CNO FINANCIAL GROUP, INC. In this section, we review the consolidated financial condition of CNO and its consolidated results of operations for the years endedDecember 31, 2019 , 2018 and 2017 and, where appropriate, factors that may affect future financial performance. Please read this discussion in conjunction with the consolidated financial statements and notes included in this Form 10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Our statements, trend analyses and other information contained in this report and elsewhere (such as in filings by CNO with theSEC , press releases, presentations by CNO or its management or oral statements) relative to markets for CNO's products and trends in CNO's operations or financial results, as well as other statements, contain forward-looking statements within the meaning of the federal securities laws and the Private Securities Litigation Reform Act of 1995. Forward-looking statements typically are identified by the use of terms such as "anticipate," "believe," "plan," "estimate," "expect," "project," "intend," "may," "will," "would," "contemplate," "possible," "attempt," "seek," "should," "could," "goal," "target," "on track," "comfortable with," "optimistic," "guidance," "outlook" and similar words, although some forward-looking statements are expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or they state other "forward-looking" information based on currently available information. The "Risk Factors" in Item 1A provide 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:
• changes in or sustained low interest rates causing reductions in
investment income, the margins of our fixed annuity and life insurance
businesses, and sales of, and demand for, our products;
• expectations of lower future investment earnings may cause us toaccelerate amortization, write down the balance of insurance acquisition
costs or establish additional liabilities for insurance products;
• 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;
• the ultimate outcome of lawsuits filed against us and other legal and
regulatory proceedings to which we are subject;
• our ability to make anticipated changes to certain non-guaranteed elements
of our life insurance products;
• our ability to obtain adequate and timely rate increases on our health
products, including our long-term care business;
• the receipt of any required regulatory approvals for dividend and surplus
debenture interest payments from our insurance subsidiaries;
• mortality, morbidity, the increased cost and usage of health careservices, persistency, the adequacy of our previous reserve estimates,
changes in the health care market and other factors which may affect the
profitability of our insurance products;
• changes in our assumptions related to deferred acquisition costs or the
present value of future profits;
• the recoverability of our deferred tax assets and the effect of potential
ownership changes and tax rate changes on their value;
• our assumption that the positions we take on our tax return filings will
not be successfully challenged by the
• changes in accounting principles and the interpretation thereof;
• our ability to continue to satisfy the financial ratio and balance
requirements and other covenants of our debt agreements;
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• our ability to achieve anticipated expense reductions and levels of
operational efficiencies including improvements in claims adjudication and
continued automation and rationalization of operating systems;
• performance and valuation of our investments, including the impact of
realized losses (including other-than-temporary impairment charges);
• our ability to identify products and markets in which we can compete
effectively against competitors with greater market share, higher ratings,
greater financial resources and stronger brand recognition;
• our ability to generate sufficient liquidity to meet our debt service
obligations and other cash needs;
• changes in capital deployment opportunities;
• our ability to maintain effective controls over financial reporting;
• our ability to continue to recruit and retain productive agents and
distribution partners;
• customer response to new products, distribution channels and marketing
initiatives;
• our ability to maintain the financial strength ratings of CNO and ourinsurance company subsidiaries as well as the impact of our ratings on our
business, our ability to access capital, and the cost of capital;
• regulatory changes or actions, including: those relating to regulation of
the financial affairs of our insurance companies, such as the calculation
of risk-based capital and minimum capital requirements, and payment of
dividends and surplus debenture interest to us; regulation of the sale,underwriting and pricing of products; and health care regulation affecting
health insurance products;
• changes in the Federal income tax laws and regulations which may affect or
eliminate the relative tax advantages of some of our products or affect
the value of our deferred tax assets;
• availability and effectiveness of reinsurance arrangements, as well as the
impact of any defaults or failure of reinsurers to perform;
• the performance of third party service providers and potential
difficulties arising from outsourcing arrangements;
• the growth rate of sales, collected premiums, annuity deposits and assets;
• interruption in telecommunication, information technology or other
operational systems or failure to maintain the security, confidentiality
or privacy of sensitive data on such systems;
• events of terrorism, cyber attacks, natural disasters or other
catastrophic events, including losses from a disease pandemic;
• ineffectiveness of risk management policies and procedures in identifying,
monitoring and managing risks; and
• the risk factors or uncertainties listed from time to time in our filings
with the SEC .
Other factors and assumptions not identified above are also relevant to the forward-looking statements, and if they prove incorrect, could also cause actual results to differ materially from those projected.
All written or oral forward-looking statements attributable to us are expressly
qualified in their entirety by the foregoing cautionary statement. Our
forward-looking statements speak only as of the date made. We assume no
obligation to update or to publicly announce the results of any revisions to any
of the forward-looking statements to reflect actual results, future events or
developments, changes in assumptions or changes in other factors affecting the
forward-looking statements.
The reporting of RBC measures is not intended for the purpose of ranking any
insurance company or for use in connection with any marketing, advertising or
promotional activities.
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Table of Contents 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 the senior and middle-income markets, which we believe are attractive, underserved, high growth markets. We sell our products through three distribution channels: career agents, independent producers (some of whom sell one or more of our product lines exclusively) and direct marketing. We measure segment performance by excluding the loss related to reinsurance transaction, net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, income taxes and other non-operating items consisting primarily of earnings attributable to VIEs ("pre-tax operating earnings") because we believe that this performance measure is a better indicator of the ongoing business and trends in our business. Our primary investment focus is on investment income to support our liabilities for insurance products as opposed to the generation of net realized investment gains (losses), and a long-term focus is necessary to maintain profitability over the life of the business. The loss related to reinsurance transaction, net realized investment gains (losses), fair value changes in embedded derivative liabilities (net of related amortization), fair value changes related to the agent deferred compensation plan, loss on extinguishment of debt, and other non-operating items consisting primarily of earnings attributable to VIEs depend on market conditions or represent unusual items that do not necessarily relate to the underlying business of our segments. Net realized investment gains (losses) and fair value changes in embedded derivative liabilities (net of related amortization) may affect future earnings levels since our underlying business is long-term in nature and changes in our investment portfolio may impact our ability to earn the assumed interest rates needed to maintain the profitability of our business.
The Company's insurance segments are described below:
• Bankers Life, which underwrites, markets and distributes Medicare
supplement insurance, interest-sensitive life insurance, traditional life
insurance, fixed annuities and long-term care insurance products to themiddle-income senior market through a dedicated field force of career
agents, financial and investment advisors, and sales managers supported by
a network of community-based sales offices. The Bankers Life segment
includes primarily the business of Bankers Life. Bankers Life also has
various distribution and marketing agreements with other insurance
companies to use Bankers Life's career agents to distribute Medicare
Advantage and prescription drug plan products in exchange for a fee.
• Washington National, which underwrites, markets and distributessupplemental health (including specified disease, accident and hospital
indemnity insurance products) and life insurance to middle-income
consumers at home and at the worksite. These products are marketed through
PMA and through independent marketing organizations and insurance agencies
including worksite marketing. The products being marketed are underwritten
by Washington National. This segment's business also includes certain
closed blocks of annuities and Medicare supplement policies which are no
longer being actively marketed by this segment and were primarily issued
or acquired by Washington National.
• Colonial Penn, which markets primarily graded benefit and simplified issue
life insurance directly to customers in the senior middle-income market
through television advertising, direct mail, the internet and
telemarketing. The Colonial Penn segment includes primarily the business
of Colonial Penn.
• Long-term care in run-off consists of: (i) the long-term care business
that was recaptured due to the termination of certain reinsurance
agreements effective
marketed and was issued or acquired by Washington National and BCLIC); and
(ii) certain legacy (prior to 2003) comprehensive and nursing home
long-term care policies which were ceded in
was not actively marketed and was issued by Bankers Life).
InJanuary 2020 , we announced a new operating model that realigns the Company from the operating business segments described above into two divisions - Consumer and Worksite. The new structure will create a leaner, more integrated, customer-centric organization that better positions us for long-term success and shareholder value creation. Under the new structure, we will be organized around two business divisions that reflect the customers served by the Company. The Consumer Division will serve individual consumers, engaging with them on the phone, online, face-to-face with agents, or through a combination of sales channels. This structure unifies consumer capabilities into a single division and 49
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integrates the strength of our agent sales forces and industry-leading direct-to-consumer business with proven experience in advertising, web/digital and call center support.
The Worksite Division will focus on worksite and group sales for businesses,
associations, and other membership groups, interacting with customers at their
place of employment. By creating a dedicated Worksite Division, we will bring a
sharper focus to this high-growth business while further capitalizing on the
strength of our recent WBD acquisition.
We will also centralize certain functional areas previously housed in the three
business segments, including marketing, business unit finance, sales training
and support, and agent recruiting, among others. We will continue to market our
products under our three primary brands: Bankers Life, Washington National and
Colonial Penn. All policy, contract, and certificate terms, conditions, and
benefits remain unchanged.
We will begin reporting under a different segment structure focused on product
types beginning in the first quarter of 2020 based on the way management will
make operating decisions and assess performance going forward. Prior period
results will be reclassified to conform to the new reporting structure.
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The following summarizes our earnings for the three years ending
2019 2018 2017
Adjusted EBIT (a non-GAAP financial measure) (a): Bankers Life$ 300.7 $ 340.6 $ 367.5 Washington National 111.2 121.9 98.3 Colonial Penn 14.3 14.8 22.6 Long-term care in run-off 12.0 22.9 53.1 Adjusted EBIT from business segments 438.2 500.2 541.5 Corporate Operations, excluding corporate interest expense (17.5 ) (71.0 ) (40.3 ) Adjusted EBIT 420.7 429.2 501.2 Corporate interest expense (52.4 ) (48.0 ) (46.5 ) Operating earnings before taxes 368.3 381.2 454.7 Tax expense on operating income 78.3 78.1 153.8 Net operating income 290.0 303.1 300.9 Net realized investment gains from sales and impairments (net of related amortization) 2.1
37.9 34.3 Net change in market value of investments recognized in earnings
25.5 (48.8 ) 15.0 Fair value changes in embedded derivative liabilities (net of related amortization)
(81.4 ) 55.5 (2.5 )
Fair value changes related to agent deferred
compensation plan (20.4 ) 11.9 (12.2 )
Loss related to reinsurance transaction - (704.2 ) -
Loss on extinguishment of debt (7.3 ) - -
Other (12.6 ) 1.7 (8.8 )
Non-operating income (loss) before taxes (94.1 ) (646.0 ) 25.8
Income tax expense (benefit):
On non-operating income (loss) (19.8 ) (135.7 ) 9.0 Valuation allowance for deferred tax assets and other tax items
(193.7 ) 107.8 142.1
Net non-operating income (loss) 119.4 (618.1 ) (125.3 )
Net income (loss) $ 409.4 $ (315.0 ) $ 175.6
Per diluted share:
Net operating income $ 1.85 $ 1.83 $ 1.75
Net realized investment gains from sales and
impairments (net of related amortization and taxes) .01 .18 .13
Net change in market value of investments recognized
in earnings (net of taxes) .13 (.23 ) .06 Fair value changes in embedded derivative liabilities (net of related amortization and taxes)
(.41 ) .27 (.01 )
Fair value changes related to agent deferred
compensation plan (net of taxes) (.10 ) .06 (.05 )
Loss related to reinsurance transaction (net of taxes) - (4.00 ) -
Loss on extinguishment of debt (net of taxes) (.04 ) - -
Valuation allowance for deferred tax assets and other
tax items 1.23 (.02 ) (.83 )
Other (.06 ) .01 (.03 )
Net income (loss) $ 2.61 $ (1.90 ) $ 1.02
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____________
(a) Management believes that an analysis of net operating income provides a
clearer comparison of the operating results of the Company from period to
period because it excludes: (i) loss related to reinsurance transaction,
including impact of taxes; (ii) net realized investment gains or losses
from sales and impairments, net of related amortization and taxes; (iii)
net change in market value of investments recognized in earnings, net of
taxes; (iv) 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; (v) fair value
changes related to the agent deferred compensation plan, net of taxes;
(vi) loss on extinguishment of debt; (vii) changes in the valuation
allowance for deferred tax assets and other tax items; and (viii) other
non-operating items consisting primarily of earnings attributable to VIEs.
Adjusted EBIT is presented as net operating income excluding corporate
interest expense and income tax expense. 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,
Adjusted EBIT and net operating income are not measurements of financial
performance under GAAP and should not be considered as alternatives to cash flow
from operating activities, as measures of liquidity, or as alternatives to net
income as measures of our operating performance or any other measures of
performance derived in accordance with GAAP. In addition, Adjusted EBIT and net
operating income should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items. Adjusted EBIT and net
operating income have limitations as analytical tools, and you should not
consider such measures either in isolation or as substitutes for analyzing our
results as reported under GAAP. Our definitions and calculation of Adjusted EBIT
and net operating income are not necessarily comparable to other similarly
titled measures used by other companies due to different methods of calculation.
At CNO, our mission is to enrich lives by providing financial solutions that
help protect the health and retirement needs of middle-income Americans, while
building enduring value for all our stakeholders. We remain committed to our
strategic priorities to grow the franchise; engage consumers with valuable
products, services and experiences; expand to the right to reach slightly
younger, wealthier consumers within the middle market; and deploy excess capital
to its highest and best use.
Our middle-market focus and diverse distribution are key strengths and
opportunities for CNO. We have career agents at Bankers Life, wholly-owned and
independent distributors at Washington National and a direct-to-consumer
business at Colonial Penn to reach consumers according to their buying
preferences. Our product portfolio mix is well-aligned to the retirement,
healthcare, supplemental health and income accumulation needs of working-age
consumers as well as those in and near retirement. As Americans live longer into
their retirement years, consumers need holistic retirement income planning,
which includes our insurance and annuity solutions, and the investment choices
offered by our broker-dealer and growing force of registered investment
advisors. Specifically, we are focused on the following priorities:
Growth
• Maximize our product portfolio to ensure it meets our customers' needs for
integrated products and advice covering a broad range of their financial
goals
• Respond effectively to evolving customer preferences
• Expand and enhance elements of our broker-dealer and registered investment
advisor program
• Continue our strategy to reach slightly younger and wealthier consumers
within the middle-income market
• Increase the speed-to-market for new products that are a good fit for our
customers
• Make strategic, measured changes to our business practices to improve our
competitive advantage
• Continue to invest in technology to support agent productivity and our
customer experience
Increase profitability and return on equity
• Maintain our strong capital position and favorable financial metrics
• Work to increase our return on equity
• Maintain pricing discipline
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Effectively manage risk and deploy capital • Maintain an active enterprise risk management process
• Utilize excess cash flow to maximize long-term returns
• Maintain a competitive dividend payout ratio
Continue to invest in talent • Attract, retain and develop the best talent to help us drive sustainable
profitable growth
• Recruit, develop and retain our agent force
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of various assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Management has made estimates in the past that we believed to be appropriate but were subsequently revised to reflect actual experience. If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition could be materially affected. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. We continually evaluate the information used to make these estimates as our business and the economic environment change. The use of estimates is pervasive throughout our financial statements. The accounting policies and estimates we consider most critical are summarized below. Additional information on our accounting policies is included in the note to our consolidated financial statements entitled "Summary of Significant Accounting Policies".
Investment Valuation
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and, therefore, represents an exit price, not an entry price. We carry certain assets and liabilities at fair value on a recurring basis, including fixed maturities, equity securities, trading securities, investments held by VIEs, derivatives, separate account assets and embedded derivatives.
The degree of judgment utilized in measuring the fair value of financial
instruments is largely dependent on the level to which pricing is based on
observable inputs. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect our view of market
assumptions in the absence of observable market information. Financial
instruments with readily available active quoted prices would be considered to
have fair values based on the highest level of observable inputs, and little
judgment would be utilized in measuring fair value. Financial instruments that
rarely trade would often have fair value based on a lower level of observable
inputs, and more judgment would be utilized in measuring fair value. We
categorize our financial instruments carried at fair value into a three-level
hierarchy based on the observability of inputs. The three-level hierarchy for
fair value measurements is described in the note to the consolidated financial
statements entitled "Fair Value Measurements."
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The following summarizes our investments on our consolidated balance sheet
carried at fair value by pricing source and fair value hierarchy level as of
Quoted prices
in active
markets for
identical Significant Significant
assets observable inputs unobservable inputs
(Level 1) (Level 2) (Level 3) Total fair value
Priced by third-party pricing
services $ 31.3 $ 21,937.9 $ - $ 21,969.2
Priced by independent broker
quotations - 109.3 32.9 142.2
Priced by matrices - 649.6 24.3 673.9
Priced by other methods (a) - 34.2 156.1 190.3
Total $ 31.3 $ 22,731.0 $ 213.3 $ 22,975.6
Percent of total .1 % 98.9 % 1.0 % 100.0 %
_______________(a) Represents primarily securities benchmarked to comparable securities to compute fair value.
Our evaluation of investments for impairment requires significant judgments,
including: (i) the identification of potentially impaired securities; (ii) the
determination of their estimated fair value; and (iii) the assessment of whether
any decline in estimated fair value is other than temporary.
