CNO Financial Group Inc

RESULTS OF OPERATIONS

The following tables and narratives summarize the operating results of our segments (dollars in millions):

(a)Amortization and non-deferred commissions are comprised of: (i) the amortization of deferred acquisition costs and present value of future profits; and (ii) commission expenses that are not directly related to the successful acquisition of new or renewal insurance contracts and, therefore, are not eligible to be deferred. Such non-deferred commissions are included in other operating costs and expenses on the consolidated statement of operations.

CNO is the top tier holding company for a group of insurance companies that develop, market and administer health insurance, annuity, individual life insurance and other insurance and financial services products. We view our operations by segments, which consist of insurance product lines. These products are distributed by our two divisions. The Consumer Division serves individual consumers, engaging with them on the phone, virtually, online, face-to-face with agents, or through a combination of sales channels. The Worksite Division focuses on the sale of voluntary benefit life and health insurance products in the workplace for businesses, associations, and other membership groups, interacting with customers at their place of employment and virtually.

Insurance product margin is management's measure of the profitability of its annuity, health and life product lines' performance and consists of insurance policy income plus allocated investment income less insurance policy benefits, interest credited, commissions, advertising expense and amortization of acquisition costs. Income from insurance products is the sum of the insurance margins of the annuity, health and life product lines, less expenses allocated to the insurance lines. It excludes the income from our fee income business, investment income not allocated to product lines, net expenses not allocated to product lines (primarily holding company expenses) and income taxes. Management believes this information helps provide a better understanding of the business and a more meaningful analysis of the results of our insurance product lines.

Net investment income is allocated to the product lines using the book yield of investments backing the block of business, which is applied to the average insurance liabilities for the block in each period. Net insurance liabilities for the purpose of allocating investment income to product lines are equal to: (i) policyholder account balances for annuity products; (ii) total reserves before the fair value adjustments reflected in accumulated other comprehensive income (loss), if applicable, for all other products; less (iii) amounts related to reinsured business; (iv) deferred acquisition costs; (v) the present value of future profits; and (vi) the value of unexpired options credited to insurance liabilities. Investment income not allocated to product lines represents net investment income less: (i) equity returns credited to policyholder account balances; (ii) the investment income allocated to our product lines; (iii) interest expense on notes payable, investment borrowings and financing arrangements; (iv) expenses related to the FABN program; and (v) certain expenses related to benefit plans that are offset by special-purpose investment income; plus (vi) the impact of annual option forfeitures related to fixed indexed annuity surrenders. Investment income not allocated to product lines includes investment income on investments in excess of amounts allocated to product lines, investments held by our holding companies, the spread we earn from our FHLB investment borrowing and FABN programs and variable components of investment income (including call and prepayment income, adjustments to returns on structured securities due to cash flow changes, income (loss) from COLI and alternative investment income not allocated to product lines), net of interest expense on corporate debt and financing arrangements. The spread earned from our FHLB investment borrowing and FABN programs includes the investment income on the matched assets less: (i) interest on investment borrowings related to the FHLB investment borrowing program; (ii) interest credited on funding agreements; and (iii) amortization of deferred acquisition costs related to the FABN program.

Summary of Operating Results: Net operating income was $114.6 million in the second quarter of 2024, compared to $62.3 million in the second quarter of 2023, and was $172.1 million in the first six months of 2024, compared to $120.9 million in the first six months of 2023.

Insurance product margin was $275.1 million in the second quarter of 2024 compared to $223.2 million in the second quarter of 2023, and was $504.7 million in the first six months of 2024, compared to $444.4 million in the first six months of 2023. Fluctuations by product line are discussed in greater detail in the narratives that follow.

Total net investment income (comprised of investment income allocated and not allocated to products) increased 12 percent to $297.1 million in the second quarter of 2024, as compared to $266.1 million in the second quarter of 2023, and 7.2 percent to $554.7 million in the first six months of 2024, compared to $517.3 million in the first six months of 2023, reflecting growth in the investment portfolio and higher yields. The higher yields reflect six consecutive quarters of new money rates in excess of 6.0 percent. In addition, the yield in the second quarter of 2024 benefited from portfolio optimization trades in the quarter as we selectively sold certain lower yielding securities and reinvested in higher yielding securities.

Total allocated and unallocated expenses are summarized in the table below (dollars in millions):

Total allocated and unallocated expenses in the first six months of 2024 were up slightly as compared to the same period in the prior year, and were in line with our expectations. We currently expect our projected expense ratio for the full year to be between 19.0 percent to 19.2 percent, narrowing the range of our previous guidance of between 18.8 percent to 19.2 percent. The expense ratio is defined as total allocated and unallocated expenses divided by the sum of insurance policy income and net investment income allocated to products.

