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Gary Bhojwani (Photo: CNO)

Life Health > Annuities > Fixed Annuities

Interest Rate Hikes Turn Lead Into Helium for CNO Life and Annuity Products

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What You Need to Know

  • Life and annuity issuers depend heavily on investments in bonds and similar instruments.
  • Rates on new bonds are higher they were.
  • The new rates are just starting to rise over the average yield CNO is earning on its assets.

Low interest rates weighed down investment earnings at CNO Financial for years.

In the middle of the first quarter, rates increased enough to stop acting like a bag of investment earnings lead, and to start acting like investment earnings helium.

Eric Johnson, CNO’s chief financial officer, talked about the lead-to-helium transition Tuesday, during a conference call the company held to go over its latest results with securities analysts.

Different pools of investments back different products, and that means the crossover points will be higher for some of the products than for others, Johnson said.

For some health lines, and for fixed annuities, “we’ve crossed over for those,” Johnson said. “In general, and on average, I think we’re probably pretty much there now.”

What It Means

Life insurance, annuities and disability insurance might once again become something that even publicly traded financial services companies really want to sell, not something that they apologize to securities analysts for offering.

You might be able to help clients find products with better benefits guarantees, with more rate stability.

Because a life and annuity issuer invests something like a big, long-lived retirement saver, CNO’s analysis might have some bearing on what happens to clients who buy and hold bonds and other long-term fixed-income instruments to maturity.

If those clients began building their portfolios in the early 2000s, they might be starting to get new-money rates that beat the rates on the products they already own.

The Earnings

CNO is a Carmel, Indiana-based company known for selling life insurance, annuities, supplemental health insurance products, and long-term care insurances with relatively short benefit periods.

The company is reporting $112 million in net income for the first quarter on $843 million in revenue, compared with $147 million in net income on $1 billion in revenue for the first quarter of 2021.

Annuity collected premiums increased to $369 million, from $325 million.

Long-term care insurance sales increased 6%, to $6.8 million.

Gary Bhojwani, the CEO, said one challenge has been the difficulty of recruiting agents in a tight labor market.

But productivity levels and retention levels for experienced agents have been strong, Bhojwani said.

The Rates

The Federal Reserve Board recently moved to cool the economy and hold down inflation by beginning to increase the short-term rates it controls.

Years ago, CNO, like other life and annuity issuers, locked in relatively high returns on many of the bonds and other investments supporting its benefits obligations.

But rates have been so low for so long that, for years, rates on any newly invested money have usually been lower than CNO’s average portfolio yield.

In the first quarter, Johnson said, the average portfolio yield was about 4.6%, and the average new-money rate was 3.73%.

The new-money rate was so low because CNO invested most of the cash it invested in the quarter by around mid-February, when the new-money rate was around 3.5%, Johnson said.

“During the second half of the quarter, when we didn’t really have a lot of new money to invest — basically, after the middle of February — the new-money rate was north of 4%,” Johnson said. “And, then, after the quarter ended, and up till now, you’re looking at a much higher number. Which, I will say, is north of 4.5%.”

The average portfolio yields for health and fixed annuity lines tend to be below 4%, and that means new-money rates are now enough to improve portfolio yields for those products, Johnson said.

New-money rates are just now starting to reach that crossover point for permanent life products, long-term care insurance and other long-duration products, he added.

Johnson emphasized that CNO is being careful about how and what it buys, and that it wants to have high-quality investments, with asset durations match insurance policy and annuity contract durations.

But, overall, “this quarter, perhaps you will see the new-money rate being a tailwind rather than a headwind,” Johnson said.

Gary Bhojwani and other CNO executives talked about rate increase details during the company’s latest earnings call. Pictured: Bhojwani (Photo: CNO)