We regularly evaluate all of our investments with unrealized losses for possible
impairment. Our assessment of whether unrealized losses are "other than
temporary" requires significant judgment. Factors considered include: (i) the
extent to which fair value is less than the cost basis; (ii) the length of time
that the fair value has been less than cost; (iii) whether the unrealized loss
is event driven, credit-driven or a result of changes in market interest rates
or risk premium; (iv) the near-term prospects for specific events, developments
or circumstances likely to affect the value of the investment; (v) the
investment's rating and whether the investment is investment-grade and/or has
been downgraded since its purchase; (vi) whether the issuer is current on all
payments in accordance with the contractual terms of the investment and is
expected to meet all of its obligations under the terms of the investment; (vii)
whether we intend to sell the investment or it is more likely than not that
circumstances will require us to sell the investment before recovery occurs;
(viii) the underlying current and prospective asset and enterprise values of the
issuer and the extent to which the recoverability of the carrying value of our
investment may be affected by changes in such values; (ix) projections of, and
unfavorable changes in, cash flows on structured securities including
mortgage-backed and asset-backed securities; (x) our best estimate of the value
of any collateral; and (xi) other objective and subjective factors.
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 manner in which impairment losses on fixed maturity securities, available
for sale, are recognized in the financial statements is dependent on the facts
and circumstances related to the specific security. If we intend to sell a
security or it is more likely than not that we would be required to sell a
security before the recovery of its amortized cost, the security is
other-than-temporarily impaired and the full amount of the impairment is
recognized as a loss through earnings. If we do not expect to recover the
amortized cost basis, we do not plan to sell the security, and if it is not more
likely than not that we would be required to sell a security before the recovery
of its amortized cost, less any current period credit loss, the recognition of
the other-than-temporary impairment is bifurcated. We recognize the credit loss
portion in net income and the noncredit loss portion in accumulated other
comprehensive income.
We estimate the amount of the credit loss component of a fixed maturity security
impairment as the difference between amortized cost and the present value of the
expected cash flows of the security. The present value is determined using the
best estimate of future cash flows discounted at the effective interest rate
implicit to the security at the date of purchase or the current yield to accrete
an asset-backed or floating-rate security. The methodology and assumptions for
establishing the best estimate of future cash flows vary depending on the type
of security.
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For most structured securities, cash flow estimates are based on bond-specific facts and circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity, prepayment speeds and structural support, including overcollateralization, excess spread, subordination and guarantees. For corporate bonds, cash flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using bond-specific facts and circumstances. The previous amortized cost basis less the impairment recognized in net income becomes the security's new cost basis. We accrete the new cost basis to the estimated future cash flows over the expected remaining life of the security, except when the security is in default or considered nonperforming. The remaining noncredit impairment, which is recorded in accumulated other comprehensive income, is the difference between the security's estimated fair value and our best estimate of future cash flows discounted at the effective interest rate prior to impairment. The remaining noncredit impairment typically represents changes in the market interest rates, current market liquidity and risk premiums. 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.
For more information on our investment portfolio and our critical accounting policies related to investments, see the note to our consolidated financial statements entitled "Investments".
Present Value of Future Profits and Deferred Acquisition Costs
In conjunction with the implementation of fresh start accounting, we eliminated the historical balances of our Predecessor's deferred acquisition costs and the present value of future profits and replaced them with the present value of future profits as calculated on the Effective Date. The value assigned to the right to receive future cash flows from contracts existing at the Effective Date is referred to as the present value of future profits. The balance of this account is amortized, evaluated for recovery, and adjusted for the impact of unrealized gains (losses) in the same manner as the deferred acquisition costs described below. We expect to amortize the balance of the present value of future profits as ofDecember 31, 2019 as follows: 11 percent in 2020, 9 percent in 2021, 8 percent in 2022, 7 percent in 2023 and 7 percent in 2024. Deferred acquisition costs represent incremental direct costs related to the successful acquisition of new or renewal insurance contracts. For interest-sensitive life or annuity products, we amortize these costs in relation to the estimated gross profits using the interest rate credited to the underlying policies. For other products, we generally amortize these costs in relation to future anticipated premium revenue using the projected investment earnings rate. Insurance acquisition costs are amortized to expense over the lives of the underlying policies in relation to future anticipated premiums or gross profits. The insurance acquisition costs for policies other than interest-sensitive life and annuity products are amortized with interest (using the projected investment earnings rate) over the estimated premium-paying period of the policies, in a manner which recognizes amortization expense in proportion to each year's premium income. The insurance acquisition costs for interest-sensitive life and annuity products are amortized with interest (using the interest rate credited to the underlying policy) in proportion to estimated gross profits. The interest, mortality, morbidity and persistency assumptions used to amortize insurance acquisition costs are consistent with those assumptions used to estimate liabilities for insurance products. For interest-sensitive life and annuity products, these assumptions are reviewed on a regular basis. When actual profits or our current best estimates of future profits are different from previous estimates, we adjust cumulative amortization of insurance acquisition costs to maintain amortization expense as a constant percentage of gross profits over the entire life of the policies. When we realize a gain or loss on investments backing our interest-sensitive life or annuity products, we adjust the amortization of insurance acquisition costs to reflect the change in estimated gross profits from the products due to the gain or loss realized and the effect on future investment yields. We increased (decreased) amortization expense for such changes by$.6 million ,$(.4) million and$1.0 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively. We also adjust 55
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insurance acquisition costs for the change in amortization that would have been recorded if fixed maturity securities, available for sale, had been sold at their stated aggregate fair value and the proceeds reinvested at current yields. Such adjustments are commonly referred to as "shadow adjustments" and may include adjustments to: (i) deferred acquisition costs; (ii) the present value of future profits; (iii) loss recognition reserves; and (iv) income taxes. We include the impact of this adjustment in accumulated other comprehensive income (loss) within shareholders' equity. The total pre-tax impact of such adjustments on accumulated other comprehensive income was a decrease of$343.3 million atDecember 31, 2019 (including$135.5 million for premium deficiencies that would exist on certain blocks of business if unrealized gains on the assets backing such products had been realized and the proceeds from our sales of such assets were invested at then current yields). The total pre-tax impact of such adjustments on accumulated other comprehensive income atDecember 31, 2018 was a decrease of$45.3 million (including$2.5 million for premium deficiencies that would exist on certain blocks of business if unrealized gains on the assets backing such products had been realized and the proceeds from our sales of such assets were invested at then current yields). AtDecember 31, 2019 , the balance of insurance acquisition costs was$1.5 billion . The recoverability of this amount is dependent on the future profitability of the related business. Each year, we evaluate the recoverability of the unamortized balance of insurance acquisition costs. These evaluations are performed to determine whether estimates of the present value of future cash flows, in combination with the related liability for insurance products, will support the unamortized balance. These future cash flows are based on our best estimate of future premium income, less benefits and expenses. The present value of these cash flows, plus the related balance of liabilities for insurance products, is then compared with the unamortized balance of insurance acquisition costs. In the event of a deficiency, such amount would be charged to amortization expense. If the deficiency exceeds the balance of insurance acquisition costs, a premium deficiency reserve is established for the excess. The determination of future cash flows involves significant judgment. Revisions to the assumptions which determine such cash flows could have a significant adverse effect on our results of operations and financial position. The long-term care business in the Long-term care in run-off segment is not expected to generate significant future profits. While we expect the long-term care business in the Bankers Life segment to generate future profits, the margins are relatively thin. Accordingly, both of these long-term care blocks are vulnerable to changes in assumptions. The table presented below summarizes our estimates of cumulative adjustments to insurance acquisition costs or premium deficiency reserves (when the deficiency exceeds the balance of insurance acquisition costs) resulting from hypothetical revisions to certain assumptions. Although such hypothetical revisions are not currently required or anticipated, we believe they could occur based on past variances in experience and our expectations of the ranges of future experience that could reasonably occur. We have assumed that revisions to assumptions resulting in the adjustments summarized below would occur equally among policy types, ages and durations within each product classification. Any actual adjustment would be dependent on the specific policies affected and, therefore, may differ from the estimates summarized below. In addition, the impact of actual adjustments would reflect the net effect of all changes in assumptions during the period. 56
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Estimated adjustment to
income before income
taxes based on
revisions to certain
Change in assumptions assumptions
(dollars in millions)
Interest-sensitive life products:
5% increase to assumed mortality $ (24 )
5% decrease to assumed mortality 25
15% increase to assumed expenses (10 ) 15% decrease to assumed expenses
10
10 basis point decrease to assumed spread (7 ) 10 basis point increase to assumed spread
7
20% increase to assumed lapses (15 ) 20% decrease to assumed lapses
17
Fixed index and fixed interest annuity products: 20% increase to assumed surrenders (62 ) 20% decrease to assumed surrenders
74
15% increase to assumed expenses (8 ) 15% decrease to assumed expenses
8
10 basis point decrease to assumed spread (43 ) 10 basis point increase to assumed spread
42
Other than interest-sensitive life and annuity products (a): 5% increase to assumed morbidity
(24 )
5% decrease to assumed mortality (10 )
No increase in new money rate assumption after one year (8 )
__________________
(a) We have excluded the effect of reasonably likely changes in lapse,
surrender and expense assumptions for policies other than
interest-sensitive life and annuity products.
The following summarizes the persistency of our major blocks of insurance business summarized by segment and line of business:
Years ended December 31,
2019 2018 2017
Bankers Life:
Medicare supplement (1) 84.4 % 85.1 % 85.0 %
Long-term care (1) 90.2 % 90.1 % 89.9 %
Fixed index annuities (2) 90.7 % 90.9 % 91.2 %
Other annuities (2) 82.3 % 83.0 % 85.2 %
Life (1) 89.5 % 88.5 % 87.5 %
Washington National:
Medicare supplement (1) 84.8 % 84.9 % 85.3 %
Supplemental health (1) 88.9 % 89.3 % 89.2 %
Life (1) 92.2 % 91.8 % 90.6 %
Colonial Penn:
Life (1) 82.9 % 83.1 % 83.4 %Long-term care in run-off (1) 90.4 % 90.7 % 91.2 %
_____________________
(1) Based on number of inforce policies.
(2) Based on the percentage of the inforce block persisting.
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Liabilities for Insurance Products - reserves for the future payment of long-term care policy claims
We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For all our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. For example, our long-term care policy claims may be paid over a long period of time and, therefore, loss estimates have a higher degree of uncertainty.
The following summarizes the components of the reserves related to our long-term care business in our Bankers Life and Long-term care in run-off segments:
2019 2018
(Dollars in millions)
Amounts classified as future policy benefits: Active life reserves$ 3,876.9
1,461.7 1,404.6
Premium deficiency reserves assuming net unrealized gains had been realized
75.5 -
Amounts classified as liability for policy and
contract claims:
Liability for due and unpaid claims, claims in the
course of settlement and incurred but not reported
claims 217.9 211.7
Total 5,632.0 5,489.6
Reinsurance receivables 3,087.6 3,030.3
Long-term care reserves, net of reinsurance
receivables $ 2,544.4 $ 2,459.3
The significant assumptions used to calculate the active life reserves include
morbidity, persistency and investment yields. These assumptions are determined
at the issuance date and do not change over the life of the policy.
The significant assumptions used to calculate the reserves for the present value
of amounts not yet due on claims include future benefit payments, interest rates
and claim continuance patterns. Interest rates are used to determine the present
value of the future benefit payments and are based on the investment yield of
assets supporting the reserves. Claim continuance assumptions are estimates of
the expected period of time that claim payments will continue before termination
due to recovery, death or attainment of policy maximum benefits. These estimates
are based on historical claim experience for similar policy and coverage types.
Our estimates of benefit payments, interest rates and claim continuance are
reviewed regularly and updated to consider current portfolio investment yields
and recent claims experience.
The significant assumptions used to calculate the liability for due and unpaid
claims, claims in the course of settlement and incurred but not reported claims
are based on historical claim payment patterns and include assumptions related
to the number of claims and the size and timing of claim payments. These
assumptions are updated quarterly to reflect the most current information
regarding claim payment patterns. In order to determine the accuracy of our
prior estimates, we calculate the total redundancy (deficiency) of our prior
claim reserve estimates. The 2018 claim reserve redundancy for long-term care
claim reserves in our Bankers Life segment, as measured at December 31, 2019 ,
was approximately $2.0 million .
Estimates of unpaid losses related to long-term care business have a higher
degree of uncertainty than estimates for our other products due to the range of
ultimate duration of these claims and the resulting variability in their cost
(in addition to the variations in the lag time in reporting claims). As an
example, an increase in the loss ratio of 5 percentage points for claims
incurred in 2019 related to our long-term care business would have resulted in
an immediate decrease in our earnings of approximately $13 million . Our
financial results depend significantly upon the extent to which our actual
claims experience is consistent with the assumptions we used in determining our
reserves and pricing our products. If our assumptions with respect to future
claims are incorrect, and our reserves are insufficient to cover our actual
losses and expenses, we would be required to increase our liabilities, which
would negatively affect our operating results.
