Fourth Quarter 2019
Financial and operating results for the period ended December 31, 2019
February 11, 2020
Unless otherwise specified, comparisons in this presentation are between 4Q18 and 4Q19.
Forward-Looking Statements
Certain statements made in this presentation should be considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These include statements about future results of operations and capital plans. We caution investors that these forward-looking statements are not guarantees of future performance, and actual results may differ materially. Investors should consider the important risks and uncertainties that may cause actual results to differ, including those included in our press release issued on February 11, 2020, our Quarterly Reports on Form 10-Q, our Annual Report on Form 10-K and other filings we make with the Securities and Exchange Commission. We assume no obligation to update this presentation, which speaks as of today's date.
Non-GAAP Measures
This presentation contains the following financial measures that differ from the comparable measures under Generally Accepted Accounting Principles (GAAP): operating earnings measures; book value, excluding accumulated other comprehensive income (loss) per share; operating return measures; earnings before net realized investment gains (losses) from sales and impairments, net change in market value of investments recognized in earnings, fair value changes in embedded derivative liabilities, fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, loss related to reinsurance transaction, other non-operating items, corporate interest expense and taxes; and debt to capital ratios, excluding accumulated other comprehensive income (loss). Reconciliations between those non-GAAP measures and the comparable GAAP measures are included in the Appendix, or on the page such measure is presented.
While management believes these measures are useful to enhance understanding and comparability of our financial results, these non-GAAP measures should not be considered substitutes for the most directly comparable GAAP measures.
Additional information concerning non-GAAP measures is included in our periodic filings with the Securities and Exchange Commission that are available in the "Investors - SEC Filings" section of CNO's website, CNOinc.com.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 2 |
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 3 |
2019 Year in Review
Strong production and operating discipline enhancing shareholder value
Strong
Operational
Performance
Building on Track Record of Execution
- Growth initiatives continue to bear fruit; all growth scorecard metrics up for the full year
- Solid new product launch activity
- Underwriting performance stable; all health benefit ratios within or better than provided guidance
- Second consecutive year of record Worksite sales
- Leveraged and broadened DTC capabilities
- Returned $319 million to shareholders; $252 million in share buybacks; increased buyback authorization by $500 million
- Received investment grade credit ratings from S&P and Fitch
- 13% increase in BV per diluted share (excl. AOCI)1 due to tax planning strategy and strong operating performance
- Acquired Web Benefits Design ("WBD")
- Entered into strategic technology partnership expected to deliver $20 million in savings over 5 years
1 A non-GAAP measure. See the Appendix for a reconciliation to the corresponding GAAP measure.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 4 |
Quarter in Review
Solid performance fueled by disciplined growth
Strong
Operational
Performance
Building on Track Record of Execution
- Life and health sales up 9%
- Annuity collected premiums down 9% reflecting pricing discipline; account values up 5%
- Insurance policy income up 1%
- All health benefit ratios within or better than provided guidance
- Fee income up $20 million
- Tax strategy enables full use of expiring NOLs ($194 million); drove a $1.28 increase in net income per share
- Operating income1 per share up 4% excluding significant items
- Returned $91.4 million to shareholders; $75 million in share buybacks
- BV per diluted share (excl. AOCI)1 of $22.09 up 9% from $20.30 at 9/30
- Operating ROE1, excluding significant items, of 10.4%
1 A non-GAAP measure. See the Appendix for a reconciliation to the corresponding GAAP measure.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 5 |
Growth Scorecard
Three of five metrics up Q/Q; all five up for full year
Drive Growth the Right
Expand to
($ millions) | 2018 | 2019 | % Change | |||||||||||||||
4Q | TY | 1Q | 2Q | 3Q | 4Q | TY | Q/Q | TY | ||||||||||
New Annualized Premium 1 | ||||||||||||||||
Life Insurance | $36.3 | $147.5 | $39.7 | $39.4 | $37.3 | $34.9 | $151.3 | -3.9% | 2.6% | |||||||
Health Insurance | 53.3 | 183.7 | 40.1 | 45.8 | 46.7 | 62.7 | 195.3 | 17.6% | 6.3% | |||||||
Total Life & Health Insurance | $89.6 | $331.2 | $79.8 | $85.2 | $84.0 | $97.6 | $346.6 | 8.9% | 4.6% | |||||||
Collected Premiums | ||||||||||||||||
Bankers Life | $732.1 | $2,648.2 | $683.9 | $705.2 | $692.8 | $711.1 | $2,793.0 | -2.9% | 5.5% | |||||||
Washington National | 176.3 | 692.8 | 176.8 | 176.9 | 176.1 | 181.2 | 711.0 | 2.8% | 2.6% | |||||||
Colonial Penn | 75.2 | 298.3 | 77.2 | 76.7 | 77.1 | 77.3 | 308.3 | 2.8% | 3.4% | |||||||
Sub-total | 983.6 | 3,639.3 | 937.9 | 958.8 | 946.0 | 969.6 | 3,812.3 | -1.4% | 4.8% | |||||||
LTC in run-off | 3.7 | 145.8 | 3.6 | 3.4 | 3.3 | 3.2 | 13.5 | -13.5% | nm | |||||||
Total CNO | $987.3 | $3,785.1 | $941.5 | $962.2 | $949.3 | $972.8 | $3,825.8 | -1.5% | 1.1% | |||||||
Annuity Collected Premiums | ||||||||||||||||
Bankers Life | $354.3 | $1,163.2 | $315.3 | $341.0 | $325.0 | $324.1 | $1,305.4 | -8.5% | 12.2% | |||||||
Client Assets in Brokerage and Advisory 2 | ||||||||||||||||
Bankers Life | $1,104.9 | $1,104.9 | $1,234.4 | $1,303.0 | $1,362.7 | $1,515.0 | $1,515.0 | 37.1% | 37.1% | |||||||
Fee Revenue | $10.6 | $49.8 | $25.4 | $15.6 | $16.3 | $30.2 | $87.5 | 185.0% | 75.7% |
-
Measured as 100% of new term life and health annualized premiums and 10% of single premium whole life deposits.
