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We are downgrading our recommendation on CNO Financial Group Inc. 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. and Torchmark Corp. . Currently, the company carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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