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Table of Contents Income Taxes Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities and NOLs. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which temporary differences are expected to be recovered or paid. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period when the changes are enacted. A reduction of the net carrying amount of deferred tax assets by establishing a valuation allowance is required if, based on the available evidence, it is more likely than not that such assets will not be realized. In assessing the need for a valuation allowance, all available evidence, both positive and negative, shall be considered to determine whether, based on the weight of that evidence, a valuation allowance for deferred tax assets is needed. This assessment requires significant judgment and considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of carryforward periods, our experience with operating loss and tax credit carryforwards expiring unused, and tax planning strategies. We evaluate the need to establish a valuation allowance for our deferred income tax assets on an ongoing basis using a deferred tax valuation model. Our model is adjusted to reflect changes in our projections of future taxable income including changes resulting from the Tax Reform Act, investment strategies, the impact of the sale or reinsurance of business, the recapture of business previously ceded and tax planning strategies. Our estimates of future taxable income are based on evidence we consider to be objective and verifiable. AtDecember 31, 2019 , our projection of future taxable income for purposes of determining the valuation allowance is based on our adjusted average annual baseline taxable income which is assumed to increase by approximately 3.5% for the next five years, and level taxable income thereafter, plus the incremental increase to non-life taxable income associated with a tax planning strategy. Based on our assessment, we have concluded that it is more likely than not that all our deferred tax assets of$428.9 million will be realized through future taxable earnings. Therefore, the Company released its remaining valuation allowance of$193.7 million in the fourth quarter of 2019. Recovery of our deferred tax asset is dependent on achieving the level of future taxable income projected in our deferred tax valuation model and failure to do so could result in an increase in the valuation allowance in a future period. Any future increase in the valuation allowance may result in additional income tax expense and reduce shareholders' equity, and such an increase could have a significant impact upon our earnings in the future. The Code limits the extent to which losses realized by a non-life entity (or entities) may offset income from a life insurance company (or companies) to the lesser of: (i) 35 percent of the income of the life insurance company; or (ii) 35 percent of the total loss of the non-life entities (including NOLs of the non-life entities). This limitation is the primary reason a valuation allowance for NOLs is required. There is no similar limitation on the extent to which losses realized by a life insurance entity (or entities) may offset income from a non-life entity (or entities). 59
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Pursuant to the Tax Reform Act, NOLs generated subsequent to 2017 do not have an expiration date. We have$2.5 billion of federal NOLs as ofDecember 31, 2019 , as summarized below (dollars in millions): Net operating loss Year of expiration carryforwards 2023 $ 1,424.3 2025 85.2 2026 149.9 2027 10.8 2028 80.3 2029 213.2 2030 .3 2031 .2 2032 44.4 2033 .6 2034 .9 2035 .8 Total federal non-life NOLs 2,010.9 Post 2017 life NOLs with no expiration 523.6 Total federal NOLs $ 2,534.5 The loss on the reinsurance transaction that was completed inSeptember 2018 resulted in a life NOL. The life NOL is expected to be used to offset 80 percent of our future life insurance company taxable income due to limitations prescribed in the Tax Reform Act. Our life NOL has no expiration date and we expect it to be fully utilized over the next two years, depending on the level of life taxable income during such period. Our non-life NOLs can be used to offset 35 percent of remaining life insurance company taxable income after application of the life NOLs, until all non-life NOLs are utilized or expire. Liabilities for Insurance Products AtDecember 31, 2019 , the total balance of our liabilities for insurance products was$24.4 billion . These liabilities are generally payable over an extended period of time and the profitability of the related products is dependent on the pricing of the products and other factors. Differences between our expectations when we sold these products and our actual experience could result in future losses. We calculate and maintain reserves for the future payment of claims to our policyholders based on actuarial assumptions. For our insurance products, we establish an active life reserve, a liability for due and unpaid claims, claims in the course of settlement and incurred but not reported claims. In addition, for our health insurance business, we establish a reserve for the present value of amounts not yet due on claims. Many factors can affect these reserves and liabilities, such as economic and social conditions, inflation, hospital and pharmaceutical costs, changes in doctrines of legal liability and extra-contractual damage awards. We establish liabilities for annuity and interest-sensitive life products equal to the accumulated policy account values, which include an accumulation of deposit payments plus credited interest, less withdrawals and the amounts assessed against the policyholder through the end of the period. In addition, policyholder account values for certain interest-sensitive life products are impacted by our assumptions related to changes of certain NGEs that we are allowed to make under the terms of the policy, such as cost of insurance charges, expense loads, credited interest rates and policyholder bonuses. Therefore, our reserves and liabilities are necessarily based on numerous estimates and assumptions as well as historical experience. Establishing reserves is an uncertain process, and it is possible that actual claims will materially exceed our reserves and have a material adverse effect on our results of operations and financial condition. Our financial results depend significantly upon the extent to which our actual claims experience is consistent with the assumptions we used in determining our reserves and pricing our products. If our assumptions with respect to future claims are incorrect, and our reserves are insufficient to cover our actual losses and expenses, we would be required to increase our liabilities, which would negatively affect our operating results. Liabilities for insurance products are calculated using management's best judgments, based on our past experience and standard actuarial tables, of mortality, morbidity, lapse rates, investment experience and expense levels. 60
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Table of Contents RESULTS OF OPERATIONS
The following tables and narratives summarize the operating results of our segments (dollars in millions):
2019 2018 2017
Pre-tax operating earnings (a non-GAAP measure) (a): Bankers Life$ 300.7 $ 340.6 $ 367.5 Washington National 111.2 121.9 98.3 Colonial Penn 14.3 14.8 22.6 Long-term care in run-off 12.0 22.9 53.1 Corporate operations (69.9 ) (119.0 ) (86.8 ) 368.3 381.2 454.7 Loss related to reinsurance transactions: Corporate operations - (704.2 ) - - (704.2 ) - Net realized investment gains (losses), net of related amortization: Bankers Life 26.2 13.5 29.8 Washington National 24.2 (9.9 ) 11.7 Colonial Penn 3.4 (2.4 ) - Long-term care in run-off (6.5 ) (4.5 ) 10.8 Corporate operations (19.7 ) (7.6 ) (3.0 ) 27.6 (10.9 ) 49.3 Fair value changes in embedded derivative liabilities, net of related amortization: Bankers Life (80.5 ) 55.0 (2.7 ) Washington National (.9 ) .5 .2 (81.4 ) 55.5 (2.5 ) Earnings attributable to VIEs: Corporate operations 2.1 1.6 (8.8 ) Net revenue pursuant to transition services agreement, net of taxes: Corporate operations 1.2 .1 - Fair value changes related to agent deferred compensation plan: Corporate operations (20.4 ) 11.9 (12.2 ) Other expenses: Corporate operations (15.9 ) - - Loss on extinguishment of debt: Corporate operations (7.3 ) - - Income (loss) before income taxes: Bankers Life 246.4 409.1 394.6 Washington National 134.5 112.5 110.2 Colonial Penn 17.7 12.4 22.6 Long-term care in run-off 5.5 18.4 63.9 Corporate operations (129.9 ) (817.2 ) (110.8 ) Income (loss) before income taxes$ 274.2 $ (264.8 ) $ 480.5 61
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____________________
(a) These non-GAAP measures as presented in the above table and in the following
segment financial data and discussions of segment results exclude the loss
related to reinsurance transaction, net realized investment gains (losses),
fair value changes in embedded derivative liabilities, net of related
amortization, fair value changes related to the agent deferred compensation
plan, loss on extinguishment of debt, net revenue pursuant to transition
services agreement, earnings attributable to VIEs and before income
taxes. These are considered non-GAAP financial measures. 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.
These non-GAAP financial measures of "pre-tax operating earnings" differ from
"income (loss) before income taxes" as presented in our consolidated statement
of operations prepared in accordance with GAAP due to the exclusion of the loss
related to reinsurance transaction, realized investment gains (losses), fair
value changes in embedded derivative liabilities, net of related amortization,
fair value changes related to the agent deferred compensation plan, loss on
extinguishment of debt, net revenue pursuant to transition services agreement
and earnings attributable to VIEs. We measure segment performance excluding
these items because we believe that this performance measure is a better
indicator of the ongoing businesses and trends in our business. Our primary
investment focus is on investment income to support our liabilities for
insurance products as opposed to the generation of realized investment gains
(losses), and a long-term focus is necessary to maintain profitability over the
life of the business. Realized investment gains (losses), fair value changes in
embedded derivative liabilities, fair value changes related to the agent
deferred compensation plan and earnings attributable to VIEs depend on market
conditions and do not necessarily relate to decisions regarding the underlying
business of our segments. However, "pre-tax operating earnings" does not replace
"income (loss) before income taxes" as a measure of overall profitability.
We may experience realized investment gains (losses), which will affect future
earnings levels since our underlying business is long-term in nature and we need
to earn the assumed interest rates on the investments backing our liabilities
for insurance products to maintain the profitability of our business. In
addition, management uses this non-GAAP financial measure 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. The table above
reconciles the non-GAAP measure to the corresponding GAAP measure.
General: 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 distribute these products through our Bankers Life segment, which
utilizes a career agency force, through our Washington National segment, which
utilizes independent producers and through our Colonial Penn segment, which
utilizes direct response marketing. We also have a Long-term care in run-off
segment that consists of: (i) the long-term care business that was recaptured
due to the termination of certain reinsurance agreements effective September 30,
2016 (such business is not actively marketed and was issued or acquired by
Washington National and BCLIC); and (ii) certain legacy (prior to 2003)
comprehensive and nursing home long-term care policies that were ceded in
September 2018 (such business was not actively marketed and was issued by
Bankers Life). Beginning in the fourth quarter of 2018, the earnings of this
segment only reflect the long-term care business that was recaptured in
September 2016 as the legacy long-term care business was ceded under a 100%
indemnity coinsurance agreement in September 2018 .
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Bankers Life (dollars in millions)
2019 2018 2017
Premium collections:
Annuities $ 1,305.4 $ 1,163.2 $ 1,030.6
Medicare supplement and other supplemental
health 1,020.2 1,019.0 1,025.1
Life 467.4 466.0 462.4
Total collections $ 2,793.0 $ 2,648.2 $ 2,518.1
Average liabilities for insurance products:
Fixed index annuities $ 6,607.4 $ 5,788.9 $ 5,139.6
Fixed interest annuities 2,272.6 2,590.1 2,899.5
SPIAs and supplemental contracts: Mortality based 139.5 147.9 160.5 Deposit based 140.8 144.1 149.0 Health: Long-term care 2,012.0 1,907.1 1,805.1 Medicare supplement 309.7 314.3 334.9 Other health 62.5 59.8 55.9 Life: Interest sensitive 882.5 829.1 778.2 Non-interest sensitive 1,224.1 1,159.8 1,089.9 Total average liabilities for insurance products, net of reinsurance ceded$ 13,651.1 $ 12,941.1 $ 12,412.6 Broker dealer and registered investment advisor client assets: Net new client assets (a) Brokerage$ 32.9 $ 40.5 $ 35.0 Advisory 144.2 157.0 116.0 Total$ 177.1 $ 197.5 $ 151.0 Client assets at end of period (b) Brokerage$ 982.9 $ 794.1 $ 831.3 Advisory 532.1 310.8 171.3 Total$ 1,515.0 $ 1,104.9 $ 1,002.6 63
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2019 2018 2017
Revenues:
Insurance policy income $ 1,457.3 $ 1,458.5 $ 1,473.7
Net investment income:
General account invested assets 782.2 804.4 764.7
Fixed index products 147.5 (41.5 )
153.5
Fee revenue and other income 75.2 51.9 44.1 Total revenues 2,462.2 2,273.3 2,436.0 Expenses: Insurance policy benefits 1,157.6 1,175.3 1,151.6 Amounts added to policyholder account liabilities: Cost of interest credited to policyholders 93.7 98.1
105.0
Cost of options to fund index credits, net of forfeitures 98.8 81.4
63.7
Market value changes credited to policyholders 149.2 (42.9 )
154.6
Amortization related to operations 176.3 171.3
153.3
Interest expense on investment borrowings 32.3 29.7
19.8
Commission expense and distribution fees 72.3 60.9
55.7
Other operating costs and expenses 381.3 358.9
364.8
Total benefits and expenses 2,161.5 1,932.7
2,068.5
Income before net realized investment gains (losses), net of related amortization, and fair value changes in embedded derivative liabilities, net of related amortization, and income taxes 300.7 340.6
367.5
Net realized investment gains (losses) 26.9 13.2
30.8
Amortization related to net realized investment gains (losses) (.7 ) .3 (1.0 ) Net realized investment gains (losses), net of related amortization 26.2 13.5
29.8
Insurance policy benefits - fair value changes in embedded derivative liabilities (100.7 ) 66.7 (3.4 ) Amortization related to fair value changes in embedded derivative liabilities 20.2 (11.7 )
.7
Fair value changes in embedded derivative liabilities, net of related amortization (80.5 ) 55.0 (2.7 ) Income before income taxes$ 246.4 $ 409.1 $ 394.6 64
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2019 2018 2017
Health benefit ratios:
All health lines:
Insurance policy benefits $ 871.7 $ 876.1 $ 853.0
Benefit ratio (c) 85.8 % 85.6 % 82.2 %
Medicare supplement:
Insurance policy benefits $ 562.2 $ 571.8 $ 550.6
Benefit ratio (c) 73.8 % 74.5 % 70.8 %
A 1% change in the annual Medicare supplement
benefit ratio is approximately equivalent to a
$7.6 million change in insurance policy
benefits.
Long-term care:
Insurance policy benefits $ 309.5 $ 304.3 $ 302.4
Benefit ratio (c) 121.7 % 119.0 % 116.2 %
Interest-adjusted benefit ratio (d) 77.1 % 76.0 % 75.0 %
A 1% change in the annual long-term care
interest-adjusted benefit ratio is
approximately equivalent to a $2.4 million
change in insurance policy benefits.
______________
(a) 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.
(b) Client assets include cash and securities in brokerage and managed advisory
accounts.
(c) We calculate benefit ratios by dividing the related product's insurance
policy benefits by insurance policy income.
(d) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) forBankers Life's long-term care products by dividing such product's insurance
policy benefits less the imputed interest income on the accumulated assets
backing the insurance liabilities by policy income. These are considered
non-GAAP financial measures. 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.
These non-GAAP financial measures of "interest-adjusted benefit ratios" differ from "benefit ratios" due to the deduction of imputed interest income on the accumulated assets backing the insurance liabilities from the product's insurance policy benefits used to determine the ratio. Interest income is an important factor in measuring the performance of health products that are expected to be inforce for a longer duration of time, are not subject to unilateral changes in provisions (such as non-cancelable or guaranteed renewable contracts) and require the performance of various functions and services (including insurance protection) for an extended period of time. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that 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 benefits 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 (which is equal to the tabular interest on the related insurance liabilities). Since interest income is an important factor in measuring the performance of this product, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the "interest-adjusted benefit ratio" does not replace the "benefit ratio" as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both "benefit ratios" and "interest-adjusted benefit ratios" when analyzing the financial results attributable to these products. The imputed investment income earned on the accumulated assets backing Bankers Life's long-term care reserves was$113.4 million ,$110.1 million and$107.1 million in 2019, 2018 and 2017, respectively. Bankers Life is the marketing brand of various affiliated companies ofCNO Financial Group including,Bankers Life and Casualty Company ,Bankers Life Securities, Inc. , andBankers Life Advisory Services, Inc. Non-affiliated insurance products are offered throughBankers Life General Agency, Inc. (dbaBL General Insurance Agency, Inc. , AK, AL,CA, NV , PA). Agents who are financial advisors are registered withBankers Life Securities, Inc. 65
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Securities and variable annuity products and services are offered byBankers Life Securities, Inc. MemberFINRA /SIPC , (dbaBL Securities, Inc. , AL, GA, IA, IL,MI, NV , PA). Advisory products and services are offered byBankers Life Advisory Services, Inc. SEC Registered Investment Adviser (dbaBL Advisory Services, Inc. , AL, GA, IA,MT, NV , PA). Home Office:111 East Wacker Drive , Suite 1900,Chicago, IL 60601. Total premium collections were$2,793.0 million in 2019, up 5.5 percent from 2018, and$2,648.2 million in 2018, up 5.2 percent from 2017, primarily driven by sales of fixed index annuities. See "Premium Collections" for further analysis of Bankers Life's premium collections. Average liabilities for insurance products, net of reinsurance ceded were$13.7 billion in 2019, up 5.5 percent from 2018 and$12.9 billion in 2018, up 4.3 percent from 2017. The increase in average liabilities for insurance products is primarily due to new sales and the amounts added to policyholder account liabilities on interest-sensitive products. Broker dealer and registered investment advisor client assets totaled$1,515.0 million and$1,104.9 million atDecember 31, 2019 and 2018, respectively, with net inflows of$177.1 million and$197.5 million in 2019 and 2018, respectively.
Insurance policy income is comprised of premiums earned on policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies.
Net investment income on general account invested assets (which excludes income on policyholder portfolios) decreased 2.8 percent, to$782.2 million , in 2019 and increased 5.2 percent, to$804.4 million , in 2018. The decrease in 2019 reflects: (i) lower investment income from alternative investments; (ii) lower prepayment income (including call premiums); and (iii) lower investment yields partially offset by higher average investments in this segment. The lower yields in 2019 are primarily due to lower market yields in general, as well as repositioning a portion of our portfolio into higher rated investments in the first quarter of 2019. Alternative investments are typically reported a quarter in arrears. Alternative investments earned satisfactory returns in 2019 relative to our expectations, but were less than 2018. Investment income from alternative investments was$41.8 million ,$48.7 million and$26.2 million in 2019, 2018 and 2017 respectively. In addition, prepayment income (including call premiums) was$11.5 million ,$18.6 million and$27.7 million in 2019, 2018 and 2017, respectively. Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to offset or hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that investment income spread is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income (loss) related to fixed index products was$147.5 million ,$(41.5) million and$153.5 million in 2019, 2018 and 2017, respectively. Such amounts were substantially offset by the corresponding charge (credit) to amounts added to policyholder account liabilities - market value changes credited to policyholders. Such income and related charges fluctuate based on the value of options embedded in the segment's fixed index annuity policyholder account liabilities subject to this benefit and to the performance of the index to which the returns on such products are linked. Fee revenue and other income was$75.2 million ,$51.9 million and$44.1 million in 2019, 2018 and 2017, respectively. We recognized fee income of$57.1 million ,$35.5 million and$30.8 million in 2019, 2018 and 2017, respectively, pursuant to distribution and marketing agreements to sell third-party products (primarily Medicare Advantage) of other insurance companies. The increase in fee income in 2019 from the sales of third-party products primarily reflects increased sales and changes in the assumptions used to estimate revenues on these sales. Such assumptions are based on a larger pool of historical information related to renewal patterns and resulted in the recognition of$11.3 million of additional fee revenue and$4.8 million of additional distribution expense in the fourth quarter of 2019. The remaining increase in fee revenue in 2019 and 2018 is primarily attributable to fee income earned by our broker-dealer and registered investment advisor subsidiaries.
Insurance policy benefits fluctuated as a result of the factors summarized below for benefit ratios. Benefit ratios are calculated by dividing the related insurance product's insurance policy benefits by insurance policy income.
