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.

Comprehensive Annual Actuarial Review: We update the assumptions and experience underlying the expected gross

margins for policies accounted for as investment contracts annually. Previously, the review was completed in the fourth quarter of each year, however, we began performing this review in the third quarter starting with 2024 to better align with our annual planning process and third quarter is also more consistent with industry practice. In addition, we also review and update our assumptions on a more frequent basis to the extent current conditions or circumstances warrant changes that could be significant to our operating results. The impacts of these unlocking exercises have had a significant impact on our earnings.

In the third quarter of 2024, we performed our comprehensive annual actuarial review, including, but not limited to,

assumptions related to mortality rates, surrender rates, earned rates, credited rates and expenses. This review resulted in a net favorable impact to insurance product margins included in pre-tax operating income of $27.3 million.

The most significant impacts related to fixed indexed annuities and Medicare supplement products which were favorably (unfavorably) impacted by $36.2 million and $(9.4) million, respectively. The primary fixed indexed annuities changes related to higher mortality assumptions. The primary Medicare supplement changes related to higher morbidity and higher persistency assumptions.

In addition, the comprehensive annual actuarial review unfavorably impacted pre-tax non-operating income by $42.8 million related to changes in the fair value of embedded derivative liabilities and market risk benefits on our fixed indexed annuities. The primary changes related to higher earned rate assumptions.

Refer to “Results of Operations” in our 2023 Annual Report on Form 10-K for information on our annual actuarial review for 2023, which was performed in the fourth quarter of 2023.

The following table summarizes the impact to pre-tax operating earnings from our comprehensive annual actuarial review in both the third quarter and the first nine months of 2024 (dollars in millions):

Summary of Operating Results: Net operating income was $119.2 million in the third quarter of 2024, compared to $101.3 million in the third quarter of 2023, and was $291.3 million in the first nine months of 2024, compared to $222.2 million in the first nine months of 2023.

Insurance product margin was $282.2 million in the third quarter of 2024, compared to $240.0 million in the third quarter of 2023, and was $786.9 million in the first nine months of 2024, compared to $684.4 million in the first nine 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 7.0 percent to $299.5 million in the third quarter of 2024, as compared to $279.9 million in the third quarter of 2023, and 7.2 percent to $854.2 million in the first nine months of 2024, compared to $797.2 million in the first nine months of 2023, reflecting growth in the investment portfolio and higher yields. The higher yields reflect seven consecutive quarters of new money rates in excess of 6.0 percent. In addition, the yield in 2024 benefited from portfolio optimization trades 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. Expenses not allocated to product lines include certain significant items listed in the table below. Total allocated and unallocated expenses as adjusted for the significant items are summarized below (dollars in millions):

Total allocated and unallocated expenses in the first nine months of 2024 were up slightly as compared to the same period in the prior year, and were in line with our expectations. Consistent with our disclosure in the second quarter of 2024, we continue to expect our projected expense ratio for the full year to be between 19.0 percent to 19.2 percent, narrowing the range of our original 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):

Net fee income showed modest improvement in the third quarter of 2024, compared to the same period in 2023. For the first nine months of 2024, as compared to the same period of 2023, net fee income decreased 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 nine months of 2024 was 22.7 percent.

Margin from Annuity Products (dollars in millions):

Margin from fixed indexed annuitieswas $79.0 million in the third quarter of 2024, compared to $47.2 million in the third quarter of 2023, and was $172.3 million in the first nine months of 2024, compared to $141.3 million in the first nine months of 2023. The margin, excluding the net favorable impacts of the annual actuarial review previously discussed, was $42.8 million in the third quarter of 2024, and $136.1 million in the first nine months of 2024. The margins, excluding the impacts of the annual actuarial review, have declined in the third quarter and the first nine months of 2024 as compared to the same periods in 2023, primarily due to additional amortization resulting from higher surrenders and assumption changes partially offset by increased surrender charge income. Spread income has remained flat period over period as investment income increased due to: (i) growth in the block; (ii) increased new money rates; and (iii) portfolio optimization trades in 2024 which increased the yield; offset by increased credited rates due to surrenders of policies with lower crediting rates. 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 $9,899.4 million and $9,381.0 million in the third quarters of 2024 and 2023, respectively, and were $9,764.6 million and $9,280.2 million in the first nine 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 4.68 percent in the third quarter of 2024 up from 4.45 percent in the third quarter of 2023, and was 4.62 percent in the first nine months of 2024 up from 4.37 percent in the first nine 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 $62.1 million and $(49.8) million in the third quarters of 2024 and 2023, respectively, and were $225.6 million and $22.8 million in the first nine months of 2024 and 2023, respectively.

