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We reiterate our Neutral recommendation on CNO Financial Group, Inc. (CNO) on the back of strong operating performance in most of the business segments, which are offset by the pricing challenges in the long-term care business, lower revenues in the Bankers’ Life segment and the ongoing market volatility.

CNO Financial reported second-quarter net operating income of $57.5 million or 20 cents per share, slightly ahead of the Zacks Consensus Estimate of 18 cents. This also compares favorably with income of $44.9 million or 16 cents in the year-ago quarter.

The value of CNO Financial’s investment portfolio is steadily increasing. Additionally, CNO Financial has been able to improve its cash position over the years even after fulfilling its interest obligations and making huge payments for stock repurchases and debt repayment. This has been possible due to substantial growth in cash flow from operating and financing activities.

Moreover, CNO Financial is taking steps to reduce costs in order to improve its bottom-line.The company amended its credit facility in May 2011 to reduce its borrowing costs on the total debt in the ongoing volatile interest rate environment.

Besides, healthy financial ratings bode well for CNO Financial’s growth. In June 2011, Fitch affirmed the issuer debt rating (IDR) of CNO Financial at “B+”. It also affirmed the IFS of Bankers Life and Casualty at “BBB-“ and those of Conseco Life Insurance Company, Bankers Conseco Life Insurance Company, Colonial Penn Life Insurance Company and Washington National Insurance Company at “BB+”.

The rating agency also upgraded the debt rating of the company’s senior secured credit facilities. Such rating upgrades are expected to reduce policy surrenders and withdrawals and increase borrowing ability.

However, there are some weaknesses, which partly offset the positives of CNO Financial. The top-line performance of the Bankers’ Life segment has been deteriorating over the years. The revenues and premium collections of the segment have declined considerably from 2008 to 2010. The reduced earnings from annuities and health products are mainly responsible for the weakening performance of the segment.

Moreover, the results for the last few quarters show that CNO Financial continues to face underwriting and pricing challenges in the long-term care business. The current interest rate environment, which is generating spread compression, will continue to put pressure on the bottom line.

Further, CNO Financial had a balance of about $309 million outstanding under its senior secured credit agreement as on June 30, 2011. The company has to make principal and interest payments on its outstanding indebtedness.

Hence, CNO Financial requires significant amounts of cash each year to fund its operations and repay debt. Moreover, the senior secured credit agreement has various restrictive covenants and ratio standards, which need to be maintained.

The Zacks Consensus Estimate for CNO Financial’s third-quarter 2011 earnings is currently 18 cents per share, up 13.8% year over year. For full year 2011, the Zacks Consensus Estimate stands at 75 cents per share, up 15.6% from 2010.

CNO Financial competes with AFLAC Inc. (AFL) and Torchmark Corp. (TMK).Currently, the company carries a Zacks #3 Rank, which translates into a short term Hold rating, indicating no clear directional pressure on the shares over the near term.

 
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