On Jun 27, 2014, we issued an updated research report on CNO Financial (CNO - Free Report) . We believe that though the company’s rising operating costs and high debt levels are matters of concern, its coinsurance agreements and divestitures will help the run-off business and bolster earnings going ahead.
Earlier, CNO Financial reported first-quarter 2014 earnings that were in line with the Zacks Consensus Estimate and improved year over year on lower share count and growth in premiums. Notably, this multiline insurer delivered positive earnings surprises in three of the last four quarters with an average beat of 15.87%.
CNO Financial vended its closed Block OCB to Beechwood Re through a reinsurance agreement, which is boosting earnings and return on equity. Going forward, the divestment of Conseco Life Insurance Company (CLIC) and elimination of 400,000 complex interest-sensitive policies are expected to improve operating leverage and ROE further. CNO Financial’s steady financial performance further raises optimism regarding management’s targeted ROE of about 9% by 2015-end.
The operating cash flow of CNO Financial has been strong over the years. The first quarter of 2014 witnessed a significant increase in cash flow (by 319%). The divestiture of low-return generating CLIC business (expected by mid-2014) should also free up cash to be deployed for working capital requirements. Higher cash flow paved the way for a 100% hike in dividends in Mar 2014.
Additionally, CNO Financial’s strong liquidity enables it to make investments to improve operations. This is also evident from management’s projection of investing $45–$55 million in key initiatives in 2014 that include agent productivity, geographic expansion, product launches and so on. This Zacks Rank #3 (Hold) stock also scores strongly with the credit rating agencies.
On the flip side, CNO Financial has been witnessing an increase in operating expenses since 2012. Moreover, rising operating expenses raises concern and needs to be checked to avoid an adverse impact on margins. CNO Financial has a risky business profile with about $844.1 million of direct corporate obligations as of Mar 31, 2014.
Moreover, the Bankers Life segment has been showing volatility for some time. While premium collections increased in the first quarter of 2014, overall health premiums were down. This was mainly due to the decline in long-term care and Coventry PDP quota share premium. This volatility may continue as persistently low new money interest rates might weigh on the sales of annuities, thereby affecting growth prospects.
Other Stocks to Consider
Better-ranked stocks in the insurance space include Old Republic International Corporation (ORI - Free Report) , Radian Group Inc. (RDN - Free Report) and AXA Group (AXAHY - Free Report) . While Old Republic and Radian sport a Zacks Rank #1 (Strong Buy), AXA Group has a Zacks Rank #2 (Buy).