HEALTH CARE
CNO FINANCIAL GROUP, INC. Management’s discussion and analysis of its consolidated financial condition and results of operations. (Form 10-Q)
In this section, we review the consolidated financial condition of CNO atSeptember 30, 2022 , and its consolidated results of operations for the nine months endedSeptember 30, 2022 and 2021, 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.
Cautionary Note 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 2021 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 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 future resulting increased claim costs, 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;
• Exposure to interest rate risk, including interest rate fluctuations, may adversely affect our operating results, financial condition or cash flows.
•future investment results, including the impact of realized losses (including other-than-temporary impairment charges) may diminish the value of our invested assets and negatively impact our profitability, our financial condition and our liquidity;
• the final outcome of lawsuits brought 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 appropriate and timely price increases for our health products, including our long-term care business;
• Receipt of regulatory approvals required to pay dividends and excess bond interest 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 assumptions related to deferred acquisition costs or the present value of future earnings.
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• the recoverability of our deferred tax assets, the impact of potential changes in ownership and changes in tax rates on their values;
• Our assumption that our position on filing tax returns will not be successfully challenged by the Internal Revenue Service.
• Changes in accounting principles and their interpretation.
• our ability to continue to meet our financial ratio and balance requirements and other covenants of our debt agreements;
• Performance and valuation of our investments.
• Our ability to identify products and markets that can effectively compete with 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 control over financial reporting and modeling.
• our ability to continue to recruit and retain productive agents and distribution partners;
• Customer reaction to new products, distribution channels, and marketing initiatives.
•inflation may impact the sales and persistency of insurance products, a portion of our insurance policy benefits affected by increased medical coverage costs and various selling, general and administrative expenses; •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 federal income tax laws and regulations may affect or eliminate the relative tax advantage of some products and may affect the value of deferred tax assets.
• The availability and validity of reinsurance contracts and the reinsurer’s default or impact of default.
• Performance of third party service providers and potential issues arising from outsourcing arrangements.
• Expectations for growth in sales, premiums collected, pension deposits and assets.
• Disruption of telecommunications, 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 climate change;
• Ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks.When
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• Risk factors or uncertainties are stated in our filings from time to time.
Other factors and assumptions not specified above also relate to forward-looking statements that, if they prove to be incorrect, could 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.
Risk-Based Capital (“RBC”) metric reporting is not intended to rank insurance companies and is not intended to be used in connection with 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 income segments. Our segments are aligned based on their common characteristics, comparability of profit margins and the way management makes operating decisions and assesses the performance of the business. Our insurance product line segments (annuity, health and life) include marketing, underwriting and administration of the policies our insurance subsidiaries sell. The business written in each of the three product categories through all of our insurance subsidiaries is aggregated allowing management and investors to assess the performance of each product category. When analyzing profitability of these segments, we use insurance product margin as the measure of profitability, which is: (i) insurance policy income; and (ii) net investment income allocated to the insurance product lines; less (i) insurance policy benefits and interest credited to policyholders; and (ii) amortization, non-deferred commissions and advertising expense. Net investment income is allocated to the product lines using the book yield of investments backing the block of business, which is applied to the average insurance liabilities, net of insurance intangibles, for the block in each period. Income from insurance products is the sum of the insurance margins of the annuity, health and life product lines, less expenses allocated to the insurance lines. It excludes the income from our fee income business, investment income not allocated to product lines, net expenses not allocated to product lines (primarily holding company expenses) and income taxes. Management believes insurance product margin and income from insurance products help provide a better understanding of the business and a more meaningful analysis of the results of our insurance product lines.
We sell insurance products through our Consumer and Worksite divisions, which reflect the customers we serve.
The Consumer Division serves individual consumers, engaging with them on the phone, virtually, online, face-to-face with agents, or through a combination of sales channels. This structure unifies consumer capabilities into a single division and integrates the strength of our agent sales forces with one of the largest direct-to-consumer insurance businesses with proven experience in advertising, web/digital and call center support. The Worksite Division focuses on worksite and group sales for businesses, associations, and other membership groups, interacting with customers at their place of employment and virtually. With a separate Worksite Division, we are bringing a sharper focus to this high-growth business while further capitalizing on the strength of our acquisitions of WBD andDirectPath . Sales in the Worksite Division have been particularly adversely impacted by the COVID-19 pandemic given the challenges of interacting with customers at their place of employment. The Worksite Division is increasing its recruiting efforts to rebuild its agent force which was adversely impacted by the COVID-19 pandemic. 59 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ The Consumer and Worksite Divisions are primarily focused on marketing insurance products, several types of which are sold in both divisions and underwritten in the same manner. Sales of group underwritten policies are currently not significant, but are expected to increase within the Worksite Division. The investment segment involves the management of our capital resources, including investments and the management of corporate debt and liquidity. Our measure of profitability of this segment is the total net investment income not allocated to the insurance products. Investment income not allocated to product lines represents net investment income less: (i) equity returns credited to policyholder account balances; (ii) the investment income allocated to our product lines; (iii) interest expense on notes payable and investment borrowings; (iv) expenses related to the FABN program; and (v) certain expenses related to benefit plans that are offset by special-purpose investment income. Investment income not allocated to product lines includes investment income on investments in excess of average insurance liabilities, investments held by our holding companies, the spread we earn from our FHLB investment borrowing and FABN programs and variable components of investment income (including call and prepayment income, adjustments to returns on structured securities due to cash flow changes, income (loss) from COLI and alternative investment income not allocated to product lines), net of interest expense on corporate debt. Our fee income segment includes the earnings generated from sales of third-party insurance products, services provided by WBD (our on-line benefit administration firm), Optavise (a national provider of year-round technology-driven employee benefits management services) and the operations of our broker dealer and registered investment advisor.
Expenses not allocated to product lines include our operating expenses, excluding interest expense on debt.
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Below is a summary of the earnings for the 3 and 9 months.
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Insurance product margin
Annuity margin $ 39.8 $ 52.5 $ 121.5 $ 176.4
Health margin 124.1 117.9 362.3 363.5
Life margin 43.4 53.2 120.0 120.0
Total insurance product margin 207.3 223.6 603.8 659.9
Allocated expenses (150.5) (140.5) (447.5) (423.2)
Income from insurance products 56.8 83.1
156.3 236.7
Fee income 1.4 2.6 14.5 16.5 Investment income not allocated to product lines 32.2 50.9 129.2 141.7 Expenses not allocated to product lines (16.1) (17.3) (28.0) (63.1) Operating earnings before taxes 74.3 119.3 272.0 331.8 Income tax expense on operating income (17.4) (26.5) (63.9) (74.7) Net operating income (a) 56.9 92.8 208.1 257.1 Net realized investment gains (losses) from sales, impairments and change in allowance for credit losses (net of related amortization) (.1) 2.2 (33.3) 30.1 Net change in market value of investments recognized in earnings (17.0) (4.6) (64.2) (5.3) Fair value changes related to agent deferred compensation plan 12.0 - 48.7 13.2 Fair value changes in embedded derivative liabilities (net of related amortization) 66.0 10.9
236.5 48.1
Other 2.0 .2 2.2 1.7 Net non-operating income before taxes 62.9 8.7
189.9 87.8
Income tax expense on non-operating income (14.8) (1.7) (44.6) (19.7) Net non-operating income 48.1 7.0 145.3 68.1 Net income$ 105.0 $ 99.8 $ 353.4 $ 325.2 Per diluted share Net operating income$ .49 $ .72 $ 1.76 $ 1.93 Net non-operating income .42 .05 1.23 .51 Net income$ .91 $ .77 $ 2.99 $ 2.44 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 operating income," a non-GAAP financial measure) is important to evaluate
the financial performance of the company, and is a key measure commonly used in
the life insurance industry. Management uses this measure to evaluate
performance because the items excluded from net operating income can be affected
by events that are unrelated to the Company's underlying fundamentals. The table
above reconciles the non-GAAP measure to the corresponding GAAP measure.