Margin from fixed interest annuitieswas $7.3 million in the third quarter of 2024, compared to $8.4 million in the third quarter of 2023, and was $23.6 million in the first nine months of 2024, compared to $26.2 million in the first nine months of 2023. The slight decrease in margin in both the third quarter and the first nine months of 2024, as compared to the same periods 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 $1,568.2 million in the third quarter of 2024, compared to $1,603.0 million in the third quarter of 2023, and were $1,575.2 million in the first nine months of 2024, compared to $1,615.7 million in the first nine 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 5.31 percent in the third quarter of 2024 from 5.24 percent in the third quarter of 2023, and to 5.29 percent in the first nine months of 2024 from 5.18 percent in the first nine months of 2023, reflecting higher portfolio yields.

Margin from other annuitieswas $4.8 million in the third quarter of 2024, compared to $1.4 million in the third quarter of 2023, and was $23.3 million in the first nine months of 2024, compared to $3.9 million in the first nine 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. We experienced elevated annuitant mortality on a small number of closed block payout annuity policies in both the third quarter and the first nine months of 2024.

Margin from Health Products (dollars in millions):

Margin from supplemental health business was $68.6 million in the third quarter of 2024, compared to $62.8 million in the third quarter of 2023, and was $199.1 million in the first nine months of 2024, compared to $186.0 million in the first nine months of 2023. The margin as a percentage of insurance policy income was 38 percent in the third quarter of 2024, compared to 35 percent in the prior year period, and was 37 percent in the first nine months of 2024, compared to 35 percent in the first nine months of 2023. Margins improved in 2024 from the comparable periods in 2023 due to growth in the block and improved morbidity.

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 $26.3 million and $37.2 million in the third quarters of 2024 and 2023, respectively, and $88.3 million and $95.6 million in the first nine months of 2024 and 2023, respectively. The margin, excluding the net unfavorable impacts of the annual actuarial review previously discussed, was $35.7 million in the third quarter of 2024, and $97.7 million in the first nine months of 2024. Claims were slightly higher in the third quarter of 2024 and slightly lower in the first nine months of 2024, as compared to the same periods in 2023. Claim experience will fluctuate from period to period. Insurance policy income was $156.3 million in the third quarter of 2024, compared to $154.2 million in the third quarter of 2023, and was $463.8 million in the first nine months of 2024, compared to $466.0 million in the first nine months of 2023. Higher sales in recent periods have contributed to slightly higher insurance policy income in the third 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 $32.9 million and $23.2 million in the third quarters of 2024 and 2023, respectively, and $99.3 million and $66.3 million in the first nine months of 2024 and 2023, respectively. The margin as a percentage of insurance policy income was 48 percent in the third quarter of 2024, compared to 35 percent in the third quarter of 2023, and was 49 percent in the first nine months of 2024, compared to 34 percent in the first nine 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 third quarter of 2024 and in the first nine months of 2024, compared to unfavorable claim experience in the comparable periods in 2023. Claim experience will fluctuate from quarter to quarter. Effective October 1, 2024, we discontinued ceding 25 percent of long-term care new business under a reinsurance agreement. We will now retain 100 percent of our long-term care new business. This does not impact the inforce business that we previously ceded. As a result, we expect margins to increase modestly in 2025 and grow more in future years as earnings emerge from the sales.

