CNO Financial Beats, Top-line Grows - Analyst Blog

CNO Financial Group, Inc. (CNO) reported its second-quarter income from continuing operations of $44.9 million or 16 cents per share, well ahead of the Zacks Consensus Estimate of 14 cents. This also compares favorably with income of $40.8 million or 22 cents in the year-ago quarter. The improved showing was the result of strong top-line growth in all the business segments.

CNO Financial’s net income was $33.1 million or 12 cents in the reported quarter as opposed to $27.6 million or 15 cents in the prior year quarter. The results include $11.8 million or 4 cents per share of net realized investment losses and loss on extinguishment of debt in the reported quarter and $13.2 million or 7 cents of net realized investment losses in the prior-year quarter.

Also, CNO Financial’s earnings from continuing operations and reported earnings were reflective of the dilution from the issuance of 65.9 million shares of common stock and $293.0 million of convertible debentures. Earnings per share from continuing operations reflect dilution of 7 cents per share and reported earnings per share in the current quarter reflect dilution of 5 cents per share related to the issuance of common stock and convertible debentures.

Business Update

CNO Financial’s results reflected a 3% year-over-year growth in EBIT (income before net realized investment gains, interest and taxes) to $89.7 million, while corporate interest expense decreased 17% to $19.8 million. A modest EBIT growth was witnessed across Bankers Life and Conseco Insurance Group, partially offset by a decline in Colonial Penn segments.

Collected premiums showed a year-over-year decline in CNO Financial, especially at Bankers Life and Conseco Insurance Group segments. However, Colonial Penn segment’s results improved slightly.

Overall, CNO Financial’s revenues were down 13.0% from the prior-year quarter due to a decline in insurance policy income and increase in net realized investment losses.

In the Bankers Life segment, EBIT increased to $64.0 million from $63.3 million in the prior-year quarter. The results were aided by stabilized earnings in the long-term care block and higher spread on annuities.

The Conseco Insurance Group’s EBIT was $29.9 million, compared with $21.2 million in the prior-year quarter. Results for the quarter were affected by higher investment spreads due to bond prepayment income and improved annuity persistency.

Colonial Penn’s EBIT decreased to $7.6 million from $11.0 million in the year-ago quarter. Results for the reported quarter were primarily affected by a $3 million gain on termination of reinsurance pool in 2009.

Net realized investment losses of CNO Financial were $11.2 million (net of related amortization and taxes) in second quarter 2010, which includes total other-than-temporary impairment losses of $29.3 million. In the prior year quarter, net realized investment losses were $13.2 million (net of related amortization and taxes and the establishment of a valuation allowance for deferred tax assets related to such losses), and includes total other-than-temporary impairment losses of $53.7 million and a $4.6 million increase to the deferred tax valuation allowance.

Evaluation of Financial Strength

The CNO Financial’s combined statutory risk-based capital ratio of the insurance subsidiaries decreased 1% to 318% in the second quarter of 2010, which includes an 8-basis point decrease from the adoption of the new Mortgage Experience Adjustment Factors.
 

As of June 30, 2010, debt-to-total capital ratio, excluding accumulated other comprehensive income (loss) improved to 21.0% from 21.5% at the end of December 31, 2009. Book value per common share, excluding accumulated other comprehensive income (loss) also increased to $15.39 from $15.14 at the end of December 31, 2009.

As of June 30, 2010, total assets of CNO Financial were $31.2 billion and shareholders’ equity was $4.2 billion.

Our Take

We remain concerned about CNO Financial’s pricing challenges in the long-term care business and the rating downgrades, which in turn are influencing the losses in its investment portfolio. However, increasing new business volume along with cost containment measures is expected to support the bottom line to some extent.

Currently, CNO Financial carries a Zacks #3 Rank, which translates into a short-term Hold recommendation, indicating no clear directional pressure on the shares over the near term.