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Tim Travis is CIO of www.optimitrading.com and is CEO of T&T Investment Management L.L.C. Tim currently possesses the series 3, 7, 63, and 65 licenses, and he works actively in the field of investment management. Both Optimi Trading and T&T Investment Management L.L.C are investment... More
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  • CNO Stock and Call Purchase 0 comments
    Jul 2, 2010 12:34 PM | about stocks: CNO
    6-30-2010 CNO Stock and Call Purchase
    JUNE 30, 2010 BY optimitrading.com

    1)      Date:6-30-2010

    2)      Company: CNO Financial Group

    3)      Symbol: CNO

    4)      Price: $4.95

    5)      Shares Outstanding: 193 Million

    6)      Market Cap: $955.35

    7)      Book Value: $3.720 Billion

    8)      Tangible Book Value: $3.720

    9)      Earnings Per Share  2009:   $.49            TTM 2010: $.45

    10)   P/E:  11     

    11)   Forward P/E: 7.5 based on a .66 EPS estimate for 2011

    Investment Rationale:

    After emerging from bankruptcy in 2003, Conseco sold its finance business and focused on insurance. Main revenue sources include Medicare supplement, fixed annuities, and long-term care insurance, but the firm also offers life and specified disease insurance, such as cancer and heart/stroke policies, and equity-indexed annuities through a network of career agents, independent distributors, and direct marketing, targeting seniors and the middle-income market.

    CNO Financial Group or the old Conseco has a checkered past which culminated in a bankruptcy filing that they exited in 2003. Now they are differentiating themselves from their competitors in the health insurance industry by focusing on the senior market. Their business plan targets the baby boomer population and particularly those that need supplementary income in addition to their Medicare.

    CNO got into trouble by mispricing their long term care policies which hurt their capital situation and reduced returns. They were able to spin off this business and they sold some of their annuity business off as well, but unfortunately for CNO the financial crisis hit, and the investment portfolio took some big hits. This forced the company to raise capital and to renegotiate debt covenants which was key to its survival, but the overhang of these issues has continued to stay with the company.

    Due to experiencing losses during the financial crisis in 2007 and 2008 CNO has NOL carry forwards could be a big benefit as the company should be profitable over the next few years barring a double dip recession. CNO has a negative history of reserving appropriately for insurance losses so there is certainly uncertainty in this investment which is why we demand a large margin of safety.

     CNO Financial Group’s primary businesses are Bankers Life, Colonial Penn, and Conseco Insurance Group. Back in November of 2009 the famous Hedge Fund Paulson & Co acquired 16,400,000 shares of common stock and warrants to purchase 5,000,000 shares at an exercise price of $6.50 per share. The capital raise of 2009 really reduced the risk in the company substantially so we see no reason why in the next two years the stock should not trade near its book value which is over 300% above the current stock price.

    Total premium collections

        2009     2008     2007  
    Supplemental health:                  
    Bankers Life                                          $ 1,711.7     $ 1,887.0     $ 1,546.1  
    Colonial Penn                                            7.5       8.9       10.4  
    Conseco Insurance Group     600.4       621.8       633.4  
                             
    Total supplemental health     2,319.6       2,517.7       2,189.9  
                             
    Annuities:                        
    Bankers Life                                            1,060.4       1,224.1       885.5  
    Conseco Insurance Group     78.4       129.8       368.6  
                             
    Total annuities                                        1,138.8       1,353.9       1,254.1  
                             
    Life:                        
    Bankers Life                                            228.8       209.4       200.0  
    Colonial Penn                                            187.3       174.1       113.7  
    Conseco Insurance Group     240.3       269.8        287.3  
                             
    Total life                                        656.4       653.3       601.0  
                             
    Total premium collections                                              $ 4,114.8     $ 4,524.9     $ 4,045.0  
                             

     SELECTED CONSOLIDATED FINANCIAL DATA.