In addition, management uses these non-GAAP financial measures in its budgeting
process, financial analysis of segment performance and in assessing the
allocation of resources. We believe these non-GAAP financial measures enhance an
investor's understanding of our financial performance and allows them to make
more informed judgments about the Company as a whole. These measures also
highlight operating trends that might not otherwise be apparent. However, net
operating income is not a measurement of financial performance under GAAP and
should not be considered as an alternative to cash flow from operating
activities, as measures of liquidity, or as an alternative to net income as
measures of our operating performance or any other measures of performance
derived in accordance with GAAP. In addition, net operating income should not be
construed as an inference that our future results will be unaffected by unusual
or non-recurring items. Net operating income has limitations as an analytical
tool, and you should not consider such measure either in isolation or as a
substitute for analyzing our results as reported under GAAP. Our definition and
calculation of net operating income are not necessarily comparable to other
similarly titled measures used by other companies due to different methods of
calculation.
Significant accounting policies
Refer to "Critical Accounting Policies" in our 2021 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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Operation result
The following table and descriptions summarize the operating results of our segments (in millions of dollars).
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Insurance product margin
Annuity:
Insurance policy income $ 6.3 $ 5.8 $ 17.1 $ 15.5
Net investment income 117.3 115.5 347.2 346.1
Insurance policy benefits (23.7) (16.2) (69.1) (23.7)
Interest credited (46.3) (38.1) (129.9) (113.7)
Amortization and non-deferred commissions (13.8) (14.5) (43.8) (47.8)
Annuity margin 39.8 52.5 121.5 176.4
Health:
Insurance policy income 403.5 414.4 1,213.7 1,246.3
Net investment income 71.9 72.2 215.3 215.3
Insurance policy benefits (307.8) (325.4) (924.8) (955.3)
Amortization and non-deferred commissions (43.5) (43.3) (141.9) (142.8)
Health margin 124.1 117.9 362.3 363.5
Life:
Insurance policy income 213.4 210.4 643.0 631.7
Net investment income 36.6 36.4 109.1 108.3
Insurance policy benefits (142.6) (141.3) (444.6) (454.4)
Interest credited (12.2) (11.1) (35.1) (32.7)
Amortization and non-deferred commissions (29.7) (21.4) (78.4) (64.9)
Advertising expense (22.1) (19.8) (74.0) (68.0)
Life margin 43.4 53.2 120.0 120.0
Total insurance product margin 207.3 223.6 603.8 659.9
Allocated expenses:
Branch office expenses (16.5) (14.8) (50.0) (49.5)
Other allocated expenses (134.0) (125.7) (397.5) (373.7)
Income from insurance products 56.8 83.1 156.3 236.7
Fee income 1.4 2.6 14.5 16.5
Investment income not allocated to product lines 32.2 50.9 129.2 141.7
Expenses not allocated to product lines (16.1) (17.3) (28.0) (63.1)
Operating earnings before taxes 74.3 119.3 272.0 331.8
Income tax expense on operating income (17.4) (26.5) (63.9) (74.7)
Net operating income $ 56.9 $ 92.8 $ 208.1 $ 257.1
CNO is the top tier holding company for a group of insurance companies operating
throughout the 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, virtually, online,
face-to-face with agents, or through a combination of sales channels. The
Worksite Division focuses on worksite and group sales for businesses,
associations, and other membership groups, interacting with customers at their
place of employment and virtually.
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Insurance product margin is management's measure of the profitability of its
annuity, health and life product lines' performance and consists of insurance
policy income plus allocated investment income less insurance policy benefits,
interest credited, commissions, advertising expense and amortization of
acquisition costs. Income from insurance products is the sum of the insurance
margins of the annuity, health and life product lines, less expenses allocated
to the insurance lines. It excludes the income from our fee income business,
investment income not allocated to product lines, net expenses not allocated to
product lines (primarily holding company expenses) and income taxes. Management
believes insurance product margin and income from insurance products help
provide a better understanding of the business and a more meaningful analysis of
the results of our insurance product lines.
Investment income is allocated to the product lines using the book yield of
investments backing the block of business, which is applied to the average
insurance liabilities, net of insurance intangibles, for the block in each
period. Investment income not allocated to product lines represents net
investment income less: (i) equity returns credited to policyholder account
balances; (ii) the investment income allocated to our product lines; (iii)
interest expense on notes payable and investment borrowings; (iv) expenses
related to the FABN program; and (v) certain expenses related to benefit plans
that are offset by special-purpose investment income. Investment income not
allocated to product lines includes investment income on investments in excess
of average insurance liabilities, investments held by our holding companies, the
spread we earn from our FHLB investment borrowing and FABN programs and variable
components of investment income (including call and prepayment income,
adjustments to returns on structured securities due to cash flow changes, income
(loss) from COLI and alternative investment income not allocated to product
lines), net of interest expense on corporate debt.
Summary of Operating Results: Net operating income was $56.9 million in the
third quarter of 2022, down from $92.8 million in the third quarter of 2021, and
was $208.1 million in the first nine months of 2022, down from $257.1 million in
the first nine months of 2021.
Insurance product margin was $207.3 million in the third quarter of 2022
compared to $223.6 million in the third quarter of 2021, and was $603.8 million
in the first nine months of 2022 compared to $659.9 million in the first nine
months of 2021. Insurance product margin has been significantly impacted by the
COVID-19 pandemic. Our life margin reflected adverse mortality as a result of
increased deaths related to COVID-19 of approximately $5 million and $3 million
in the third quarters of 2022 and 2021, respectively, and $21 million and $33
million in the first nine months of 2022 and 2021, respectively. Our health
margin continues to compare favorably to the margins experienced prior to the
COVID-19 pandemic. We estimate the favorable impacts on our health margin due to
COVID-19 to be approximately $26 million and $25 million in the third quarters
of 2022 and 2021, respectively, and $79 million and $95 million in the first
nine months of 2022 and 2021, respectively. In addition, the margin from fixed
index annuities in the three and nine months ended September 30, 2022 decreased
by $11 million and $47 million , respectively, due to recent market volatility,
as compared to the same periods in 2021.
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Expenses allocated to insurance products were $150.5 million in the third
quarter of 2022, up 7.1 percent from the third quarter of 2021, and were $447.5
million in the first nine months of 2022, up 5.7 percent from the comparable
period in 2021. Such higher expenses primarily reflect our continued investment
in growth initiatives.
Fee income segments are summarized below (in millions of dollars).
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Fee revenue $ 30.6 $ 28.0 $ 102.0 $ 91.4
Operating costs and expenses (29.2) (25.4) (87.5) (74.9)
Net fee income $ 1.4 $ 2.6 $ 14.5 $ 16.5
Operating costs and expenses in the fee income segment in the 2022 periods
primarily reflect higher expenses related to our businesses that provide
benefits administration and employee benefits management services. Such expenses
in the 2022 periods are partially offset by the growth related to the sales of
third party products in recent periods and changes to our assumptions reflecting
favorable policy persistency.
