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On Jan 16, 2013, we upgraded insurance company CNO Financial Group, Inc. (CNO - Analyst Report) to Outperform. The improved recommendation was based on strong fundamentals and prospects of significant capital deployment in 2013.

Why the Upgrade?

We remain upbeat about the fourth-quarter 2012 earnings of CNO Financial, with an Earnings Surprise Prediction (ESP) of 4.35%. The company has consistently outperformed estimates in the last four quarters, leading to an Average Surprise of 16.72%. ESP is a leading indicator of an expected positive earnings surprise for shares. As a result, the company carries a Zacks Rank #2 (Buy).

CNO Financial reported third-quarter 2012 adjusted operating earnings of 26 cents per share, surpassing the Zacks Consensus Estimate of 19 cents and year-ago earnings of 16 cents. Revenues increased 10.1% to $1.1 billion from $0.9 billion in the prior-year quarter. Total revenue also surpassed the Zacks Consensus Estimate of $1.03 billion.

The Zacks Consensus Estimate for CNO Financial’s fourth-quarter earnings is 23 cents per share, up 15.7% over the prior-year quarter. The company’s fourth-quarter and full year 2012 financial results are scheduled to release after the closing bell on Feb 11, 2013.

Apart from a history of outperforming estimates and strong financial results, CNO Financial has other positives such as stable credit ratings, strong investment portfolio and declining expenses. Moreover, the recapitalization in September 2012 has improved the capital structure and debt maturity profile.

Further, the value of CNO Financial’s investment portfolio is steadily increasing since 2008 and its operating cash flow has also been strong over the years. Moreover, the company’s strong organic growth and excess capital generation allowed it to announce a $300 million hike in its share repurchase authorization in December 2012, after a $100 million hike in February 2012. CNO Financial is expected to spend $250–$300 million each on share buybacks and dividend payouts in 2013.

Other Stocks to Consider

Some of the other companies, which are performing well in the insurance sector are Ageas SA/NV (AGESY) – Zacks Rank #1 (Strong Buy), Prudential plc (PUK - Snapshot Report) – Zacks Rank #2 (Buy) and FBL Financial Group Inc. (FFG - Snapshot Report) – Zacks Rank #2 (Buy).

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