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We maintain our Neutral recommendation on CNO Financial Group Inc. (CNO - Analyst Report) based on improved book value per share, initiation of a quarterly dividend, strong investment portfolio and stable ratings. However, poor operating results of the Bankers Life segment, significant underwriting and pricing risks and substantial interest and debt obligations are the downsides.

CNO Financial reported first-quarter 2012 operating income of 15 cents per share, at par with the year-ago earnings. However, earnings per share surpassed the Zacks Consensus Estimate by a penny.

Despite share repurchases, debt repayment and investment purchase, CNO Financial’s cash position has strengthened over the years. Moreover, the company approved an additional $100 million for its share repurchase program in February, as a part of its constant endeavor to return value to shareholders. Furthermore, the repayment of the entire outstanding balance on the Senior Health notes removed the restriction on dividend payment, allowing CNO Financial to initiate a quarterly dividend policy.

Meanwhile, enhanced asset quality and high statutory earnings drove an improvement in the consolidated statutory risk-based capital ratio of CNO Financial’s insurance subsidiaries to 360% in the first quarter of 2012. The healthy financial ratios and reduced debt also drove the book value of the company by 2.02% to $16.20 per share in the first quarter of 2012 from $15.88 at the end of 2011. Book value is expected to improve further as CNO Financial continues to deploy cash for share repurchase and debt repayment.

However, 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 5.2% in the first quarter of 2012.

Moreover, CNO Financial requires significant amounts of cash each year to fund its operations and repay debt, which reduced cash in 2011 and in the first quarter of 2012. It required over $122 million in cash to service the debt in 2011 and is expected to require $109 million in 2012.

CNO Financial competes with AFLAC Inc. (AFL - Analyst Report) and Torchmark Corp. (TMK - Analyst Report). Currently, the company carries a Zacks #3 Rank (a short-term Hold rating).

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