and often subordinated to other indebtedness of the issuer. Also, issuers of below-investment grade corporate debt securities frequently have higher levels of debt relative to investment-grade issuers, hence, all other things being equal, are generally more sensitive to adverse economic conditions. The Company attempts to reduce the overall risk related to its investment in below-investment grade securities, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor and by industry. 84 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Net Realized and Unrealized Investment Losses
During the first nine months of 2021, the$18.4 million of realized losses on sales of$350.3 million of fixed maturity securities, available for sale, primarily related to various corporate securities. Securities are generally sold at a loss following unforeseen issuer-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. During the first nine months of 2020, the$51.3 million of realized losses on sales of$412.9 million of fixed maturity securities, available for sale, included: (i)$15.8 million related to various corporate securities; (ii)$25.0 million related to commercial mortgage-backed securities; and (iii)$10.5 million related to various other investments. There were no investments sold at a loss during the first nine months of 2021 which had been continuously in an unrealized loss position exceeding 20 percent of the amortized cost basis prior to the sale. 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. The following table sets forth the amortized cost and estimated fair value of those fixed maturities, available for sale, with unrealized losses atSeptember 30, 2021 , by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Structured securities frequently include provisions for periodic principal payments and permit periodic unscheduled payments. Estimated Amortized fair cost value (Dollars in millions)
Due after one year through five years $ 57.6 $ 56.2
Due after five years through ten years 125.2 123.2
Due after ten years 880.7 853.6
Subtotal 1,063.5 1,033.0
Structured securities 776.6 770.0
Total $ 1,840.1 $ 1,803.0
There were no investments in our portfolio rated below-investment grade not
deemed to have credit losses which had been continuously in an unrealized loss
position exceeding 20 percent of the cost basis.
85
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
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The following table summarizes the gross unrealized losses of our fixed maturity
securities, available for sale, by category and ratings category as of
Investment grade Below-investment grade
Total gross
B+ and unrealized
AAA/AA/A BBB BB below losses
Technology $ .9 $ 2.9 $ - $ - $ 3.8
Commercial mortgage-backed securities 2.5 .6 .4 -
3.5
States and political subdivisions 3.0 - - - 3.0 Healthcare/pharmaceuticals 2.4 .5 - - 2.9 Insurance 2.3 - .3 - 2.6 Utilities .7 1.3 - - 2.0 Retail 1.5 .2 - - 1.7 Non-agency residential mortgage-backed securities .2 1.2 - - 1.4 Cable/media - 1.2 .1 - 1.3 Banks .8 .5 - - 1.3 Food/beverage - 1.2 - - 1.2 Asset-backed securities .1 .1 - .9 1.1 Brokerage .5 .5 - - 1.0 Other 2.1 2.3 .5 - 4.9 Total fixed maturities, available for sale$ 17.0 $ 12.5 $ 1.3$ .9 $ 31.7 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.
AtSeptember 30, 2021 , fixed maturity investments included structured securities with an estimated fair value of$5.7 billion (or 23.5 percent of all fixed maturity securities). The yield characteristics of structured securities generally differ in some respects from those of traditional corporate fixed-income securities or government securities. For example, interest and principal payments on structured securities may occur more frequently, often monthly. In many instances, we are subject to variability in the amount and timing of principal and interest payments. For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of prepayments on the underlying assets backing the security to changes in interest rates and asset values; the availability of alternative financing; a variety of economic, geographic and other factors; the timing, pace and proceeds of liquidations of defaulted collateral; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure). In addition, the total amount of payments for non-agency structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral. 86 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ The amortized cost and estimated fair value of structured securities atSeptember 30, 2021 , summarized by type of security, were as follows (dollars in millions): Estimated fair value Percent Amortized of fixed Type cost Amount maturities Asset-backed securities$ 988.8 $ 1,035.0 4.3 % Agency residential mortgage-backed securities 40.7 45.3 .2 Non-agency residential mortgage-backed securities 1,761.0 1,929.6 8.0 Collateralized loan obligations 522.4 524.6 2.1 Commercial mortgage-backed securities 2,040.8 2,142.7 8.9 Total structured securities$ 5,353.7 $ 5,677.2 23.5 % Residential mortgage-backed securities ("RMBS") include transactions collateralized by agency-guaranteed and non-agency mortgage obligations. Non-agency RMBS investments are primarily categorized by underlying borrower credit quality: Prime, Alt-A, Non-Qualified Mortgage ("Non-QM"), and Subprime. Prime borrowers typically default with the lowest frequency, Alt-A and Non-QM default at higher rates, and Subprime borrowers default with the highest frequency. In addition to borrower credit categories, RMBS investments include Re-Performing Loan ("RPL") and Credit Risk Transfer ("CRT") transactions. RPL transactions include borrowers with prior difficulty meeting the original mortgage terms and were subsequently modified, resulting in a sustainable payback arrangement. CRT securities are collateralized by Government-Sponsored Enterprise ("GSE") conforming mortgages and Prime borrowers, but without an agency guarantee against default losses. Commercial mortgage-backed securities ("CMBS") are secured by commercial real estate mortgages, generally income producing properties that are managed for profit. Property types include multi-family dwellings including apartments, retail centers, hotels, restaurants, hospitals, nursing homes, warehouses, and office buildings. While most CMBS have call protection features whereby underlying borrowers may not prepay their mortgages for stated periods of time without incurring prepayment penalties, recoveries on defaulted collateral may result in involuntary prepayments.