The fee income segment is summarized below (dollars in millions):

The increase in net fee income in the second quarter of 2024, as compared to the same period in 2023, is primarily due to: (i) higher revenues related to sales of third-party products by our Consumer Division; partially offset by (ii) lower revenues related to benefits administration services provided by our Worksite Division. The decrease in net fee income in the first six months of 2024, as compared to the same period in the prior year, is primarily due to: (i) changes to our revenue recognition assumptions related to sales of third-party products by our Consumer Division reflecting less favorable policy persistency and higher agent persistency resulting in higher renewal commissions; partially offset by (ii) higher sales of third-party products in the 2024 period.

Investment income not allocated to product lines generally fluctuates from period to period based on the performance of our alternative investments (which are typically reported a quarter in arrears); the earnings related to the investments underlying our COLI; the spread we earn from our FHLB investment borrowing and FABN programs; the level of trading account income; and the impact of annual option forfeitures related to fixed indexed annuity surrenders.

The effective tax rate for the first six months of 2024 was 23.0 percent.

Margin from Annuity Products (dollars in millions):

Margin from fixed indexed annuitieswas $49.9 million in the second quarter of 2024 compared to $47.6 million in the second quarter of 2023, and was $93.3 million in the first six months of 2024 compared to $94.1 million in the first six months of 2023. The increase in margin in the second quarter of 2024, as compared to the same period in the prior year, is primarily due to: (i) growth in the block and higher yields; (ii) higher surrender charges; partially offset by (iii) additional amortization from growth in the block. The higher yield in the second quarter of 2024 benefited from portfolio optimization trades in the quarter as we selectively sold certain lower yielding securities and reinvested in higher yielding securities. The margin in the first six months of 2024 was down slightly from the same period in 2023 as the factors impacting the quarter over quarter results generally offset each other on a year to date basis. Average net insurance liabilities (policyholder account balances less: (i) amounts related to reinsured business; (ii) deferred acquisition costs; (iii) present value of future profits; and (iv) the value of unexpired options credited to insurance liabilities) were $9,758.1 million and $9,276.0 million in the second quarters of 2024 and 2023, respectively, and were $9,697.2 million and $9,229.9 million in the first six months of 2024 and 2023, respectively, driven by deposits and reinvested returns in excess of withdrawals. The increase in net insurance liabilities results in higher net investment income allocated. The earned yield was 4.66 percent in the second quarter of 2024 up from 4.36 percent in the second quarter of 2023, and was 4.58 percent in the first six months of 2024 up from 4.33 percent in the first six months of 2023, reflecting higher portfolio yields.

Net investment income and interest credited exclude the change in market values of the underlying options supporting the fixed indexed annuity products and corresponding offsetting amount credited to policyholder account balances. Such amounts were $34.9 million and $56.1 million in the second quarters of 2024 and 2023, respectively, and were $163.5 million and $72.6 million in the first six months of 2024 and 2023, respectively.

Margin from fixed interest annuitieswas $8.7 million in both the second quarters of 2024 and 2023, and was $16.3 million in the first six months of 2024 compared to $17.8 million in the first six months of 2023. The decrease in margin in the first six months of 2024, as compared to the same period in 2023, is driven primarily by additional amortization from higher policy surrenders and a reduction in the size of the block. Average net insurance liabilities were $1,569.4 million in the second quarter of 2024 compared to $1,613.1 million in the second quarter of 2023, and were $1,578.7 million in the first six months of 2024 compared to $1,622.0 million in the first six months of 2023, driven by withdrawals in excess of deposits and reinvested returns. The decrease in net insurance liabilities results in lower net investment income allocated, however, the earned yield increased to 5.38 percent in the second quarter of 2024 from 5.18 percent in the second quarter of 2023, and to 5.28 percent in the first six months of 2024 from 5.15 percent in the first six months of 2023, reflecting higher portfolio yields.

Margin from other annuitieswas $17.5 million in the second quarter of 2024 compared to $0.8 million in the second quarter of 2023, and was $18.5 million in the first six months of 2024 compared to $2.5 million in the first six months of 2023. The margin on this relatively small block of business is sensitive to annuitant mortality related to contracts with life contingencies. An increase in mortality in this block will result in a decrease in insurance liabilities and insurance policy benefits. In the second quarter of 2024, we experienced annuitant mortality on five large policies in a closed block of payout annuities which reduced insurance policy benefits by $15.1 million.