In the fourth quarter of 2019, we completed our comprehensive review of actuarial assumptions. Such review resulted in a decrease to reserves of$1.4 million and an increase in amortization of$12.2 million including the impact from changes in earned rate, credited rate, mortality rate and surrender rate assumptions related to fixed index and fixed interest annuities and interest-sensitive life products. In the fourth quarter of 2018, our comprehensive review resulted in a decrease to reserves of$5.2 million and an increase in amortization of$8.3 million including the net impact from changes to spread and persistency assumptions related to fixed index and fixed interest annuities. In the fourth quarter of 2017, our comprehensive review 66
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resulted in a decrease in reserves of
The Medicare supplement business consists of both individual and group policies. Government regulations generally require us to attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefit reserves), after three years from the original issuance of the policy and over the lifetime of the policy, of not less than 65 percent on individual products and not less than 75 percent on group products, as determined 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. Our benefit ratios were 73.8 percent, 74.5 percent and 70.8 percent in 2019, 2018 and 2017, respectively. Beginning in 2018, our margins reflect the expansion of the use of the Medicare crossover claims process for all of this segment's Medicare supplement business. The Medicare crossover process is a claims payment platform that provides for straight through processing of provider claims. As expected, this new process increased the reporting of smaller claims, resulting in higher benefit ratios in 2019 and 2018. Annually, we review our loss experience on these products and when appropriate, apply for actuarially justified rate increases. The next effective date for rate increases for the majority of these policies isJanuary 1, 2020 . Our insurance policy benefits reflected favorable reserve developments of prior period claim reserves of approximately$1.8 million ,$.7 million and$6.0 million in 2019, 2018 and 2017, respectively. Excluding the effects of prior period claim reserve redundancies and deficiencies, our benefit ratios would have been 74.1 percent, 74.5 percent and 71.5 percent in 2019, 2018 and 2017, respectively. The benefit ratio in 2019 on this Medicare supplement business was in line with our previously announced expectations which were in the range of 73 percent to 77 percent for 2019. The net cash flows from our long-term care products 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 typically increases, but the increase in reserves is partially offset by investment income earned on the accumulated assets. The benefit ratio on our long-term care business in the Bankers Life segment was 121.7 percent, 119.0 percent and 116.2 percent in 2019, 2018 and 2017, respectively. The interest-adjusted benefit ratio on this business was 77.1 percent, 76.0 percent and 75.0 percent in 2019, 2018 and 2017, respectively. The interest-adjusted benefit ratio in 2017 was favorably impacted by$3.4 million of one-time reserve releases which was comprised of: (i)$1.9 million related to lower persistency (including the results of procedures performed to identify policies that had terminated prior toJune 30, 2017 due to death); (ii)$.9 million related to an out-of-period adjustment that reduced reserves; and (iii)$.6 million related to the impact of policyholder decisions to surrender or reduce coverage following rate increases. The interest-adjusted benefit ratio in 2017, excluding such favorable reserve releases, was 76.3 percent. The interest-adjusted benefit ratio in 2019 on this long-term care business was in line with our previously announced expectations which were in the range of 74 percent to 79 percent for 2019. Since the insurance product liabilities we establish for the long-term care 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. When policies lapse, active life reserves for such lapsed policies are released, resulting in decreased insurance policy benefits (although such decrease is somewhat offset by additional amortization expense). Amounts added to policyholder account liabilities - cost of interest credited to policyholders were$93.7 million ,$98.1 million and$105.0 million in 2019, 2018 and 2017, respectively. The weighted average crediting rates for these products was 2.9 percent in 2019 and 2.8 percent in both 2018 and 2017. The average liabilities of the fixed interest annuity block were$2.3 billion ,$2.6 billion and$2.9 billion in 2019, 2018 and 2017, respectively. The decrease in the liabilities related to these annuities reflects the lower sales of these products in the current low interest rate environment and consumer preference for fixed index products. Amounts added to policyholder account liabilities for fixed index products represent a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the S&P 500 Index, over a specified period. Such amounts include our cost to fund the annual index credits, net of policies that are canceled prior to their anniversary date (classified as cost of options to fund index credits, net of forfeitures). Market value changes in the underlying indices during a specified period of time are classified as market value changes credited to policyholders. Such market value changes are generally offset by the net investment income related to fixed index products discussed above. Amortization related to operations includes amortization of deferred acquisition costs and the present value of future profits. Deferred acquisition costs and the present value of future profits are collectively referred to as "insurance acquisition costs". Insurance acquisition costs are generally amortized either: (i) in relation to the estimated gross profits for interest- 67
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sensitive life and annuity products; or (ii) in relation to actual and expected premium revenue for other products. In addition, for interest-sensitive life and annuity products, we are required to adjust the total amortization recorded to date through the statement of operations if actual experience or other evidence suggests that earlier estimates of future gross profits should be revised. Accordingly, amortization for interest-sensitive life and annuity products is dependent on the profits realized during the period and on our expectation of future profits. For other products, we amortize insurance acquisition costs in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Amortization was impacted in each year by our comprehensive review of actuarial assumptions discussed above under insurance policy benefits. Interest expense on investment borrowings represents interest expense on collateralized borrowings as further described in the note to the consolidated financial statements entitled "Summary of Significant Accounting Policies - Investment Borrowings". The increase in interest expense is primarily due to higher interest rates on the variable rate investment borrowings. Commission expense and distribution fees were higher in 2019 due to higher sales of insurance products, including the sales of third-party Medicare Advantage policies.
Other operating costs and expenses in our Bankers Life segment were
Net realized investment gains (losses) fluctuate each period. During 2019, we recognized net realized investment gains of$26.9 million , which were comprised of: (i)$17.2 million of net gains from the sales of investments; (ii) a$9.5 million favorable change in the fair value of equity securities; (iii) the increase in fair value of certain fixed maturity investments with embedded derivatives of$5.6 million ; and (iv)$5.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2018, we recognized net realized investment gains of$13.2 million , which were comprised of: (i)$43.7 million of net gains from the sales of investments; (ii) a$24.1 million unfavorable change in the fair value of equity securities; (iii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of$6.0 million ; and (iv)$.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2017, we recognized net realized investment gains of$30.8 million , which were comprised of: (i)$22.1 million of net gains from the sales of investments; and (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of$8.7 million . Amortization related to net realized investment gains (losses) is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. When we sell securities which back our interest-sensitive life and annuity products at a gain (loss) and reinvest the proceeds at a different yield, we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Sales of fixed maturity investments resulted in an increase (decrease) in the amortization of insurance acquisition costs of$.7 million ,$(.3) million and$1.0 million in 2019, 2018 and 2017, respectively. Insurance policy benefits - fair value changes in embedded derivative liabilities represents fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities. Over the life of an annuity policy, the fair value changes in the embedded derivative related to such policy are classified as non-operating earnings and will net to zero. These changes solely reflect fluctuations in the discount rate used to determine the embedded derivative liability and do not reflect the actual costs of the options purchased to support the benefits accruing to the fixed index annuity.
Amortization related to fair value changes in embedded derivative liabilities is the increase or decrease in the amortization of insurance acquisition costs which results from changes in interest rates used to discount embedded derivative liabilities related to our fixed index annuities.
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Washington National (dollars in millions)
2019 2018 2017
Premium collections: Supplemental health and other health$ 632.3 $ 613.0 $ 589.1 Medicare supplement 40.9 46.3 51.6 Life 36.8 32.2 30.0 Annuity 1.0 1.3 .9 Total collections$ 711.0 $ 692.8 $ 671.6 Average liabilities for insurance products: Fixed index annuities$ 252.0 $ 283.3 $ 314.2 Fixed interest annuities 81.8 90.3
97.9
SPIAs and supplemental contracts: Mortality based 214.2 219.5 232.1 Deposit based 272.1 270.6 269.5 Separate Accounts 4.6 4.8 4.7 Health: Supplemental health 3,005.7 2,867.5 2,732.0 Medicare supplement 17.9 20.7 24.8 Other health 10.1 11.8 13.5 Life: Interest sensitive life 149.1 149.2 149.2 Non-interest sensitive life 162.4 166.6 175.0 Total average liabilities for insurance products, net of reinsurance ceded$ 4,169.9 $ 4,084.3 $ 4,012.9 Revenues: Insurance policy income$ 700.8 $ 687.6 $ 671.4 Net investment income (loss): General account invested assets 255.5 261.1
257.5
Fixed index products 4.5 (1.5 )
9.0
Trading account income related to policyholder accounts - .2
3.7
Fee revenue and other income 14.2 .9 1.0 Total revenues 975.0 948.3 942.6 Expenses: Insurance policy benefits 550.9 540.9 550.7 Amounts added to policyholder account liabilities: Cost of interest credited to policyholders 12.4 12.8
12.9
Cost of options to fund index credits, net of forfeitures 4.5 4.6
4.4
Market value changes credited to policyholders 4.4 (1.8 )
13.1
Amortization related to operations 58.5 55.8
58.8
Interest expense on investment borrowings 12.4 10.8
6.3
Commission expense 84.1 73.9
69.8
Other operating costs and expenses 136.6 129.4
128.3
Total benefits and expenses 863.8 826.4
844.3
Income before net realized investment gains (losses) and fair value changes in embedded derivative liabilities, net of related amortization, and income taxes 111.2 121.9
98.3
Net realized investment gains (losses) 24.1 (10.0 )
11.7
Amortization related to net realized investment gains (losses) .1 .1 - Net realized investment gains (losses), net of related amortization 24.2 (9.9 )
11.7
Insurance policy benefits - fair value changes in embedded derivative liabilities (2.6 ) 1.6
.5
Amortization related to fair value changes in embedded derivative liabilities 1.7 (1.1 ) (.3 ) Fair value changes in embedded derivative liabilities, net of related amortization (.9 ) .5 .2 Income before income taxes$ 134.5 $ 112.5 $ 110.2 69
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2019 2018 2017
Health benefit ratios:
Supplemental health:
Insurance policy benefits $ 496.4 $ 486.0 $ 489.8
Benefit ratio (a) 78.8 % 79.5 % 83.2 %
Interest-adjusted benefit ratio (b) 54.8 % 55.4 % 59.1 %
A 1% change in the annual interest-adjusted
benefit ratio is approximately equivalent to a
$6.3 million change in insurance policy
benefits.
Medicare supplement:
Insurance policy benefits $ 28.9 $ 32.8 $ 37.0
Benefit ratio (a) 71.4 % 68.9 % 68.1 %
_________________(a) We calculate benefit ratios by dividing the related product's insurance
policy benefits by insurance policy income.
(b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) for
Washington National's supplemental health products by dividing suchproduct's insurance policy benefits less the imputed interest income on the
accumulated assets backing the insurance liabilities by policy income. These
are considered non-GAAP financial measures. 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.
These non-GAAP financial measures of "interest-adjusted benefit ratios" differ
from "benefit ratios" due to the deduction of imputed interest income on the
accumulated assets backing the insurance liabilities from the product's
insurance policy benefits used to determine the ratio. Interest income is an
important factor in measuring the performance of health products that are
expected to be inforce for a longer duration of time, are not subject to
unilateral changes in provisions (such as non-cancelable or guaranteed renewable
contracts) and require the performance of various functions and services
(including insurance protection) for an extended period of time. The net cash
flows from supplemental health products generally cause an accumulation of
amounts in the early years of a policy (accounted for as reserve increases) that
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 benefits 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 (which is equal to the
tabular interest on the related insurance liabilities). Since interest income is
an important factor in measuring the performance of these products, management
believes a benefit ratio that includes the effect of interest income is useful
in analyzing product performance. We utilize the interest-adjusted benefit ratio
in measuring segment performance because we believe that this performance
measure is a better indicator of the ongoing businesses and trends in the
business. However, the "interest-adjusted benefit ratio" does not replace the
"benefit ratio" as a measure of current period benefits to current period
insurance policy income. Accordingly, management reviews both "benefit ratios"
and "interest-adjusted benefit ratios" when analyzing the financial results
attributable to these products. The imputed investment income earned on the
accumulated assets backing the supplemental health reserves was $151.5 million ,
$147.2 million and $141.7 million in 2019, 2018 and 2017, respectively.
Total premium collections were $711.0 million in 2019, up 2.6 percent from 2018,
and $692.8 million in 2018, up 3.2 percent from 2017, driven by sales and
persistency of the segment's supplemental health block; partially offset by
lower Medicare supplement collected premiums due to the run-off of this block of
business. This segment no longer markets Medicare supplement products and no
longer actively pursues sales of annuity products. See "Premium Collections" for
further analysis of fluctuations in premiums collected by product.
Average liabilities for insurance products, net of reinsurance ceded were
Insurance policy income is comprised of premiums earned on traditional insurance
policies which provide mortality or morbidity coverage and fees and other
charges assessed on other policies. Such income increased in recent periods as
supplemental health premiums have increased consistent with sales; partially
offset by the decrease in Medicare supplement premiums.
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Net investment income on general account invested assets (which excludes income on policyholder portfolios and reinsurer accounts) was$255.5 million in 2019,$261.1 million in 2018 and$257.5 million in 2017. Net investment income on general account invested assets in 2019 reflects lower investment income from alternative investments as well as lower investment yields, as compared to 2018. The lower yields in 2019 are primarily due to lower market yields in general, as well as repositioning a portion of our portfolio into higher rated investments in the first quarter of 2019. Alternative investments are typically reported a quarter in arrears. Alternative investments earned satisfactory returns in 2019 relative to our expectations, but were less than 2018. Investment income from alternative investments was$10.8 million ,$12.4 million and$7.3 million in 2019, 2018 and 2017, respectively. Prepayment income (including call premiums) was$4.7 million ,$3.8 million and$5.9 million in 2019, 2018 and 2017, respectively. Net investment income related to fixed index products represents the change in the estimated fair value of options which are purchased in an effort to offset or hedge certain potential benefits accruing to the policyholders of our fixed index products. Our fixed index products are designed so that investment income spread is expected to be more than adequate to cover the cost of the options and other costs related to these policies. Net investment income (loss) related to fixed index products was$4.5 million ,$(1.5) million and$9.0 million in 2019, 2018 and 2017, respectively. Such amounts were substantially offset by the corresponding charge to amounts added to policyholder account liabilities - market value changes credited to policyholders. Such income and related charges fluctuate based on the value of options embedded in the segment's fixed index annuity policyholder account liabilities subject to this benefit and to the performance of the index to which the returns on such products are linked. Trading account income related to policyholder accounts represents the income on investments backing the market strategies of certain annuity products which provide for different rates of cash value growth based on the experience of a particular market strategy. The income on our trading account securities is designed to substantially offset certain amounts included in insurance policy benefits related to the aforementioned annuity products. Fee revenue and other income increased in 2019 due to the fee income recognized by WBD subsequent to its acquisition as further described in the note to the consolidated financial statements entitled "Business and Basis of Presentation".
Insurance policy benefits fluctuated as a result of the factors summarized below. Benefit ratios are calculated by dividing the related insurance product's insurance policy benefits by insurance policy income.
