CNO Financial Group Inc. (CNO) announced its second-quarter 2011 net operating income of $57.5 million or 20 cents per share, a couple of pennies ahead of the Zacks Consensus Estimate of 18 cents per share. This also compares favorably with income of $44.9 million or 16 cents per share in the year-ago quarter.
The improved showing was the result of strong top-line growth in most business segments and improved capital ratios.
CNO Financial’s net income jumped to $59.5 million or 21 cents per share, showing an astounding hike from $33.1 million or 12 cents per share in the prior-year quarter.
This includes $2.0 million or 1 cent per share related to net realized investment gains and loss on extinguishment of debt in the reported quarter compared to $11.8 million or 4 cents per share of net realized investment losses and loss on extinguishment of debt in the prior-year quarter.
CNO Financial’s revenues increased by 8.42% to $1.03 billion from $0.95 billion in the prior-year quarter, primarily due to realized investment gains as opposed to losses in the year-ago quarter. The revenues also exceeded the Zacks Consensus Estimate of $1.02 billion.
Collected premiums showed a year over year decline in the Bankers Life segment, while it increased in the Washington National, Colonial Penn and other CNO business segments.
Meanwhile, operating income surged 21% year over year to $108.5 million, while corporate interest expense decreased to $19.3 million from $19.8 million in the prior year quarter.
Segment-wise, pre-tax operating earnings in the Bankers Life segment climbed 32% to $84.7 million. The results were impacted by higher investment spreads for annuity products primarily reflecting growth in the business and bond prepayment income of $6.0 million. Pre-tax earnings include $3.7 million earned from the PFFS business assumed through reinsurance agreements with Coventry.
Washington National’s pre-tax operating earnings increased by 8% to $22.7 million, while that of Colonial Penn remained almost in line with the prior year quarter at $7.6 million. However, other CNO businesses reported earnings of $4.8 million, as against $8.8 million in the prior-year quarter.
Besides, Corporate Operations, which include investment advisory subsidiary and corporate expenses, recorded expenses of $11.3 million in the reported quarter, marginally lower from $11.8 million in the prior year quarter.
The results in the reported quarter included a $0.4 million loss on extinguishment of debt, net of income taxes, on account of prepayment of $16.2 million under the senior secured credit agreement. The results for the year-ago quarter include a $0.6 million loss on extinguishment of debt, net of income taxes, related to the repurchase of $52.5 million aggregate principal amount of 3.5% convertible senior debentures.
Additionally, net realized investment gains of CNO Financial stood at $2.4 million (net of related amortization and taxes) in the reported quarter, which included other-than-temporary impairment losses of $10.1 million. This compared favorably to net realized investment losses of $11.2 million (net of related amortization and taxes), and include other-than-temporary impairment losses of $29.3 million, in the prior-year quarter.
Financial Update
During the quarter, the consolidated statutory risk-based capital ratio of CNO Financial’s insurance subsidiaries increased 10 percentage points to 351%, driven by improved asset quality and statutory earnings of $78.7 million, but partially offset by $78 million of dividend payments to the holding company.
In addition, unrestricted cash and investments held by the non-insurance subsidiaries increased $65 million to $234 million.
As of June 30, 2011, debt-to-total capital ratio reduced to 18.7% from 20.0% at the end of December 31, 2010. Book value per common share, excluding accumulated other comprehensive income (loss) also increased to $16.80 from $16.28 at the end of December 31, 2010.
As of June 30, 2011, total assets of CNO Financial were $32.4 billion and shareholders’ equity was $4.6 billion.
Stock Repurchase Update
On June 30, 2011, CNO Financial announced the repurchase of 2.2 million shares at an average price of $7.35 under the share repurchase program announced on May 16, 2011.Under the repurchase program, CNO Financial can repurchase shares for up to $100 million over the next two years. The total purchase price amounted to $16.2 million.
Loan Prepayment
In June 2011, CNO Financial prepaid $16.2 million towards the outstanding principal under the Senior Secured Credit Agreement. The terms of SSCA state that principal pre-payment should be made for an amount equivalent to the amount spent on share repurchase if the debt-to-total capitalization ratio is greater than 17.5%. The balance outstanding under SSCA after the pre-payment is $308.8 million.
Ratings Update
On June 7, 2011, Fitch affirmed the IDR of CNO Financial at “B+”. It also affirmed the IFS of Bankers Life and Casualty at “BBB-“and that of Conseco Life Insurance Company, Bankers Conseco Life Insurance Company, Colonial Penn Life Insurance Company and Washington National Insurance Company at “BB+”.
Fitch upgraded the debt rating of 7% debt to “B/RR5” from “B-/RR6”, senior secured bank credit facility to “BB/RR2” from “B+'/RR4” and 9% senior secured note to “BB/RR2” from “B+'/RR4”.
Our Take
We feel that CNO Financial will continue its growth in the future. Both top-line and bottom-line of CNO Financial showed substantial growth in the reported quarter.
Moreover, the financial position of the company strengthened, as reflected in the improved ratios and increased cash balance, even after dividend payment, loan prepayment and stock repurchase.
However, premiums earned from the Other CNO business segment declined in the reported quarter and the Colonial Penn segment failed to show any growth. Also, the current interest rate environment is generating spread compression, putting pressure on the bottom line. Nonetheless, considering the strong performance of most of its business segments, we expect an upside in the long run.
Protective Life Corp. (PL), a competitor of CNO Financial is expected to announce its second quarter earnings on August 3, 2011. Another rival, Unum Group (UNM), will declare its second quarter results after the market closes on August 2, 2011.
Currently, CNO Financial carries a Zacks #3 Rank, implying a short term Hold rating.
CNO FINL GRP (CNO): Free Stock Analysis Report
PROTECTIVE LIFE (PL): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment