CNO Financial Drops to Underperform - Analyst Blog
January 13 2012 - 11:09AM
Zacks
We are downgrading our recommendation on CNO Financial
Group Inc. (CNO) to Underperform from Neutral given
continued deterioration in the premium revenue of its Bankers’ Life
segment as well as the significant underwriting and pricing
risks.
The top-line performance of the Bankers’ Life segment has been
deteriorating over the past few years. The reduced earnings from
annuities and health products are mainly responsible for the
weakening performance of the segment.
While annuities premium declined as a result of reduced money
interest rates, premium from health products declined due to higher
lapses of long-term policies and reduced prescription drug benefit
and Private-Fee-For-Service collections.
Moreover, 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. Thus, the company requires significant amounts of
cash each year to fund its operations and repay debt.
Additionally, the results for the last few quarters reveal 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 exert pressure on the bottom line.
However, on the positive side, the cash position of CNO
Financial has strengthened over the years. The company has been
able to improve its cash position due to substantial growth in cash
flow from operating and financing activities.
Additionally, the value of CNO Financial’s investment portfolio
is steadily increasing. While the values of certain types of
securities in CNO Financial’s investment portfolio, such as
asset-backed securities supported by residential and commercial
mortgages, vary with changes in capital market conditions, the
company holds some trading securities to neutralize the effects of
interest rate fluctuations on the investment portfolio. Thus, the
portfolio is substantially protected from market variations and can
be expected to continue to grow in future.
The Zacks Consensus Estimate for CNO Financial’s fourth-quarter
2011 earnings is currently 19 cents per share, up 4% year over
year. For full year 2011, the Zacks Consensus Estimate stands at 73
cents per share, up about 13% 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.
AFLAC INC (AFL): Free Stock Analysis Report
CNO FINL GRP (CNO): Free Stock Analysis Report
TORCHMARK CORP (TMK): Free Stock Analysis Report
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