Investment income not allocated to product lines generally fluctuates from
period to period based on the level of prepayment income (including call
premiums) and trading account income; the performance of our alternative
investments (which are typically reported a quarter in arrears); the earnings
related to the investments underlying our COLI; and the spread we earn from our
FHLB investment borrowing and FABN programs.
Costs not allocated to product lines include certain significant items listed in the table below. Unallocated costs to product lines adjusted for these significant items are summarized below (in millions of dollars).
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Expenses not allocated to product lines $ 16.1 $ 17.3 $ 28.0 $ 63.1
Experience refund related to a reinsurance
agreement (a) - - 22.5 -
Net expenses related to significant legal and
regulatory matters - (3.0) - (12.8)
Transaction expenses related to acquisition of
DirectPath - - - (2.5)
Adjusted total $ 16.1 $ 14.3 $ 50.5 $ 47.8
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(a) Under the terms of the reinsurance agreement to cede a substantial portion
of our legacy long-term care block, we are entitled to receive an experience
refund of up to $22.5 million if certain rate increases are approved and
implemented. As of June 30, 2022 , all requirements to earn the maximum
experience refund had been met and the refund had been recognized. Pursuant to
the terms of the agreement, the refund is payable in the second half of 2023.
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Margin from Annuity Products ($ millions):
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Annuity margin:
Fixed index annuities
Insurance policy income $ 3.6
net investment income
91.3 86.3 267.4 256.1 Insurance policy benefits (19.0) (9.8) (56.7) (4.4) Interest credited (34.4) (24.8) (94.1) (73.1) Amortization and non-deferred commissions (12.2) (12.6) (38.6) (42.2) Margin from fixed index annuities$ 29.3
average net insurance liability
$ 8,555.6
Margin/Average net insurance liability
1.37 % 2.15 % 1.40 % 2.54 % Fixed interest annuities Insurance policy income$ .2
net investment income
20.3 23.0 62.4 71.1 Insurance policy benefits .1 (.2) (.8) (.7) Interest credited (11.3) (12.7) (34.0) (38.7) Amortization and non-deferred commissions (1.5) (1.8) (4.9) (5.4) Margin from fixed interest annuities$ 7.8
average net insurance liability
$ 1,677.4
Margin/Average net insurance liability
1.86 % 1.85 % 1.81 % 1.89 % Other annuities Insurance policy income$ 2.5 $ 2.2 6.2$ 5.3 Net investment income 5.7 6.2 17.4 18.9 Insurance policy benefits (4.8) (6.2) (11.6) (18.6) Interest credited (.6) (.6) (1.8) (1.9) Amortization and non-deferred commissions (.1) (.1) (.3) (.2) Margin from other annuities$ 2.7
average net insurance liability
$ 476.3
Margin/Average net insurance liability
2.27 % 1.20 % 2.74 % .92 % Total annuity margin$ 39.8
average net insurance liability
$ 10,709.3
Margin/Average net insurance liability
1.49 % 2.05 % 1.53 % 2.34 % Margin from fixed index annuities was$29.3 million in the third quarter of 2022 compared to$42.4 million in the third quarter of 2021, and was$88.3 million in the first nine months of 2022 compared to$146.0 million in the first nine months of 2021. The decrease in margin in the 2022 periods is primarily driven by unfavorable impacts resulting from market conditions (primarily higher interest rates and lower equity markets) in 2022 as compared to the 2021 periods. Such unfavorable market conditions reduced margins on this block of business by$17 million and$6 million in the third quarters of 2022 and 2021, respectively, and by$48 million and$1 million in the first nine months of 2022 and 2021, respectively. Average net insurance liabilities (total insurance liabilities less: (i) amounts related to reinsured business; (ii) deferred acquisition costs; (iii) present value of future profits; and (iv) the value of unexpired options credited to insurance liabilities) were$8,555.6 million and$7,881.9 million in the third quarters of 2022 and 2021, respectively, and were$8,414.8 million and$7,663.4 million in the first nine months of 2022 and 2021, respectively, driven by deposits and reinvested returns in excess of withdrawals. The increase in net insurance liabilities results in higher net investment income allocated, however, the earned yield was 4.27 percent in the 66 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ third quarter of 2022, down from 4.38 percent in the third quarter of 2021, and was 4.24 percent in the first nine months of 2022 down from 4.46 percent in the first nine months of 2021, reflecting lower investment yields. We believe the margin on fixed index annuities was favorably impacted by approximately nil and$6 million in the three and nine months endedSeptember 30, 2021 , respectively, primarily due to persistency impacts indirectly related to the pandemic. There were no material COVID-19 impacts in the 2022 periods. Net investment income and interest credited exclude the change in market values of the underlying options supporting the fixed index annuity products and corresponding offsetting amount credited to policyholder account balances. Such amounts were$(30.9) million and$6.3 million in the third quarters of 2022 and 2021, respectively, and were$(175.3) million and$112.3 million in the first nine months of 2022 and 2021, respectively. Margin from fixed interest annuities was$7.8 million in the third quarter of 2022 compared to$8.6 million in the third quarter of 2021, and was$23.3 million in the first nine months of 2022 compared to$26.9 million in the first nine months of 2021, driven primarily by a reduction in the size of the block and lower investment yields. Average net insurance liabilities were$1,677.4 million in the third quarter of 2022 compared to$1,856.3 million in the third quarter of 2021, and were$1,717.6 million in the first nine months of 2022 compared to$1,902.4 million in the first nine months of 2021, 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 4.84 percent in the third quarter of 2022 from 4.96 percent in the third quarter of 2021, and to 4.84 percent in the first nine months of 2022 from 4.98 percent in the first nine months of 2021, reflecting lower investment yields. Margin from other annuities was$2.7 million in the third quarter of 2022 compared to$1.5 million in the third quarter of 2021, and was$9.9 million in the first nine months of 2022 compared to$3.5 million in the first nine months of 2021. 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 2022 periods compared to the same periods in 2021. We believe the margin from other annuities reflected favorable (unfavorable) COVID-19 impacts of approximately$1 million and$2 million in the three and nine months endedSeptember 30, 2022 , respectively, and approximately$(1) million and$(4) million in the three and nine months endedSeptember 30, 2021 , respectively. 67 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
margin from
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Health margin:
Supplemental health
Insurance policy income $ 173.5 $ 171.2 $ 519.0 $ 511.0
Net investment income 38.0 36.9 113.3 109.3
Insurance policy benefits (117.7) (127.8) (370.6) (385.0)
Amortization and non-deferred commissions (30.5) (29.4) (88.9) (86.5)
Margin from supplemental health $ 63.3 $ 50.9 $ 172.8 $ 148.8
Margin/insurance policy income 36 % 30 % 33 % 29 %
Medicare supplement
Insurance policy income $ 163.6 $ 177.4 $ 495.5 $ 538.1
Net investment income 1.3 1.3 4.0 3.9
Insurance policy benefits (115.9) (129.7) (341.6) (372.7)
Amortization and non-deferred commissions (10.8) (11.7) (47.1) (48.1)
Margin from Medicare supplement $ 38.2 $ 37.3 $ 110.8 $ 121.2
Margin/insurance policy income 23 % 21 % 22 % 23 %
Long-term care
Insurance policy income $ 66.4 $ 65.8 $ 199.2 $ 197.2
Net investment income 32.6 34.0 98.0 102.1
Insurance policy benefits (74.2) (67.9) (212.6) (197.6)
Amortization and non-deferred commissions (2.2) (2.2) (5.9) (8.2)
Margin from long-term care $ 22.6 $ 29.7 $ 78.7 $ 93.5
Margin/insurance policy income 34 % 45 % 40 % 47 %
Total health margin $ 124.1 $ 117.9 $ 362.3 $ 363.5
Margin/insurance policy income 31 % 28 %
30% 29%
