The Long and Short
CNO trades wide of UNM with less tail risk
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CNO Financial (CNO: Baa3/BBB-/BBB-) 2029 notes trade roughly 35 bp wide to Unum Group (UNM: Baa3/BBB/BBB-) 2029 notes. Both life insurers have similar scale and exposure to long-term care (LTC) lines either in run-off or being actively de-emphasized. Investors have long considered LTC a tail risk for life insurers and a key interest rate risk. According to Moody’s, LTC made up approximately 11% of CNO’s reserves at the end of 2022, while UNM’s “closed block” of business, which is primarily its run-off LTC operations, makes up approximately 51% of the company’s total net reserves. Although not completely identical comparisons, CNO bonds trade significantly wide to UNM in the intermediate part of the curve, despite carrying materially less LTC exposure.
Exhibit 1. IG Life Insurance credit – intermediate part of the curve
Source: Santander US Capital Markets LLC, Bloomberg/TRACE BVAL G-spread indications
CNO 5.25% 5/30/29 @ +195/5YR; G+194; 6.49%; $94.29
Issuer: CNO Financial Group (CNO)
CUSIP: 12621EAL7
Amount outstanding: $500 million (index eligible)
RATING: Baa3/BBB-/BBB-
Global Issue
Comparable Securities:
Source: Santander US Capital Markets LLC
CNO provides a traditional suite of health, life, and retirement lines, with emphasis on the middle-income customer group. The core products include: Medicare supplement, supplemental health, and long-term care insurance policies, life insurance, and annuities. CNO’s primary US operating subsidiaries include Bankers Life and Casualty Company, Colonial Penn Life Insurance Company, and Washington National Insurance Company, which all maintain A3 insurance financial strength ratings. 40|86 Advisors manages all the investment portfolios of CNO’s insurance subsidiaries. The company’s business is divided between Consumer and Worksite, utilizing three distinct distribution channels: career agents, professional independent producers, and direct marketing. Like some of its similarly positioned life insurance peers, e.g. UNM, CNO has some exposure to higher-risk long-term care (LTC) business, but has been actively de-risking by putting greater emphasis on shorter duration products in that space.
CNO’s liquidity profile appears well positioned relative to the company’s maturity schedule. The company reported $461 million in cash on the balance sheet as of third quarter 2023 and also has full access to a $250 million revolving credit facility through 2026. Management reports holding company liquidity of $171 million and targets a level of $150 million going forward. The first unsecured public debt maturity is a $500 million note due 2025, followed by the $500 million 2029 notes as well. The remainder of CNO’s debt obligations are secured, funding-agreement backed notes (FABNs) laddered throughout 2025, 2026 and 2029, which do not impact holding company unsecured liquidity. CNO has not accessed the unsecured public debt market since 2019.
CNO appears to have a solid capital position relative to its ratings profile. As of mid-year, the reported statutory capital and surplus on the balance sheet was $1.7 billion. The last reported full-year statutory risk-based capital ratio (TAC/ACL RBC%) was 768%, while the NAIC consolidated RBC ratio is roughly 392% as of third quarter this year, and management targets a ratio of approximately 375% going forward.
CNO reported third quarter financial results earlier this week with adjusted operating EPS of $0.74 in-line with the $0.73 consensus forecast, unadjusted operating EPS of $0.88 was up 31% year-over-year. GAAP EPS of $1.46 ($167.3 million net income) beat estimates by $0.74, while top-line revenue of $947.5 million for the quarter came in moderately ahead of expectations, as new annualized premiums increased 12.6% year-over-year. Within the investment portfolio, concentration in ‘BBB’ credit—which has been a modest concern for rating agencies—was reduced by 320 bp in the last twelve months, while allocation to ‘A’ or better credit has increased 420 bp over the same period.
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