2 Client assets include cash and securities in brokerage and managed advisory accounts.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 6 |
Segment Update
Growth in earnings and continued momentum with initiatives
Key Initiatives
Reinvigorate growth
Expand to the right
Reshape the agent force and optimize productivity
Fourth Quarter Highlights
- EBIT excluding significant items1 up 2% despite NII headwinds
- Life and Health NAP flat; third party policies up 20%
- Fee revenue up 123%
- Annuity account value up 5% to $9.1 billion
- Total client assets up 37% at BD/RIA to $1.5 billion
- FA count up 7%; 14% of agent force is dually licensed
- Sixth consecutive quarter of growing producing agent count; up 6% vs +4% in 4Q18
- Ongoing agent retention and productivity improvements
1 A non-GAAP measure. See the Appendix for a reconciliation to the corresponding GAAP measure.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 7 |
Segment Update
Record overall sales and sharp improvement in consumer market
Key Initiatives
Maintain growth momentum
Advance worksite capabilities
Expand geographically
Enhance product portfolio
Fourth Quarter Highlights
- New sales record; overall NAP up 32%
- Life NAP up 7%; Life collected premiums up 14%
- Consumer division sales up 57%
- Worksite NAP up 7% against +38% in 4Q18
- Worksite producing agent count up 14%
- WBD integration in line with expectations
- Continued expansion into underpenetrated territories
- Geographic expansion drove 3% of total 4Q NAP
- Product diversification initiatives comprised 8% of total 4Q NAP
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 8 |
Segment Update
Record full year production; leveraging DTC platform
Key Initiatives
Continue sales growth
Improve sales productivity; expand web/digital capabilities
Enhance product portfolio; extend DTC capabilities
Fourth Quarter Highlights
- Best full year sales on record (up 7%); 4Q NAP down 8% due to lower marketing spend
- First-yearcollected premiums up 7%; Total collected premiums up 3%
- Continue to invest in web/digital capabilities
- Technology enhancements supporting productivity gains
- Continued diversification of consumer contact points: 2.4 million unique website visitors (up 20%) and 1.2 million telesales interactions in 2019; 5,000 webchats per month
- Piloting third party products in DTC channel
- Leveraging DTC expertise to support other channels
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 9 |
Excess Capital Allocation Strategy
Disciplined and opportunistic approach to maximize shareholder value
Organic investments to sustain and grow the core businesses
Return capital to shareholders
- $75 million in share repurchases in 4Q; $252 million YTD
- Dividend payout ratio targeted at 20-25%
- $532 million left under current repurchase authorization
Opportunistic transactions
- Highly selective M&A to expand product offerings or enhance distribution
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 10 |
Financial Highlights
Net operating income per share1 up 4%; tax strategy created $194 million in shareholder value
Fourth Quarter 2019 | Net Operating Income | |
- Net operating income per diluted share1 of $0.52, up 44% from $0.36 in 4Q18
- Excluding significant items, operating income per share up 4%
- Lower NII from change in market yields, lower prepayment income, and 1Q19 up-in-quality repositioning drove decline of $0.081 per share
- YTD operating income per share of $1.80, down 2%2
- Actuarial review complete; lowered ultimate new money rate
- Weighted average share count down 9%
- Operating ROE1, excluding significant items, of 10.4%
- Tax strategy enhances shareholder value; drives 9% increase in BV per diluted share (excl. AOCI)1, generates $194 million in income, $1.29 per share
- Generated $327 million in gross full year FCF; $287 million net
- Holding company cash and investments of $187 million
- Estimated consolidated RBC ratio of 408%
- Statutory operating income of $563 million; Statutory capital
and surplus of $1.7 billion
1 A non-GAAP measure. See the Appendix for a reconciliation to the corresponding GAAP measure.
-
YTD 2018 operating income per share adj. to remove the earnings from the ceded LTC business and excl. significant items.
3 Excludes $46 million income tax benefit to be received from the holding company that will be returned to the holding company in the form of a dividend. There was no impact on capital and surplus.
($ millions, except where noted)
$1.83 | $1.85 | |||
Net Operating | $1.83 | $1.80 | ||
Income Per Share1 | ||||
Net Operating | ||||
Income Per Share | ||||
Adjusted for Ceded | ||||
LTC Business2 and | $0.52 | |||
Excluding Significant | $0.36 $0.45 | |||
Items | $0.47 | |||
4Q18 | 4Q19 | FY182 | FY19 | |
Net Operating | $59.8 | $78.6 | $303.1 | $290.0 |
Income1 | ||||
Net Operating Income | ||||
Adj. for Ceded LTC | $74.9 | $70.7 | $303.2 | $282.1 |
Business2 and Excl. | ||||
Significant Items | ||||
Weighted Average | ||||
Shares Outstanding | 165.9 | 151.4 | 165.5 | 157.1 |
(in millions) | ||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 11 |
Segment Results
Stable underwriting margins despite NII headwinds
Segment EBIT Excluding Significant Items1
($ millions) | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | |
Bankers Life | $81.1 | $63.1 | $86.4 | $78.9 | $83.1 | |
Washington | $30.5 | |||||
National | $29.7 | $25.9 | $26.8 | $27.2 | ||
Colonial | $4.8 | $5.8 | $3.7 | $6.2 | ||
Penn | ($1.4) | |||||
LTC in | $0.3 | $2.5 | $3.2 | $3.6 | $2.7 | |
run-off | ||||||
Corporate | $0.8 | ($12.0) | ($11.2) | |||
($15.3) | ($15.1) | |||||
Total CNO | $100.6 | $95.5 | $109.3 | $101.8 | $104.1 | |
Colonial Penn | $17.8 | $14.2 | $19.7 | $19.1 | $18.8 | |
In-Force1 |
Segment Highlights
- Lower investment income impacted all segments
- Bankers Life results reflect improved benefit ratios and fee income offset by $12.7 million in investment headwinds
- Washington National results impacted by MS run-off block and favorable ISL results in prior period
- Colonial Penn Adjusted EBIT1 reflects solid in-force growth (up 6% to $19 million)
- Full year Adjusted EBIT of $14 million; full year In-Force EBIT of $72 million, up 7%
- LTC in run-off benefited from favorable underwriting margin; expect breakeven performance going forward
1 A non-GAAP measure. See the Appendix for a reconciliation to the corresponding GAAP measure.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 12 |
Health Margins
All benefit ratios within or better than guidance
Bankers Life Medicare
Supplement Benefit Ratio
$190 | $191 | $191 | $190 | $189 |
76.0% | 72.3% | 74.0% | 74.9% | 74.2% |
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 |
Earned Premium ($ millions)
Reported Benefit Ratio
- Benefit ratio of 74.2%
- 1% (+/-) = $1.9 million pre-tax
- 2019 benefit ratio guidance of
73-77%
Bankers Life Long-term Care
IABR1,2
$64 | $64 | $64 | $64 | $63 |
74.7% | 77.2% | 77.5% | 78.7% | 75.0% |
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 |
Earned Premium ($ millions)
Reported IABR
- IABR1,2 of 75.0%
- 1% (+/-) = $0.6 million pre-tax
- 2019 IABR1,2 guidance of 74-79%
Washington National
Supplemental Health IABR1
$156 $156 $157 $158 $160
53.8% | 56.2% | 55.4% | 54.2% |
53.4% |
4Q18 1Q19 2Q19 3Q19 4Q19
Earned Premium ($ millions)
Reported IABR
- IABR1 of 54.2%
- 1% (+/-) = $1.6 million pre-tax
- 2019 IABR1 guidance of 55-58%
1 Interest-adjusted benefit ratio (IABR); a non-GAAP measure. Refer to the Appendix for the corresponding GAAP measure. 2 Retained LTC business only.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 13 |
Investment Results
Consistent performance reflecting stable allocation in low rate environment
Average Invested Assets and Cash
$21,832 $22,058 $22,201 $22,382 $22,588
$290.4 | $270.6 | $286.7 | $275.9 | $272.0 | |||||||||||
Net | |||||||||||||||
Investment | |||||||||||||||
Income |
($ millions) | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 |
New Money Rate1 | 4.77% | 4.38% | 4.58% | 4.66% | 4.08% |
Book Yield2 | 5.24% | 5.15% | 5.08% | 5.03% | 4.97% |
Earned Yield3 | 5.40% | 5.02% | 5.30% | 5.11% | 4.97% |
Pre-Pay/Call/Make- | $10.9 | $2.5 | $6.6 | $3.0 | $4.6 |
whole Income | |||||
Alternative | $13.0 | $5.5 | $17.1 | $17.7 | $12.9 |
Investment Income | |||||
Impairments | $0.5 | $2.2 | - | $3.4 | $6.8 |
Quarter Highlights
- New money rate reflects conservative positioning
- Sequential decline largely reflects lack of new alternatives investments
- Sequential book yield decline of 6 bps in line with expectations
- Alternatives results in line with expectations
- Prepayment income $6.3 million lower YoY
- Credit performance remains solid
- No significant allocation changes in 4Q
- BBBs comprise 39% of fixed maturity portfolio vs. 45% in 4Q18
- New money rate is the book yield on fixed maturity investments acquired in the period, excluding assets purchased for FHLB matchbook program.
