S&P Raises CNO Financial Group (CNO) to 'BB+'; Conseco Life Sale Will Reduce Volatility

Standard & Poor's Ratings Services said today that it raised its issuer credit and senior unsecured debt ratings on CNO Financial Group Inc. (NYSE: CNO) to 'BB+' from 'BB' and its issuer credit and financial strength ratings on CNO's core operating subsidiaries (Bankers Conseco Life Insurance Co., Bankers Life and Casualty Co., Colonial Penn Life Insurance Co., and Washington National Insurance Co.) to 'BBB+' from 'BBB'. The outlook is stable.

We affirmed our rating on Conseco Life Insurance Co. (Conseco Life; considered non-strategically important, with a stand-alone credit profile of 'B') and subsequently withdrew it at the issuer's request.

"The upgrade resulted from the sale of Conseco Life to Wilton Re, which we believe will decrease future capital and earnings volatility of the remaining operations," said Standard & Poor's credit analyst David Zuber. Our upgrade of CNO Financial Group reflects the company's continued improvement during the past few years in operating performance and statutory capitalization. CNO's capital and earnings volatility also decreased with the sale of Conseco Life, creating less stress on the group to provide capital infusions into this run-off subsidiary. The company's competitive position continues to improve due to CNO's predominantly captive agent force and penetration into the middle-income and senior markets.

The stable outlook on CNO and its core operating subsidiaries reflects our view that we are unlikely to change the rating on CNO within the next 18-24 months. We expect the company to continue to grow while improving its operating performance. Such would be measured by a GAAP pretax operating income of between $375 million and $400 million with a return on equity of more than 9% through 2015 excluding any unforeseen litigation or extraordinary costs, or extraordinary expenses associated with the disposition of Conseco Life to Wilton Re. Financial leverage would also need to be less than 25% with improving fixed-charge coverage of more than 6.5x. From a statutory perspective, we expect the company to earn pretax GAAP operating income on a consolidated basis of between $400 million and $425 million, reporting a return on assets of more than 150 basis points (bps) through year-end 2015. We also expect CNO to continue to accrete earnings to its capital base, growing its capital adequacy to our 'BBB' ratings confidence level.

We could raise our ratings on CNO if operating performance improves to a level that consistently outperforms our expectations. Such would be measured on a pretax GAAP operating income basis of more than $450 million and a return on equity of more than 11%, with a clear expense advantage against peers. From a statutory perspective, we would seek a return on assets in excess of 200 bps on a consistent basis, with continued accretion of earnings to its capital base, increasing the company's capital adequacy as measured by our risk-based capital model in excess of our 'A' ratings confidence level.

Albeit unlikely, we could lower the ratings on CNO if capital adequacy were to deteriorate materially below our 'BBB' ratings confidence level as measured by our risk-based capital model. Such can occur through significant earnings and investment losses or by outsize litigation-related expenses. Further informing our decision will be leverage in excess of 35% and fixed-charge coverage less than 4.0x.

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