CNO Financial's Lackluster Performance Raises Concerns

On May 23, we issued an updated research report on CNO Financial Group, Inc. (NYSE:CNO) .

In the first quarter of 2016, this multi-line insurer’s operating earnings missed the Zacks Consensus Estimate due to higher expenses and weak performance across all segments. All of the company’s segments underperformed. Bankers Life and Washington National reported a decline in earnings. On the other hand, the loss figures at Colonial Penn and Corporate Operations segment were wider than the prior-year quarter. Although new annualized premiums inched up slightly, the company’s performance remains challenged by the rise in expenses. Going by the surprise trend, the company delivered negative surprises in two of the last four quarters.

CNO Financial has consistently been facing underwriting and pricing challenges in the long-term care business. A new strategic initiative to reduce this exposure is transferring risk of a portion of the business through one or more reinsurance transactions. But this also comes with a risk of recognition of loss and unrealized tax benefits which could hit the company’s cash flow. The company continues to struggle to increase its market share as its competitors have much stronger financial resources and better brand recognition. The company’s debt management is another major concern for investors with $911.5 million of corporate notes payable as of Mar 31, 2016. The company’s debt-to total capital ratio deteriorated 20 basis points in this quarter. Expenses rose by 2.7% in the first quarter of 2016 and hampered margins.

However, some growth initiatives undertaken by the company could work in its favor. Worksite technology and geographic expansion has enabled Washington National to grow by 4% this quarter. Banker’s Life might witness improvement later in 2016 on strategic initiatives. CNO Financial also plans to invest $250 million in Tennenbaum Capital Partners (TCP) funds. The company’s Return on Equity has improved and despite concerns, the company enjoys a healthy financial rating. It remains to be seen if the company is able to effectively manage debt and boost growth.

CNO Financial has focused on increasing shareholder value through dividends and share buybacks. It recently hiked dividends by 14% to 8 cents per share. It paid $12.7 million in dividends in the first quarter this year and spent $90 million to buy back 5.3 million shares. The company’s management targets share repurchases between $275 million and $375 million in 2016.

The Zacks Consensus Estimate is currently pegged at $1.40 per share for 2016 and $1.61 for 2017. This translates to a decline of 0.89% year over year in 2016 followed by a 15.38% increase in 2017.

Currently, the insurer carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same space are AXA Group (OTC:AXAHY) sporting a Zacks Rank # 1(Strong Buy), Ageas SA/NV (OTC:AGESY) and FBL Financial Group Inc. (NYSE:FFG) with a Zacks Rank #2 (Buy).