Margin from supplemental health business was$63.3 million in the third quarter of 2022, up 24 percent from the third quarter of 2021, and was$172.8 million in the first nine months of 2022, up 16 percent from the first nine months of 2021, reflecting growth in the block and favorable claim experience. The margin as a percentage of insurance policy income was 36 percent in the third quarter of 2022 compared to 30 percent in the prior year period, and was 33 percent in the first nine months of 2022 compared to 29 percent in the first nine months of 2021. The supplemental health margin continues to compare favorably to the margins experienced prior to the COVID-19 pandemic. We estimate the favorable impacts due to COVID-19 on the supplemental health margin in the three and nine months endedSeptember 30, 2022 were approximately$14 million and$29 million , respectively, and approximately$8 million and$16 million in the three and nine months endedSeptember 30, 2021 , respectively, relative to our expectations and previous experience prior to COVID-19. Claim experience will fluctuate from period to period and there is no assurance that such favorable impacts will continue. The supplemental health margin was also favorably impacted by$3 million in the third quarter of 2022 due to a refinement to our claim reserve loss adjustment expense assumption as a result of a recently completed loss adjustment expense study. 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 68 --------------------------------------------------------------------------------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$38.2 million and$37.3 million in the third quarters of 2022 and 2021, respectively, and$110.8 million and$121.2 million in the first nine months of 2022 and 2021, respectively. The margin on the Medicare supplement business in the 2022 and 2021 periods continued to compare favorably to the margins experienced prior to the COVID-19 pandemic. We estimate that the favorable impacts due to COVID-19 (based on actual claims incurred and persistency relative to our expectations and previous experience prior to COVID-19) on the Medicare supplement margin were approximately$3 million and$14 million in the three and nine months endedSeptember 30, 2022 , respectively, and$3 million and$23 million in the three and nine months endedSeptember 30, 2021 , respectively. Claim experience will fluctuate from period to period and there is no assurance that such favorable impacts will continue. Insurance policy income was$163.6 million in the third quarter of 2022, down 7.8 percent from the third quarter of 2021, and was$495.5 million in the first nine months of 2022, down 7.9 percent from the first nine months of 2021, reflecting lower sales in recent periods partially offset by premium rate increases. We have experienced a shift in the sale of Medicare supplement policies to the sale of Medicare Advantage policies. We receive fee income when Medicare Advantage policies of other providers are sold, which is recorded in our Fee income segment. We continue to invest in both our Medicare supplement products and Medicare Advantage distribution to meet our customers' needs and preferences. For example, we launched a new competitive Medicare supplement product in the second quarter of 2022. Medicare supplement business consists of both individual and group policies. Government regulations generally require we attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefits reserves which is a component of Insurance policy benefits) of not less than 65 percent on individual products and not less than 75 percent on group products. The ratio is determined after three years from the original issuance of the policy and over the lifetime of the policy and measured in accordance with statutory accounting principles. Since the insurance product liabilities we establish for Medicare supplement business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Changes to our estimates are reflected in insurance policy benefits in the period the change is determined. Margin from Long-term care products was$22.6 million in the third quarter of 2022, down 24 percent from the third quarter of 2021, and was$78.7 million in the first nine months of 2022, down 16 percent from the first nine months of 2021. The margin as a percentage of insurance policy income was 34 percent in the third quarter of 2022 compared to 45 percent in the third quarter of 2021, and was 40 percent in the first nine months of 2022 compared to 47 percent in the first nine months of 2021. The margin in both the 2022 and 2021 periods continued to compare favorably to the margins experienced prior to the COVID-19 pandemic. In addition, an increase in policyholder deaths attributable to the pandemic resulted in higher than expected reserve releases in the first quarter of 2021. We estimate the favorable impacts due to COVID-19 (based on actual claims incurred and persistency relative to our expectations and previous experience prior to COVID-19) on the long-term care margin were approximately$9 million and$36 million in the three and nine months endedSeptember 30, 2022 , respectively, and by approximately$14 million and$56 million in the three and nine months endedSeptember 30, 2021 , respectively. Claim experience will fluctuate from period to period and there is no assurance that such favorable impacts will continue. In addition, the margin has been favorably impacted by the more profitable business currently being sold and the run-off of less profitable older long-term care business. 69 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Margin from Life Products ($ millions):
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Life margin:
Interest-sensitive life
Insurance policy income $ 43.5 $ 42.3 $ 130.4 $ 124.5
Net investment income 13.0 12.6 38.9 37.4
Insurance policy benefits (20.5) (17.4) (57.5) (60.1)
Interest credited (12.0) (10.9) (34.6) (32.2)
Amortization and non-deferred commissions (7.7) (6.6) (22.2) (18.6)
Margin from interest-sensitive life $ 16.3 $ 20.0 $ 55.0 $ 51.0
Average net insurance liabilities $ 1,025.0 $ 983.8 $ 1,019.1 $ 969.5
Interest margin $ 1.0 $ 1.7 $ 4.3 $ 5.2
Interest margin/average net insurance liabilities .39 % .69 % .56 % .72 %
Underwriting margin $ 15.3 $ 18.3 $ 50.7 $ 45.8
Underwriting margin/insurance policy income 35 % 43 % 39 % 37 %
Traditional life
Insurance policy income $ 169.9 $ 168.1 $ 512.6 $ 507.2
Net investment income 23.6 23.8 70.2 70.9
Insurance policy benefits (122.1) (123.9) (387.1) (394.3)
Interest credited (.2) (.2) (.5) (.5)
Amortization and non-deferred commissions (22.0) (14.9) (56.2) (46.3)
Advertising expense (22.1) (19.7) (74.0) (68.0)
Margin from traditional life $ 27.1 $ 33.2 $ 65.0 $ 69.0
Margin/insurance policy income 16 % 20 % 13 % 14 %
Margin excluding advertising expense/insurance policy
income 29 % 31 % 27 % 27 %
Total life margin $ 43.4 $ 53.2 $ 120.0 $ 120.0
Margin from interest-sensitive life business was $16.3 million in the third
quarter of 2022, down 19 percent from the third quarter of 2021, and was $55.0
million in the first nine months of 2022, up 7.8 percent from the first nine
months of 2021. The change in margin reflects the mortality experienced related
to COVID-19 in the 2022 periods, compared to the 2021 periods and growth in the
block due to sales in recent periods. We estimate that the unfavorable impact
from death claims related to COVID-19 on the margin of this block of business
was approximately $3 million and $6 million in the three and nine months ended
September 30, 2022 , respectively, and approximately $1 million and $12 million
in the three and nine months ended September 30, 2021 , respectively.
The interest margin was $1.0 million and $1.7 million in the third quarters of
2022 and 2021, respectively, and was $4.3 million and $5.2 million in the first
nine months of 2022 and 2021, respectively. Net investment income in the 2022
periods was slightly higher than the 2021 periods. The increase in average net
insurance liabilities results in higher net investment income allocated, which
is partially offset by lower earned yields. The earned yield was 5.07 percent
and 5.12 percent in the third quarters of 2022 and 2021, respectively, and was
5.09 percent and 5.14 percent in the first nine months of 2022 and 2021,
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 were $(4.0) million and $.9 million in the third quarters of 2022 and
2021, respectively, and were $(23.9) million and $13.5 million in the first nine
months of 2022 and 2021, respectively.
