On Sep 24, 2013, we downgraded our recommendation on CNO Financial Group Inc. (CNO) to Neutral as rising benefits and expenses, and constantly declining Bankers Life segment results are expected to weigh on company growth going forward.
Why the Downgrade?
CNO Financial’s earnings for the second quarter of 2013 came in at $0.30 per share, surpassing the year-over-year earnings of $0.20 by 50% and the Zacks Consensus Estimate of $0.26 by 15.4%.
However, increase in benefits and expenses of CNO Financial raise concern. After posting regular declines since 2008, benefits and expenses of CNO Financial started increasing in 2012 and maintained the increasing trend in the first half of 2013 also. This was due to an increase in operating costs and the loss on extinguishment of debt. Rising operating expenses are worrisome and need to be checked to avoid an adverse impact on margins. The current low interest rate environment, which is generating spread compression, also puts pressure on the bottom line.
The Bankers Life segment has also been a drag since 2008. Although premium collections edged up slightly in the first half of 2013, reduced sales in the annuities segment owing to persistent low new money interest rates raise caution on the future outlook. The absence of an immediate solution to arrest this critical decline could start weighing heavily on the segment’s bottom line.
Moreover, high levels of debt and concurrently an increase in interest expenses have weighed on company financials for quite some time now. The first half of 2013 also suffered the same fate. High level of debt increases the financial risk of the company and may also make additional borrowing costly in the future. Additionally competitive pressure from market players that have greater market share, superior financial resources, higher ratings and stronger brand recognition poses risks for business opportunities and profitability of CNO Financial.
However, amid all these negatives, the recapitalization plan of CNO Financial, has helped it to improve the debt-to-capital ratio and also generate return on equity that is closer to the company’s long-term guidance. Also an increase in CNO Financial’s investment portfolio, robust operating cash flow and strong score with the credit rating agencies are expected to bode well for the company going forward. This life and health insurer carries a Zacks Rank #2 (Buy).
Other Stocks to Consider
Other insurers that are worth considering are AXA Group (AXAHY), Eastern Insurance Holdings Inc. (EIHI) and FBL Financial Group Inc. (FFG). All these stocks carry a favorable Zacks Rank #1 (Strong Buy).
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