On the back of strong ratings from credit rating agency A.M. Best, share price of CNO Financial Group Inc. (CNO - Analyst Report) went up 0.1% to $14.40 on Sep 30, 2013. On Sep 27, 2013, A.M. Best Co. affirmed the issuer credit ratings (ICR) of “bbb” and financial strength ratings of “B++” of the key life/health subsidiaries of CNO Financial. Concurrently, the ratings agency upgraded the outlook on the ICR to positive from stable while it retained the stable outlook on FSR. Additionally the ICR of “bb” on CNO Financial and the existing debt ratings have been affirmed while revising the outlook to positive from stable.
The upward revision in the outlook of the ICRs and debt ratings came on the back of the favorable trends in CNO Financial’s statutory operating earnings, risk-adjusted capitalization and core life insurance sales. CNO Financial’s impressive execution of strategic business plans, which includes focus on advantageous markets, divesting non-core businesses, curbing expenses, recapitalization initiatives and proactive risk mitigations have also added to the ratings revision.
A.M. Best also views favorably the debt restructuring by CNO Financial that reduced cost of capital and improved the debt maturity profile, thereby enhancing the financial flexibility of the company. Furthermore, A.M. Best is of the opinion that CNO Financial’s profit maintaining capacity which goes to enhance capital growth, strengthens the company’s position in the credit market compared to its peers. The debt-to-capital ratio of CNO Financial that is below 20% is expected to decline further owing to the scheduled amortization.
Nevertheless, A. M. Best recognizes the risk from the ongoing low interest rate environment. The low interest rate environment that is responsible for reducing net investment income is expected to weigh on earnings sustainability of CNO Financial going forward.
A. M. Best stated that an upward revision in ratings is possible in case of diversification in business mix, considerable growth in risk-adjusted capitalization and continued earnings growth. On the other hand, significant realized losses, operating losses or deterioration in risk-adjusted capitalization might invite a downgrade.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that CNO Financial’s present score with the credit rating agency will help it write more business going forward.
CNO Financial currently carries a Zacks Rank #3 (Hold). Other stocks that are worth considering are AXA Group (AXAHY), Eastern Insurance Holdings Inc. and FBL Financial Group Inc. (FFG - Snapshot Report). All the three stocks carry a favorable Zacks Rank #1 (Strong Buy).