70
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
___________________
Margin from traditional life business was $27.1 million and $33.2 million in the
third quarters of 2022 and 2021, respectively, and was $65.0 million and $69.0
million in the first nine months of 2022 and 2021, respectively. Insurance
policy benefits were $122.1 million in the third quarter of 2022, down 1.5
percent from the same period in 2021, and were $387.1 million in the first nine
months of 2022, down 1.8 percent from the same period in 2021. We estimate that
the impact from death claims related to COVID-19 increased insurance policy
benefits by approximately $2 million and $15 million in the three and nine
months ended September 30, 2022 , respectively, and by approximately $2 million
and $21 million in the three and nine months ended September 30, 2021 ,
respectively. In addition, amortization is higher in the 2022 periods, as
compared to the same periods in 2021, primarily related to higher deferred
acquisition costs in recent periods due to strong sales, including sales of our
direct-to-consumer products through third party distributors.
Allocated net investment income in the 2022 periods was down slightly, as
compared to the 2021 periods, as lower average investment yields more than
offset the growth in the block.
Advertising expense was $22.1 million in the third quarter of 2022, up 12
percent from the comparable period in 2021, and was $74.0 million in the first
nine months of 2022, up 8.8 percent from the comparable period in 2021. 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,
2022 2021 2022 2021
Collecting Premiums from Annuities and Interest-Sensitive Life Insurance Products: Annuities
$ 370.0
curious life
56.6 54.4 169.8 163.5 Total collected premiums from annuity and interest-sensitive life products$ 426.6
Collected premiums from annuity and interest-sensitive products increased 10
percent in the third quarter of 2022 compared to the third quarter of 2021, and
15 percent in the first nine months of 2022 compared to the first nine months of
2021, primarily due to higher premium collections from fixed index annuity
products.
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CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES
___________________
Investment return not allocated to product lines ($ millions):
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Net investment income $ 268.1 $ 308.2 $ 700.2 $ 1,025.6
Allocated to product lines:
Annuity (117.3) (115.5) (347.2) (346.1)
Health (71.9) (72.2) (215.3) (215.3)
Life (36.6) (36.4) (109.1) (108.3)
Equity returns credited to policyholder account
balances 34.9 (7.2) 199.2 (125.8)
The amount allocated to the product line and credited to the policyholder’s account balance
(190.9) (231.3) (472.4) (795.5)
Amounts related to variable interest entities and other non-operating items
(13.6) (7.1) (29.9) (22.9) Interest expense on debt (15.6) (15.6) (46.9) (46.7)
Interest expense on investment borrowings from FHLB (10.3)
(2.3) (17.4) (7.5) Expenses related to FABN program (7.5) - (22.4) -
Deduction for Deferred Compensation Plan (offset of investment income)
2.0 (1.0) 18.0 (11.3) Total adjustments (45.0) (26.0) (98.6) (88.4)
Investment return 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 spread we earn from our FHLB investment borrowing and FABN programs. Net Non-Operating Income:
Below is a summary of net non-operating income for the three and nine months.
Three months ended Nine months ended
September 30, September 30,
2022 2021 2022 2021
Net realized investment gains (losses) from sales, impairments and changes in loan loss reserves (net of related amortization)
$ (.1) $ 2.2 $ (33.3) $ 30.1
Net change in market value of investments recognized in revenue
(17.0) (4.6) (64.2) (5.3) Fair value changes related to agent deferred compensation plan 12.0 - 48.7 13.2
Changes in fair value of embedded derivative liabilities (related net amortization)
66.0 10.9 236.5 48.1 Other 2.0 .2 2.2 1.7 Net non-operating income before taxes$ 62.9 $ 8.7 $ 189.9 $ 87.8 Net realized investment losses, net of related amortization, in the three and nine months endedSeptember 30, 2022 , were$0.1 million and$33.3 million , respectively, including the favorable (unfavorable) change in the allowance for credit losses of$7.5 million and$(46.9) million , respectively, which was recorded in earnings. 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, 72 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Includes favorable (unfavorable) changes in allowance for doubtful accounts
The change in market value of investments recognized in earnings was a decrease of$17.0 million and$4.6 million in the third quarters of 2022 and 2021, respectively, and$64.2 million and$5.3 million in the first nine months of 2022 and 2021, respectively. The change in value will fluctuate from period to period based on market conditions. During the first nine months of 2022 and 2021, we recognized an increase in earnings of$48.7 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 earnings by$236.5 million and$48.1 million in the first nine months of 2022 and 2021, respectively, resulting from changes in the estimated fair value of embedded derivative liabilities related to our fixed index annuities, net of related amortization. Such amounts include the impacts of changes in market interest rates used to determine the derivative's estimated fair value. The discount rate is based on risk-free rates (U.S. Treasury rates for similar durations) adjusted for our non-performance risk and risk margins for non-capital market inputs. The increase inU.S. Treasury rates in 2022 was the primary factor in the change in estimated fair value of the embedded derivative liabilities. Other non-operating items primarily 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. 73 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Liquidity and capital resources
Outlook for 2022
Market volatility adversely impacted our results in the first nine months of 2022 (specifically the decrease in equity markets, the higher equity market volatility and increase in interest rates), decreasing our fixed index annuity margin by approximately$48 million . If such market volatility persists in future periods, we expect it would have directionally similar adverse impacts on our results in those periods.
In the fourth quarter of 2022, we expect:
•continued positive sales momentum with respect to new annualized premiums, collected premiums and fee revenue; •continued net favorable COVID-19 impacts on insurance product margin, but lower than recent periods; •investment income allocated to product lines to be slightly higher due to growth in our insurance inforce and leveling yields, as compared to the fourth quarter of 2021; •net investment income not allocated to product lines to be lower in the fourth quarter of 2022, as compared to the same period in 2021, due to lower expected yields on alternative investments; •earnings from our fee income segment to be seasonally higher in the fourth quarter due to: (i) the Medicare annual enrollment period; and (ii) employer benefit enrollments; •total expenses allocated and not allocated to product lines in the fourth quarter of 2022 to be higher than the fourth quarter of 2021, reflecting a trend similar to the first nine months of 2022, as compared to the same period in 2021, as we capture operating efficiencies, while also investing in growth; and •effective tax rate in 2022 to be higher than 2021 primarily due to higher state income taxes.
