We have downgraded our recommendation on
CNO Financial Group Inc.
) to 'Neutral' from 'Outperform' based on its high financial
leverage and constantly deteriorating results in the Bankers Life
segment. However, benefits from recapitalization and an enhanced
investment portfolio offset the headwinds.
CNO Financial reported third-quarter 2012 adjusted operating
earnings of 26 cents per share, beating the Zacks Consensus
Estimate of 19 cents. Results were higher than 16 cents earned in
the year-ago quarter.
The top-line performance of the Bankers Life segment has been
deteriorating over the past few years. Premium collections
plummeted 14% in 2010 and 9.6% in 2009. Although collections
remained almost flat year over year in 2011, these reported a
decline of 9.5% in the first nine months of 2012. The reduced
earnings from annuities are mainly responsible for the weakening
performance of the segment, along with a marginal deterioration
in the health premiums.
Moreover, CNO Financial has a risky business profile with
about $1.04 billion of direct corporate obligations. Even the
recapitalization plan, implemented in September 2012, increased
the debt-to-total capital ratio, excluding accumulated other
comprehensive income, by 520 bps from 16.6% as of June 30,
Also, CNO Financial had to make high principal and interest
payments on its outstanding indebtedness, which reduced the cash
balance in 2011 and the first nine months of 2012. Moreover, the
company required over $122 million in cash to service the debt in
2011 and will likely require $109 million in 2012 for the
Nevertheless, the recapitalization plan has boosted the
company's financial flexibility and improved its debt maturity
profile. The cost of debt has also reduced by about 210 basis
points after the completion of the recapitalization, thereby
bringing down the cost of capital. The plan is also expected to
enhance the growth rate of the company's earnings per share and
return on equity.
Additionally, the value of CNO Financial's investment
portfolio is steadily increasing. It escalated to $26.36 billion
in 2011 from $23.78 billion in 2010, $21.53 billion in 2009 and
$18.65 billion in 2008. The value of the investment portfolio
increased further to $28.09 billion in the first nine months of
2012. Although underwriting and pricing challenges remain the
primary concerns, increasing new business volume, along with cost
containment measures are expected to support the bottom line in
the long run.
CNO Financial currently carries a Zacks #3 Rank, indicating a
short-term Hold. However, another company in the accident and
health insurance industry -
) - carries a Zacks #2 Rank (short-term Buy).
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CNO FINL GRP (CNO): Free Stock Analysis
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