Business Overview and History: CNO Financial Group, Inc. (CNO) is a leading insurance holding company that develops, markets, and administers health insurance, annuity, individual life insurance, and other insurance products. The company's primary focus is on serving the middle-income pre-retiree and retired Americans, a segment that it believes is underserved and offers significant growth potential.
CNO was originally founded in 1979 as Conseco, Inc. and primarily focused on acquiring and consolidating insurance companies. In the 1990s, the company expanded rapidly through a series of acquisitions, including the purchase of Kemper Corporation in 1998. However, the company faced significant challenges in the early 2000s, including accounting issues, the collapse of the subprime mortgage market, and the inability to successfully integrate its various acquisitions. This led to Conseco filing for Chapter 11 bankruptcy protection in 2002.
The company emerged from bankruptcy in 2003 after being restructured and renamed CNO Financial Group. Under new leadership, CNO focused on streamlining its operations and divesting non-core businesses in order to stabilize the company. This included the sale of its annuity and certain life insurance businesses to other insurers. Over the next decade, CNO worked to rebuild its operations and regain its financial footing, emphasizing a strategy of focusing on the middle-income consumer market and providing health, life, and retirement solutions. This included growing its Bankers Life and Colonial Penn insurance agent networks as well as expanding its product portfolio. CNO also made investments to enhance its technological capabilities and improve its customer service.
Today, CNO Financial Group is a leading insurance holding company that provides a variety of insurance and financial services products. The company operates in three main product line segments: annuity, health, and life insurance. The company's core insurance subsidiaries - Bankers Life, Colonial Penn, and Washington National - serve middle-income pre-retiree and retired Americans. CNO has worked to diversify its distribution channels, product offerings, and geographic footprint in order to serve this target market more effectively.
Financial Performance and Ratios: As of the most recent fiscal year (2023), CNO reported annual revenue of $4.15 billion, net income of $276.50 million, annual operating cash flow of $582.90 million, and annual free cash flow of $582.90 million. In the most recent quarter (Q3 2024), the company reported revenue of $1.13 billion, net income of $9.3 million, operating cash flow of $110.9 million, and free cash flow of $110.9 million. Compared to Q3 2023, revenue was up, net income was down, while operating cash flow and free cash flow remained flat.
The company's financial ratios demonstrate its solid financial position, with a current ratio of 6.43, a quick ratio of 6.43, and a cash ratio of 1.48. As of Q3 2024, CNO's debt-to-equity ratio stood at 1.86.
Liquidity: The company's balance sheet and capital position remain robust, with a consolidated risk-based capital ratio of 388% and available holding company liquidity of $453 million as of June 30, 2024. As of Q3 2024, CNO had $992.1 million in cash and a $250 million revolving credit agreement with no amounts outstanding.
Recent Developments and Outlook: In the company's most recent 10-Q filing for the period ended June 30, 2024, CNO reported strong operational and financial performance. Total new annualized premium (NAP) was up 1% across the enterprise, with the Consumer Division delivering its eighth consecutive quarter of sales momentum. The Worksite Division also continued its impressive growth, posting a record third quarter performance with NAP up 4%.
CNO has also taken steps to improve its organizational efficiency, including a 3% reduction in its workforce, which is expected to contribute to improved profitability and return on equity going forward.
Looking ahead, the company has raised and narrowed its full-year 2024 guidance for operating earnings per share to between $3.50 and $3.60, excluding significant items. This updated guidance reflects the strong earnings results reported year-to-date and the company's confidence in its ability to continue delivering strong financial performance. Additionally, CNO raised and narrowed its full-year 2024 excess cash flow to the holding company guidance to a range of $250 million to $275 million, with the midpoint of the new range being 50% higher than the midpoint of the original range. The company is maintaining its full-year 2024 expense ratio guidance range of 19.0% to 19.2%.
CNO stated it will continue to manage to a consolidated RBC ratio of 375% in its U.S.-based insurance companies and minimum Holdco liquidity of $150 million over the long-term, although it expects to end 2024 well above those target levels. The company also maintained its target leverage range of 25% to 28%.
Product Segment Performance: CNO's annuity segment includes fixed indexed annuities, fixed interest annuities, and other annuities. In the first six months of 2024, the margin from fixed indexed annuities was $93.3 million, slightly down from $94.1 million in the same period in 2023. The average net insurance liabilities for fixed indexed annuities increased to $9.70 billion from $9.23 billion. Fixed interest annuities saw a margin of $16.3 million, down from $17.8 million, with average net insurance liabilities decreasing to $1.58 billion from $1.62 billion. Other annuities experienced significant growth, with margins increasing to $18.5 million from $2.5 million, despite a decrease in average net insurance liabilities.
The health segment, which includes supplemental health, Medicare supplement, and long-term care insurance products, showed strong performance. Supplemental health margin increased to $130.5 million from $123.2 million, Medicare supplement margin rose to $62.0 million from $58.4 million, and long-term care margin significantly improved to $66.4 million from $43.1 million.
In the life segment, interest-sensitive life products saw a slight decrease in margin to $46.4 million from $46.9 million, while traditional life products experienced substantial growth, with margins increasing to $71.3 million from $58.4 million.
Overall, CNO reported net operating income of $172.1 million in the first six months of 2024, compared to $120.9 million in the same period in 2023. The company's insurance product margin was $504.7 million in the first six months of 2024, up from $444.4 million in the same period in 2023.
Risks and Challenges: While CNO has made significant progress in recent years, the company faces several risks and challenges that investors should be aware of. These include regulatory changes, competition from other insurance providers, exposure to interest rate and credit risk, and the potential impact of economic downturns on its core customer base.
Additionally, the company's reliance on its agent-based distribution model and its ability to maintain strong relationships with its agents and customers are critical to its continued success. Any disruptions or changes in this model could have a material impact on the company's sales and profitability.
Industry Trends: The life and health insurance industry in the United States has seen a compound annual growth rate (CAGR) of approximately 4-6% over the past 5 years. CNO's focus on the middle-income market segment and its diversified product offerings position it well to capitalize on this industry growth.
Conclusion: CNO Financial Group has established itself as a leading provider of insurance and financial services solutions for the middle-income American market. The company's strategic transformation, diversified product portfolio, and strong financial position have positioned it for continued growth and success. The recent improvements in financial performance across various product segments and the raised guidance for 2024 demonstrate the company's resilience and potential for future growth. However, investors should carefully consider the risks and challenges facing the company as they evaluate the investment potential of CNO's stock.