2 Book yield on fixed maturity investments, excluding assets held in the FHLB matchbook program.
- Earned yield is the investment income earned during the period divided by the weighted average book value of the investment portfolio, excluding amounts related to assets held in the FHLB matchbook program.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 14 |
Committed to Long-Term Shareholder Value Creation
Continued progress on strategic initiatives
Extend depth and | Leverage diverse | |||||||
Effectively deploy | distribution | Expand to | Enhance customer | |||||
breadth of product | channels and | |||||||
excess capital | the right | experience | ||||||
offerings | unique product | |||||||
combination | ||||||||
Growth in sales, earnings, FCF, and ROE
Striking the right balance between growth and profitability
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 15 |
Questions and Answers
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 16 |
Appendix 1: Quarter in Review
Strong Operational Performance | ||
• | Broker-Dealer/Registered Investment Advisor | Slide 18 |
• | Agent Count | Slide 19 |
Building on Strong Track Record of Execution | ||
• | Bankers Life Retained LTC Insurance | Slides 20-21 |
• | Portfolio Composition | Slide 22 |
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 17 |
Broker-Dealer/Registered Investment Advisor
Account value up 37% YoY; over $1.5 billion in client assets
($ millions) | 2018 | 2019 | |||||||||
4Q | 1Q | 2Q | 3Q | 4Q | |||||||
Net New Client Assets in | Brokerage | ||||||||||
-$1.1 | -$3.0 | $5.1 | $13.4 | $17.4 | |||||||
Brokerage and Advisory1 | Advisory | 13.2 | 35.7 | 33.2 | 29.9 | 45.4 | |||||
Total | $12.1 | $32.7 | $38.3 | $43.3 | $62.8 | ||||||
Client Assets in Brokerage and | Brokerage | $794.1 | $861.6 | $886.0 | $913.7 | $982.9 | |||||
Advisory1 at end of period | Advisory | 310.8 | 372.8 | 417.0 | 449.0 | 532.1 | |||||
Total | $1,104.9 | $1,234.4 | $1,303.0 | $1,362.7 | $1,515.0 |
1 Client assets include cash and securities in brokerage and managed advisory accounts. Net new client assets includes total inflows of cash and securities into brokerage and managed advisory accounts less outflows. Inflows include interest and dividends and exclude changes due to market fluctuations.
Bankers Life is the marketing brand of various affiliated companies of CNO Financial Group including, Bankers Life and Casualty Company, Bankers Life Securities, Inc., and Bankers Life Advisory Services, Inc. Non-affiliated insurance products are offered through Bankers Life General Agency, Inc. (dba BL General Insurance Agency, Inc., AK, AL, CA, NV, PA). Agents who
are financial advisors are registered with Bankers Life Securities, Inc.
Securities and variable annuity products and services are offered by Bankers Life Securities, Inc. Member FINRA/SIPC, (dba BL Securities, Inc., AL, GA, IA, IL, MI, NV, PA). Advisory products and services are offered by Bankers Life Advisory Services, Inc. SEC Registered Investment Adviser (dba BL Advisory Services, Inc., AL, GA, IA, MT, NV, PA). Home Office: 111 East Wacker Drive, Suite 1900, Chicago, IL 60601
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 18 |
Agent Counts
Bankers Life producing agent count up for sixth consecutive quarter
Bankers Life | 2018 | 2019 | % Change | ||||||||||
4Q | 1Q | 2Q | 3Q | 4Q | Q/Q | ||||||||
Total Quarterly Average Producing Agents1,3 | 4,177 | 4,125 | 4,294 | 4,270 | 4,417 | 5.7% | |||||||
Quarterly Average Financial Advisors2,3 | 560 | 583 | 595 | 596 | 596 | 6.4% | |||||||
Washington National | |||||||||||||
Total Quarterly Average Producing Agents1,3 | 730 | 682 | 726 | 729 | 745 | 2.1% |
1 Producing Agents are agents that have submitted at least one policy in the month.
2 Financial advisors are agents who are licensed to sell certain securities brokerage products and services. 3 Quarterly average agent and advisor counts represent the average of the last 3 months.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 19 |
Bankers Life Retained Long-Term Care Insurance
Retained book characterized by limited benefits, shorter duration periods
% of Policies by Benefit Period | Key LTC Data | ||||||
(As of 12/31/2019) | |||||||
2% | GAAP Reserves | $1.92B | |||||
<= 1 Yr | |||||||
4% | Statutory Reserves | $1.97B | |||||
Between 1 and 4 | Policies In-Force | 187,679 | |||||
37% | Yrs | Average Attained Age | 74 years | ||||
57% | Greater Than 4 | ||||||
Avg. Daily Benefit | $175 | ||||||
but Not Life | |||||||
Life | % Policies w/ Inflation Rider | 26.1% | |||||
Average Benefit Period1 | 1.6 years |
1 Not including policies with lifetime benefits.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 20 |
Bankers Life Retained Long-Term Care Insurance
Highly-differentiatedin-force block; prudently managed
- New sales (~$25 million annually) focused on short duration products
- 98% of new sales for policies with 2 years or less in benefits
- Average benefit period of 11 months
- New business 25% reinsured since 2008
- Reserve assumptions informed by historical experience
- No morbidity improvement
- No mortality improvement
- Minimal future rate increases
- Ultimate new money rate lowered to target 4.00% 10-year Treasury rate
- Favorable economic profile
- 2019 Loss Recognition Testing margin increased to $251 million or ~13.3% of Net GAAP Liabilities
- Statutory reserves ~$50 million higher than GAAP reserves
- Total LTC is just 13% of overall CNO reserves
- Potential adverse impact from severe stress scenarios is significantly reduced
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 21 |
Portfolio Composition
Conservative allocation; 1Q19 up-in-quality repositioning
$25 billion of Invested Assets | Fixed Maturity Securities by Ratings | |
Mortgage | HY Corporates, | (Fair Value as of 12/31/2019) |
Loans, 6.6% | 2.5% | |
CMO, 4.2% |
CMBS,
8.0%
Municipals, | |
8.9% | |
ABS, 10.3% | |
IG Corporates, | Govts/Agency, |
1.2% | |
49.0% | |
CLO, 1.6% | |
Equities, 0.2% | |
Other Invested | |
Assets, 2.1% | |
Alternatives, 2.3% | |
General Approach | Policy Loans, 0.5% |
Cash, 2.6% |
- Positioned for stable performance across credit cycles
- Emphasizing quality
NAIC 2, 38.6%
NAIC 1, 57.7%
NAIC 3, 2.9%
NAIC 4, 0.8%
NAIC 5 & NAIC 6,
0.0%
- Low impairments through multiple cycles
- Lower than average allocation to most higher risk categories - all carefully calibrated
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 22 |
Appendix 2: Financial Exhibits
• | Holding Company Liquidity | Slide 24 |
• | Tax Asset Summary | Slide 25 |
• | Non-GAAP Financial Measures | Slides 26-42 |
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 23 |
2019 Holding Company Liquidity
($ millions) | 4Q19 | FY19 |
Cash and Investments Balance - Beginning | $ 260.4 | $ 220.4 |
Sources | ||
Dividends from Insurance Subsidiaries | 16.0 | 186.3 |
Dividends from Non-insurance Subsidiaries | - | 8.0 |
Management Fees | 28.1 | 115.5 |
Surplus Debenture Interest | 12.3 | 59.9 |
Earnings on Corporate Investments | 2.2 | 13.6 |
Gross Proceeds from New Debt | - | 500.0 |
Other | 1.6 | 20.9 |
Total Sources | 60.2 | 904.2 |
Uses | ||
Share Repurchases | 73.2 | 250.5 |
Interest Expense | 25.5 | 48.3 |
Common Stock Dividends | 16.4 | 66.9 |
Debt Repayments | - | 425.0 |
Acquisition | - | 66.7 |
Holding Company Expenses & Other | 18.8 | 80.7 |
Total Uses | 133.9 | 938.1 |
Mark-to-market Changes in Investment Balances | - | 0.2 |
Cash and Investments Balance - December 31, 2019 | $ 186.7 | $ 186.7 |
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 24 |
Tax Asset Summary
Loss Carryforwards
($ millions)
$532
Life $110
Non-Life $422
Loss Carryforwards (1)
Details
- Total estimated economic value of NOLs of $406 million @ 10% discount rate (~$2.71 on per share basis)
- Life NOLs are expected to offset 80% of life taxable income until fully utilized. Non-life NOLs are expected to offset 100% of non- life taxable income and 35% of the remaining life taxable income not offset by life NOLs through 2023.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 1 Excludes $10 million related to state operating loss carryforwards. | 25 |
4Q18 Significant Items
The table below summarizes the financial impact of significant items on our 4Q18 net operating income. Management believes that identifying the impact of these items enhances the understanding of our operating results (dollars in millions).