In the fourth quarter of 2019, we completed our comprehensive annual review of actuarial assumptions. Such review resulted in a decrease in amortization of$2.2 million , partially offset by an increase in reserves of$1.4 million , primarily related to fixed index annuities. In the fourth quarter of 2018, our comprehensive annual review resulted in a decrease in amortization of$2.4 million , partially offset by an increase in reserves of$.2 million , primarily related to interest-sensitive life products. In the fourth quarter of 2017, our comprehensive review resulted in a$1 million increase in amortization of deferred acquisition costs related to interest-sensitive life products. Washington National's 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) were sold with return of premium or cash value riders. The return of premium rider generally provides that after a policy has been inforce for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, without interest, less the aggregate amount of all claims incurred under the policy. The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned. Accordingly, the net cash flows from these products generally result in the accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases) which 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, the benefit ratio will typically increase, but the increase in benefits will be partially offset by investment income earned on the accumulated assets. The benefit ratio will fluctuate depending on the claim experience during the year. Insurance margins (insurance policy income less insurance policy benefits) on supplemental health products were$133.2 million ,$125.3 million and$98.7 million in 2019, 2018 and 2017, respectively. The increase in margin on this block of business in 2019 reflects the growth in the block and lower claims experience. The increase in margin on this block of business 71
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in 2018, compared to 2017, reflects higher insurance policy income due to higher sales and growth in the block, as well as favorable claims and favorable development of prior period claim reserves. The benefit ratio on these products was 78.8 percent, 79.5 percent and 83.2 percent in 2019, 2018 and 2017, respectively. The interest-adjusted benefit ratio on this supplemental health business was 54.8 percent, 55.4 percent and 59.1 percent in 2019, 2018 and 2017, respectively. The interest-adjusted benefit ratio in 2019 on this supplemental health business was slightly better than our previously announced expectations which were in the range of 55 percent to 58 percent for 2019. Washington National's Medicare supplement business primarily consists of individual policies. The insurance product liabilities we establish for our Medicare supplement business are subject to significant estimates and the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Governmental regulations generally require us to attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefit reserves), after three years from the original issuance of the policy and over the lifetime of the policy, of not less than 65 percent on these products, as determined in accordance with statutory accounting principles. Insurance margins (insurance policy income less insurance policy benefits) on these products were$11.6 million ,$14.8 million and$17.4 million in 2019, 2018 and 2017, respectively. Such decrease reflects the run-off of this block of business. Amounts added to policyholder account liabilities - cost of interest credited to policyholders were$12.4 million ,$12.8 million and$12.9 million in 2019, 2018 and 2017, respectively. Amounts added to policyholder account liabilities for fixed index products represent a guaranteed minimum rate of return and a higher potential return that is based on a percentage (the "participation rate") of the amount of increase in the value of a particular index, such as the S&P 500 Index, over a specified period. Such amounts include our cost to fund the annual index credits, net of policies that are canceled prior to their anniversary date (classified as cost of options to fund index credits, net of forfeitures). Market value changes in the underlying indices during a specified period of time are classified as market value changes credited to policyholders. Such market value changes are generally offset by the net investment income related to fixed index products discussed above. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs are generally amortized in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Such amounts were generally consistent with the related premium revenue. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods. Interest expense on investment borrowings represents$12.4 million ,$10.8 million and$6.3 million of interest expense on collateralized borrowings in 2019, 2018 and 2017, respectively, as further described in the note to the consolidated financial statements entitled "Summary of Significant Accounting Policies - Investment Borrowings". The increase in interest expense is due to higher interest rates on the variable rate investment borrowings. Commission expense was$84.1 million ,$73.9 million and$69.8 million in 2019, 2018 and 2017, respectively. The increase in commission expense is consistent with the growth in the supplemental health block. Other operating costs and expenses were$136.6 million ,$129.4 million and$128.3 million in 2019, 2018 and 2017, respectively. The increase in other operating costs and expenses in 2019 is primarily due to the expenses recognized by WBD subsequent to its acquisition as further described in the note to the consolidated financial statements entitled "Business and Basis of Presentation". Net realized investment gains (losses) fluctuate each period. During 2019, we recognized net realized investment gains of$24.1 million , which were comprised of: (i)$14.6 million of net gains from the sales of investments; (ii) a$1.6 million favorable change in the fair value of equity securities; (iii) an increase in fair value of certain fixed maturity investments with embedded derivatives of$2.6 million ; and (iv) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of$5.3 million . During 2018, we recognized net realized investment losses of$10.0 million , which were comprised of: (i)$1.8 million of net gains from the sales of investments; (ii) a$7.5 million unfavorable change in the fair value of equity securities; (iii) an increase in fair value of certain fixed maturity investments with embedded derivatives of$.9 million ; (iv) the decrease in fair value of embedded derivatives related to a modified coinsurance agreement of$5.1 million ; and (v)$.1 million of writedowns of investments for other than temporary declines in fair value which were recorded in earnings. During 2017, we recognized net realized investment gains of$11.7 million , which were comprised of: (i)$7.4 million of net gains from the sales of investments; (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of$2.5 million ; (iii) the increase in fair value of embedded derivatives related to a modified coinsurance 72
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agreement of
Amortization related to net realized investment gains (losses) is the increase or decrease in the amortization of insurance acquisition costs which results from realized investment gains or losses. When we sell securities which back our interest-sensitive life and annuity products at a gain (loss) and reinvest the proceeds at a different yield (or when we have the intent to sell the impaired investments before an anticipated recovery in value occurs), we increase (reduce) the amortization of insurance acquisition costs in order to reflect the change in estimated gross profits due to the gains (losses) realized and the resulting effect on estimated future yields. Insurance policy benefits - fair value changes in embedded derivative liabilities represents fair value changes due to fluctuations in the interest rates used to discount embedded derivative liabilities related to our fixed index annuities. Over the life of an annuity policy, the fair value changes in the embedded derivative related to such policy are classified as non-operating earnings and will net to zero. These changes solely reflect fluctuations in the discount rate used to determine the embedded derivative liability and do not reflect the actual costs of the options purchased to support the benefits accruing to the fixed index annuity.
Amortization related to fair value changes in embedded derivative liabilities is the increase or decrease in the amortization of insurance acquisition costs which results from changes in interest rates used to discount embedded derivative liabilities related to our fixed index annuities.
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Colonial Penn (dollars in millions)
2019 2018 2017
Premium collections:
Life $ 307.0 $ 296.6 $ 289.6
Medicare supplement and other health 1.3 1.7 2.0
Total collections$ 308.3 $ 298.3 $ 291.6 Average liabilities for insurance products: SPIAs - mortality based$ 67.5 $ 69.6 $ 73.0 Health: Medicare supplement 4.2 5.0 5.7 Other health 3.2 3.7 4.1 Life: Interest sensitive 12.0 14.7 15.5 Non-interest sensitive 751.2 739.8 717.5 Total average liabilities for insurance products, net of reinsurance ceded$ 838.1 $ 832.8 $ 815.8 Revenues: Insurance policy income$ 308.8 $ 298.6 $ 291.8 Net investment income on general account invested assets 42.2 44.6 44.4 Fee revenue and other income 1.5 1.8 1.3 Total revenues 352.5 345.0 337.5 Expenses: Insurance policy benefits 209.1 206.6 199.0 Amounts added to annuity and interest-sensitive life product account balances .6 .6
.6
Amortization related to operations 18.6 17.8
16.3
Interest expense on investment borrowings 1.5 1.4
.9
Commission expense 1.3 1.4
1.4
Other operating costs and expenses 107.1 102.4
96.7
Total benefits and expenses 338.2 330.2
314.9
Income before net realized investment losses and income taxes 14.3 14.8
22.6
Net realized investment gains (losses) 3.4 (2.4 ) - Income before income taxes$ 17.7 $ 12.4 $ 22.6 This segment's results are significantly impacted by the accounting standard related to deferred acquisition costs. We are not able to defer most of Colonial Penn's direct response advertising costs although such costs generate predictable sales and future inforce profits. We plan to continue to invest in this segment's business, including the development of new products and markets. The amount of our investment in new business during a particular period will have a significant impact on this segment's results. This segment's earnings (before net realized investment gains (losses) and income taxes) in 2019 were in line with our previously announced expectations which were in the range of$12 million to$16 million for 2019. Total premium collections increased 3.4 percent, to$308.3 million , in 2019 and 2.3 percent, to$298.3 million , in 2018. The increase was driven by recent sales activity and steady persistency. See "Premium Collections" for further analysis of Colonial Penn's premium collections.
Average liabilities for insurance products, net of reinsurance ceded have increased as a result of growth in the core graded benefit and simplified issue life insurance business in this segment.
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Insurance policy income is comprised of premiums earned on policies which provide mortality or morbidity coverage and fees and other charges assessed on other policies. The increase in such income reflects the growth in the block of graded benefit and simplified issue life insurance business.
Net investment income on general account invested assets decreased in 2019 primarily due to lower investment yields compared to 2018.
Insurance policy benefits reflect growth in this segment. In addition, insurance policy benefits in 2018 reflect a$1.1 million out-of-period adjustment which increased reserves on a closed block of payout annuities in the first quarter of 2018. Insurance policy benefits in 2017 reflect favorable changes to liabilities for insurance products including a$2.5 million out-of-period adjustment and a$.5 million refinement to the calculation. Amortization related to operations includes amortization of insurance acquisition costs. Insurance acquisition costs in the Colonial Penn segment are amortized in relation to actual and expected premium revenue, and amortization is only adjusted if expected premium revenue changes or if we determine the balance of these costs is not recoverable from future profits. Such amounts were generally consistent with the related premium revenue and gross profits for such periods and the assumptions we made when we established the present value of future profits. A revision to our current assumptions could result in increases or decreases to amortization expense in future periods. Other operating costs and expenses in our Colonial Penn segment fluctuate primarily due to changes in the marketing expenses incurred to generate new business. Marketing expenses were higher in 2019 as compared to 2018. The demand and cost of television advertising appropriate for Colonial Penn's campaigns has fluctuated widely in certain periods. We are disciplined with our marketing expenditures and will increase or decrease our advertising spend depending on prices. Net realized investment gains (losses) fluctuate each period. During 2019, we recognized net realized investment gains of$3.4 million , which were comprised of: (i)$3.1 million of net gains from the sales of investments; (ii) a$.2 million favorable change in the fair value of equity securities; and (iii) the increase in fair value of certain fixed maturity investments with embedded derivatives of$.1 million . During 2018, we recognized net realized investment losses of$2.4 million , which were comprised of: (i)$1.8 million of net losses from the sales of investments; (ii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of$.2 million ; and (iii) a$.4 million unfavorable change in the fair value of equity securities. During 2017, we recognized net realized investment gains of nil, which was comprised of: (i)$.7 million of net gains from the sales of investments; (ii) the increase in fair value of certain fixed maturity investments with embedded derivatives of$.3 million ; and (iii)$1.0 million of writedowns of investments for other than temporary declines in fair value which were recorded in earnings. Management believes that 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. 75
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Recognizing the accounting standard that requires us to expense certain direct
response advertising costs (rather than deferring such costs as deferred
acquisition costs), the amount of our investment in new business in the Colonial
Penn segment during a particular period will have a significant impact on the
segment results. The following summarizes our earnings, separated between
in-force and new business for Colonial Penn (dollars in millions):
2019 2018 2017
Adjusted EBIT from In-force Business
Revenues:
Insurance policy income $ 257.2 $ 251.6 $ 241.8
Net investment income and other 43.7 46.4 45.7 Total revenues 300.9 298.0 287.5 Benefits and expenses: Insurance policy benefits 177.2 178.6 169.2 Amortization 17.0 17.2 15.6 Other expenses 34.9 36.4 33.9 Total benefits and expenses 229.1 232.2 218.7
Adjusted EBIT from In-force Business
Adjusted EBIT from New Business Revenues: Insurance policy income$ 51.6 $ 47.0 $
50.0
Net investment income and other - - - Total revenues 51.6 47.0 50.0 Benefits and expenses: Insurance policy benefits 32.5 28.6 30.4 Amortization 1.6 .6 .7 Other expenses 75.0 68.8 65.1 Total benefits and expenses 109.1 98.0 96.2 Adjusted EBIT from New Business$ (57.5 ) $ (51.0 ) $
(46.2 )
Adjusted EBIT from In-force and New Business Revenues: Insurance policy income$ 308.8 $ 298.6 $
291.8
Net investment income and other 43.7 46.4 45.7 Total revenues 352.5 345.0 337.5 Benefits and expenses: Insurance policy benefits 209.7 207.2 199.6 Amortization 18.6 17.8 16.3 Other expenses 109.9 105.2 99.0 Total benefits and expenses 338.2 330.2 314.9
Adjusted EBIT from In-force and New Business
The Adjusted EBIT from in-force business in the Colonial Penn segment increased
in 2019, as compared to 2018, reflecting growth in the block. The Adjusted EBIT
from new business in the Colonial Penn segment in 2019 primarily reflects higher
marketing costs. 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.
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Long-term care in run-off (dollars in millions)
The long-term care in run-off segment consists of: (i) the long-term care business that was recaptured due to the termination of certain reinsurance agreements effectiveSeptember 30, 2016 (such business is not actively marketed and was issued or acquired by Washington National and BCLIC); and (ii) certain legacy (prior to 2003) comprehensive and nursing home long-term care policies that were ceded inSeptember 2018 (such business is not actively marketed and was issued by Bankers Life). Beginning in the fourth quarter of 2018, the earnings of this segment only reflect the long-term care business that was recaptured inSeptember 2016 as the legacy long-term care business was ceded under a 100% indemnity coinsurance agreement inSeptember 2018 . 2019 2018 2017 Premium collections: Long-term care (all renewal)$ 13.5 $ 145.8 $ 205.2 Average liabilities for insurance products: Average liabilities for long-term care products, net of reinsurance ceded$ 570.1 $ 2,857.7 $ 3,754.7 Revenues: Insurance policy income$ 13.9 $ 148.4 $ 210.4 Net investment income on general account invested assets 33.0 172.7 223.7 Total revenues 46.9 321.1 434.1 Expenses: Insurance policy benefits 32.5 271.3 344.2 Amortization - 7.0 10.3 Commission expense .4 1.3 1.8 Other operating costs and expenses 2.0 18.6
24.7
Total benefits and expenses 34.9 298.2
381.0
Income (loss) before net realized investment gains (losses) and income taxes 12.0 22.9
53.1
Net realized investment gains (losses) (6.5 ) (4.5 ) 10.8 Income (loss) before income taxes$ 5.5 $ 18.4 $ 63.9 2019 2018 2017 Health benefit ratios: Long-term care: Insurance policy benefits$ 32.6 $ 271.3 $ 344.2 Benefit ratio (a) 234.6 % 182.8 % 163.6 %
Interest-adjusted benefit ratio (b) 35.4 % 79.1 % 69.1 %
_______________
(a) We calculate benefit ratios by dividing the related product's insurance
policy benefits by insurance policy income.
(b) We calculate the interest-adjusted benefit ratio (a non-GAAP measure) forlong-term care products in this segment by dividing such product's insurance
policy benefits less the imputed interest income on the accumulated assets
backing the insurance liabilities by policy income. These are considered
non-GAAP financial measures. 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.
These non-GAAP financial measures of "interest-adjusted benefit ratios" differ
from "benefit ratios" due to the deduction of imputed interest income on the
accumulated assets backing the insurance liabilities from the product's
insurance policy benefits used to determine the ratio. Interest income is an
important factor in measuring the performance of health products that are
expected to be inforce for a longer duration of time, are not subject to
unilateral changes in provisions (such as non-cancelable or guaranteed renewable
contracts) and require the performance of various functions and
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services (including insurance protection) for an extended period of time. The net cash flows from long-term care products generally cause an accumulation of amounts in the early years of a policy (accounted for as reserve increases) that 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 benefits 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 (which is equal to the tabular interest on the related insurance liabilities). Since interest income is an important factor in measuring the performance of these products, management believes a benefit ratio that includes the effect of interest income is useful in analyzing product performance. We utilize the interest-adjusted benefit ratio in measuring segment performance because we believe that this performance measure is a better indicator of the ongoing businesses and trends in the business. However, the "interest-adjusted benefit ratio" does not replace the "benefit ratio" as a measure of current period benefits to current period insurance policy income. Accordingly, management reviews both "benefit ratios" and "interest-adjusted benefit ratios" when analyzing the financial results attributable to these products. The imputed investment income earned on the accumulated assets backing the long-term care reserves was$27.7 million ,$153.9 million and$198.8 million in 2019, 2018 and 2017, respectively. Average liabilities for long-term care products decreased as a result of the legacy long-term care business which was ceded under a 100% indemnity coinsurance agreement inSeptember 2018 . In addition, the average liabilities were increased by$75.5 million and$130 million in 2019 and 2017, respectively, to reflect the premium deficiencies that would exist if unrealized gains on the assets backing such products had been realized and the proceeds from the sales of such assets were invested at then current yields. Such increase is reflected as a reduction of accumulated other comprehensive income. Insurance policy benefits were$32.5 million ,$271.3 million and$344.2 million in 2019, 2018 and 2017, respectively. The interest-adjusted benefit ratio on the business in this segment was 35.4 percent, 79.1 percent and 69.1 percent in 2019, 2018 and 2017, respectively. Our 2019 comprehensive actuarial review of this block reflected relatively low margins. Accordingly, this segment's results can be volatile from period to period. This block of business is particularly sensitive to changes in assumptions. Net realized investment losses fluctuated each period. During 2019, we recognized net realized investment losses of$6.5 million , which were comprised of: (i)$3.0 million of net losses from the sales of investments; (ii) a$.5 million favorable change in the fair value of equity securities; and (iii)$4.0 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2018, we recognized net realized investment losses of$4.5 million , which were comprised of: (i)$.3 million of net losses from the sales of investments; (ii) a$1.9 million unfavorable change in the fair value of equity securities; (iii) the decrease in fair value of certain fixed maturity investments with embedded derivatives of$.2 million ; and (iv)$2.1 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2017, we recognized net realized investment gains of$10.8 million , which were comprised of: (i)$29.1 million of net gains from the sales of investments; and (ii)$18.3 million of writedowns of investments for other than temporary declines in fair value recognized through net income. 78
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Corporate Operations (dollars in millions)
2019 2018 2017
Corporate operations: Interest expense on corporate debt$ (52.4 ) $ (48.0 ) $ (46.5 ) Net investment income (loss): General investment portfolio 5.0 6.6
5.6
Other special-purpose portfolios: COLI 15.0 (17.8 )
17.4
Investments held in a rabbi trust 7.6 (2.7 )
3.4
Other trading account activities 8.8 8.3
9.1
Fee revenue and other income 37.5 6.7
8.5
Other operating costs and expenses (91.4 ) (72.1 ) (84.3 ) Loss before net realized investment losses, earnings attributable to VIEs, fair value changes related to agent deferred compensation plan, loss related to reinsurance transaction, net revenue pursuant to transition services agreement, loss on extinguishment of debt and income taxes (69.9 ) (119.0 ) (86.8 ) Net realized investment losses (19.7 ) (7.6 ) (3.0 ) Earnings attributable to VIEs 2.1 1.6 (8.8 ) Fair value changes related to agent deferred compensation plan (20.4 ) 11.9 (12.2 ) Net revenue pursuant to transition services agreement 1.2 .1 - Other expenses (15.9 ) - - Loss related to reinsurance transaction - (704.2 ) - Loss on extinguishment of debt (7.3 ) - - Loss before income taxes$ (129.9 ) $ (817.2 ) $ (110.8 ) Interest expense on corporate debt was$52.4 million ,$48.0 million and$46.5 million in 2019, 2018 and 2017, respectively. Our average corporate debt outstanding was$966.1 million in 2019 and$925.0 million in both 2018 and 2017. The average interest rate on our debt was 5.1 percent, 4.8 percent and 4.8 percent in 2019, 2018 and 2017, respectively. Average corporate debt outstanding and the average interest rate were impacted by the debt refinancing transaction completed inJune 2019 (as further discussed in the note to the consolidated financial statements entitled "Notes Payable - Direct Corporate Obligations") along with the mix of interest rates on the related outstanding borrowings.