Margin from Life Products (dollars in millions):

Margin from interest-sensitive life business was $28.2 million in the third quarter of 2024, compared to $22.9 million in the third quarter of 2023, and was $74.6 million in the first nine months of 2024, compared to $69.8 million in the first nine months of 2023. The margin, excluding the net favorable impacts of the annual actuarial review previously discussed, was $24.4 million in the third quarter of 2024, and $70.8 million in the first nine months of 2024. The increase in margin, excluding the impacts of the annual actuarial review, in the third quarter of 2024 and in the first nine months of 2024, reflects higher margins compared to the same periods in 2023 due to growth in the business offset by increased claims in the first nine months of 2024.

The interest margin was $0.1 million and $1.0 million in the third quarters of 2024 and 2023, respectively, and was $1.9 million and $2.8 million in the first nine months of 2024 and 2023, respectively. Net investment income in the 2024 periods was slightly higher than 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 4.96 percent in the third quarters of 2024 and 2023, respectively, and was 4.98 percent in both the first nine months of 2024 and 2023. 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 $5.5 million and $(4.8) million in the third quarters of 2024 and 2023, respectively, and were $20.6 million and $3.5 million in the first nine months of 2024 and 2023, respectively.

Margin from traditional life business was $35.1 million and $36.9 million in the third quarters of 2024 and 2023, respectively, and was $106.4 million and $95.3 million in the first nine months of 2024 and 2023, respectively. The margin, excluding the net unfavorable impacts of the annual actuarial review previously discussed, was $39.6 million in the third quarter of 2024, and $110.9 million in the first nine months in 2024. The increase in margin, excluding the impacts of the annual actuarial review, in the third quarter of 2024, primarily reflects lower advertising expense, compared to the same period in 2023. The increase in margin in the first nine months of 2024, compared to the same period in 2023, reflects lower advertising expense and growth in the block.

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 4.68 percent and 4.72 percent in the third quarters of 2024 and 2023, respectively, and was 4.69 percent and 4.72 percent in the first nine months of 2024 and 2023, respectively.

Advertising expense was $18.5 million in the third quarter of 2024, down from $22.6 million in the comparable period in 2023, and was $64.0 million in the first nine months of 2024, down from $76.8 million in the comparable period in 2023. The demand and cost of television advertising can fluctuate from period to period and tends to spike during presidential election cycles. 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 22.2 percent in the third quarter of 2024, compared to the third quarter of 2023, and increased 12.0 percent in the first nine months of 2024, compared to the first nine 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 nine months ended September 30, 2024 and 2023 (dollars in millions):

Net realized investment losses in the three and nine months ended September 30, 2024, were $11.1 million and $37.6 million, respectively, net of reductions in the allowance for credit losses of $11.6 million and $17.2 million, respectively. Net realized investment losses in the three and nine months ended September 30, 2023, were $20.1 million and $64.1 million, respectively, including the unfavorable change in the allowance for credit losses of $2.3 million and $13.7 million, respectively.

The change in market value of investments recognized in earnings was an increase (decrease) of $12.3 million and $(9.2) million in the third quarters of 2024 and 2023, respectively, and $29.4 million and $(15.1) million in the first nine months of 2024 and 2023, respectively. The change in value will fluctuate from period to period based on market conditions.

In the third quarter of 2024, we recognized a decrease in earnings of $3.5 million, compared to an increase in earnings of $6.8 million in both the third quarter and the first nine months of 2023, 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 $(127.1) million and $109.4 million in the third quarters of 2024 and 2023, respectively, and $(46.3) million and $94.7 million in the first nine 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. Excluding the net unfavorable impacts of the annual actuarial review previously discussed, we recognized a decrease in earnings of $84.3 million and $3.5 million in the third quarter and first nine months of 2024, respectively. 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 in the third quarter of 2024 included a charge of $8.3 million primarily related to a five percent workforce reduction and transition costs for outsourcing certain operations activities. At the same time, we are planning to add roles to enhance support of our Consumer and Worksite divisions and that add technology expertise in areas such as artificial intelligence, robotics and automation. In both the third quarter and the first nine months of 2023, the reinsurance receivables allowance for credit losses increased $1.0 million. The remaining other non-operating items are comprised of 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.