Overall, our consolidated RBC capital levels and holding company excess liquidity are approximately
We expect free cash flow to be less than the$380 million generated in 2021, reflecting moderating yield on alternative investments and tapering of net favorable COVID-19 impacts, capital strain from new business, and our decision in 2021 to reduce capital and excess holding company liquidity to target levels which contributed to higher levels of free cash flow in 2021. Our expectations are based on our financial model, which reflects our best estimate assumptions of various key variables. Given the unprecedented nature of the COVID-19 pandemic and the current macro-economic and geopolitical environment, the assumptions used in our modeling are based on variables that are inherently unpredictable, are subject to change, and have been difficult to predict accurately in prior periods. There are many plausible assumptions which could result in materially different projected outcomes from those used in our modeling which could affect our business, results of operations, financial condition and liquidity. The outcome generated by the application of updated assumptions may be materially different from those described above. 74 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Current capital structure
September 30,
2022 December 31, 2021
Total capital:
Corporate notes payable $ 1,138.4 $ 1,137.3
Shareholders' equity:
Common stock 1.1 1.2
Additional paid-in capital 2,030.6 2,184.2
Accumulated other comprehensive income (loss) (2,165.7)
1,947.1 Retained earnings 1,431.9 1,127.2 Total shareholders' equity 1,297.9 5,259.7 Total capital$ 2,436.3 $ 6,397.0 The following table summarizes certain financial ratios as of and for the nine months endedSeptember 30, 2022 and as of and for the year endedDecember 31, 2021 : September 30, 2022 December 31, 2021 Book value per common share $
11.35 $ 43.69 Book value per share of common stock, excluding accumulated other comprehensive income (loss)(a)
30.28 27.52 Debt to total capital ratios: Corporate debt to total capital 46.7 % 17.8 %
Bonds against total equity, excluding accumulated other comprehensive income (loss) (a)
24.7 % 25.6 %
_____________________
(a)This non-GAAP measure differs from the corresponding GAAP measure presented immediately above, because accumulated other comprehensive income (loss) has been excluded from the value of capital used to determine this measure. Management believes this non-GAAP measure is useful because it removes the volatility that arises from changes in accumulated other comprehensive income (loss). Such volatility is often caused by changes in the estimated fair value of our investment portfolio resulting from changes in general market interest rates rather than the business decisions made by management. However, this measure does not replace the corresponding GAAP measure.
Liquidity in the insurance business
Our insurance companies generally receive adequate cash flows from premium collections and investment income to meet their obligations. Life insurance, long-term care and supplemental health insurance and annuity liabilities are generally long-term in nature. Life and annuity policyholders may, however, withdraw funds or surrender their policies, subject to any applicable penalty provisions; there are generally no withdrawal or surrender benefits for long-term care insurance. We actively manage the relationship between the duration of our invested assets and the estimated duration of benefit payments arising from contract liabilities. Three of the Company's insurance subsidiaries (Bankers Life, Washington National and Colonial Penn) are members of the FHLB. As members of the FHLB, our insurance subsidiaries have the ability to borrow on a collateralized basis from the FHLB. We are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings. AtSeptember 30, 2022 , the carrying value of the FHLB common stock was$75.2 million . As ofSeptember 30, 2022 , collateralized borrowings from the FHLB totaled$1.6 billion and the proceeds were used to purchase matched variable rate fixed maturity securities. The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet. The borrowings are collateralized by investments with an estimated fair value of$2.1 billion atSeptember 30, 2022 , which are maintained in custodial accounts for the benefit of the FHLB. 75 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ In the third quarter of 2021, Bankers Life established a FABN program pursuant to which Bankers Life may issue funding agreements to aDelaware statutory trust organized in series (the "Trust") to generate spread-based earnings. The maximum aggregate principal amount of funding agreements permitted to be outstanding at any one time under the FABN program is$3 billion . InOctober 2021 , Bankers Life issued a funding agreement to a series of the Trust in an aggregate principal amount of$500 million . InJanuary 2022 , Bankers Life issued two additional funding agreements, each to a series of the Trust, totaling$900 million . We expect the FABN program to provide approximately 100 basis points of annualized pre-tax spread income on the notional amount of the funding agreements outstanding, net of the expense associated with the program. The activity related to the funding agreements is 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 375 percent atSeptember 30, 2022 , compared to 360 percent atJune 30, 2022 , and 386 percent atDecember 31, 2021 . In the first nine months of 2022, the RBC ratio reflected our estimated consolidated statutory operating earnings of$189 million and insurance company dividends (net of capital contributions) of$95.0 million that were paid to the holding company. Our RBC ratio atSeptember 30, 2022 , was equal to our targeted statutory RBC ratio of 375 percent and above the minimum 350 percent that is reflected in our risk appetite statement that we share and discuss with rating agencies and insurance regulators. Our targeted RBC ratio of 375 percent allows for a reduction in the ratio toward our minimum threshold of 350 percent in stressed market conditions such as we have experienced this year. Our holding company liquidity atSeptember 30, 2022 , was$162 million which was above our minimum target level of$150 million (see "-Liquidity of the Holding Companies" below). In the aggregate, our RBC capital level and excess holding company liquidity were approximately$12 million above our target capital levels. In the event we are below our target levels (such as we experienced in the first half of 2022), we would expect to manage back to$150 million of holding company liquidity and the 375 percent targeted consolidated statutory RBC ratio over time. We believe that the 375 percent RBC ratio target continues to adequately support our financial strength and credit ratings and is aligned with our risk appetite. 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.
Insurance Subsidiary Financial Ratings
Financial strength ratings provided byAM Best Company ("AM Best"), Fitch Ratings ("Fitch"), Moody's Investor Services, Inc. ("Moody's") and S&P are the rating agency's opinions of the ability of our insurance subsidiaries to pay policyholder claims and obligations when due. OnJanuary 26, 2022 , AM Best upgraded the financial strength ratings of our primary insurance subsidiaries to "A" from "A-" and the outlook for these ratings is stable. The "A" rating is assigned to companies that have an excellent ability, in AM Best's opinion, to meet their ongoing obligations to policyholders. AM Best ratings for the industry currently range from "A++ (Superior)" to "F (In Liquidation)" and some companies are not rated. An "A++" rating indicates a superior ability to meet ongoing obligations to policyholders. AM Best has sixteen possible ratings. There are two ratings above the "A" rating of our primary insurance subsidiaries and thirteen ratings that are below that rating. OnDecember 2, 2021 , Fitch affirmed its "A-" financial strength ratings of our primary insurance subsidiaries. The outlook for these ratings remain 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. 76 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ 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. 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.
Holding company liquidity
Availability, sources and use of holding company liquidity. Restrictions on the ability of insurance subsidiaries to pay dividends and excess bond interest to the holding company.Restrictions on holding company activities
AtSeptember 30, 2022 , 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$162.3 million of cash and investments which was comprised of: (i) unrestricted cash and cash equivalents of$125.8 million ; and (ii) exchange-traded funds that invest in fixed income securities of$36.5 million . Our holding company liquidity of$162.3 million increased$21.4 million fromJune 30, 2022 , and was above our minimum target level of$150 million . Refer to "-Liquidity for Insurance Operations" above regarding our aggregate capital levels relative to our consolidated statutory RBC ratio target and minimum holding company liquidity target. 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 2022, our insurance subsidiaries paid dividends toCDOC totaling$109.6 million . We expect to receive regulatory approval for 77 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
However, there is no assurance that such payments will be approved or that the insurance subsidiary’s financial condition will remain unchanged, and future approvals are unlikely.
