CNO Financial Beats Zacks Target - Analyst Blog

CNO Financial Group, Inc. (CNO) reported its third-quarter income from continuing operations of $47.1 million or 16 cents per share, well ahead of the Zacks Consensus Estimate of 15 cents. This, however, compares unfavorably with income of $54.3 million or 29 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 $49.4 million or 17 cents in the reported quarter as opposed to $15.4 million or 8 cents in the prior-year quarter. The results include $2.3 million of net realized investment gains in the reported quarter and $38.9 million of net realized investment losses and valuation allowance for deferred tax assets in the prior-year quarter.

Also, CNO Financial's earnings from continuing operations and reported earnings per share 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 a dilution of 10 cents per share and reported earnings per share in the current quarter reflect a dilution of 2 cents per share related to the issuance of common stock and convertible debentures.

Business Update

Overall, CNO Financial's revenues were down 5.9% to $1.05 billion in the current quarter from $1.12 billion in the prior-year quarter, primarily due to a decline in insurance policy income. However, the revenues exceeded the Zacks Consensus Estimate of $987.0 million.

Collected premiums showed a year-over-year decline in CNO Financial, especially at Bankers Life, Washington National and other CNO business segments. However, Colonial Penn segment's results improved slightly.

CNO Financial's results reflected a 12% year-over-year decline in EBIT (income before net realized investment gains, corporate interest and taxes) to $93.8 million, while corporate interest expense decreased 17% to $20.0 million. A modest EBIT growth was witnessed across Bankers Life and Colonial Penn, partially offset by a decline in Washington National segments.

In the Bankers Life segment, EBIT increased to $95.5 million from $85.4 million in the prior-year quarter. The results were aided by higher investment earnings from higher average yields on a larger asset base and an improved Medicare supplement benefit ratio. However, they were offset by a reduction in earnings from the Private-Fee-For-Service business.

The Washington National's EBIT was $27.2 million, compared with $29.1 million in the prior-year quarter. The third quarter of 2009 earnings was positively impacted by approximately $4 million of reserve refinements related to supplemental health products.

Colonial Penn's EBIT increased to $7.8 million from $7.4 million in the year-ago quarter, on account of favorable life margins.

Other CNO businesses reported losses of $24.4 million in the reported quarter, as against losses of $7.5 million in the prior-year quarter. The increase in losses was due to a reduction in earnings from additional amortization expense, which came from decreased projected future investment yields related to interest sensitive insurance products, as well as from the write-off of the present value of future profits related to this segment's long-term care insurance block.

CNO Financial's Corporate Operations, which includes investment advisory subsidiary and corporate expenses, reflects a $4.5 million legal settlement in the reported quarter related to an obligation assumed in conjunction with the acquisition of a subsidiary in 1991. The prior-year quarter's results also reflected the increase to the deferred tax valuation allowance of $20 million, upon the completion of a reinsurance transaction with Wilton Resources, Inc.

Net realized investment gains of CNO Financial were $2.3 million (net of related amortization and taxes) in the third quarter 2010, which includes total other-than-temporary impairment losses of $22.8 million. In the prior-year quarter, net realized investment losses were $18.9 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 $162.4 million and a $6.7 million increase to the deferred tax valuation allowance.

Evaluation of Financial Strength

CNO Financial's combined statutory risk-based capital ratio of the insurance subsidiaries increased 2% to 320% in the third quarter of 2010.

As of September 30, 2010, debt-to-total capital ratio, excluding accumulated other comprehensive income (loss) improved to 20.8% from 21.5% at the end of December 31, 2009. Book value per common share, excluding accumulated other comprehensive income (loss) also increased to $15.60 from $15.14 at the end of December 31, 2009.

As of September 30, 2010, total assets of CNO Financial were $32.0 billion and shareholders' equity was $4.6 billion.

We remain concerned about CNO Financial's pricing challenges in its long-term care business and rating downgrades, which in turn are influencing the losses in its investment portfolio.

Currently, CNO Financial carries a Zacks #4 Rank, which translates into a short-term Sell recommendation, indicating slight downward pressure on the stock over the near term.