Three months ended | ||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Excluding | ||||||||||||||||||||||||
significant | ||||||||||||||||||||||||
Actual results | Significant items | items | ||||||||||||||||||||||
Net Operating Income: | ||||||||||||||||||||||||
Bankers Life | $ | 78.0 | $ | 3.1 | (1) | $ | 81.1 | |||||||||||||||||
Washington National | 31.9 | (2.2) | (1) | 29.7 | ||||||||||||||||||||
Colonial Penn | 4.8 | - | 4.8 | |||||||||||||||||||||
Long-term care in run-off | 0.3 | - | 0.3 | |||||||||||||||||||||
Adjusted EBIT from business segments | 115.0 | 0.9 | 115.9 | |||||||||||||||||||||
Corporate Operations, excluding corporate interest expense | (29.7) | 14.4 | (2) | (15.3) | ||||||||||||||||||||
Adjusted EBIT | 85.3 | 15.3 | 100.6 | |||||||||||||||||||||
Corporate interest expense | (12.1) | - | (12.1) | |||||||||||||||||||||
Operating earnings before tax | 73.2 | 15.3 | 88.5 | |||||||||||||||||||||
Tax expense on operating income | 13.4 | 0.2 | 13.6 | |||||||||||||||||||||
Net operating income (3) | $ | 59.8 | $ | 15.1 | $ | 74.9 | ||||||||||||||||||
Net operating income per diluted share (3) | $ | 0.36 | $ | 0.09 | $ | 0.45 |
- Adjustments arising from our comprehensive annual actuarial review of assumptions including $3.1 million of unfavorable impacts in the Bankers Life segment and $2.2 million of favorable impacts in the Washington National segment.
- $14.4 million unfavorable impact of current market conditions on the value of investments backing our Company-owned life insurance (COLI) used as a vehicle to fund Bankers Life's agent deferred compensation plan. Changes in the value of COLI investments are not subject to income taxes.
- A non-GAAP measure. See pages 28 and 31 for a reconciliation to the corresponding GAAP measure.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 26 |
4Q19 Significant Items
The table below summarizes the financial impact of significant items on our 4Q19 net operating income. Management believes that identifying the impact of these items enhances the understanding of our operating results (dollars in millions).
Three months ended | |||||||||||||||||||||||||
December 31, 2019 | |||||||||||||||||||||||||
Excluding | |||||||||||||||||||||||||
significant | |||||||||||||||||||||||||
Actual results | Significant items | items | |||||||||||||||||||||||
Net Operating Income: | |||||||||||||||||||||||||
Bankers Life | $ | 72.3 | $ | 10.8 | (1) | $ | 83.1 | ||||||||||||||||||
Washington National | 28.0 | (0.8) | (1) | 27.2 | |||||||||||||||||||||
Colonial Penn | 6.2 | - | 6.2 | ||||||||||||||||||||||
Long-term care in run-off | 2.7 | - | 2.7 | ||||||||||||||||||||||
Adjusted EBIT from business segments | 109.2 | 10.0 | 119.2 | ||||||||||||||||||||||
Corporate Operations, excluding corporate interest expense | 4.9 | (20.0) | (2) | (15.1) | |||||||||||||||||||||
Adjusted EBIT | 114.1 | (10.0) | 104.1 | ||||||||||||||||||||||
Corporate interest expense | (13.8) | - | (13.8) | ||||||||||||||||||||||
Operating earnings before tax | 100.3 | (10.0) | 90.3 | ||||||||||||||||||||||
Tax expense on operating income | 21.6 | (2.1) | 19.5 | ||||||||||||||||||||||
Net operating income (3) | $ | 78.7 | $ | (7.9) | $ | 70.8 | |||||||||||||||||||
Net operating income per diluted share (3) | $ | 0.52 | $ | (0.05) | $ | 0.47 |
- Adjustments arising from our comprehensive annual actuarial review of assumptions including $10.8 million of unfavorable impacts in the Bankers Life segment and $0.8 million of favorable impacts in the Washington National segment.
- $20.0 million of the net favorable impact from legal and regulatory matters.
