CNO Financial Group, Inc. (CNO) reported its fourth-quarter net operating income of $51.7 million or 18 cents per share, well ahead of the Zacks Consensus Estimate of 16 cents. This also compares favorably with income of $32.0 million or 15 cents in the year-ago quarter. The improved showing was the result of strong top-line growth in all the business segments and improved capital ratios.
In fiscal 2010, CNO Financial also posted strong net operating earnings of 65 cents per share, exceeding the Zacks Consensus Estimate of 61 cents. However, the results lagged the prior-year earnings of 86 cents.
The net operating earnings exclude $116.5 million or 38 cents in the fourth quarter 2010 and $102.7 million or 34 cents in fiscal 2010 related to net realized investment gains, decrease in valuation allowance for deferred tax assets and loss on extinguishment of debt.
On the other hand, net operating earnings in the fourth quarter 2009 and full year 2009 results exclude net realized investment losses, increase in valuation allowance for deferred tax assets and loss on extinguishment of debt of $13.8 million or 6 cents and $78.9 million or 41 cents per share, respectively.
Including the one-time items, CNO Financial’s net income jumped to $168.2 million or 56 cents in the reported quarter as opposed to $18.2 million or 9 cents in the prior-year quarter. Net income in fiscal 2010 also climbed 232% year over year to $284.6 million. Net income per share was 99 cents in 2010 as against 45 cents in 2009.
Business Update
CNO Financial’s revenues increased 1.7% to $1.08 billion in the current quarter from $1.06 billion in the prior-year quarter, primarily due to a rise in net investment income. The revenues also exceeded the Zacks Consensus Estimate of $998.0 million.
However, revenues plummeted 5.9% to $4.08 billion in fiscal 2010 from $4.34 billion in the prior year, but still exceeded the Zacks Consensus Estimate of $4.01 billion.
Collected premiums showed a year-over-year decline in CNO Financial in all the segments of Bankers Life, Washington National, Colonial Penn and other CNO business segments.
CNO Financial’s results reflected a 38% year-over-year increase in EBIT (income before net realized investment gains or losses, corporate interest expense, loss on extinguishment or modification of debt and taxes) to $98.2 million, while corporate interest expense decreased 13% to $20.0 million in the fourth quarter. EBIT also increased 7% year over year in fiscal 2010 to $360.9 million, with corporate interest expense of $79.3 million, down 6%.
A modest EBIT growth was witnessed across Washington National and other CNO businesses, partially offset by a decline in Bankers Life and Colonial Penn segments in the fourth quarter. However, EBIT grew in Bankers Life and other CNO businesses, partially offset by a decline in Washington National and Colonial Penn segments, as we look into 2010.
In the Bankers Life segment, EBIT declined to $71.4 million, down 16% from the prior-year quarter. The results were impacted by an increase in insurance policy benefits of $4 million due to unfavorable life mortality and an increase in amortization expense of $3 million due to increased lapses of Medicare supplement policies. However, they were offset by $18 million from improved spreads and growth in the annuity block. EBIT in 2010 increased 2% to $284.1 million.
Washington National’s EBIT was $28.7 million, up 25% from the prior-year quarter, reflecting an increase in earnings of approximately $6 million from supplemental health products, due to growth in this block of business and favorable claim experience. EBIT in 2010 decreased 6% to $104.6 million.
Colonial Penn’s EBIT decreased to $5.8 million in the fourth quarter 2010 from $5.9 million in the prior-year quarter, while it decreased 10% to $26.5 million in 2010.
Other CNO businesses reported gains of $6.0 million in the reported quarter, as against losses of $29.7 million in the prior-year quarter. The growth in 4Q10 reflected favorable mortality which increased earnings by $6 million.
However, results in 4Q09 were unfavorably impacted by regulatory and legal settlements of $14 million and amortization of insurance intangibles primarily related to an unprofitable universal life insurance block of business of $15 million. Other CNO businesses reported losses of $11.5 million and $43.6 million in fiscal years 2010 and 2009, respectively.
CNO Financial’s Corporate Operations, which includes investment advisory subsidiary and corporate expenses, reflects higher expenses in the reported quarter.
The results in the reported quarter includes a $2.6 million loss on extinguishment of debt, net of income taxes, related to the repayment of our previous senior credit agreement; while the results in the prior-year quarter includes an $8.3 million loss on extinguishment of debt, net of income taxes, primarily related to the tender of $176.5 million of aggregate principal amount of the 3.5% convertible senior debentures.
CNO Financial’s fourth quarter results also reflect a $95.0 million reduction to the deferred tax valuation allowance primarily resulting from the utilization of capital loss carry-forwards in 2010 and consideration of the recent higher levels of operating income when projecting future taxable income.
On the other hand, the prior-year quarter reflects a net increase to the deferred tax valuation allowance of $3.0 million consisting of an increase of $18 million from the completion of a reinsurance transaction with Wilton Re, net of a $15 million reduction.
Net realized investment gains of CNO Financial were $24.1 million (net of related amortization and taxes) in the fourth quarter 2010, which includes total other-than-temporary impairment losses of $77.0 million. In the prior-year quarter, net realized investment losses were $2.5 million (net of related amortization and taxes), and includes total other-than-temporary impairment losses of $60.8 million and an $8.9 million decrease to the deferred tax valuation allowance.
Evaluation of Financial Strength
During the reported quarter, unrestricted cash held by the non-insurance subsidiaries decreased $29 million to $161 million, reflecting the repayment of debt.
CNO Financial’s combined statutory risk-based capital ratio of the insurance subsidiaries increased 12% to 332% in the fourth quarter of 2010, while it increased 23% in fiscal 2010.
As of December 31, 2010, debt-to-total capital ratio reduced to 19.99% from 21.63% at the end of December 31, 2009. Book value per common share, excluding accumulated other comprehensive income (loss) also increased to $16.28 from $15.14 at the end of December 31, 2009.
As of September 30, 2010, total assets of CNO Financial were $32.0 billion and shareholders’ equity was $4.6 billion.
Its competitor, Torchmark Corporation (TMK) reported fourth-quarter net operating income of $1.68 per share on February 10, which compared favorably with $1.47 in the year ago quarter. Another rival Unum Group (UNM) reported fourth-quarter operating income of 66 cents per share on February 3, which was 3 cents lower than the Zacks Consensus Estimate. Results were in line with the prior-year period.
We remain concerned about CNO Financial’s pricing challenges in its long-term care business, which in turn are influencing the losses in its investment portfolio.
Currently, CNO Financial carries a Zacks #2 Rank, which translates into a short-term Buy recommendation, indicating slight upward pressure on the stock over the near term.
CNO FINL GRP (CNO): Free Stock Analysis Report
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