        Years ended December 31,  
        2009     2008(a)     2007(a)     2006(a)     2005(a)  
                                   
    (Amounts in millions, except per share data)                              
    STATEMENT OF OPERATIONS DATA (b)                              
    Insurance policy income   $ 3,093.6     $ 3,253.6     $ 2,895.7     $ 2,696.4     $ 2,620.9  
    Net investment income     1,292.7       1,178.8       1,369.8       1,350.8       1,222.8  
    Net realized investment gains (losses)     (60.5 )     (262.4 )     (158.0 )     (46.6 )     (3.3 )
    Total revenues     4,341.4       4,189.7       4,131.3       4,019.8       3,865.1  
    Interest expense     117.9       106.5       125.3       81.0       61.0  
    Total benefits and expenses     4,167.8       4,186.0       4,149.3       3,860.6       3,462.1  
    Income (loss) before income taxes and discontinued operations     173.6       3.7       (18.0 )     159.2       403.0  
    Income tax expense     87.9       413.3       61.1       58.3       143.1  
    Income (loss) before discontinued operations     85.7       (409.6 )     (79.1 )     100.9       259.9  
    Discontinued operations, net of income taxes     -       (722.7 )     (105.9 )     .3       51.1  
    Net income (loss)     85.7       (1,132.3 )     (185.0 )     101.2       311.0  
    Preferred stock dividends     -       -       14.1       38.0       38.0  
    Net income (loss) applicable to common stock     85.7       (1,132.3 )     (199.1 )     63.2       273.0  
                                             
    PER SHARE DATA  (b)                                        
    Income (loss) before discontinued operations, basic   $ .45     $ (2.22 )   $ (.54 )   $ .42     $ 1.47  
    Income (loss) before discontinued operations, diluted     .45       (2.22 )     (.54 )     .41       1.40  
    Net income, basic     .45       (6.13 )     (1.15 )     .42       1.81  
    Net income, diluted     .45       (6.13 )     (1.15 )     .41       1.68  
    Book value per common share outstanding     14.09       8.82       23.03       26.64       25.45  
    Weighted average shares outstanding for basic earnings     188.4       184.7       173.4       151.7       151.2  
    Weighted average shares outstanding for diluted earnings     193.3       184.7       173.4       152.5       185.0  
    Shares outstanding at period-end     250.8       184.8       184.7       152.2       151.5  
                                             
    BALANCE SHEET DATA – AT PERIOD END (b)                                        
    Total investments   $ 21,530.2     $ 18,647.5     $ 21,324.5     $ 23,768.8     $ 23,424.6  
    Total assets     30,343.8       28,763.3       33,961.5       33,580.2       32,871.0  
    Corporate notes payable     1,037.4       1,311.5       1,167.6       966.4       809.4  
    Total liabilities     26,811.4       27,133.3       29,709.2       28,858.6       28,347.4  
    Shareholders’ equity     3,532.4       1,630.0       4,252.3       4,721.6       4,523.6  
                                             
    STATUTORY DATA – AT PERIOD END (c)                                        
    Statutory capital and surplus   $ 1,410.7     $ 1,311.5     $ 1,336.2     $ 1,554.5     $ 1,603.8  
    Asset valuation reserve (“AVR”)     28.2       55.0       161.3       179.1       142.7  
    Total statutory capital and surplus and AVR     1,438.9       1,366.5       1,497.5       1,733.6       1,746.5  

    ____________________

    Investment Strategy:

    Buy 100 CNO shares at $4.95

    Buy 1 January 2012 $7.5 CNO call for $1.00

    Target Profit: $255 on the stock and $250 on the options for a total of $505

    Maximum Risk: $595 total

    Days Remaining: 569

    Target Net on Cash: 85%

    Annualized target net on cash: 54%

    Break Even Price: $5.95

    Target Price: $7.50 or 10 times our .75 cent earnings estimate for 2011.

     

     

    Primary Risk Factors:

    A double dip recession would hurt their investment portfolio and could promulgate ratings downgrades.

    The company has a bad history of reserving properly so if they haven’t fixed their ways that is a problem. 

    Disclosure: Long CNO Stock, Short CNO puts
    Stocks: CNO
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