- A non-GAAP measure. See pages 28 and 31 for a reconciliation to the corresponding GAAP measure.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 27 |
Quarterly Earnings
($ millions) | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||||||
Bankers Life | $ | 78.0 | $ | 63.1 | $ | 86.4 | $ | 78.9 | $ | 72.3 | |||||||||
Washington National | 31.9 | 30.5 | 25.9 | 26.8 | 28.0 | ||||||||||||||
Colonial Penn | 4.8 | (1.4) | 5.8 | 3.7 | 6.2 | ||||||||||||||
Long-term care in run-off | 0.3 | 2.5 | 3.2 | 3.6 | 2.7 | ||||||||||||||
Adjusted EBIT from business segments | |||||||||||||||||||
115.0 | 94.7 | 121.3 | 113.0 | 109.2 | |||||||||||||||
Corporate operations, excluding interest expense | (29.7) | 0.8 | (12.0) | (11.2) | 4.8 | ||||||||||||||
Adjusted EBIT* | |||||||||||||||||||
85.3 | 95.5 | 109.3 | 101.8 | 114.1 | |||||||||||||||
Corporate interest expense | (12.1) | (12.1) | (12.6) | (13.9) | (13.8) | ||||||||||||||
Operating earnings before taxes | 73.2 | 83.4 | 96.7 | 87.9 | 100.3 | ||||||||||||||
Tax expense on period income | 13.4 | 17.6 | 20.3 | 18.7 | 21.7 | ||||||||||||||
Net operating income | 59.8 | 65.8 | 76.4 | 69.2 | 78.6 | ||||||||||||||
Net realized investment gains (losses) from sales and impairments, net of related amortization | (10.5) | (0.7) | (1.7) | (2.6) | 7.1 | ||||||||||||||
Net change in market value of investments recognized in earnings | (27.5) | 16.6 | 6.8 | 4.7 | (2.6) | ||||||||||||||
Fair value changes in embedded derivative liabilities, net of related amortization | (0.8) | (29.6) | (35.9) | (29.3) | 13.4 | ||||||||||||||
Fair value changes related to the agent deferred compensation plan | 0.9 | (5.3) | (11.6) | (6.0) | 2.5 | ||||||||||||||
Loss on extinguishment of debt | - | - | (7.3) | - | - | ||||||||||||||
Other | 1.8 | 1.2 | 0.7 | (1.2) | (13.3) | ||||||||||||||
Non-operating income (loss) before taxes | (36.1) | (17.8) | (49.0) | (34.4) | 7.1 | ||||||||||||||
Income tax expense (benefit): | |||||||||||||||||||
On non-operating income (loss) | (7.6) | (3.8) | (10.2) | (7.2) | 1.4 | ||||||||||||||
Valuation allowance for deferred tax assets and other tax items | 3.0 | - | - | - | (193.7) | ||||||||||||||
Net non-operating income (loss) | (31.5) | (14.0) | (38.8) | (27.2) | 199.4 | ||||||||||||||
Net income (loss) | $ | 28.3 | $ | 51.8 | $ | 37.6 | $ | 42.0 | $ | 278.0 | |||||||||
*Management believes that an analysis of earnings before net realized investment gains (losses) from sales and impairments, net change in market value of investments recognized in earnings, fair value changes in embedded derivative liabilities, fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, loss related to
reinsurance transaction, other non-operating items, corporate interest expense and taxes ("Adjusted EBIT," a non-GAAP financial measure) provides a clearer comparison of the
operating results of the company quarter-over-quarter because it excludes: (1) net realized investment gains (losses) from sales and impairments; (2) net change in market value of investments recognized in earnings; (3) fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities that
are unrelated to the company's underlying fundamentals; (4) loss on extinguishment of debt; (5) fair value changes related to the agent deferred compensation plan; (6) loss related to reinsurance transaction; (7) charges in the valuation allowance for deferred tax assets and other tax items; and (8) other non-operating items consisting primarily of earnings attributable
to variable interest entities. The table above provides a reconciliation of Adjusted EBIT to net income.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 28 |
Colonial Penn Segment Adjusted EBIT Summarized by In-Force and New Business
An analysis of Adjusted EBIT for Colonial Penn, separated between in-force and new business, provides increased clarity for this segment as the vast majority of the costs to generate new business in this segment are not deferrable and Adjusted EBIT will fluctuate based on management's decisions on how much marketing costs to incur in each period. Adjusted EBIT from new business includes pre-tax revenues and expenses associated with new sales of our insurance products during the first year after the sale is completed. Adjusted EBIT from in-force business includes all pre-tax revenues and expenses associated with sales of insurance products that were completed more than one year before the end of the reporting period. The allocation of certain revenues and expenses between new and in-force business is based on estimates, which we believe are reasonable (dollars in millions):
Adjusted EBIT from Inforce Business | Adjusted EBIT from New Business | Adjusted EBIT from Inforce and New Business | |||||||||||||||||||||||||||||||||||||||||||
Revenues | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||||||||||||||||||||||
Insurance policy income | $ | 62.9 | $ | 64.0 | $ | 64.3 | $ | 64.5 | $ | 64.4 | $ | 12.0 | $ | 12.7 | $ | 13.3 | $ | 13.0 | $ | 12.6 | $ | 74.9 | $ | 76.7 | $ | 77.6 | $ | 77.5 | $ | 77.0 | |||||||||||||||
Net investment income | 11.2 | 10.7 | 10.8 | 10.4 | 10.3 | - | - | - | - | - | 11.2 | 10.7 | 10.8 | 10.4 | 10.3 | ||||||||||||||||||||||||||||||
Fee revenue and other income | 0.4 | 0.5 | 0.4 | 0.3 | 0.3 | - | - | - | - | - | 0.4 | 0.5 | 0.4 | 0.3 | 0.3 | ||||||||||||||||||||||||||||||
Total revenues | 74.5 | 75.2 | 75.5 | 75.2 | 75.0 | 12.0 | 12.7 | 13.3 | 13.0 | 12.6 | 86.5 | 87.9 | 88.8 | 88.2 | 87.6 | ||||||||||||||||||||||||||||||
Benefits and expenses | |||||||||||||||||||||||||||||||||||||||||||||
Insurance policy benefits | 42.8 | 48.2 | 44.1 | 42.5 | 42.4 | 7.3 | 8.0 | 8.4 | 8.2 | 7.9 | 50.1 | 56.2 | 52.5 | 50.7 | 50.3 | ||||||||||||||||||||||||||||||
Interest expense | 0.4 | 0.4 | 0.4 | 0.4 | 0.3 | - | - | - | - | - | 0.4 | 0.4 | 0.4 | 0.4 | 0.3 | ||||||||||||||||||||||||||||||
Amortization | 4.8 | 4.1 | 3.2 | 5.0 | 4.7 | 0.1 | 0.4 | 0.4 | 0.4 | 0.4 | 4.9 | 4.5 | 3.6 | 5.4 | 5.1 | ||||||||||||||||||||||||||||||
Other operating costs and expenses | 8.7 | 8.3 | 8.1 | 8.2 | 8.8 | 17.6 | 19.9 | 18.4 | 19.8 | 16.9 | 26.3 | 28.2 | 26.5 | 28.0 | 25.7 | ||||||||||||||||||||||||||||||
Total benefits and expenses | 56.7 | 61.0 | 55.8 | 56.1 | 56.2 | 25.0 | 28.3 | 27.2 | 28.4 | 25.2 | 81.7 | 89.3 | 83.0 | 84.5 | 81.4 | ||||||||||||||||||||||||||||||
Adjusted EBIT from Inforce Business | $ | 17.8 | $ | 14.2 | $ | 19.7 | $ | 19.1 | $ | 18.8 | $ | (13.0) | $ | (15.6) | $ | (13.9) | $ | (15.4) | $ | (12.6) | $ | 4.8 | $ | (1.4) | $ | 5.8 | $ | 3.7 | $ | 6.2 |
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 29 |
Information Related to Certain Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP measures used in this presentation. A non-GAAP measure is a numerical measure of a company's performance, financial position, or cash flows that excludes or includes amounts that are normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. While management believes these measures are useful to enhance understanding and comparability of our financial results, these non-GAAP measures should not be considered as substitutes for the most directly comparable GAAP measures. Additional information concerning non-GAAP measures is included in our periodic filings with the Securities and Exchange Commission that are available in the "Investors - SEC Filings" section of CNO's website, www.CNOinc.com.