Margin from Health Products (dollars in millions):

Margin from supplemental health business was $65.1 million in the second quarter of 2024 compared to $59.9 million in the second quarter of 2023, and was $130.5 million in the first six months of 2024 compared to $123.2 million in the first six months of 2023, reflecting growth in the block. The margin as a percentage of insurance policy income was 36 percent in the second quarter of 2024 compared to 34 percent in the prior year period, and was 36 percent in the first six months of 2024 compared to 35 percent in the first six months of 2023.

Our supplemental health products (including specified disease, accident and hospital indemnity products) generally provide fixed or limited benefits. For example, payments under cancer insurance policies are generally made directly to, or at the direction of, the policyholder following diagnosis of, or treatment for, a covered type of cancer. Approximately three-fourths of our supplemental health policies inforce (based on policy count) are sold with return of premium or cash value riders. The return of premium rider generally provides that after a policy has been inforce for a specified number of years or upon the policyholder reaching a specified age, we will pay to the policyholder, or a beneficiary under the policy, the aggregate amount of all premiums paid under the policy, without interest, less the aggregate amount of all claims incurred under the policy. The cash value rider is similar to the return of premium rider, but also provides for payment of a graded portion of the return of premium benefit if the policy terminates before the return of premium benefit is earned. Accordingly, the net cash flows from these products generally result in the accumulation of amounts in the early years of a policy (reflected in our earnings as reserve increases which is a component of insurance policy benefits) which will be paid out as benefits in later policy years (reflected in our earnings as reserve decreases which offset the recording of benefit payments). As the policies age, insurance policy benefits will typically increase, but the increase in benefits will be partially offset by investment income earned on the accumulated assets.

Margin from Medicare supplement business was $35.5 million and $32.3 million in the second quarters of 2024 and 2023, respectively, and $62.0 million and $58.4 million in the first six months of 2024 and 2023, respectively. The increase in margin on the Medicare supplement business is primarily due to favorable claims experience in the 2024 periods, as compared to the 2023 periods, partially offset by a reduction in the size of the block. Claim experience will fluctuate from period to period. Insurance policy income was $155.8 million in the second quarter of 2024, compared to $155.3 million in the second quarter of 2023, and was $307.5 million in the first six months of 2024, compared to $311.8 million in the first six months of 2023. Higher sales in recent periods have contributed to slightly higher insurance policy income in the second quarter of 2024 as compared to the same period in 2023. Over the last several years, we have experienced a shift in the sale of Medicare supplement policies to the sale of Medicare Advantage policies. We receive fee income when Medicare Advantage policies of other providers are sold, which is recorded in our Fee income segment. We continue to invest in both our Medicare supplement products and Medicare Advantage distribution to meet our customers' needs and preferences.

Medicare supplement business consists of both individual and group policies. Government regulations generally require we attain and maintain a ratio of total benefits incurred to total premiums earned (excluding changes in policy benefits reserves which is a component of Insurance policy benefits) of not less than 65 percent on individual products and not less than 75 percent on group products. The ratio is determined after three years from the original issuance of the policy and over the lifetime of the policy and measured in accordance with statutory accounting principles. Since the insurance product liabilities we establish for Medicare supplement business are subject to significant estimates, the ultimate claim liability we incur for a particular period is likely to be different than our initial estimate. Changes to our estimates are reflected in insurance policy benefits in the period the change is determined.

Margin from Long-term care products was $35.3 million and $16.0 million in the second quarters of 2024 and 2023, respectively, and $66.4 million and $43.1 million in the first six months of 2024 and 2023, respectively. The margin as a percentage of insurance policy income was 52 percent in the second quarter of 2024 compared to 24 percent in the second quarter of 2023, and was 49 percent in the first six months of 2024 compared to 33 percent in the first six months of 2023. The increase in margin in the 2024 periods is primarily due to growth in the block and lower insurance policy benefits, as compared to the 2023 periods. The margin reflected favorable claim experience in the second quarter of 2024, while the margin in the second quarter of 2023 reflected unfavorable claims experience which was elevated relative to our expectations. Claim experience will fluctuate from quarter to quarter.

Margin from Life Products (dollars in millions):

Margin from interest-sensitive life business was $23.9 million in the second quarter of 2024, down from $24.1 million in the second quarter of 2023, and was $46.4 million in the first six months of 2024, down from $46.9 million in the first six months of 2023, reflecting unfavorable claims experience, as compared to the 2023 periods; partially offset by growth in the block due to sales in recent periods.

