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
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 $6.50 per share. The capital raise of 2009 really reduced the risk in the company substantially so we see no reason why in the next two years the stock should not trade near its book value which is over 300% above the current stock price.
Total premium collections
|Conseco Insurance Group||600.4||621.8||633.4|
|Total supplemental health||2,319.6||2,517.7||2,189.9|
|Conseco Insurance Group||78.4||129.8||368.6|
|Conseco Insurance Group||240.3||269.8||287.3|
|Total premium collections||$||4,114.8||$||4,524.9||$||4,045.0|
SELECTED CONSOLIDATED FINANCIAL DATA.
|Years ended December 31,|
|(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||$||2,620.9|
|Net investment income||1,292.7||1,178.8||1,369.8||1,350.8||1,222.8|
|Net realized investment gains (losses)||(60.5||)||(262.4||)||(158.0||)||(46.6||)||(3.3||)|
|Total benefits and expenses||4,167.8||4,186.0||4,149.3||3,860.6||3,462.1|
|Income (loss) before income taxes and discontinued operations||173.6||3.7||(18.0||)||159.2||403.0|
|Income tax expense||87.9||413.3||61.1||58.3||143.1|
|Income (loss) before discontinued operations||85.7||(409.6||)||(79.1||)||100.9||259.9|
|Discontinued operations, net of income taxes||-||(722.7||)||(105.9||)||.3||51.1|
|Net income (loss)||85.7||(1,132.3||)||(185.0||)||101.2||311.0|
|Preferred stock dividends||-||-||14.1||38.0||38.0|
|Net income (loss) applicable to common stock||85.7||(1,132.3||)||(199.1||)||63.2||273.0|
|PER SHARE DATA (b)|
|Income (loss) before discontinued operations, basic||$||.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)|
|Corporate notes payable||1,037.4||1,311.5||1,167.6||966.4||809.4|
|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|
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.
Disclosure: Long CNO Stock, Short CNO puts