Operating earnings measures
Management believes that an analysis of net income applicable to common stock before net realized investment gains or losses from sales and impairments, net change in market value of investments recognized in earnings, fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities, fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, loss related to reinsurance transaction, changes in the valuation allowance for deferred tax assets and other tax items and other non-operating items consisting primarily of earnings attributable to variable interest entities ("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.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 30 |
Information Related to Certain Non-GAAP Financial Measures
A reconciliation of net income (loss) applicable to common stock to net operating income (and related per-share amounts) is as follows (dollars in millions, except per-share amounts):
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||
Net income (loss) applicable to common stock | $ | 28.3 | $ | 51.8 | $ | 37.6 | $ | 42.0 | $ | 278.0 | ||||
Non-operating items: | ||||||||||||||
Net realized investment (gains) losses from sales and impairments, net of related amortization | 10.5 | 0.7 | 1.7 | 2.6 | (7.1) | |||||||||
Net change in market value of investments recognized in earnings | 27.5 | (16.6) | (6.8) | (4.7) | 2.6 | |||||||||
Fair value changes in embedded derivative liabilities, net of related amortization | 0.8 | 29.6 | 35.9 | 29.3 | (13.4) | |||||||||
Fair value changes related to the agent deferred compensation plan | (0.9) | 5.3 | 11.6 | 6.0 | (2.5) | |||||||||
Loss on extinguishment of debt | - | - | 7.3 | - | - | |||||||||
Loss related to reinsurance transaction | - | - | - | - | - | |||||||||
Other | (1.8) | (1.2) | (0.7) | 1.2 | 13.3 | |||||||||
Non-operating (income) loss before taxes | 36.1 | 17.8 | 49.0 | 34.4 | (7.1) | |||||||||
Income tax (expense) benefit: | ||||||||||||||
On non-operating (income) loss | 7.6 | 3.8 | 10.2 | 7.2 | (1.4) | |||||||||
Valuation allowance for deferred tax assets and other tax items | (3.0) | - | - | - | 193.7 | |||||||||
Net non-operating (income) loss | 31.5 | 14.0 | 38.8 | 27.2 | (199.4) | |||||||||
Net operating income (a non-GAAP financial measure) | $ | 59.8 | $ | 65.8 | $ | 76.4 | $ | 69.2 | $ | 78.6 | ||||
Per diluted share: | ||||||||||||||
Net income (loss) | $ | 0.17 | $ | 0.32 | $ | 0.24 | $ | 0.27 | $ | 1.84 | ||||
Net realized investment (gains) losses from sales and impairments (net of related amortization and taxes) | 0.05 | - | 0.01 | 0.01 | (0.04) | |||||||||
Net change in market value of investments recognized in earnings (net of taxes) | 0.13 | (0.08) | (0.04) | (0.02) | 0.01 | |||||||||
Fair value changes in embedded derivative liabilities (net of related amortization and taxes) | - | 0.15 | 0.18 | 0.15 | (0.07) | |||||||||
Fair value changes related to the agent deferred compensation plan (net of taxes) | - | 0.03 | 0.06 | 0.03 | (0.01) | |||||||||
Loss on extinguishment of debt | - | - | 0.03 | - | - | |||||||||
Valuation allowance for deferred tax assets and other tax items | 0.02 | - | - | - | (1.28) | |||||||||
Other | (0.01) | (0.01) | - | 0.01 | 0.07 | |||||||||
Net operating income (a non-GAAP financial measure) | $ | 0.36 | $ | 0.41 | $ | 0.48 | $ | 0.45 | $ | 0.52 | ||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 31 |
Information Related to Certain Non-GAAP Financial Measures
A reconciliation of operating income and shares used to calculate basic and diluted operating earnings per share is as follows (dollars in millions, except per-share amounts, and shares in thousands):
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||||||||||||
Operating income | $ | 59.8 | $ | 65.8 | $ | 76.4 | $ | 69.2 | $ | 78.6 | ||||||||||||||
Weighted average shares outstanding for basic earnings per share | 164,118 | 160,948 | 158,816 | 154,257 | 150,138 | |||||||||||||||||||
Effect of dilutive securities on weighted average shares: | ||||||||||||||||||||||||
Stock options, restricted stock and performance units | 1,772 | 1,241 | 919 | 1,003 | 1,271 | |||||||||||||||||||
Weighted average shares outstanding for diluted earnings per share | 165,890 | 162,189 | 159,735 | 155,260 | 151,409 | |||||||||||||||||||
Net operating income per diluted share | $ | 0.36 | $ | 0.41 | $ | 0.48 | $ | 0.45 | $ | 0.52 | ||||||||||||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 32 |
Information Related to Certain Non-GAAP Financial Measures
Book value per diluted share
Book value per diluted share reflects the potential dilution that could occur if outstanding stock options were exercised, restricted stock and performance units were vested and convertible securities were converted. The dilution from options, restricted shares and performance units is calculated using the treasury stock method. Under this method, we assume the proceeds from the exercise of the options (or the unrecognized compensation expense with respect to restricted stock and performance units) will be used to purchase shares of our common stock at the closing market price on the last day of the period. In addition, the calculation of this non-GAAP measure differs from the corresponding GAAP measure 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 the unrealized appreciation (depreciation) of our investments. Management believes this adjustment to the December 31, 2017 non-GAAP measure is useful because it removes the tax effects stranded in accumulated other comprehensive income as a result of accounting rules which require the effects of the Tax Reform Act on deferred tax balances to be recorded in earnings, even if the balance was originally recorded in accumulated other comprehensive income.
A reconciliation from book value per share to book value per diluted share, excluding accumulated other comprehensive income (loss) is as follows (dollars in millions, except per share amounts):
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||
Total shareholders' equity | $ | 3,370.9 | $ | 3,837.9 | $ | 4,252.2 | $ | 4,553.3 | $ | 4,677.0 | ||||
Shares outstanding for the period | 162,201,692 | 159,955,172 | 156,768,002 | 152,183,491 | 148,084,178 | |||||||||
Book value per share | $ | 20.78 | $ | 23.99 | $ | 27.12 | $ | 29.92 | $ | 31.58 | ||||
Total shareholders' equity | $ | 3,370.9 | $ | 3,837.9 | $ | 4,252.2 | $ | 4,553.3 | $ | 4,677.0 | ||||
Less accumulated other comprehensive income | (177.7) | (654.9) | (1,098.2) | (1,442.9) | (1,372.5) | |||||||||
Adjusted shareholders' equity excluding AOCI | ||||||||||||||
$ | 3,193.2 | $ | 3,183.0 | $ | 3,154.0 | $ | 3,110.4 | $ | 3,304.5 | |||||
Shares outstanding for the period | 162,201,692 | 159,955,172 | 156,768,002 | 152,183,491 | 148,084,178 | |||||||||
Dilutive common stock equivalents related to: | ||||||||||||||
Stock options, restricted stock and performance units | 1,391,458 | 1,168,027 | 894,456 | 1,059,278 | 1,499,372 | |||||||||
Diluted shares outstanding | ||||||||||||||
163,593,150 | 161,123,199 | 157,662,458 | 153,242,769 | 149,583,550 | ||||||||||
Book value per diluted share (a non-GAAP financial measure) | $ | 19.52 | $ | 19.76 | $ | 20.00 | $ | 20.30 | $ | 22.09 | ||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 33 |
Information Related to Certain Non-GAAP Financial Measures
Interest-adjusted benefit ratios
The interest-adjusted benefit ratio (a non-GAAP measure) is calculated by dividing the product's insurance policy benefits less imputed interest income on the accumulated assets backing the insurance liabilities by insurance policy income. Interest income is an important factor in measuring the performance of longer duration health products. The net cash flows generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases), which will be paid out as benefits in later policy years (accounted for as reserve decreases). Accordingly, as the policies age, the benefit ratio will typically increase, but the increase in the change in reserve will be partially offset by the imputed interest income earned on the accumulated assets. The interest-adjusted benefit ratio reflects the effects of such interest income offset. Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio, which includes the effect of interest income, is useful in analyzing product performance.
