Substantial Beat for CNO Financial
CNO Financial Group Inc. (CNO) reported third-quarter 2012 adjusted operating earnings of 26 cents per share, substantially surpassing the Zacks Consensus Estimate of 19 cents. Results were a penny lower from 16 cents earned in the year-ago quarter. Adjusted operating income in the quarter was $53.1 million, down 18% from $32.8 million in the third quarter of 2011.
Adverse impact of review of actuarial assumptions and an increase to litigation reserves weighed on the numbers.
Including the charges due to the review of actuarial assumptions of $27.5 million, net realized investment gains of $4.8 million, fair value changes in embedded derivative liabilities of $2.0 million, loss on extinguishment of debt of $176.4 million and decrease in valuation allowance for deferred tax assets of $143 million, the company reported net loss of $5.0 million or 2 cents per share, comparing unfavorably with net income of $179.5 million or 61 cents.
CNO Financial’s revenues increased 10.1% to $1.1 billion from $0.9 billion in the prior-year quarter. Total revenue also surpassed the Zacks Consensus Estimate of $1.03 billion. Total new annualized premium increased 1% year over year to $94.1 million. Total benefits and expenses escalated 34.5% year over year to $1.3 billion.
Segment Update
Pre-tax operating earnings in the Bankers Life segment improved 1.5% year over year to $80.6 million in the reported quarter. The improvement stemmed from higher earnings from annuity business driven by favorable investment spreads and higher account values. It was, however, partially offset by higher benefit ratios in the long-term care block.
Washington National’s pre-tax operating earnings were $33.9 million in the quarter, surging 60% from the year-ago quarter. Favorable benefit ratios in the supplemental health and Medicare supplement blocks fueled the increase.
Pre-tax operating loss of Colonial Penn increased to $2.6 million from $1.3 million in the comparable quarter last year.
Other CNO Business reported pre-tax operating loss of $53.6 million in the quarter compared with earnings of $2.6 million in the year-ago quarter.
Corporate Operations, which includes investment advisory subsidiary and corporate expenses, narrowed pre-tax loss to $6.7 million from $27.5 million in the year-ago quarter.
Financial Update
During the reported quarter, the consolidated statutory risk-based capital ratio of CNO Financial’s insurance subsidiaries decreased 8 percentage points sequentially to 361%, driven by statutory earnings of $60.3 million.
In addition, unrestricted cash and investments held by CNO Financial’s non-insurance subsidiaries increased to $313.6 million as of September 30, 2012 from $197.7 million as of June 30, 2012.
CNO Financial bought back 12.9 million shares for $99.5 million in the first nine months of 2012 and as of September 30, 2012, had $130.7 million remaining under its existing share repurchase program. The company expects to repurchase shares near the high end of the $150–170 million range.
As of September 30, 2012, debt-to-total capital ratio, excluding accumulated other comprehensive income (loss), increased 300 basis points over 2011 end to 21.3%. Book value per common share, excluding accumulated other comprehensive income (loss), increased to $16.70 as of September 30, 2012 from $15.88 as of December 31, 2011.
As of September 30, 2012, CNO Financial had total assets worth $34.0 billion and shareholders’ equity stood at $5.3 billion.
Peer Comparison
Aflac Inc. (AFL), a competitor of CNO Financial, reported third-quarter 2012 operating earnings per share of $1.77, modestly exceeding the Zacks Consensus Estimate of $1.66 and the year-ago quarter’s earnings of $1.65. A slightly weak yen/dollar exchange rate had no impact on the operating earnings.
Torchmark Corp. (TMK) reported third-quarter 2012 net operating income of $1.29 per share, up 10.3% year over year. The earnings increase was due to higher premium revenue as well as increased insurance underwriting income. Lower share count compared with the year-ago period, owing to share repurchases, also buoyed the bottom line.
Zacks Rank
We retain our Outperform recommendation on CNO Financial. The quantitative Zacks #2 Rank for the company indicates a short-term ‘Buy’ rating.
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