Net investment income on general investment portfolio fluctuates based on the amount and type of invested assets in the corporate operations segment.
Net investment income on other special-purpose portfolios includes the income
(loss) from: (i) investments related to deferred compensation plans held in a
rabbi trust (which is offset by amounts included in other operating costs and
expenses as the investment results are allocated to participants' account
balances); (ii) trading account activities; and (iii) income (loss) from
Company-owned life insurance ("COLI") equal to the difference between the return
on these investments (representing the change in value of the underlying
investments) and our overall portfolio yield. COLI is utilized as an investment
vehicle to fund Bankers Life's agent deferred compensation plan. For segment
reporting, the Bankers Life segment is allocated a return on these investments
equivalent to the yield on the Company's overall portfolio, with any difference
in the actual COLI return allocated to the Corporate operations segment. We
recognized death benefits, net of cash surrender value, of $4.0 million related
to the COLI in 2017. At December 31, 2019 , our COLI assets had a carrying value
of $194.0 million . Since this segment's earnings reflect the changes in values
of the underlying investments supporting the insurance contracts (including
mutual funds investing in bonds, common stock and real estate) and any death
benefits received, such income can be volatile.
Fee revenue and other income includes the fees our wholly-owned investment
advisor earns for managing portfolios of commercial bank loans for investment
trusts. These trusts are consolidated as VIEs in our consolidated financial
statements, but the fees are reflected as revenues and the fee expense is
reflected in the earnings attributable to VIEs. This fee revenue fluctuates
consistent with the size of the loan portfolios. In addition, other income in
2019 reflected the favorable impact of legal recoveries from settlements with
third parties.
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Other operating costs and expenses include general corporate expenses, net of amounts charged to subsidiaries for services provided by the corporate operations. These amounts fluctuate as a result of expenses such as legal, consulting and regulatory expenses which often vary from period to period and were higher in 2019. Net realized investment losses often fluctuate each period. During 2019, net realized investment losses in this segment were$19.7 million and were comprised of: (i) a$.1 million favorable change in the fair value of equity securities (none of which was recognized by the VIEs); (ii)$11.7 million of net losses from the sales of investments (including$12.4 million of net losses recognized by the VIEs and$.7 million of net gains on other investment sales); (iii)$5.1 million of losses related to the dissolution of a VIE; and (iv)$3.0 million of writedowns of investments held by VIEs due to other-than-temporary declines in value. During 2018, net realized investment losses in this segment were$7.6 million and were comprised of: (i) a$4.3 million unfavorable change in the fair value of equity securities (none of which was recognized by the VIEs); and (ii)$3.3 million of net losses from the sales of investments (including$3.6 million of net losses recognized by the VIEs and$.3 million of net gains on other investment sales). During 2017, net realized investment losses in this segment were$3.0 million and were comprised of: (i)$3.8 million of net gains from the sales of investments (including$1.2 million of net gains recognized by the VIEs and$2.6 million of net gains on other investment sales); (ii)$4.3 million of losses on the dissolution of a VIE; and (iii)$2.5 million of writedowns of investments held by VIEs due to other-than-temporary declines in value. Earnings attributable to VIEs represent the 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. Fair value changes related to agent deferred compensation plan relate to changes in the underlying actuarial assumptions used to value liabilities for our agent deferred compensation plan. Net revenue pursuant to transition services agreement represents the difference between the fees we receive from Wilton Re and the overhead costs incurred to provide such services under the agreement in connection with the completion of a long-term care reinsurance transaction inSeptember 2018 . Other expenses in 2019 include one-time expenses associated with: (i) the new operating model announced in earlyJanuary 2020 to create a more customer-centric structure and improve operating performance; and (ii) a new strategic technology partnership with two leading, global technology solutions providers for our application development, maintenance and testing functions as well as IT infrastructure and cybersecurity services. The new operating model is expected to reduce run rate expenses by approximately$11 million per year beginning in 2021. The technology partnership is expected to deliver approximately$20 million in savings over five years with insignificant savings in the early years grading up to$8 million annually by 2024. Loss related to reinsurance transaction in 2018 resulted from ceding our legacy (prior to 2003) comprehensive and nursing home long-term care policies inSeptember 2018 through 100% indemnity coinsurance. We recognized a pre-tax loss related to the reinsurance transaction of$704.2 million (net of realized gains on the transfer of assets related to the transaction of$363.4 million ) as further described in the note to the consolidated financial statements entitled "Summary of Significant Accounting Policies - Reinsurance".
Loss on extinguishment of debt in 2019 of
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Table of Contents PREMIUM COLLECTIONS In accordance with GAAP, insurance policy income in our consolidated statement of operations consists of premiums earned for traditional insurance policies that have life contingencies or morbidity features. For annuity and interest-sensitive life contracts, premiums collected are not reported as revenues, but as deposits to insurance liabilities. We recognize revenues for these products over time in the form of investment income and surrender or other charges. Our insurance segments sell products through three primary distribution channels - career agents (our Bankers Life segment), direct marketing (our Colonial Penn segment) and independent producers (our Washington National segment). Our career agency force in the Bankers Life segment sells primarily Medicare supplement and long-term care insurance policies, life insurance and annuities. These agents visit the customer's home, which permits one-on-one contact with potential policyholders and promotes strong personal relationships with existing policyholders. Our direct marketing distribution channel in the Colonial Penn segment is engaged primarily in the sale of graded benefit life and simplified issue life insurance policies which are sold directly to the policyholder. Our Washington National segment sells primarily supplemental health and life insurance. These products are marketed through PMA, a wholly-owned subsidiary that specializes in marketing and distributing health products, and through independent marketing organizations and insurance agencies, including worksite marketing. Agents, insurance brokers and marketing companies who market our products and prospective purchasers of our products use the financial strength ratings of our insurance subsidiaries as an important factor in determining whether to market or purchase. Ratings have the most impact on our sales of supplemental health and life products to consumers at the worksite. The current financial strength ratings of our primary insurance subsidiaries fromA.M. Best , S&P, Fitch and Moody's are "A-", "A-", "A-" and "A3", respectively. For a description of these ratings and additional information on our ratings, see "Consolidated Financial Condition - Financial Strength Ratings of our Insurance Subsidiaries." We set premium rates on our health insurance policies based on facts and circumstances known at the time we issue the policies using assumptions about numerous variables, including the actuarial probability of a policyholder incurring a claim, the probable size of the claim, and the interest rate earned on our investment of premiums. We also consider historical claims information, industry statistics, the rates of our competitors and other factors. If our actual claims experience is less favorable than we anticipated and we are unable to raise our premium rates, our financial results may be adversely affected. We generally cannot raise our health insurance premiums in any state until we obtain the approval of the state insurance regulator. We review the adequacy of our premium rates regularly and file for rate increases on our products when we believe such rates are too low. It is likely that we will not be able to obtain approval for all requested premium rate increases. If such requests are denied in one or more states, our net income may decrease. If such requests are approved, increased premium rates may reduce the volume of our new sales and may cause existing policyholders to lapse their policies. If the healthier policyholders allow their policies to lapse, this would reduce our premium income and profitability in the future. 81
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Total premium collections were$3,825.8 million in 2019, up 1.1 percent from 2018, and$3,785.1 million in 2018, up 2.6 percent from 2017. First year collected premiums were$1,626.4 million in 2019, up 9.6 percent from 2018, and$1,484.5 million in 2018, up 8.0 percent from 2017. Total premiums collected are summarized as follows (dollars in millions): 2019 2018 2017 First year: Bankers Life$ 1,497.8 $ 1,361.1 $ 1,245.6 Washington National 76.9 76.5 78.4 Colonial Penn 51.7 46.9 50.1 Total first year 1,626.4 1,484.5 1,374.1 Renewal: Bankers Life 1,295.2 1,287.1 1,272.5 Washington National 634.1 616.3 595.0 Colonial Penn 256.6 251.4 241.5
Long-term care in run-off 13.5 145.8 205.2 Total renewal
2,199.4 2,300.6 2,314.2
Total premiums collected
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Total premium collections by segment were as follows:
Bankers Life (dollars in millions)
2019 2018 2017
Premiums collected by product: Annuities: Fixed index (first-year)$ 1,241.2 $ 1,112.0 $ 964.7 Other fixed interest (first-year) 59.1 45.8
59.8
Other fixed interest (renewal) 5.1 5.4
6.1
Subtotal - other fixed interest annuities 64.2 51.2
65.9
Total annuities 1,305.4 1,163.2
1,030.6
Health:
Medicare supplement (first-year) 60.2 61.9
69.3
Medicare supplement (renewal) 673.7 672.4
670.1
Subtotal - Medicare supplement 733.9 734.3 739.4 Long-term care (first-year) 18.9 15.6 16.0 Long-term care (renewal) 236.7 239.5 241.0 Subtotal - long-term care 255.6 255.1 257.0 Supplemental health (first-year) 4.5 4.4
5.0
Supplemental health (renewal) 20.4 19.2
17.6
Subtotal - supplemental health 24.9 23.6 22.6 Other health (first-year) .8 .8 .8 Other health (renewal) 5.0 5.2 5.3 Subtotal - other health 5.8 6.0 6.1 Total health 1,020.2 1,019.0 1,025.1 Life insurance: Traditional (first-year) 68.4 71.6 82.6 Traditional (renewal) 225.1 223.6 217.3 Subtotal - traditional 293.5 295.2 299.9 Interest-sensitive (first-year) 44.7 49.0 47.4 Interest-sensitive (renewal) 129.2 121.8 115.1 Subtotal - interest-sensitive 173.9 170.8 162.5 Total life insurance 467.4 466.0 462.4 Collections on insurance products: Total first-year premium collections on insurance products 1,497.8 1,361.1
1,245.6
Total renewal premium collections on insurance products 1,295.2 1,287.1
1,272.5
Total collections on insurance products
Annuities in this segment include fixed index and other fixed interest annuities sold to the senior market. Annuity collections in this segment increased 12 percent, to$1,305.4 million in 2019 and 13 percent, to$1,163.2 million , in 2018. The increase in premium collections from our fixed index products in 2019 and 2018 is primarily due to the general stock market performance which made these products attractive to certain customers. Premium collections from our other fixed interest products reflect consumer preference for fixed index products in the current low interest rate environment. Health products include Medicare supplement, long-term care and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claims experience and expense management. 83
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Collected premiums on Medicare supplement policies in the Bankers Life segment were$733.9 million ,$734.3 million and$739.4 million in 2019, 2018 and 2017, respectively.
Premiums collected on Bankers Life's long-term care policies increased .2
percent, to
Life products in this segment include traditional and interest-sensitive life
products. Life premiums collected in this segment increased .3 percent, to
Washington National (dollars in millions)
2019 2018 2017
Premiums collected by product:
Health:
Medicare supplement (renewal) $ 40.9 $ 46.3 $ 51.6
Supplemental health (first-year) 67.9 70.2 73.2
Supplemental health (renewal) 562.8 541.1 515.9
Subtotal - supplemental health 630.7 611.3 589.1
Other health (first-year) .3 .2 .3
Other health (renewal) 1.3 1.5 1.5
Subtotal - other health 1.6 1.7 1.8
Total health 673.2 659.3 642.5
Life insurance:
Traditional (first-year) .6 .6 .7
Traditional (renewal) 9.0 9.5 10.2
Subtotal - traditional 9.6 10.1 10.9
Interest-sensitive (first-year) 8.1 5.4 4.2
Interest-sensitive (renewal) 19.1 16.7 14.9
Subtotal - interest-sensitive 27.2 22.1 19.1
Total life insurance 36.8 32.2 30.0
Annuities:
Fixed index (first-year) - .1 -
Fixed index (renewal) .8 1.0 .6
Subtotal - fixed index annuities .8 1.1 .6
Other fixed interest (renewal) .2 .2 .3
Total annuities 1.0 1.3 .9
Collections on insurance products:
Total first-year premium collections on insurance products 76.9 76.5 78.4
Total renewal premium collections on insurance products 634.1 616.3 595.0
Total collections on insurance products $ 711.0 $
692.8
Health products in the Washington National segment include Medicare supplement, supplemental health and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claim experience and expense management. Collected premiums on Medicare supplement policies in the Washington National segment decreased 12 percent, to$40.9 million , in 2019 and 10 percent, to$46.3 million , in 2018 due to the run-off of this block of business. Premiums collected on supplemental health products (including specified disease, accident and hospital indemnity insurance products) increased 3.2 percent, to$630.7 million , in 2019 and 3.8 percent, to$611.3 million , in 2018. Such increases are due to new sales and persistency. 84
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Life premiums collected in the Washington National segment increased 14 percent,
to
Annuities in this segment include fixed index and other fixed interest annuities. We are no longer actively pursuing sales of annuity products in this segment.
Colonial Penn (dollars in millions)
2019 2018 2017
Premiums collected by product:
Life insurance:
Traditional (first-year) $ 51.7 $ 46.9 $ 50.1
Traditional (renewal) 255.1 249.5 239.3
Subtotal - traditional 306.8 296.4 289.4
Interest-sensitive (all renewal) .2 .2 .2
Total life insurance 307.0 296.6 289.6
Health (all renewal):
Medicare supplement 1.2 1.5 1.9
Other health .1 .2 .1
Total health 1.3 1.7 2.0
Collections on insurance products:
Total first-year premium collections on insurance products 51.7 46.9 50.1
Total renewal premium collections on insurance products 256.6 251.4 241.5
Total collections on insurance products $ 308.3 $
298.3
Life products in this segment are sold primarily to the senior market. Life premiums collected in this segment increased 3.5 percent, to$307.0 million , in 2019 and 2.4 percent, to$296.6 million , in 2018. Premiums collected reflect both recent sales activity and steady persistency. Health products include Medicare supplement and other insurance products. Our profits on health policies depend on the overall level of sales, the length of time the business remains inforce, investment yields, claims experience and expense management. We do not currently market these products through this segment. 85
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Long-term care in run-off (dollars in millions)
2019 2018 2017
Premiums collected by product:
Health:
Long-term care (renewal) $ 13.5 $ 145.8 $ 205.2
The Long-term care in run-off segment only includes the premiums collected from:
(i) the long-term care business that was recaptured due to the termination of
certain reinsurance agreements effective September 30, 2016 (such business is
not actively marketed and was issued or acquired by Washington National and
BCLIC); and (ii) certain legacy (prior to 2003) comprehensive and nursing home
long-term care policies which were ceded in September 2018 (such business was
not actively marketed and was issued by Bankers Life). Such collected premiums
have decreased as the legacy long-term care business was ceded under a 100%
indemnity coinsurance agreement in September 2018 .
INVESTMENTS
Our investment strategy is to: (i) provide largely stable investment income from a diversified high quality fixed income portfolio; (ii) mitigate the effect of changing interest rates through active asset/liability management; (iii) provide liquidity to meet our cash obligations to policyholders and others; and (iv) maximize total return through active strategic asset allocation and investment management. Consistent with this strategy, investments in fixed maturity securities and mortgage loans made up 89 percent of our$25.6 billion investment portfolio atDecember 31, 2019 . The remainder of the invested assets was trading securities, investments held by VIEs, COLI, equity securities, policy loans and other invested assets.