($ millions)
Bankers Life | 4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | |||||
Long-term care benefit ratios | ||||||||||
Earned premium | $ | 63.8 | $ | 63.7 | $ | 63.5 | $ | 63.7 | $ | 63.4 |
Benefit ratio before imputed interest income on reserves | 117.9% | 120.6% | 122.1% | 123.6% | 120.4% | |||||
Interest-adjusted benefit ratio | 74.7% | 77.2% | 77.5% | 78.7% | 75.0% | |||||
Underwriting margin (earned premium plus imputed interest income on reserves less policy benefits) | $ | 16.2 | $ | 14.5 | $ | 14.3 | $ | 13.6 | $ | 15.8 |
Washington National | ||||||||||
Supplemental health benefit ratios | ||||||||||
Earned premium | $ | 156.0 | $ | 155.6 | $ | 156.7 | $ | 157.6 | $ | 159.7 |
Benefit ratio before imputed interest income on reserves | 77.7% | 77.6% | 80.2% | 79.5% | 78.1% | |||||
Interest-adjusted benefit ratio | 53.8% | 53.4% | 56.2% | 55.4% | 54.2% | |||||
Underwriting margin (earned premium plus imputed interest income on reserves less policy benefits) | $ | 72.1 | $ | 72.4 | $ | 68.7 | $ | 70.4 | $ | 73.2 |
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 34 |
Information Related to Certain Non-GAAP Financial Measures
Operating return measures
Management believes that an analysis of net income applicable to common stock before net realized investment gains or losses from sales and impairments, net change in market value of investments recognized in earnings, fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities, fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, loss on reinsurance transaction, changes in the valuation allowance for deferred tax assets and other tax items, loss on extinguishment of debt and other non-operating items consisting primarily of earnings attributable to variable interest entities ("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.
Management also believes that an operating return, excluding significant items, is important as the impact of these items enhances the understanding of our operating results.
This non-GAAP financial measure also differs from return on equity because accumulated other comprehensive income (loss) has been excluded from the value of equity used to determine this ratio. Management believes this non-GAAP financial 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.
In addition, our equity includes the value of significant net operating loss carryforwards (included in income tax assets). In accordance with GAAP, these assets are not discounted, and accordingly will not provide a return to shareholders (until after it is realized as a reduction to taxes that would otherwise be paid). Management believes that excluding this value from the equity component of this measure enhances the understanding of the effect these non-discounted assets have on operating returns and the comparability of these measures from period-to-period. Operating return measures are used in measuring the performance of our business units and are used as a basis for incentive compensation.
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 35 |
Information Related to Certain Non-GAAP Financial Measures
The calculations of: (i) operating return on equity, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure); (ii) operating return, excluding significant items, on equity, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure); and (iii) return on equity are as follows (dollars in millions):
Trailing Twelve Months Ended | ||||||||||||||
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||
Operating income | $ | 303.1 | $ | 295.0 | $ | 289.5 | $ | 271.2 | $ | 290.0 | ||||
Operating income, excluding significant items | $ | 317.3 | $ | 310.1 | $ | 304.6 | $ | 286.3 | $ | 282.1 | ||||
Net Income (loss) | $ | (315.0) | $ | (347.5) | $ | (412.1) | $ | 159.7 | $ | 409.4 | ||||
Average common equity, excluding accumulated other | ||||||||||||||
comprehensive income (loss) and net operating loss | ||||||||||||||
carryforwards (a non-GAAP financial measure) | $ | 3,086.7 | $ | 2,942.5 | $ | 2,782.7 | $ | 2,697.2 | $ | 2,703.9 | ||||
Average common shareholders' equity | $ | 4,200.3 | $ | 3,918.3 | $ | 3,795.6 | $ | 3,886.9 | $ | 4,166.8 | ||||
Operating return on equity, excluding accumulated other | ||||||||||||||
comprehensive income (loss) and net operating loss | ||||||||||||||
carryforwards (a non-GAAP financial measure) | 9.8% | 10.0% | 10.4% | 10.1% | 10.7% | |||||||||
Operating return, excluding significant items, on equity, excluding | ||||||||||||||
accumulated other comprehensive income (loss) and net | ||||||||||||||
operating loss carryforwards (a non-GAAP financial measure) | 10.3% | 10.5% | 10.9% | 10.6% | 10.4% | |||||||||
Return on equity | -7.5% | -8.9% | -10.9% | 4.1% | 9.8% |
(Continued on next page)
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 36 |
Information Related to Certain Non-GAAP Financial Measures
The following summarizes: (i) operating earnings; (ii) significant items; (iii) operating earnings, excluding significant items; and (iv) net income(loss) (dollars in millions):
Net Operating | ||||||||||||
Net Operating | Income, | |||||||||||
income, | excluding | Net | ||||||||||
excluding | significant | income (loss) - | ||||||||||
Net Operating | Significant | significant | items - trailing | Net | trailing | |||||||
income | items (a) | items | four quarters | income (loss) | four quarters | |||||||
1Q18 | $ | 73.9 | $ | (0.9) | $ | 73.0 | $ | 299.6 | $ | 84.3 | $ | 197.6 |
2Q18 | 81.9 | - | 81.9 | 309.0 | 102.2 | 216.4 | ||||||
3Q18 | 87.5 | - | 87.5 | 321.8 | (529.8) | (414.2) | ||||||
4Q18 | 59.8 | 15.1 | 74.9 | 317.3 | 28.3 | (315.0) | ||||||
1Q19 | 65.8 | - | 65.8 | 310.1 | 51.8 | (347.5) | ||||||
2Q19 | 76.4 | - | 76.4 | 304.6 | 37.6 | (412.1) | ||||||
3Q19 | 69.2 | - | 69.2 | 286.3 | 42.0 | 159.7 | ||||||
4Q19 | 78.6 | (7.9) | 70.7 | 282.1 | 278.0 | 409.4 |
(a) The significant items have been discussed in prior press releases.