INVESTMENTS IN VARIABLE INTEREST ENTITIES
The following table provides supplemental information about the revenues and
expenses of the VIEs which have been consolidated in accordance with
authoritative guidance, after giving effect to the elimination of our investment
in the VIEs and investment management fees earned by a subsidiary of the Company
(dollars in millions):
Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
Revenues:
Net investment income - policyholder and other
special-purpose portfolios $ 10.9 $ 12.2 $ 34.4 $ 40.5
Fee revenue and other income 1.3 1.2 4.0 3.8
Total revenues 12.2 13.4 38.4 44.3
Expenses:
Interest expense 5.8 6.7 17.6 26.4
Other operating expenses .2 .3 1.0 1.0
Total expenses 6.0 7.0 18.6 27.4
Income (loss) before net realized investment
gains (losses) and income taxes 6.2 6.4 19.8 16.9
Net realized investment gains (losses) - 3.4 5.1 (17.9)
Income (loss) before income taxes $ 6.2 $ 9.8 $ 24.9 $ (1.0)
87
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
___________________
Supplemental Information on Investments Held by VIEs
The following table summarizes the carrying values and gross unrealized losses of the investments held by the VIEs by category as ofSeptember 30, 2021 (dollars in millions): Percent of Percent Gross gross of fixed unrealized unrealized Carrying value maturities losses losses Technology $ 158.2 13.0 %$ .5 11.2 % Healthcare/pharmaceuticals 157.3 12.9 .5 10.9 Cable/media 128.0 10.5 .6 13.4 Food/beverage 83.2 6.8 .5 10.3 Capital goods 69.0 5.6 .4 8.3 Building materials 64.7 5.3 .2 3.6 Chemicals 63.9 5.2 .1 2.1 Consumer products 59.6 4.9 .3 6.0 Paper 58.7 4.8 .2 3.3 Brokerage 51.8 4.2 .2 3.4 Aerospace/defense 42.7 3.5 .2 4.5 Utilities 36.3 3.0 .3 5.8 Insurance 35.8 2.9 .2 3.5 Autos 32.9 2.7 .1 2.2 Other 179.2 14.7 .4 11.5 Total$ 1,221.3 100.0 %$ 4.7 100.0 % The following table sets forth the amortized cost and estimated fair value of those investments held by the VIEs with unrealized losses atSeptember 30, 2021 , by contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties. Estimated Amortized fair cost value (Dollars in millions)
Due after one year through five years $ 467.1 $ 461.7
Due after five years through ten years 324.7 322.9
Total $ 791.8 $ 784.6
The following summarizes the investments sold at a loss during the first nine
months of 2021 which had been continuously in an unrealized loss position
exceeding 20 percent of the amortized cost basis prior to the sale for the
period indicated (dollars in millions):
At date of sale
Number
of issuers Amortized cost Fair value
Greater than or equal to 6 months and less
than 12 months prior to sale 3 $ 4.1 $ 3.0
Greater than 12 months prior to sale 1 1.1 .4
4 $ 5.2 $ 3.4
88
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
___________________
There were no investments in our portfolio rated below-investment grade not
deemed to have credit losses which had been continuously in an unrealized loss
position exceeding 20 percent of the cost basis.
NEW ACCOUNTING STANDARDS
See "Recently Issued Accounting Standards" in the notes to consolidated
financial statements for a discussion of recently issued accounting standards.
Joint Industry Plan; Order Disapproving an Amendment to the National Market System Plan Governing the Consolidated Audit Trail
For Fifth Consecutive Year, Combined Insurance Named a "Best For Vets" Employer
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