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We have reiterated our Neutral recommendation on CNO Financial Group Inc. (CNO) based on the lack of significant earnings growth momentum.

CNO Financial reported its third-quarter 2011 operating earnings of 17 cents per share, at par with the Zacks Consensus Estimate but beating the year-ago earnings by a penny.

The company’s strategies of cost reduction and divestiture of non-core business units to focus on the core business have translated into consistent profitability and capital growth, leading to healthy financial ratings. In November 2011, A.M. Best affirmed the issuer credit and financial strength ratings of all of CNO’s subsidiaries.

Additionally, the rating agency affirmed the debt rating of the company’s various outstanding 7.0% senior unsecured convertible debentures, due 2016 and 9.0% senior secured notes, due 2018. All the ratings reflect a stable outlook, showcasing the company’s modest claims-paying ability along with its risk-absorbing capacity.

Moreover, the amendment of the company’s senior secured credit facility reduced the annual interest rates, thereby increasing financial flexibility. Moreover, CNO’s debt-to-capital ratio of 18% is substantially lower than the maximum of 30% acceptable under its banking facility covenant.

The cash position of CNO Financial has also strengthened over the years due to substantial growth in cash flows from operating and financing activities. Moreover, the consolidated statutory risk-based capital ratio of CNO Financial’s insurance subsidiaries improved to 359% in the third quarter of 2011, driven by enhanced asset quality and high statutory earnings.

The book value of the company has improved to $17.89 per share as of September 30, 2011 from $16.28 at the end of 2010. Moreover, the value of CNO Financial’s investment portfolio is steadily increasing. It escalated to $25.84 billion at the end of September 2011 from $23.78 billion in 2010, $21.53 billion in 2009 and $18.65 billion in 2008.

However, 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.

Additionally, CNO Financial has a risky business profile with about $269 million balance outstanding under its senior secured credit agreement as on September 30, 2011. Also, the company has to make high principal and interest payments on its outstanding indebtedness.

Further, the top-line performance of the Bankers’ Life segment has been deteriorating over the years. The reduced earnings from annuities and health products are mainly responsible for the weakening performance of the segment.

Thus, considering all the pros and cons, we expect CNO Financial to trade in line with its peer group.The Zacks Consensus Estimate for the fourth-quarter 2011 earnings is currently 19 cents per share, up 2.8% year over year. For full year 2011, the Zacks Consensus Estimate stands at 74 cents per share, up 13.5% 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.

 
AFLAC INC (AFL): Free Stock Analysis Report
 
CNO FINL GRP (CNO): Free Stock Analysis Report
 
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