(Continued on next page)
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 37 |
Information Related to Certain Non-GAAP Financial Measures
A reconciliation of pretax operating earnings (a non-GAAP financial measure) to net income (loss) is as follows (dollars in millions):
Twelve Months Ended | ||||||||||||||
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||
Pretax operating earnings (a non-GAAP financial measure) | $ | 381.2 | $ | 369.7 | $ | 362.3 | $ | 341.2 | $ | 368.3 | ||||
Income tax expense | (78.1) | (74.7) | (72.8) | (70.0) | (78.3) | |||||||||
Operating return | 303.1 | 295.0 | 289.5 | 271.2 | 290.0 | |||||||||
Non-operating items: | ||||||||||||||
Net realized investment gains (losses) from sales and impairments, net of related amortization | 37.9 | 36.7 | 24.1 | (15.5) | 2.1 | |||||||||
Net change in market value of investments recognized in earnings | (48.8) | (16.5) | (9.4) | 0.6 | 25.5 | |||||||||
Fair value changes in embedded derivative liabilities, net of related amortization | 55.5 | 0.8 | (43.4) | (95.6) | (81.4) | |||||||||
Fair value changes and amendment related to the agent deferred compensation plan | 11.9 | 6.6 | (16.0) | (22.0) | (20.4) | |||||||||
Loss on extinguishment of debt | - | - | (7.3) | (7.3) | (7.3) | |||||||||
Loss on reinsurance transaction | (704.2) | (704.2) | (704.2) | - | - | |||||||||
Other | 1.7 | (0.4) | 4.5 | 2.5 | (12.6) | |||||||||
Non-operating loss before taxes | (646.0) | (677.0) | (751.7) | (137.3) | (94.1) | |||||||||
Income tax expense (benefit): | ||||||||||||||
On non-operating loss | (135.7) | (142.3) | (157.9) | (28.8) | (19.8) | |||||||||
Valuation allowance for deferred tax assets and other tax items | 107.8 | 107.8 | 107.8 | 3.0 | (193.7) | |||||||||
Net non-operating loss | (618.1) | (642.5) | (701.6) | (111.5) | 119.4 | |||||||||
Net income (loss) | $ | (315.0) | $ | (347.5) | $ | (412.1) | $ | 159.7 | $ | 409.4 | ||||
(Continued on next page)
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 38 |
Information Related to Certain Non-GAAP Financial Measures
A reconciliation of consolidated capital, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure) to common shareholders' equity, is as follows (dollars in millions):
1Q17 | 2Q17 | 3Q17 | 4Q17 | ||||||||
Consolidated capital, excluding accumulated other comprehensive | |||||||||||
income (loss) and net operating loss carryforwards | |||||||||||
(a non-GAAP financial measure) | $ | 3,236.6 | $ | 3,263.2 | $ | 3,335.0 | $ | 3,225.6 | |||
Net operating loss carryforwards | 640.6 | 621.6 | 613.1 | 409.8 | |||||||
Accumulated other comprehensive income | 729.6 | 894.5 | 933.6 | 1,212.1 | |||||||
Common shareholders' equity | $ | 4,606.8 | $ | 4,779.3 | $ | 4,881.7 | $ | 4,847.5 | |||
1Q18 | 2Q18 | 3Q18 | 4Q18 | ||||||||
Consolidated capital, excluding accumulated other comprehensive | |||||||||||
income (loss) and net operating loss carryforwards | |||||||||||
(a non-GAAP financial measure) | $ | 3,318.7 | $ | 3,366.0 | $ | 2,705.8 | $ | 2,687.3 | |||
Net operating loss carryforwards | 404.2 | 388.7 | 510.6 | 505.9 | |||||||
Accumulated other comprehensive income | 894.3 | 700.2 | 403.5 | 177.7 | |||||||
Common shareholders' equity | $ | 4,617.2 | $ | 4,454.9 | $ | 3,619.9 | $ | 3,370.9 | |||
1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||
Consolidated capital, excluding accumulated other comprehensive | |||||||||||
income (loss) and net operating loss carryforwards | |||||||||||
(a non-GAAP financial measure) | $ | 2,703.4 | $ | 2,702.9 | $ | 2,685.0 | $ | 2,761.9 | |||
Net operating loss carryforwards | 479.6 | 451.1 | 425.4 | 542.6 | |||||||
Accumulated other comprehensive income | 654.9 | 1,098.2 | 1,442.9 | 1,372.5 | |||||||
Common shareholders' equity | $ | 3,837.9 | $ | 4,252.2 | $ | 4,553.3 | $ | 4,677.0 | |||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 39 |
Information Related to Certain Non-GAAP Financial Measures
A reconciliation of consolidated capital, excluding accumulated other comprehensive income (loss) and net operating loss carryforwards (a non-GAAP financial measure) to common shareholders' equity, is as follows (dollars in millions):
Trailing Four Quarter Average | |||||||||||||||
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | |||||||||||
Consolidated capital, excluding accumulated other comprehensive | |||||||||||||||
income (loss) and net operating loss carryforwards | |||||||||||||||
(a non-GAAP financial measure) | $ | 3,086.7 | $ | 2,942.5 | $ | 2,782.7 | $ | 2,697.2 | $ | 2,703.9 | |||||
Net operating loss carryforwards | 440.4 | 461.8 | 479.0 | 476.2 | 470.1 | ||||||||||
Accumulated other comprehensive income | 673.2 | 514.0 | 533.8 | 713.5 | 992.8 | ||||||||||
Common shareholders' equity | $ | 4,200.3 | $ | 3,918.3 | $ | 3,795.5 | $ | 3,886.9 | $ | 4,166.8 | |||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 40 |
Information Related to Certain Non-GAAP Financial Measures
Debt to capital ratio, excluding accumulated other comprehensive income (loss)
The debt to capital ratio, excluding accumulated other comprehensive income (loss), differs from the debt to capital ratio because accumulated other comprehensive income (loss) has been excluded from the value of capital used to determine this measure. Management believes this non-GAAP financial 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. A reconciliation of these ratios is as follows (dollars in millions):
4Q18 | 1Q19 | 2Q19 | 3Q19 | 4Q19 | ||||||||||
Corporate notes payable | $ | 916.8 | $ | 917.3 | $ | 988.3 | $ | 988.7 | $ | 989.1 | ||||
Total shareholders' equity | 3,370.9 | 3,837.9 | 4,252.2 | 4,553.3 | 4,677.0 | |||||||||
Total capital | $ | 4,287.7 | $ | 4,755.2 | $ | 5,240.5 | $ | 5,542.0 | $ | 5,666.1 | ||||
Corporate debt to capital | 21.4% | 19.3% | 18.9% | 17.8% | 17.5% | |||||||||
Corporate notes payable | $ | 916.8 | $ | 917.3 | $ | 988.3 | $ | 988.7 | $ | 989.1 | ||||
Total shareholders' equity | 3,370.9 | 3,837.9 | 4,252.2 | 4,553.3 | 4,677.0 | |||||||||
Less accumulated other comprehensive income | (177.7) | (654.9) | (1,098.2) | (1,442.9) | (1,372.5) | |||||||||
Total capital | $ | 4,110.0 | $ | 4,100.3 | $ | 4,142.3 | $ | 4,099.1 | $ | 4,293.6 | ||||
Debt to total capital ratio, excluding AOCI (a | ||||||||||||||
non-GAAP financial measure) | 22.3% | 22.4% | 23.9% | 24.1% | 23.0% | |||||||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 41 |
Information Related to Certain Non-GAAP Financial Measures
The following summarizes our estimate of the impact of lower general account asset investment income and changes in amounts impacting spreads on 4Q19 net income compared to 4Q18 net income (dollars in millions, except per share data):
4Q19 | 4Q18 | Difference | ||||||
Net investment income on general account assets | $ | 272.0 | $ | 290.4 | $ | (18.4) | ||
Impact of amounts credited and cost of options impacting spread: | ||||||||
Cost of interest credited to policyholders | (25.9) | (27.4) | 1.5 | |||||
Cost of options to fund index credits, net of forfeitures | (24.8) | (25.9) | 1.1 | |||||
Subtotal | 221.3 | 237.1 | (15.8) | |||||
Tax expense (benefit) | 46.5 | 49.8 | (3.3) | |||||
Impact on net income, net of income taxes | $ | 174.8 | $ | 187.3 | $ | (12.5) | ||
Per diluted share impact, based on 4Q19 weighted average shares oustanding (a non- | ||||||||
$ | (0.08) | |||||||
GAAP financial measure) | ||||||||
CNO Financial Group | Fourth Quarter 2019 Earnings | February 11, 2020 | 42 |
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CNO Financial Group Inc. published this content on 11 February 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 11 February 2020 22:17:06 UTC