CNO - CNO Financial Group: Lackluster Growth Could Cause A Stagnating Dividend

2023-09-29 06:50:25 ET

Summary

• CNO Financial Group's performance over the past 10 years has been lackluster, with slow EPS growth and limited expansion.
• The company specializes in insurance and financial products for the senior and middle-income markets, with a focus on meeting their specific needs.
• While CNO has a strong liquidity position and recognizable brand, elevated health claims and increased competition may impact its financial performance and valuation.

Introduction

The insurance space is quite difficult to navigate efficiently seeing as a large part of the business is trying to mitigate taking too many losses. Over the last 10 years for CNO Financial Group Inc ( CNO ) I think quite frankly that the performance is quite lackluster. The EPS has not been growing that quickly for the business and sits at a negative 4.99% annual growth rate for the last 10 years. For an insurance company, this just ensures the fact they haven't been able to expand the way many other companies have. Even if CNO offers a dividend yield right now, I don't think it makes sense to rate it a buy. Without growth in the business and higher earrings, you are unfortunately not investing in something fundamentally solid. The last quarter showed growth in the total health insurance new annualized premiums, but this is something that can't be a one-off thing, it needs to continue for several quarters to make the business appealing in any way. The liquidity position and the financials of the business remain very solid and rating it a sell would be a mistake I think, so a hold is a conclusion.

Company Structure

CNO and its subsidiaries are actively involved in the development, marketing, and administration of various insurance and financial products tailored for the senior and middle-income markets within the United States. These encompass a wide spectrum of offerings, including health insurance, annuities, individual life insurance policies, and a range of financial services.

The company's strategic focus revolves around catering to the specific needs and requirements of these demographics, providing them with essential insurance coverage and financial solutions. By specializing in these markets, CNO aims to deliver valuable protection and investment options to individuals in their senior and middle-income years.

Looking at CNO more closely a large part of their business is made up of fixed indexed annuities at 45% of the average liability by insurance product in the last quarter. This is a decent spread in my opinion and puts CNO in a pretty stable and sound position.

Furthermore, CNO remains very well positioned to capitalize on the growing elderly population in the US and be able to yield stable and expanding earnings for the business. The extensive presence the company has had in the market is a key driver behind this I think and the recognisable brand is an advantage. With a diverse set of products available too for clients and customers CNO is further able to expand the business and market share. For instance, some of the products the company has are a range of insurance and financial products tailored to meet the diverse needs of its customer base. Among its offerings are Medicare supplement, supplemental health, and long-term care insurance policies, catering to individuals seeking reliable coverage for various healthcare and wellness needs. Additionally, the company provides life insurance and annuities, ensuring individuals have access to financial protection and investment opportunities for a secure future.

Earnings Transcript

From the last earnings call that the company held, I think there are some worthwhile comments to include here from the company management. The CEO of CNO Gary Bhojwani had the following to say to investors on August 2.

"Variable investment income improved sequentially. Elevated health claims impacted results in the quarter. We expect this to moderate in the second-half of the year. Paul will touch on this during his remarks. Both our Consumer and Worksite divisions once again delivered strong sales production and agent results in the quarter. Total new annualized premium was up 11%. We reported double-digit sales growth in field life sales, Medicare supplement, supplemental health and the worksite insurance sales".

As I have said before, if the company can manage to grow their sales efficiently over the next couple of quarters consistently then perhaps we are seeing a new uptrend for the business. But if the last quarter was a one-off and elevated health claim is going to unproportionally impact the results of the business, CNO looks quite risky right now.

"Capital and liquidity improved and remained above target levels even after returning $47 million to shareholders. This demonstrates the strong cash flow generation of the enterprise. Our high-quality investment portfolio continues to produce stable core investment income. Book value, excluding AOCI, was up to $32.34 per share".

This comment I think highlights quite well why CNO makes sense as a hold for now. The management still has the ability and will to return large sums of capital to shareholders. The company has a strong history of high amounts of FCF, with 2022 for example yielding over $520 million. But if the rise in health claims is hurting this then it enhances why CNO is a hold and not a buy. Favorable market conditions need to appear before it could be considered a buy.

Risk Associated

As the United States experiences a significant demographic shift with a growing number of individuals reaching retirement age, the elderly population has expanded to unprecedented levels. This demographic trend presents a favorable tailwind for CNO, given its specialization in serving the needs of this aging demographic. The company is well-positioned to cater to the financial and insurance requirements of retirees and those approaching retirement.

However, it's important to acknowledge that as the market for retirement-related financial services becomes more competitive, acquisition costs may rise. This heightened competition could potentially put pressure on CNO's revenue and earnings growth. If the company struggles to manage these increased costs effectively, it may result in stagnation in its financial performance. Such challenges, if persistent, could ultimately impact the company's valuation in the market.

Investor Takeaway

The main attraction with CNO I think is the strong amount of capital that is being returned to shareholders currently. If this is a practice that can continue then I think CNO looks appealing for the long-term. But it seems that elevated health claims are taking a toll on the business. Looking more at the valuation of the business I think it sits at a very fair price right now in comparison to the broader sector. The P/E displays a premium of 3% and the P/FCF is even below that of the sector. I don't think you would be overpaying for CNO right now, but I also don't think you would be getting in at a price where the potential upside is great enough to make it a buy. This is resulting in me rating CNO a hold for now.

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