S&P Removes CNO Financial Group (CNO), Subsidiaries from CreditWatch Negative
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S&P Global Ratings said that it affirmed its 'BB+' long-term counterparty credit rating on CNO Financial Group Inc. (NYSE: CNO) and its 'BBB+' long-term counterparty credit and financial strength ratings on CNO Financial's operating subsidiaries (Bankers Life & Casualty Co., Colonial Penn Life Insurance Co., Bankers Conseco Life Insurance Co., and Washington National Insurance Co.). All ratings were removed from CreditWatch Negative where they were initially placed on Aug. 1, 2016. The outlook is negative.
"Our rating actions reflect the effect on CNO's capital adequacy and earnings capabilities of its plan to recapture its closed block long-term care insurance business from Beechwood Re Ltd.," said S&P Global Ratings credit analyst Anthony Beato. CNO expects to recapture approximately $525 million in liabilities and $591 million in assets related to its ceded long-term care block of business. CNO is also revaluing the assets and liabilities consistent with its assumptions, increasing its reserves associated with this block of business by $60 million. This also results in the writing down of $80 million in investments associated with the trust and $18 million in receivables that it does not anticipate receiving from Beechwood. We believe these actions predispose CNO to some capital and earnings deterioration that we did not include in our previous base-case scenario projection.
One of our key concerns is CNO's prospective capital adequacy as a result of its relatively aggressive capital-management and deployment programs. Additionally, our more-conservative risk-based capital (RBC) modeling shows a moderate level of deterioration upon recapturing of this business. We expect CNO's operations on a statutory basis to continue to produce significant earnings and cash flows. However, we believe the company will be susceptible to earnings volatility caused by remarking assets and liabilities, including the various market-value adjustments associated with the assessment of its trust assets, liability-related valuation assumption revisions caused by continued low interest rates, and the experience of this older block of business. Our concerns are somewhat mitigated by CNO's commitment to inject $200 million of capital into its operating subsidiaries with a goal of maintaining a 450% consolidated RBC ratio, and its commitment to suspend share repurchases through the remainder of 2016.
The negative outlook on CNO means that we could lower the ratings within the next 18-24 months. This is based on our expectation that as a result of its announced recapture of its long-term care block of business from Beechwood, CNO will face additional capital and earnings strain that will immediately affect its capitalization metrics as measured by our RBC model.
We could lower the ratings if we view heightened levels of aggressiveness surrounding CNO's dividend intentions or deterioration in its RBC model output. Furthermore, increased aggressiveness in the company's financial policies, resulting in increased share-repurchase guidance, financial leverage metrics in excess of 30%, and EBITDA fixed-charge coverage of less than 5x for a prolonged period could also lead us to lower the ratings.
We could affirm the current ratings if CNO maintains higher levels of risk-based capitalization as measured by our RBC model and its NAIC RBC ratio on a sustainable basis. This would be measured by capitalization consistently exceeding the 'BBB' ratings level as measured by our RBC model. We would also expect the company to maintain statutory net income growth at historic levels with less-aggressive capital management programs to its nonoperating holding company.
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