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 323 percent atSeptember 30, 2022 .CDOC also holds a surplus debenture from Colonial Penn with a principal balance of$160.0 million . Interest payments on that surplus debenture require prior approval by thePennsylvania state insurance department. Dividends 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, 2022 , the subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions): Subsidiaries of CLTX Earned surplus (deficit) Additional information Bankers Life $ 346.0 (a) Colonial Penn (452.9) (b) ____________________ (a)Bankers Life paid dividends of$45.0 million to CLTX in the first nine months of 2022. Bankers Life may pay dividends without regulatory approval or prior notice for any 12-month period if such dividends are less than the greater of: (i) statutory net income for the prior year; or (ii) 10 percent of statutory capital and surplus as of the end of the preceding year. Dividends in excess of these levels require 30 days prior notice. (b)The deficit is primarily due to transactions which occurred several years ago, including a tax planning transaction and the fee paid to recapture a block of business previously ceded to an unaffiliated insurer. A significant deterioration in the financial condition, earnings or cash flow of the material subsidiaries of CNO orCDOC for any reason could hinder such subsidiaries' ability to pay cash dividends or other disbursements to CNO and/orCDOC , which, in turn, could limit CNO's ability to meet debt service requirements and satisfy other financial obligations. In addition, we may choose to retain capital in our insurance subsidiaries or to contribute additional capital to our insurance subsidiaries to maintain or strengthen their surplus or fund reinsurance transactions, and these decisions could limit the amount available at our top tier insurance subsidiaries to pay dividends to the holding companies. In the first nine months of 2022,CDOC made a capital contribution of$14.6 million to CLTX. AtSeptember 30, 2022 , there are no amounts outstanding under our$250 million Revolving Credit Agreement and there are no scheduled repayments of our direct corporate obligations untilMay 2025 . 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 2022, we generated$132 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 2022, we repurchased 7.2 million shares of common stock for$170.0 million under our securities repurchase program. The Company had remaining repurchase authority of$196.9 million as ofSeptember 30, 2022 . In the first nine months of 2022, dividends declared on common stock totaled$48.7 million ($0.41 per common share). InMay 2022 , the Company increased its quarterly common stock dividend to$0.14 per share from$0.13 per share. 78 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________ OnJanuary 26, 2022 , AM Best upgraded our issuer credit and senior unsecured debt ratings to "bbb" from "bbb-" and the outlook for these ratings is stable. In AM Best's view, a company rated "bbb" has an adequate ability to meet the terms of its obligations; however, the issuer is more susceptible to changes in economic or other conditions. Pluses and minuses show the relative standing within a category. AM Best has a total of 22 possible ratings ranging from "aaa (Exceptional)" to "d (In default)". There are eight ratings above CNO's "bbb" rating and thirteen ratings that are below its rating. OnDecember 2, 2021 , Fitch affirmed its "BBB-" rating on our senior unsecured debt. The outlook for these ratings remain 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. 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 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. 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. 79 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
investment
and
Gross Gross Estimated
Amortized unrealized unrealized Allowance for fair
cost gains losses credit losses value
Investment grade (a):
Corporate securities $ 13,242.8 $ 21.3 $ (2,062.1) $ (35.9) $ 11,166.1
United States Treasury securities and
obligations of United States government
corporations and agencies 169.5 - (11.7) - 157.8
States and political subdivisions 2,807.2 20.9 (437.0) (1.5) 2,389.6
Foreign governments 84.5 - (14.4) (.8) 69.3
Asset-backed securities 1,266.5 .2 (114.6) (.3) 1,151.8
Agency residential mortgage-backed securities 39.0 - (.5) - 38.5
Non-agency residential mortgage-backed
securities 1,168.2 6.1 (156.8) - 1,017.5
Collateralized loan obligations 778.3 - (45.1) - 733.2
Commercial mortgage-backed securities 2,368.6 - (225.0) - 2,143.6
Total investment grade fixed maturities,
available for sale 21,924.6 48.5 (3,067.2) (38.5) 18,867.4
Below-investment grade (a) (b):
Corporate securities 699.4 .9 (74.5) (13.3) 612.5
States and political subdivisions 11.6 - (.8) (.2) 10.6
Asset-backed securities 135.5 - (17.2) - 118.3
Non-agency residential mortgage-backed
securities 587.3 44.6 (10.5) - 621.4
Commercial mortgage-backed securities 84.1 - (13.2) - 70.9
Total below-investment grade fixed maturities,
available for sale 1,517.9 45.5 (116.2) (13.5) 1,433.7
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 National Association
of Insurance Commissioners (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.
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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, 2022 is as follows (dollars in
millions):
Estimated fair Percentage of total
NAIC designation Amortized cost value estimated fair value
1 $ 13,913.9 $ 12,147.2 59.9 %
2 8,586.8 7,335.5 36.1
Sum of NAIC 1 and 2 (investment amount
grade) 22,500.7 19,482.7 96.0
3 681.6 592.9 2.9
4 241.3 208.3 1.0
5 17.9 17.2 .1
6 1.0 - -
Total NAIC 3, 4, 5 and 6
(below-investment grade) 941.8 818.4 4.0
Total $ 23,442.5 $ 20,301.1 100.0 %
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The following table summarizes the carrying value and gross unrealized losses of our fixed maturity securities available for sale by current category.
Percent of
Percent of Gross gross
fixed unrealized unrealized
Carrying value maturities losses losses
States and political
subdivisions $ 2,400.2 11.8 % $ 437.8 13.8 %
Commercial mortgage-backed
securities 2,214.5 10.9 238.2 7.5
Banks 1,740.1 8.6 303.9 9.6
Non-agency residential
mortgage-backed securities 1,638.9 8.1 167.3 5.3
Asset-backed securities 1,270.1 6.3 131.8 4.1
Insurance 1,191.5 5.9 220.4 6.9
Utilities 1,176.6 5.8 198.9 6.2
Healthcare/pharmaceuticals 1,052.9 5.2 235.3 7.4
Brokerage 990.9 4.9 164.5 5.2
Technology 767.8 3.8 192.2 6.0
Collateralized loan obligations 733.2 3.6 45.1 1.4
Food/beverage 677.5 3.3 108.6 3.4
Energy 506.9 2.5 66.5 2.1
Cable/media 444.8 2.2 101.3 3.2
Real estate/REITs 395.8 1.9 52.6 1.7
Transportation 383.5 1.9 51.7 1.6
Telecom 322.4 1.6 45.5 1.4
Capital goods 282.4 1.4 44.1 1.4
Chemicals 271.2 1.3 48.8 1.5
Other 1,839.9 9.0 328.9 10.3
Total fixed maturities,
available for sale $ 20,301.1 100.0 % $ 3,183.4 100.0 %
AtSeptember 30, 2022 , the amortized cost of the Company's below-investment grade fixed maturity securities, available for sale, was$1,517.9 million , or 6.5 percent of the Company's fixed maturity portfolio (or$941.8 million , or 4.0 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$1,433.7 million , or 94 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. 82 --------------------------------------------------------------------------------CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
Net realized and unrealized investment losses
During the first nine months of 2022, we recognized$81.3 million of realized losses on sales of$1,321.7 million of fixed maturity securities, available for sale, including: (i)$54.3 million related to various corporate securities; (ii)$14.0 million related to non-agency residential mortgage-backed securities; (iii)$7.3 million related to states and political subdivisions; and (iv)$5.7 million related to various other investments. 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; (v) better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities; or (vi) changes in expected portfolio cash flows. During the first nine months of 2021, we recognized$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. The following summarizes the investments sold at a loss during the first nine months of 2022 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 Less than 6 months prior to sale 16 $ 64.0
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, 2022 , 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 in one year or less$ 62.9 $
61.7
1 to 5 years 1,776.6 1,643.4
5 to 10 years 1,962.2 1,726.0
Due after ten years 11,838.6
9,557.0
Subtotal 15,640.3
12,988.1
Structured securities 5,937.3
5,354.1
Total $ 21,577.6 $ 18,342.2
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The following summarizes the investments in our portfolio rated below-investment
grade not deemed to have credit losses which have been continuously in an
unrealized loss position exceeding 20 percent of the cost basis for the period
indicated as of September 30, 2022 (dollars in millions):
Number Cost Unrealized Estimated
of issuers basis loss fair value
Less than 6 months 15 $ 49.2 $ (12.6) $ 36.6
Greater than or equal to 6 months and
less than 12 months 1 5.0 (1.8) 3.2
Total $ 54.2 $ (14.4) $ 39.8
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The following table summarizes the total unrealized losses on our available-for-sale fixed maturity securities by category and rating category.
