On Feb 20, 2013, we downgraded CNO Financial Group Inc. (CNO) to Neutral from Outperform based on rising benefits and expenses and the consistent weak results at Bankers Life segment.
Why the Downgrade?
The top-line performance of CNO Financial’s Bankers Life segment has been deteriorating over the years. The revenues and premium collections of the segment declined considerably from 2008 to 2010.
Although collections remained almost flat year over year in 2011, it again declined 5.5% in 2012. The absence of an immediate solution to arrest this critical decline could start weighing heavily on the company’s bottom line.
Moreover, after posting regular declines since 2008, the benefits and expenses of CNO Financial surged almost 10% in 2012. This reversal in the long-term trend was driven by a surge in the loss on extinguishment of debt along with higher operating costs and expenses.
While the loss on extinguishment of debt is a non-recurring item and is not expected to be so high in 2013, increasing operating costs and expenses remain matters of concern and need to be checked.
Further, the recapitalization plan implemented in Sep 2012 increased the debt-to-total capital ratio, excluding accumulated other comprehensive income, by 240 basis points over 2011-end to 20.7% at 2012-end. The company has to regularly make high principal and interest payments on its outstanding debt. The current interest rate environment, which is generating spread compression, also continues to put pressure on the bottom line.
However, despite these negatives, this multi-line insurance company with a Zacks Rank #1 (Strong Buy) outperformed in the fourth quarter of 2012. The company reported fourth-quarter 2012 adjusted operating earnings of 25 cents per share, surpassing the Zacks Consensus Estimate of 23 cents. Results also surpassed 18 cents earned in the year-ago quarter.
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