We have upgraded our recommendation on
CNO Financial Group Inc.
) to 'Outperform' based on its latest recapitalization plan.
Improved credit ratings, strong investment portfolio and declining
expenses are the other positives.
CNO Financial reported second-quarter 2012 earnings of 20 cents
per share, handily beating the Zacks Consensus Estimate of 17 cents
as well as the year-ago earnings of 15 cents. Operating income in
the quarter was $54.2 million, up 22% from $44.5 million in the
second quarter of 2011.
Promptly acting on a favorable capital market condition, CNO
Financial publicized a recapitalization plan earlier this month.
This plan aims to improve the company's capital structure, boost
its financial flexibility and enhance the growth rate of earnings
per share and return on equity. The debt maturity profile of the
company is also expected to improve as a result of the refinancing
activities. Further, the cost of debt is anticipated to reduce by
160 basis points after the completion of the recapitalization.
CNO Financial also actively manages its capital to boost
shareholders' value. The company is expected to buyback shares
worth $150-$170 million in 2012 and to spend almost $200-$275
million on dividend payments. Moreover, 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 $27.45 billion in the
first half of 2012.
However, the top-line performance of the Bankers Life segment
has been deteriorating over the years. The revenues and premium
collections of the segment declined considerably from 2008 to 2010.
Although collections remained almost flat year-over-year in 2011,
these again declined 8.4% in the first half of 2012. Absence of an
immediate solution to arrest this critical decline could start
pressurizing the company's bottom line.
Moreover, CNO Financial has to make high principal and interest
payments on its outstanding indebtedness. The company requires
significant amounts of cash each year to fund its operations and
repay debt, which reduced cash in 2011 and in the first half of
2012. The company is expected to require $109 million in cash to
service the debt in the current year. This increases the financial
risk of the company and may also make additional borrowing costly
in the future.
CNO Financial, which competes with
), currently carries a short-term Zacks #2 Rank (Buy).
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