The following table summarizes the composition of our investment portfolio as of
Percent of total
Carrying value investments
Fixed maturities, available for sale $ 21,295.2 83 %
Equity securities 44.1 -
Mortgage loans 1,566.1 6
Policy loans 124.5 -
Trading securities 243.9 1
Investments held by variable interest
entities 1,188.6 5
Company-owned life insurance 194.0 1
Other invested assets 924.5 4
Total investments $ 25,580.9 100 %
The following table summarizes investment yields earned over the past three years on the general account invested assets of our insurance subsidiaries. General account investments exclude the value of options.
2019 2018 2017
(dollars in millions)
Weighted average general account invested assets at amortized cost$ 21,986.0 $ 23,668.0 $ 23,819.5 Net investment income on general account invested assets 1,112.9 1,282.8 1,290.3 Yield earned 5.06 % 5.42 % 5.42 % Insurance statutes regulate the types of investments that our insurance subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In addition, we have internal management compliance limits on various exposures and activities which are typically more restrictive than insurance statutes. In light of these statutes and 86
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regulations and our business and investment strategy, we generally seek to invest inUnited States government and government-agency securities and corporate securities rated investment grade by established nationally recognized rating organizations or in securities of comparable investment quality, if not rated.
Fixed Maturities, Available for Sale
The following table summarizes the carrying values and gross unrealized losses
of our fixed maturity securities, available for sale, by category as of
Percent of Percent of gross
fixed Gross unrealized unrealized
Carrying value maturities losses losses
Asset-backed securities $ 2,520.3 11.8 % $ 2.0 9.4 %
States and political subdivisions 2,246.7 10.5 1.5 6.9
Commercial mortgage-backed securities 1,887.0 8.9 1.0 4.9
Banks 1,532.3 7.2 .2 .8
Insurance 1,430.1 6.7 1.0 4.6
Utilities 1,407.2 6.6 - -
Healthcare/pharmaceuticals 1,182.0 5.5 .6 2.8
Collateralized mortgage obligations 1,003.6 4.7 .8 3.8
Energy 932.1 4.4 4.3 20.4
Food/beverage 853.2 4.0 .4 1.8
Brokerage 655.8 3.1 .1 .5
Technology 642.1 3.0 .3 1.4
Transportation 528.0 2.5 1.0 4.8
Cable/media 512.7 2.4 .5 2.4
Real estate/REITs 448.2 2.1 - -
Telecom 417.8 2.0 - -
Collateralized debt obligations 400.8 1.9 3.4 16.1
Capital goods 361.2 1.7 .1 .7
Chemicals 354.6 1.7 .1 .6
Aerospace/defense 232.0 1.1 - -
U.S. Treasury and Obligations 204.6 1.0 .1 .3
Other 1,542.9 7.2 3.7 17.8
Total fixed maturities, available for sale
$ 21.1 100.0 %
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The following table summarizes the gross unrealized losses of our fixed maturity
securities, available for sale, by category and ratings category as of
Investment grade Below-investment grade
Total gross
B+ and unrealized
AAA/AA/A BBB BB below losses
Energy $ - $ 2.5 $ 1.8 $ - $ 4.3
Collateralized debt
obligations 3.4 - - - 3.4
Asset-backed securities 1.0 .2 .8 - 2.0
States and political
subdivisions 1.3 .2 - - 1.5
Consumer products 1.0 .1 - - 1.1
Commercial
mortgage-backed
securities .9 .1 - - 1.0
Autos - .7 .3 - 1.0
Transportation - 1.0 - - 1.0
Insurance - 1.0 - - 1.0
Other 1.0 2.2 1.0 .6 4.8
Total fixed maturities,
available for sale $ 8.6 $ 8.0 $ 3.9 $ .6 $ 21.1
Investment ratings are assigned the second lowest rating by Nationally
Recognized Statistical Rating Organizations (Moody's, S&P or Fitch), or if not
rated by such firms, the rating assigned by the NAIC. NAIC designations of "1"
or "2" include fixed maturities generally rated investment grade (rated "Baa3"
or higher by Moody's or rated "BBB-" or higher by S&P and Fitch). NAIC
designations of "3" through "6" are referred to as below-investment grade (which
generally are rated "Ba1" or lower by Moody's or rated "BB+" or lower by S&P and
Fitch). References to investment grade or below-investment grade throughout our
consolidated financial statements are determined as described above. The
following table sets forth fixed maturity investments at December 31, 2019 ,
classified by ratings (dollars in millions):
Estimated fair value
Percent of fixed
Investment rating Amortized cost Amount maturities
AAA $ 1,747.6 $ 1,796.9 9 %
AA 2,148.4 2,407.4 11
A 5,681.2 6,455.2 30
BBB+ 2,188.8 2,514.8 12
BBB 3,520.8 3,916.6 18
BBB- 2,044.6 2,179.5 10
Investment grade 17,331.4 19,270.4 90
BB+ 233.1 241.3 1
BB 274.6 284.1 2
BB- 241.7 251.9 1
B+ and below 1,098.7 1,247.5 6
Below-investment grade 1,848.1 2,024.8 10
Total fixed maturity securities $ 19,179.5 $ 21,295.2 100 %
We continually evaluate the creditworthiness of each issuer whose securities we
hold. We pay special attention to large investments, investments which have
significant risk characteristics and to those securities whose fair values have
declined materially for reasons other than changes in general market conditions.
We evaluate the realizable value of the investment, the specific condition of
the issuer and the issuer's ability to comply with the material terms of the
security. We review the
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historical and recent operational results and financial position of the issuer, information about its industry, information about factors affecting the issuer's performance and other information. 40|86 Advisors employs experienced securities analysts in a broad variety of specialty areas who compile and review such data. If evidence does not exist to support a realizable value equal to or greater than the amortized cost of the investment, and such decline in fair value is determined to be other than temporary, we reduce the amortized cost to its fair value, which becomes the new cost basis. We report the amount of the reduction as a realized loss. We recognize any recovery of such reductions as investment income over the remaining life of the investment (but only to the extent our current valuations indicate such amounts will ultimately be collected), or upon the repayment of the investment. During 2019, we recognized net realized investment gains of$28.2 million , which were comprised of: (i)$20.2 million of net gains from the sales of investments; (ii)$5.1 million of losses on the dissolution of a VIE; (iii)$11.9 million of gains related to equity securities, including the change in fair value; (iv) the increase in fair value of certain fixed maturity investments with embedded derivatives of$8.3 million ; (v) the increase in fair value of embedded derivatives related to a modified coinsurance agreement of$5.3 million ; and (vi)$12.4 million of writedowns of investments for other than temporary declines in fair value recognized through net income. During 2019, we sold$971.2 million of fixed maturity investments which resulted in gross investment losses (before income taxes) of$55.5 million . Securities are generally sold at a loss following unforeseen issue-specific events or conditions or shifts in perceived relative values. These reasons include but are not limited to: (i) changes in the investment environment; (ii) expectation that the market value could deteriorate; (iii) our desire to reduce our exposure to an asset class, an issuer or an industry; (iv) prospective or actual changes in credit quality; or (v) changes in expected portfolio cash flows. Our investment portfolio is subject to the risk of declines in realizable value. However, we attempt to mitigate this risk through the diversification and active management of our portfolio. As ofDecember 31, 2019 , we had$6.9 million of fixed maturity securities and mortgage loans that were in substantive default (i.e., in default due to nonpayment of interest or principal). There were no other investments about which we had serious doubts as to the recoverability of the carrying value of the investment. When a security defaults or securities (other than structured securities) are other-than-temporarily impaired, our policy is to discontinue the accrual of interest and eliminate all previous interest accruals, if we determine that such amounts will not be ultimately realized in full.
Other Investments
AtDecember 31, 2019 , we held commercial mortgage loan investments with a carrying value of$1,453.8 million (or 5.7 percent of total invested assets) and a fair value of$1,538.9 million . We had one mortgage loan that was in the process of foreclosure atDecember 31, 2019 . During 2019, 2018 and 2017, we recognized nil,$2.1 million and$5.2 million , respectively, of impairments on commercial mortgage loans. Our commercial mortgage loan portfolio is comprised of large commercial mortgage loans. Our loans have risk characteristics that are individually unique. Accordingly, we measure potential losses on a loan-by-loan basis rather than establishing an allowance for losses on mortgage loans. Approximately 13 percent, 12 percent, 8 percent, 6 percent and 6 percent of the mortgage loan balance were on properties located inCalifornia ,Texas ,Maryland ,Georgia andNorth Carolina , respectively. No other state comprised greater than five percent of the mortgage loan balance. AtDecember 31, 2019 , we held residential mortgage loan investments with a carrying value of$112.3 million and a fair value of$112.5 million .
The following table shows the distribution of our commercial mortgage loan
portfolio by property type as of
Number of loans Carrying value
Retail 64 $ 252.4
Industrial 36 306.6
Multi-family 32 485.9
Office building 27 245.8
Other 21 163.1
Total commercial mortgage loans 180 $ 1,453.8
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The following table shows our commercial mortgage loan portfolio by loan size as
of
Number of loans Carrying value
Under $5 million 67 $ 150.1
$5 million but less than $10 million 58 392.7
$10 million but less than $20 million 43 627.5
Over $20 million 12 283.5
Total commercial mortgage loans 180 $ 1,453.8 The following table summarizes the distribution of maturities of our commercial
mortgage loans as of
Number of loans Carrying value
2020 5 $ 7.4
2021 6 10.4
2022 13 85.4
2023 13 157.5
2024 22 209.9
after 2024 121 983.2
Total commercial mortgage loans 180 $ 1,453.8 The following table provides the carrying value and estimated fair value of our
outstanding commercial mortgage loans and the underlying collateral as of
Estimated fair
value
Loan-to-value ratio (a) Carrying value Mortgage loans Collateral
Less than 60% $ 1,065.5 $ 1,127.4 $ 2,708.0
60% to less than 70% 229.1 242.6 360.3
70% to less than 80% 117.6 123.7 160.8
80% to less than 90% 41.6 45.2 48.4
Total $ 1,453.8 $ 1,538.9 $ 3,277.5
________________(a) Loan-to-value ratios are calculated as the ratio of: (i) the carrying
value of the commercial mortgage loans; to (ii) the estimated fair value
of the underlying collateral.
At December 31, 2019 , we held $243.9 million of trading securities. We carry
trading securities at estimated fair value; changes in fair value are reflected
in the statement of operations. Our trading securities include: (i) investments
purchased with the intent of selling in the near term to generate income; (ii)
investments supporting certain insurance liabilities and certain reinsurance
agreements; and (iii) certain fixed maturity securities containing embedded
derivatives for which we have elected the fair value option. Investment income
from trading securities backing certain insurance liabilities and certain
reinsurance agreements is substantially offset by the change in insurance policy
benefits related to certain products and agreements.
Other invested assets include options backing our fixed index annuity and life
insurance products, COLI, FHLB common stock and certain nontraditional
investments, including investments in limited partnerships, hedge funds and real
estate investments held for sale.
At December 31, 2019 , we held investments with an amortized cost of $1,206.3
million and an estimated fair value of $1,188.6 million related to VIEs that we
are required to consolidate. The investment portfolio held by the VIEs is
primarily
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comprised of commercial bank loans, the borrowers for which are almost entirely rated below-investment grade. Refer to the note to the consolidated financial statements entitled "Investments in Variable Interest Entities" for additional information on these investments.
CONSOLIDATED FINANCIAL CONDITION
Changes in the Consolidated Balance Sheet
Changes in our consolidated balance sheet between
Our capital structure as of
December 31,
2019 December 31, 2018
Total capital:
Corporate notes payable $ 989.1 $ 916.8
Shareholders' equity:
Common stock 1.5 1.6
Additional paid-in capital 2,767.3 2,995.0
Accumulated other comprehensive income 1,372.5 177.7
Retained earnings 535.7 196.6
Total shareholders' equity 4,677.0 3,370.9
Total capital $ 5,666.1 $ 4,287.7
The following table summarizes certain financial ratios as of and for the years
ended
December 31,
2019 December 31, 2018
Book value per common share $ 31.58 $ 20.78Book value per common share, excluding accumulated other comprehensive income (a)
22.32 19.69
Debt to total capital ratios:
Corporate debt to total capital 17.5 % 21.4 %
Corporate debt to total capital, excluding accumulated other comprehensive income (a)
23.0 % 22.3 %
_____________________
(a) This non-GAAP measure differs from the corresponding GAAP measure presented
immediately above, because accumulated other comprehensive income has been
excluded from the value of capital used to determine this
measure. Management believes this non-GAAP measure is useful because it
removes the volatility that arises from changes in accumulated other
comprehensive income. Such volatility is often caused by changes in the
estimated fair value of our investment portfolio resulting from changes in
general market interest rates rather than the business decisions made by
management. However, this measure does not replace the corresponding GAAP
measure.
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Table of Contents Contractual Obligations
The Company's significant contractual obligations as of
Payment due in
Total 2020 2021-2022 2023-2024 Thereafter
Insurance liabilities (a) $ 54,353.5 $ 3,184.4 $ 7,001.2 $ 6,318.2 $ 37,849.7
Notes payable (b) 1,395.7 53.1 106.2 105.0 1,131.4
Investment borrowings (c) 1,745.4 58.5 942.1 727.0 17.8
Borrowings related to
variable interest
entities (d) 1,363.4 44.3 209.2 711.4 398.5
Postretirement plans (e) 261.8 7.6 16.0 17.2 221.0
Operating leases 76.2 23.9 34.6 15.7 2.0
Commitments to
purchase/fund investments 102.3 102.3 - - -
Other contractual
commitments (f) 251.6 89.0 103.2 59.4 -
Total $ 59,549.9 $ 3,563.1 $ 8,412.5 $ 7,953.9 $ 39,620.4
________________(a) These cash flows represent our estimates of the payments we expect to make
to our policyholders, without consideration of future premiums or
reinsurance recoveries. These estimates are based on numerous assumptions
(depending on the product type) related to mortality, morbidity, lapses,
withdrawals, future premiums, future deposits, interest rates on
investments, credited rates, expenses and other factors which affect our
future payments. The cash flows presented are undiscounted for interest. As
a result, total outflows for all years exceed the corresponding liabilities
of $24.4 billion included in our consolidated balance sheet as of
December 31, 2019 . As such payments are based on numerous assumptions, the
actual payments may vary significantly from the amounts shown.
In estimating the payments we expect to make to our policyholders, we considered the following:
• For products such as immediate annuities and structured settlement
annuities without life contingencies, the payment obligation is fixed and
determinable based on the terms of the policy.
• For products such as universal life, ordinary life, long-term care,
supplemental health and fixed rate annuities, the future payments are not
due until the occurrence of an insurable event (such as death or
disability) or a triggering event (such as a surrender or partial
withdrawal). We estimated these payments using actuarial models based on
historical experience and our expectation of the future payment patterns.
• For short-term insurance products such as Medicare supplement insurance,
the future payments relate only to amounts necessary to settle all
outstanding claims, including those that have been incurred but not
reported as of the balance sheet date. We estimated these payments based
on our historical experience and our expectation of future payment
patterns.
• The average interest rate we assumed would be credited to our total
insurance liabilities (excluding interest rate bonuses for the firstpolicy year only and excluding the effect of credited rates attributable
to variable or fixed index products) over the term of the contracts was
4.6 percent.
(b) Includes projected interest payments based on interest rates, as applicable,
as of
statements entitled "Notes Payable - Direct Corporate Obligations" for
additional information on notes payable.
(c) These borrowings represent collateralized borrowings from the FHLB.
(d) These borrowings represent the securities issued by VIEs and include
projected interest payments based on interest rates, as applicable, as of
December 31, 2019 . 92
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(e) Includes benefits expected to be paid pursuant to our deferred compensation
plan and postretirement plans based on numerous actuarial assumptions and
interest credited at 3.25 percent.
(f) Includes obligations to third parties for information technology services,
software maintenance and license agreements, consulting services and
sponsorship agreements.
It is possible that the ultimate outcomes of various uncertainties could affect
our liquidity in future periods. For example, the following events could have a
material adverse effect on our cash flows:
• An adverse decision in pending or future litigation.
• An inability to obtain rate increases on certain of our insurance products.
• Worse than anticipated claims experience.
• Lower than expected dividends and/or surplus debenture interest payments
from our insurance subsidiaries (resulting from inadequate earnings or
capital or regulatory requirements).
• An inability to meet and/or maintain the covenants in our Revolving Credit
Agreement.
• A significant increase in policy surrender levels.
• A significant increase in investment defaults.
• An inability of our reinsurers to meet their financial obligations.
While we actively manage the relationship between the duration and cash flows of our invested assets and the estimated duration and cash flows of benefit payments arising from contract liabilities, there could be significant variations in the timing of such cash flows. Although we believe our current estimates properly project future claim experience, if these estimates prove to be wrong, and our experience worsens (as it did in some prior periods), our future liquidity could be adversely affected.
