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CNO Financial (CNO) Suffers from Pricing Pressure, High Debt

Despite being a top-tier Multi-line insurer, CNO Financial Group, Inc’s CNO financial results are highly susceptible to low market share in some product lines that limit business opportunities, high debt level and pricing pressure.

The company faces underwriting and pricing challenges in the long-term care business. The low interest rate environment resulted in spread compression and put pressure on margins. Although the company’s strategic priorities include reduction of exposure to long-term care business, we do not expect any significant improvement in this front in the coming quarters as the pricing pressure is expected to persist for a while.

CNO Financial funds its operations and repays debt very frequently. The cash required for these mostly comes from its debt funds. The debt-to-capital ratio has also been deteriorating over the years due to the decline in capital from losses associated with the sale of CLIC and debt repayments. The high level of debt not only increases financial risk but also makes additional borrowing costly in the future.

Despite occupying the ninth position in the list of the top writers in the individual long-term care insurance business, CNO Financials’ market share is limited to only 3% compared with the top eight writers that hold almost 87%.

The stock also looks overvalued. Over last one year, its price to earnings (PE) ratio has been 15%, above the industry’s level of 13%. Apart from being overvalued compared to the broader industry, this is at the upper end of its own range of 10.95-15.87 over the same time frame.

Reflective of these headwinds, shares of CNO Financial have gained 20% over last one year,  underperforming the Zacks categorized Multi-Line Insurance industry’s rally of 36%. However, we expect CNO Financial to retain its face value on the back of positives that include the company’s strong Washington National segment, growth initiatives as well as solid fundamentals.

Zacks Rank and Stocks to Consider

CNO Financial presently has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the insurance industry include Assurant, Inc. AIZ, Cigna Corporation CI and FBL Financial Group, Inc. FFG. Each of the stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Assurant offers risk management solutions for housing and lifestyle markets worldwide. The company has delivered positive surprises in three of the last four quarters with an average beat of 6.82%.

Cigna provides insurance plus related products and services in the United States and internationally. The company has delivered positive surprises in three of the last four quarters with an average beat of 1.35%.

FBL Financial sells individual life insurance and annuity products. The company has delivered positive surprises in two of the last four quarters with an average beat of 1.98%.

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Assurant, Inc. (AIZ): Free Stock Analysis Report
 
Cigna Corporation (CI): Free Stock Analysis Report
 
CNO Financial Group, Inc. (CNO): Free Stock Analysis Report
 
FBL Financial Group, Inc. (FFG): Free Stock Analysis Report
 
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