CNO Financial Beats EPS Est.

Zacks Equity Research

CNO Financial Group Inc. (CNO) reported fourth-quarter 2011 net operating income of 22 cents per share, which came in ahead of the Zacks Consensus Estimate by 3 cents. Earnings improved 22% from 18 cents in the year-ago quarter. Operating income in the quarter was $60.1 million, up 16% from $51.7 million in the fourth quarter of 2010.

Including net realized investment gains of $13.6 million and $0.6 million of after-tax non-operating charges related to the change in estimated fair value of embedded derivatives and a loss on extinguishment of debt, CNO Financial reported net income of $73.1 million or 26 cents per share in the quarter under review, comparing unfavorably with $168.2 million or 56 cents per share earned in the year-ago quarter.

The fourth quarter of 2010 included net realized investment gains of $24.1 million, $95.0 million reduction to the deferred tax valuation allowance and $2.6 million of after-tax non-operating charges related to the change in estimated fair value of embedded derivatives and a loss on extinguishment of debt.

Full-year operating earnings came in at 76 cents, 2 cents ahead of the Zacks Consensus Estimate and 17% above 65 cents earned in 2010. Operating earnings in 2011 were $216 million, up 19% over the prior year.

The company reported net income of $382.5 million or $1.31 per share compared with $284.6 million or 99 cents per share in 2010.

Operational Update

CNO Financial’s revenues decreased 2.3% to $1.05 billion from $1.07 billion in the prior-year quarter, primarily due to lower revenue from policyholder and reinsurer accounts and other special-purpose portfolios and lower realized gains.

Full-year revenue grossed $4.1 billion, inching up 1% over 2010.

Total benefits and expenses declined 3% year over year to $935.2 million in the quarter largely due to lower amortization and lower other operating costs and expenses. Full-year total benefits and expenses declined 1.2% over 2010.

Segment Update

Pre-tax operating earnings in the Bankers Life segment improved 22% year over year to $87.2 million in the fourth quarter.

Pre-tax earnings for the reported quarter include $11 million of favorable reserve development in the long-term care business and Medicare supplement blocks, while that for the year-ago quarter include $9 million of favorable reserve developments in the long-term care and Medicare supplement blocks.

Washington National’s pre-tax operating earnings were $29.2 million in the quarter, almost flat with the year-ago quarter. Results included $4.5 million out-of-period adjustment and $3.7 million of favorable reserve developments in the supplemental health block.

Pre-tax operating earnings of Colonial Penn showed a 7% increase from the prior-year quarter driven by solid performance in the block.

Besides, Corporate Operations, which include investment advisory subsidiary and corporate expenses, recorded net expense of $8.4 million in the quarter under review compared with $13.7 million in the year-ago quarter.

Financial Update

During 2011, the consolidated statutory risk-based capital ratio of CNO Financial’s insurance subsidiaries increased 26 percentage points to 358%, driven by statutory earnings of $363 million, partially offset by dividend payments of $209 million to the holding company.

In addition, unrestricted cash and investments held by the non-insurance subsidiaries increased $41.7 million to $202.8 million, mainly due to share repurchases and repayment of debt.

As of December 31, 2011, debt-to-total capital ratio decreased to 17.1% from 20.0% at the end of December 31, 2010. Book value per common share, excluding accumulated other comprehensive income (loss) increased to $18.26 from $16.28 at the end of December 31, 2010.

As of December 31, 2011, total assets of CNO Financial were $33.3 billion and shareholders’ equity was $5.0 billion.

Stock Repurchase Update

During the fourth quarter, CNO Financial spent $14.1 million to buy back 2.35 million shares at an average price of $6.02.

The company’s fourth-quarter repurchase brings the total buybacks under its $100 million share repurchase program to 11.12 million shares at an average price of $6.28 per share. The total purchase price for the shares bought back since the commencement of the repurchase program in May 2011 amounts to $69.8 million.

Loan Prepayment

During the reported quarter, CNO Financial prepaid $14.1 million of the outstanding principal under its Senior Secured Credit Agreement. The terms of SSCA state that principal pre-payment should be made for an amount equivalent to the amount spent on share repurchase if the debt-to-total capitalization ratio is greater than 17.5%.

Peer Comparison

Aflac Inc., (AFL) which competes with CNO Financial, reported fourth-quarter 2011 operating earnings per share of $1.48 came in 3 cents below the Zacks Consensus Estimate of $1.51 but comfortably higher than $1.33 in the year-ago quarter. A stronger yen/dollar exchange rate aided operating earnings per share growth by 6 cents.

For full year 2011, Aflac reported operating net income $6.33 per share as compared with $5.53 per share in 2010. However, operating earnings per share lagged the Zacks Consensus Estimate of $6.36.

Torchmark Corp., (TMK) another peer of CNO Financial, reported fourth-quarter 2011 operating income of $1.25 per share, up 12% year over year, led by higher insurance underwriting as well as investment income. Lower share count compared with last year, due to share repurchases, also aided the bottom line.

For the full year, net operating income was $4.68 per share, compared with $4.27 a year ago.

Zacks Rank

We retain our Underperform recommendation on CNO Financial. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.

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