Liquidity for Insurance Operations
Our insurance companies generally receive adequate cash flows from premium collections and investment income to meet their obligations. Life insurance, long-term care insurance and annuity liabilities are generally long-term in nature. Life and annuity policyholders may, however, withdraw funds or surrender their policies, subject to any applicable penalty provisions; there are generally no withdrawal or surrender benefits for long-term care insurance. We actively manage the relationship between the duration of our invested assets and the estimated duration of benefit payments arising from contract liabilities. Three of the Company's insurance subsidiaries (Bankers Life, Washington National and Colonial Penn) are members of the FHLB. As members of the FHLB, our insurance subsidiaries have the ability to borrow on a collateralized basis from the FHLB. We are required to hold certain minimum amounts of FHLB common stock as a condition of membership in the FHLB, and additional amounts based on the amount of the borrowings. AtDecember 31, 2019 , the carrying value of the FHLB common stock was$71.0 million . As ofDecember 31, 2019 , collateralized borrowings from the FHLB totaled$1.6 billion and the proceeds were used to purchase fixed maturity securities. The borrowings are classified as investment borrowings in the accompanying consolidated balance sheet. The borrowings are collateralized by investments with an estimated fair value of$2.0 billion atDecember 31, 2019 , which are maintained in custodial accounts for the benefit of the FHLB. 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 408 percent atDecember 31, 2019 , up from 393 percent atDecember 31, 2018 . The ratio atDecember 31, 2019 reflects asset reallocation activities that increased the quality of our investment portfolio and reduced our equity-type investments. For example, we reduced our allocation of fixed maturity 93
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investments rated 2 by the NAIC to 39 percent of the portfolio atDecember 31, 2019 from 45 percent atDecember 31, 2018 , and sold a significant portion of our equity securities in 2019. In 2019, our estimated consolidated statutory net income was$291.4 million and insurance company dividends of$186.3 million were paid to the holding company. Statutory net income in 2019 includes a$46.0 million tax benefit to be received from CNO (resulting from the implementation of a tax planning strategy). Such amount is offset by an accrued dividend of$46.0 million payable to the non-life parent of the insurance subsidiaries. Accordingly, there was no impact on capital and surplus in 2019 related to these transactions. During 2019, the financial statements of two of our insurance subsidiaries prepared in accordance with statutory accounting practices prescribed or permitted by regulatory authorities reflected asset adequacy or premium deficiency reserves. Total asset adequacy and premium deficiency reserves for Washington National and BCLIC were$123.0 million and$39.5 million , respectively, atDecember 31, 2019 . Due to differences between statutory and GAAP insurance liabilities, we were not required to recognize a similar asset adequacy or premium deficiency reserve in our consolidated financial statements prepared in accordance with GAAP. The determination of the need for and amount of asset adequacy or premium deficiency reserves is subject to numerous actuarial assumptions, including the Company's ability to change NGEs related to certain products consistent with contract provisions. Our insurance subsidiaries transfer exposure to certain risk to others through reinsurance arrangements. When we obtain reinsurance, we are still liable for those transferred risks in the event the reinsurer defaults on its obligations. The failure, insolvency, inability or unwillingness of one or more of the Company's reinsurers to perform in accordance with the terms of its reinsurance agreement could negatively impact our earnings or financial position and our consolidated statutory RBC ratio.
Financial Strength Ratings of our Insurance Subsidiaries
Financial strength ratings provided byA.M. Best , S&P, Fitch and Moody's and are the rating agency's opinions of the ability of our insurance subsidiaries to pay policyholder claims and obligations when due. OnJanuary 29, 2020 ,A.M. Best affirmed its "A-" financial strength ratings of our primary insurance subsidiaries. The outlook for these ratings remain stable. The "A-" rating is assigned to companies that have an excellent ability, inA.M. Best's opinion, to meet their ongoing obligations to policyholders.A.M. 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.A.M. Best has sixteen possible ratings. There are three ratings above the "A-" rating of our primary insurance subsidiaries and twelve ratings that are below that rating. 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. OnJune 14, 2019 , Fitch upgraded the financial strength ratings of our primary insurance subsidiaries to "A-" from "BBB+" and the outlook for these ratings is 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. OnOctober 4, 2018 , Moody's upgraded the financial strength ratings of our primary insurance subsidiaries to "A3" from "Baa1" and the outlook for these ratings is stable. Moody's actions resulted from the Company's announcement that Bankers Life had closed on its agreement to cede certain long-term care policies. 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. 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 94
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the rating agency models for maintenance of certain ratings levels. We cannot predict what actions rating agencies may take, or what actions we may take in response. Accordingly, downgrades and outlook revisions related to us or the life insurance industry may occur in the future at any time and without notice by any rating agency. These could increase policy surrenders and withdrawals, adversely affect relationships with our distribution channels, reduce new sales, reduce our ability to borrow and increase our future borrowing costs.
Liquidity of the Holding Companies
Availability and Sources and Uses of Holding Company Liquidity; Limitations on Ability of Insurance Subsidiaries to Make Dividend and Surplus Debenture Interest Payments to the Holding Companies; Limitations on Holding Company Activities
AtDecember 31, 2019 , CNO, CDOC and our other non-insurance subsidiaries held unrestricted cash and cash equivalents of$186.7 million . CNO and CDOC are holding companies with no business operations of their own; they depend on their operating subsidiaries for cash to make principal and interest payments on debt, and to pay administrative expenses and income taxes. CNO and CDOC receive cash from insurance subsidiaries, consisting of dividends and distributions, interest payments on surplus debentures and tax-sharing payments, as well as cash from non-insurance subsidiaries consisting of dividends, distributions, loans and advances. The principal non-insurance subsidiaries that provide cash to CNO and CDOC are 40|86 Advisors, which receives fees from the insurance subsidiaries for investment services, and CNO Services which receives fees from the insurance subsidiaries for providing administrative services. The agreements between our insurance subsidiaries and CNO Services and 40|86 Advisors, respectively, were previously approved by the domestic insurance regulator for each insurance company, and any payments thereunder do not require further regulatory approval. The following table sets forth the aggregate amount of dividends (net of capital contributions) and other distributions that our insurance subsidiaries paid to our non-insurance subsidiaries in each of the last three fiscal years (dollars in millions): Years ended December 31, 2019 2018 2017 Net dividends (contributions) from/to insurance subsidiaries$ 186.3 $ (51.1 ) $ 357.7 Surplus debenture interest 59.9 58.2 56.8 Fees for services provided pursuant to service agreements 115.5 108.9
108.1
Total dividends and other distributions paid by insurance subsidiaries$ 361.7 $ 116.0 $ 522.6
The following summarizes the current ownership structure of CNO's primary subsidiaries:
[[Image Removed: orgchart2019.jpg]]
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
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subsidiaries of CDOC 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 2019, our insurance subsidiaries paid dividends to CDOC totaling$186.3 million . We expect to receive regulatory approval for future dividends from our subsidiaries, but there can be no assurance that such payments will be approved or that the financial condition of our insurance subsidiaries will not change, making future approvals less likely. CDOC holds surplus debentures from CLTX with an aggregate principal amount of$749.6 million . Interest payments on those surplus debentures do not require additional approval provided the RBC ratio of CLTX exceeds 100 percent (but do require prior written notice to theTexas state insurance department). The estimated RBC ratio of CLTX was 346 percent atDecember 31, 2019 . 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|86 Advisors and CNO Services, to CNO or CDOC 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 of CDOC receive funds to pay dividends primarily from: (i) the earnings of their direct businesses; (ii) tax sharing payments received from subsidiaries (if applicable); and (iii) with respect to CLTX, dividends received from subsidiaries. AtDecember 31, 2019 , the subsidiaries of CLTX had earned surplus (deficit) as summarized below (dollars in millions): Subsidiary of CLTX Earned surplus (deficit) Additional information Bankers Life $ 198.1 (a) Colonial Penn (349.6 ) (b)
____________________
(a) Bankers Life paid dividends of
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 yearsago, 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 or CDOC for any reason could hinder such subsidiaries' ability to pay cash dividends or other disbursements to CNO and/or CDOC, 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, and these decisions could limit the amount available at our top tier insurance subsidiaries to pay dividends to the holding companies. OnJune 12, 2019 , the Company executed the Indenture, dated as ofJune 12, 2019 and the First Supplemental Indenture, dated as ofJune 12, 2019 , between the Company andU.S. Bank National Association , as trustee (the "Trustee") pursuant to which the Company issued$500.0 million aggregate principal amount of 5.250% Senior Notes due 2029 (the "2029 Notes"). 96
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The Company used the net proceeds from the offering of the 2029 Notes to: (i) repay all amounts outstanding under its existing Revolving Credit Agreement; (ii) redeem and satisfy and discharge all of its outstanding 4.500% Senior Notes dueMay 2020 ; and (iii) pay fees and expenses related to the foregoing. The remaining proceeds were used for general corporate purposes. The following table sets forth the sources and uses of cash from the transaction (dollars in millions): Sources: 2029 Notes$ 500.0 Uses:
Repayment of Revolving Credit Agreement$ 100.0 Repayment of 2020 Notes, including redemption premium 331.1 Accrued interest .6 Debt issuance costs 5.8 General corporate purposes 62.5 Total uses$ 500.0 OnOctober 13, 2017 , the Company entered into the Amendment Agreement with respect to its Revolving Credit Agreement. The Amendment Agreement, among other things, increased the total commitments available under the revolving credit facility from$150.0 million to$250.0 million , increased the aggregate amount of additional incremental loans the Company may incur from$50.0 million to$100.0 million and extended the maturity date of the revolving credit facility fromMay 19, 2019 toOctober 13, 2022 . As described above, all amounts outstanding under the Revolving Credit Agreement were repaid in connection with the issuance of the 2029 Notes. There were no amounts outstanding under the Revolving Credit Agreement atDecember 31, 2019 .
The scheduled principal and interest payments on our direct corporate obligations are as follows (dollars in millions):
Principal Interest (a)
2020 $ - $ 53.1
2021 - 53.1
2022 - (b) 53.1
2023 - 52.5
2024 - 52.5
2025 and thereafter 1,000.0 131.4
$ 1,000.0 $ 395.7 _________________________
(a) Based on interest rates as of
(b) The maturity date of the Revolving Credit Agreement is
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 2019, we generated$287 million of such free cash flow. The Company is committed to deploying 100 percent of its free cash flow into investment opportunities to accelerate profitable growth, common stock dividends and share repurchases. The amount and timing of the securities we repurchase (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 2019, we repurchased 15.4 million shares of common stock for$252.3 million under our securities repurchase program. The Company had remaining repurchase authority of$532.3 million as ofDecember 31, 2019 . Also, in the second quarter of 2019, the Company purchased WBD (as further described in the note to the consolidated financial statements entitled "Business and Basis of Presentation") utilizing$66.7 million of free cash flow. In 2019, 2018 and 2017, dividends declared on common stock totaled$67.2 million ($0.43 per common share),$65.1 million ($0.39 per common share) and$59.6 million ($0.35 per common share), respectively. InMay 2019 , the Company increased its quarterly common stock dividend to$0.11 per share from$0.10 per share. 97
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OnJanuary 29, 2020 ,A.M. Best affirmed its "bbb-" issuer credit and senior unsecured debt ratings. The outlook for these ratings remain stable. InA.M. 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.A.M. Best has a total of 22 possible ratings ranging from "aaa (Exceptional)" to "d (In default)". There are nine ratings above CNO's "bbb-" rating and twelve ratings that are below its rating. 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. OnJune 14, 2019 , Fitch upgraded our senior unsecured debt rating to "BBB-" from "BB+" and the outlook for these ratings is 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. OnOctober 4, 2018 , Moody's upgraded our senior unsecured debt rating to "Baa3" from "Ba1" and the outlook for these ratings is stable. Moody's actions resulted from the Company's announcement that Bankers Life had closed on its agreement to cede certain long-term care policies. 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.
Outlook
We believe that the existing cash available to the holding company, the cash flows to be generated from operations and other transactions will be sufficient to allow us to meet our debt service obligations, pay corporate expenses and satisfy other financial obligations. However, our cash flow is affected by a variety of factors, many of which are outside of our control, including insurance regulatory issues, competition, financial markets and other general business conditions. We cannot provide assurance that we will possess sufficient income and liquidity to meet all of our debt service requirements and other holding company obligations. For additional discussion regarding the liquidity and other risks that we face, see "Risk Factors".
MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Our spread-based insurance business is subject to several inherent risks arising from movements in interest rates, especially if we fail to anticipate or respond to such movements. First, interest rate changes can cause compression of our net spread between interest earned on investments and interest credited on customer deposits, thereby adversely affecting our results. Second, if interest rate changes produce an unanticipated increase in surrenders of our spread-based products, we may be forced to sell invested assets at a loss in order to fund such surrenders. Many of our products include surrender charges, market interest rate adjustments or other features to encourage persistency; however, atDecember 31, 2019 , approximately 20 percent of our total insurance liabilities, or approximately$4.9 billion , could be surrendered by the policyholder without penalty. Finally, changes in interest rates can have significant effects on our investment portfolio. We use asset/liability strategies that are designed to mitigate the effect of interest rate changes on our profitability. However, there can be no assurance that management will be successful in implementing such strategies and sustaining adequate investment spreads. We seek to invest our available funds in a manner that will fund future obligations to policyholders, subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) have similar cash flow characteristics with the liabilities they support; (ii) are diversified (including by types of obligors); and (iii) are predominantly investment-grade in quality.
Our investment strategy is to maximize, over a sustained period and within acceptable parameters of quality and risk, investment income and total investment return through active strategic asset allocation and investment management. Accordingly, we may sell securities at a gain or a loss to enhance the projected total return of the portfolio as market
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opportunities change, to reflect changing perceptions of risk, or to better match certain characteristics of our investment portfolio with the corresponding characteristics of our insurance liabilities.
The profitability of many of our products depends on the spread between the interest earned on investments and the rates credited on our insurance liabilities. In addition, changes in competition and other factors, including the level of surrenders and withdrawals, may limit our ability to adjust or to maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions. As ofDecember 31, 2019 , approximately 17 percent of our insurance liabilities had interest rates that may be reset annually; 49 percent had a fixed explicit interest rate for the duration of the contract; 31 percent had credited rates which approximate the income earned by the Company; and the remainder had no explicit interest rates. AtDecember 31, 2019 , the weighted average yield, computed on the cost basis of our fixed maturity portfolio, was 4.8 percent, and the average interest rate credited or accruing to our total insurance liabilities (excluding interest rate bonuses for the first policy year only and excluding the effect of credited rates attributable to variable or fixed index products) was 4.5 percent. Refer to "Part 1 - Item 1A. Risk Factors - Potential continuation of a low interest rate environment for an extended period of time may negatively impact our results of operations, financial position and cash flows" for additional information on interest rate risks. We simulate the cash flows expected from our existing insurance business under various interest rate scenarios. These simulations help us to measure the potential gain or loss in fair value of our interest rate-sensitive investments and to manage the relationship between the interest sensitivity of our assets and liabilities. When the estimated durations of assets and liabilities are similar, absent other factors, a change in the value of assets related to changes in interest rates should be largely offset by a change in the value of liabilities. AtDecember 31, 2019 , the estimated duration of our fixed income securities (as modified to reflect estimated prepayments and call premiums) and the estimated duration of our insurance liabilities were approximately 8.6 years and 8.4 years, respectively. We estimate that our fixed maturity securities and short-term investments (net of corresponding changes in insurance acquisition costs) would decline in fair value by approximately$335 million if interest rates were to increase by 10 percent from their levels atDecember 31, 2019 . Our simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time. We are subject to the risk that our investments will decline in value. This has occurred in the past and may occur again, particularly if interest rates rise from their current low levels. The Company is subject to risk resulting from fluctuations in market prices of our equity securities. In general, these investments have more year-to-year price variability than our fixed maturity investments. However, returns over longer time frames have been consistently higher. We manage this risk by limiting our equity securities to a relatively small portion of our total investments.
Our investment in options backing our equity-linked products is closely matched with our obligation to fixed index annuity holders. Fair value changes associated with that investment are substantially offset by an increase or decrease in the amounts added to policyholder account liabilities for fixed index products.
Inflation
Inflation rates may impact the financial statements and operating results in several areas. Inflation influences interest rates, which in turn impact the fair value of the investment portfolio and yields on new investments. Inflation also impacts a portion of our insurance policy benefits affected by increased medical coverage costs. Operating expenses, including payrolls, are impacted to a certain degree by the inflation rate.
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