Investment grade Below-investment grade
Total gross
B+ and unrealized
AAA/AA/A BBB BB below losses
States and political subdivisions $ 426.9 $ 10.1 $ - $ .8 $ 437.8
Banks 168.5 134.5 .9 - 303.9
Commercial mortgage-backed securities 181.5 43.5 11.2 2.0 238.2
Healthcare/pharmaceuticals 152.6 78.2 3.1 1.4 235.3
Insurance 107.4 108.9 3.1 1.0 220.4
Utilities 104.8 90.8 2.7 .6 198.9
Technology 103.7 77.9 7.6 3.0 192.2
Non-agency residential mortgage-backed securities 92.1 64.7 .9 9.6 167.3
Brokerage 75.2 85.5 3.1 .7 164.5
Asset-backed securities 41.4 73.2 15.6 1.6 131.8
Food/beverage 22.0 83.3 1.2 2.1 108.6
Cable/media 14.7 76.7 4.3 5.6 101.3
Energy 10.7 51.4 4.4 - 66.5
Real estate/REITs 29.7 21.8 1.1 - 52.6
Transportation 18.1 32.8 .1 .7 51.7
Chemicals 5.4 41.6 1.0 .8 48.8
Telecom .4 45.1 - - 45.5
Collateralized loan obligations 38.3 6.8 - - 45.1
Consumer products 22.2 15.8 3.0 3.5 44.5
Capital goods 21.6 20.4 1.5 .6 44.1
Retail 24.2 13.6 3.2 - 41.0
Aerospace/defense 7.0 24.4 .1 1.2 32.7
Autos 5.0 24.0 2.3 .3 31.6
Building materials 5.4 23.5 1.1 .8 30.8
Metals and mining 3.8 18.7 1.1 - 23.6
Paper .8 15.5 - .5 16.8
Foreign governments 5.8 8.6 - - 14.4
Entertainment/hotels 5.8 5.1 1.0 2.0 13.9
United States Treasury securities and obligations
of United States government corporations and
agencies 11.7 - - - 11.7
Business services - 2.0 1.1 .8 3.9
Packaging - - 1.1 .3 1.4
Other 55.8 6.3 .5 - 62.6
Total fixed maturities available for sale
$ 39.9 $ 3,183.4
Our investment strategy is to maximize investment returns and total investment returns over sustained timeframes and within quality and risk tolerances through active strategic asset allocation and investment management. Therefore, securities may be sold at a profit or a loss in order to increase the expected total return of the portfolio as a market.
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Opportunities change to reflect changing perceptions of risk or to better match certain characteristics of our investment portfolio with those of the corresponding insurance liabilities.
AtSeptember 30, 2022 , fixed maturity investments included structured securities with an estimated fair value of$5.9 billion (or 29.0 percent of all fixed maturity securities). The yield characteristics of structured securities generally differ in some respects from those of traditional corporate fixed-income securities or government securities. For example, interest and principal payments on structured securities may occur more frequently, often monthly. In many instances, we are subject to variability in the amount and timing of principal and interest payments. For example, in many cases, partial prepayments may occur at the option of the issuer and prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of prepayments on the underlying assets backing the security to changes in interest rates and asset values; the availability of alternative financing; a variety of economic, geographic and other factors; the timing, pace and proceeds of liquidations of defaulted collateral; and various security-specific structural considerations (for example, the repayment priority of a given security in a securitization structure). In addition, the total amount of payments for non-agency structured securities may be affected by changes to cumulative default rates or loss severities of the related collateral. The amortized cost and estimated fair value of structured securities atSeptember 30, 2022 , summarized by type of security, were as follows (dollars in millions): Estimated fair value Percent Amortized of fixed Type cost Amount maturities Asset-backed securities$ 1,402.0 $ 1,270.1 6.2 % Agency residential mortgage-backed securities 39.0 38.5 .2 Non-agency residential mortgage-backed securities 1,755.5 1,638.9 8.1 Collateralized loan obligations 778.3 733.2 3.6 Commercial mortgage-backed securities 2,452.7 2,214.5 10.9 Total structured securities$ 6,427.5 $ 5,895.2 29.0 % 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, but are not limited to, 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. 86 -------------------------------------------------------------------------------- CNO FINANCIAL GROUP, INC. AND SUBSIDIARIES ___________________
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,
2022 2021 2022 2021
Revenues:
Net investment income - policyholder and other
special-purpose portfolios $ 16.0 $ 10.9 $ 39.6 $ 34.4
Fee revenue and other income 1.4 1.3 3.9 4.0
Total revenues 17.4 12.2 43.5 38.4
Expenses:
Interest expense 11.7 5.8 24.9 17.6
Other operating expenses .2 .2 1.3 1.0
Total expenses 11.9 6.0 26.2 18.6
Income before net investment gains (losses) and
income taxes 5.5 6.2 17.3 19.8
Net investment gains (losses) 3.5 - (6.7) 5.1
Income before income taxes $ 9.0 $ 6.2 $ 10.6 $ 24.9
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Supplemental information about 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, 2022 (dollars in millions): Percent of Percent Gross gross of fixed unrealized unrealized Carrying value maturities losses losses Technology $ 143.1 13.0 %$ 10.4 16.9 % Cable/media 128.6 11.7 6.1 9.9 Healthcare/pharmaceuticals 118.6 10.8 8.0 13.0 Food/beverage 82.3 7.5 5.2 8.5 Brokerage 61.3 5.6 2.5 4.1 Chemicals 58.5 5.3 2.5 4.1 Capital goods 52.5 4.8 3.1 5.0 Building materials 51.6 4.7 2.5 4.1 Consumer products 47.1 4.3 3.6 5.9 Paper 42.2 3.8 2.3 3.8 Transportation 40.7 3.7 1.7 2.7 Utilities 38.5 3.5 2.0 3.2 Autos 34.5 3.1 1.6 2.7 Insurance 33.5 3.0 1.7 2.8 Aerospace/defense 32.6 3.0 1.7 2.8 Business services 23.3 2.1 1.6 2.7 Banks 18.9 1.7 .6 1.1 Retail 18.1 1.7 .7 1.1 Environmental 11.7 1.1 .3 .4 Other 61.6 5.6 3.2 5.2 Total$ 1,099.2 100.0 %$ 61.3 100.0 % The following table sets forth the amortized cost and estimated fair value of those investments held by the VIEs with unrealized losses atSeptember 30, 2022 , 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 in one year or less$ 4.6 $ 4.4 Due after one year through five years 670.9 636.0
5 to 10 years later 470.2 437.5
Total$ 1,145.7 $ 1,077.9 88
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The following summarizes the investments held by the VIEs sold at a loss during
the first nine months of 2022 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
Less than 6 months prior to sale 2 $ 3.5 $ 1.9
Greater than or equal to 6 months and less
than 12 months prior to sale 1 .4 -
$ 3.9 $ 1.9
The following summarizes the investments held by the VIEs rated below-investment
grade not deemed to have credit losses which have been continuously in an
unrealized loss position exceeding 20 percent of the cost basis for the period
indicated as of September 30, 2022 (dollars in millions):
Number Cost Unrealized Estimated
of issuers basis loss fair value
Less than 6 months 1 $ 5.3 $ (1.2) $ 4.1
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