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We are upgrading our recommendation on CNO Financial Group Inc. (CNO - Analyst Report) to Neutral from Underperform based on its improved bottom line and financial position.  While efficient capital deployment is boosting investors’ confidence on the stock, a strong investment portfolio, declining expenses and stable ratings are the other positives.

CNO Financial reported fourth-quarter 2011 net operating income of 22 cents per share, which came in 3 cents ahead of the Zacks Consensus Estimate. Earnings also improved 22% from 18 cents in the year-ago quarter.

Moreover, the continuous cost-cutting measures led to a decline in CNO Financial’s total expenses to $3.75 billion in 2011 from $3.79 billion in 2010 and $4.17 billion in 2009. Additionally, despite share repurchases, debt repayment and investment purchase, operating cash flow improved to $774.8 million in 2011 from $734.0 million in 2010 and $611.7 million in 2009.

Strong cash flows enabled CNO Financial to spend $69.8 million on stock repurchase in 2011, while repayment of $144.8 million of debt improved the debt-to-capital ratio to 17.1% as of December 31, 2011 from 20.0% at the end of 2010. Moreover, the company announced a $100 million hike in its share repurchase authorization recently, as a part of its constant endeavor to return value to shareholders.

Besides, CNO Financial also forges strategic alliances, which are likely to be beneficial for the company. Its subsidiary Bankers Life and Casualty Company’s agreement with Humana Inc. (HUM - Analyst Report) to offer Humana Medicare products is expected to increase the company’s earnings.

However, the top-line performance of CNO Financial’s Bankers Life segment has been deteriorating over the years. Premium collections reduced by 14% in 2010 and 9.6% in 2009, although collections remained almost flat year over year in 2011. The reduced earnings from annuities and health products are mainly responsible for the weakening performance of the segment.

Moreover, CNO Financial has about $857.9 million of direct corporate obligations and has to make high principal and interest payments. It required over $122 million in cash to service the debt in 2011 and will require $109 million in 2012. High level of debt increases the financial risk of the company and may also make additional borrowing costly.

The Zacks Consensus Estimate for CNO Financial’s first-quarter 2012 earnings is currently pegged at 16 cents per share, down 9% year over year. For full-year 2012, the Zacks Consensus Estimate stands at 70 cents per share, down about 6% from 2011.

Currently, CNO Financial carries a Zacks #4 Rank, which translates into a short-term Sell’ rating.

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