The interest margin was $0.9 million and $0.7 million in the second quarters of 2024 and 2023, respectively, and was $1.8 million in both the first six months of 2024 and 2023. Net investment income in the 2024 periods was comparable to the 2023 periods. The increase in average net insurance liabilities results in higher net investment income allocated, net of the impact of earned yields. The earned yield was 4.97 percent and 4.91 percent in the second quarters of 2024 and 2023, respectively, and was 4.98 percent and 4.99 percent in the first six months of 2024 and 2023, respectively. Interest credited to policyholders may be changed annually but is subject to minimum guaranteed rates and, as a result, any reduction in our earned rate may not be fully reflected in the rate credited to policyholders.

Net investment income and interest credited exclude the change in market values of the underlying options supporting the fixed indexed life products and corresponding offsetting amount credited to policyholder account balances. Such amounts were $4.0 million and $6.2 million in the second quarters of 2024 and 2023, respectively, and were $15.1 million and $8.3 million in the first six months of 2024 and 2023, respectively.

Margin from traditional life business was $39.2 million and $33.8 million in the second quarters of 2024 and 2023, respectively, and was $71.3 million and $58.4 million in the first six months of 2024 and 2023, respectively. The increase in margin in the 2024 periods, as compared to the same periods in 2023, primarily reflects growth in the block and lower advertising expense.

Net investment income in the 2024 periods was comparable to the 2023 periods. The increase in average net insurance liabilities results in higher net investment income allocated, which is largely offset by lower earned yields. The earned yield was 4.71 percent and 4.74 percent in the second quarters of 2024 and 2023, respectively, and was 4.69 percent and 4.72 percent in the first six months of 2024 and 2023, respectively.

Advertising expense was $20.9 million in the second quarter of 2024, down from $25.5 million in the comparable period in 2023, and was $45.5 million in the first six months of 2024, down from $54.2 million in the comparable period in 2023. The demand and cost of television advertising can fluctuate from period to period. We are disciplined with our marketing expenditures and will increase or decrease our marketing spend depending on the current economics of the purchase or other factors.

Collected Premiums From Annuity and Interest-Sensitive Life Products (dollars in millions):

Collected premiums from annuity and interest-sensitive products increased 8.3 percent in the second quarter of 2024 compared to the second quarter of 2023, and increased 7.1 percent in the first six months of 2024 compared to the first six months of 2023, primarily due to higher premium collections from fixed indexed annuity products.

Investment Income Not Allocated to Product Lines (dollars in millions):

The above table reconciles net investment income to investment income not allocated to product lines. Investment income not allocated to product lines generally fluctuates from period to period based on the performance of our alternative investments (which are typically reported a quarter in arrears); the earnings related to the investments underlying our COLI; the spread we earn from our FHLB investment borrowing and FABN programs; the level of trading account income; and the impact of annual option forfeitures related to fixed indexed annuity surrenders.

Net Non-Operating Income (Loss):

The following summarizes our net non-operating income (loss) for the three and six months ending June 30, 2024 and 2023 (dollars in millions):

Net realized investment losses in the three and six months ended June 30, 2024, were $21.9 million and $26.5 million, respectively, net of reductions in the allowance for credit losses of $4.1 million and $5.6 million, respectively. Net realized investment losses in the three and six months ended June 30, 2023, were $31.3 million and $44.0 million, respectively, including increases in the allowance for credit losses of $9.9 million and $11.4 million, respectively.

The change in market value of investments recognized in earnings was an increase (decrease) of $4.7 million and $(4.0) million in the second quarters of 2024 and 2023, respectively, and $17.1 million and $(5.9) million in the first six months of 2024 and 2023, respectively. The change in value will fluctuate from period to period based on market conditions.

During the first six months of 2024, we recognized an increase in earnings of $3.5 million for the mark-to-market change in the agent deferred compensation plan liability which was impacted by changes in the underlying actuarial assumptions used to value the liability. We recognize the mark-to-market change in the estimated value of this liability through earnings as assumptions change.

We recognized an increase (decrease) in earnings of $80.8 million and $(14.7) million in the first six months of 2024 and 2023, respectively, resulting from changes in the fair value of embedded derivative liabilities and MRBs related to our fixed indexed annuities. Such amounts include the impacts of changes in market interest rates and equity impacts used to determine the estimated fair values of the embedded derivatives and MRBs.

Other non-operating items primarily include earnings attributable to VIEs that we are required to consolidate, net of affiliated amounts. Such earnings are not indicative of, and are unrelated to, the Company's underlying fundamentals.