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CNO Financial Group Inc. (CNO) announced its third-quarter 2011 net operating income of $46.5 million or 17 cents per share, at par with the Zacks Consensus Estimate. Operating earnings for the year-ago quarter were $47.1 million or 16 cents per share.

The reduced income was the result of poor top-line performance in most business segments. EPS increased due to reduced number of outstanding shares.

CNO Financial’s net income jumped to $196.0 million or 66 cents per share, showing an astounding hike from $49.4 million or 17 cents per share in the prior-year quarter.

The results in the reported quarter included a $7.0 million loss on extinguishment of debt, net of income taxes, on account of prepayment of $39.5 million under the senior secured credit agreement and a $9.4 million decrease in earnings due to an increase in the estimated fair value of embedded derivative liabilities related to fixed index annuities, net of related amortization and income taxes.  

CNO Financial’s revenues decreased 5.8% to $992.3 million from $1.1 billion in the prior-year quarter, primarily due to a $54.9 million investment loss from policyholder and re-insurer accounts and other special purpose portfolios. However, the revenues exceeded the Zacks Consensus Estimate of $1.03 billion.

Meanwhile, earnings before net realized investment gains, corporate interest and taxes (EBIT) increased 2% year over year to $96.1 million, while corporate interest expense decreased to $18.7 million from $20.0 million in the prior year quarter.

Segment-wise, pre-tax operating earnings in the Bankers Life segment declined 4% to $91.4 million.

Pre-tax earnings for the reported quarter include $14 million of favorable reserve development in the long-term care business and Medicare supplement blocks, while that for the year-ago quarter include $10 million of favorable reserve developments in the long-term care and Medicare supplement blocks and $6.5 million of favorable claim developments from PFFS business assumed through reinsurance agreements with Coventry Health Care Inc. (CVH).

Washington National’s pre-tax operating earnings decreased 19% or $5.1 million to $22.1 million, mainly due to a $6.0 million out-of-period adjustment. Meanwhile pre-tax operating earnings of Colonial Penn showed a 4% increase from the prior year quarter.

However, other CNO businesses reported earnings of $2.0 million, up $26.4 million from the prior-year quarter, primarily due to a $13 million improvement in margins in the interest-sensitive life block, $4.0 million of reduced legal costs and a $6.0 million write-off of the present value of future profits related to the segment's long-term care insurance block taken in 3Q10.

Besides, Corporate Operations, which include investment advisory subsidiary and corporate expenses, recorded a $15.2 million increase in expenses from the prior year quarter, mainly due to the impact of reduced interest rates and market value fluctuations.

Additionally, net realized investment gains of CNO Financial stood at $16.6 million (net of related amortization and taxes) in the reported quarter, which included other-than-temporary impairment losses of $2.9 million. This compared favorably to net realized investment gains of $2.3 million (net of related amortization and taxes) in the prior-year quarter, which included other-than-temporary impairment losses of $22.8 million.

Financial Update

During the quarter, the consolidated statutory risk-based capital ratio of CNO Financial’s insurance subsidiaries increased 8 percentage points to 359%, driven by improved asset quality and statutory earnings of $65.5 million, but partially offset by dividend payments of $27.4 million to the holding company.

In addition, unrestricted cash and investments held by the non-insurance subsidiaries decreased $65.1 million to $168.9 million, mainly due to share repurchases, prepayment of debt and early repayment of senior health note, partly offset by debenture interest and management and investment fees.

As of September 30, 2011, debt-to-total capital ratio reduced to 18.0% from 20.0% at the end of December 31, 2010. Book value per common share, excluding accumulated other comprehensive income (loss) increased to $17.89 from $16.28 at the end of December 31, 2010.

As of September 30, 2011, total assets of CNO Financial were $32.9 billion and shareholders’ equity was $4.9 billion.

Stock Repurchase Update

During the reported quarter, CNO Financial repurchased 6.6 million shares at an average price of $6.01 under the share repurchase program announced on May 16, 2011. Under the repurchase program, CNO Financial can repurchase shares for up to $100 million over the next two years. The total purchase price amounted to $39.5 million.

Loan Prepayment

During the reported quarter, CNO Financial prepaid $39.5 million towards the outstanding principal under the Senior Secured Credit Agreement (SSCA). The terms of SSCA state that principal pre-payment should be made for an amount equivalent to the amount spent on share repurchases if the debt-to-total capitalization ratio is greater than 17.5%.

Additionally, CNO Financial prepaid $25.0 million towards the amortization of senior health note.

Our Take

While the top-line performance of CNO Financial deteriorated in most segments, top-line showed substantial growth in the reported quarter on the basis of investment gains and favorable reserve and claims releases. Moreover, the financial position of the company strengthened, as reflected in the improved ratios.

We believe that CNO Financial is fundamentally strong and efficient deployment of capital is further improving its ratios. However, the company needs to improve its bottom-line performance in the coming quarters.

Protective Life Corp. (PL), a competitor of CNO Financial is expected to announce its second quarter earnings before the market opens on November 2, 2011.

Currently, CNO Financial carries a Zacks #3 Rank, implying a short term Hold rating.

 
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