CNO Financial Group, Inc. (CNO) has recently made a couple of announcements that are expected to boost investor sentiments. Firstly, the company has entered a definitive agreement to vend its life insurance subsidiary, Conseco Life Insurance Company (CLIC), to Wilton Reassurance Company (Wilton Re) for approximately $237 million. This subsidiary consists of closed block interest-sensitive and traditional life insurance and annuities business, which has been generating low returns for a while.
As per the deal, a life insurance subsidiary of CNO Financial – Bankers Life and Casualty Company – will pay $28 million to acquire $160 million of traditional life reserves that were reinsured to Wilton earlier. On completion (expected by mid-2014), the divestiture will reduce the statutory run-off reserves by $3.4 billion which will free up capital to help the company invest in profitable ventures.
Performance in the closed-blocks of CNO Financial’s business has been volatile over quite some time. The business has thus been generating low returns. To relieve itself from such low yielding business, CNO Financial decided to divest CLIC. At the same time, this divestiture will enable CNO Financial to focus on its core operations and satisfy the needs of the fast growing and under-served middle-income market.
CNO Financial has been focused to de-risk its legacy block of business. The aforementioned divestiture marks a significant step in this regard as it will reduce the company’s exposure to life and annuity closed blocks of business. Overall, the deal will reduce the risk profile of CNO Financial and will prove accretive to return on equity (ROE).
Concurrently, the board of directors of CNO Financial approved a 100% hike in its quarterly dividends. The current quarterly dividend stands at 6 cents per share (up from 3 cents per share paid earlier) will be paid to on Mar 24, 2014 to shareholders of record as of Mar 14, 2014.
Based on the closing price of $18.49, this increased dividend translates into a yield of 1.3%. The dividend hike represents the financial strength and long-term outlook of the company. CNO Financial has ample liquidity for the payment with cash and investments of $309 million at end-2013, comparing favorably with $294 million as of Dec 31, 2012. Moreover, with the divestiture of CLIC, the company is expected to free up deployable capital that should also enhance the company liquidity thereby fund dividend payouts.
CNO Financial anticipates the aforementioned transactions to lead to a post-tax loss of around $303 million and cause shareholders’ equity to decline by $447 million.
Following the divestiture announcement, credit rating agency A.M. Best co. placed CLIC’s financial strength rating (FSR) of “B–” and issuer credit rating of “bb–” under review with positive implications.
CNO Financial currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the insurance sector include AEGON N.V. (AEG), Old Republic International Corp. (ORI) and FBL Financial Group Inc. (FFG). While AEGON and Old Republic sport a Zacks Rank #1 (Strong Buy), FBL Financial carries a Zacks Rank #2 (Buy).
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