Fitch Affirms CNO Financial's Ratings; Outlook Positive

CHICAGO--()--Fitch Ratings has affirmed CNO Financial Group Inc.'s (CNO) 'BB+' Issuer Default Rating (IDR) and Insurer Financial Strength (IFS) ratings for CNO's core insurance subsidiaries at 'BBB'. The Rating Outlook is Positive for all ratings. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The affirmation CNO's ratings reflect the company's strong balance sheet fundamentals, improved financial flexibility and liability profile and recent financial performance that remains in line with expectations.

The Positive Outlook reflects Fitch's view that CNO's ratings could be upgraded over the next 12 - 18 months based on the company's ability to sustain recent improvements in earnings profile and balance sheet fundamentals.

Fitch's primary concern is CNO's large, albeit reduced, exposure to the individual long-term care (LTC) insurance business. The company has actively managed down the exposure to its LTC exposure through disposals, reinsurance, product design and systematic price increases over the last several years. In addition, CNO's sale of Conseco Life Insurance Company freed up capital that could be used to fund potential LTC reserve strengthening tied to sustained low interest rates and adverse claims experience.

Fitch views CNO's statutory capitalization as strong and financial leverage as moderate. Consolidated RBC ratio improved to 425% at September 30, 2014, from 410% at yearend 2013. The company's financial leverage remains moderate at 17% at September 30, 2014 and flat with yearend 2013. Fitch expects both metrics to remain supportive of the rating in 2015.

CNO's business segments reported a 21% increase in pre-tax, operating earnings in the third quarter 2014 versus third quarter 2013 driven by favorable fixed annuity, Medicare supplement and long term care (LTC) margins at Bankers Life & Casualty Insurance Company. All three operating life insurers reported profitable operating results in the third quarter despite slower total sales at CNO. Nine month, net operating income after tax increased 9.9% to $200 million versus prior year results, but net income comparisons are unfavorable due to the $278 million loss on the sale of Conseco Life reported in the first quarter of 2014. The low interest rate environment has pressured earnings at CNO, but the impact has been lessened through management actions to lower crediting rates on interest-sensitive products.

CNO's debt service capabilities measured by nine month GAAP based fixed charge coverage declined to 3.9x from 6.3x for full year 2013. Operating interest coverage was strong at 10.3x for the first nine months of 2014. Fitch expects fixed charge coverage to range from 6-8x excluding unusual items for 2014.

CNO's overall investment credit quality is good at September 30, 2014. The company takes credit risk primarily through its bond portfolio with 7% of bonds rated below investment grade on a NAIC statutory basis. The investment-grade bond portfolio is dominated by 'BBB' level rated securities at 45% of the portfolio making it potentially more vulnerable in a declining economic scenario to downgrade risk. However, CNO Financial has low exposure to directly placed commercial mortgages and alternative assets. Credit related impairments continue to be minimal through nine months of 2014 and gross unrealized losses were very low.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade for all ratings include:

--Continued generation of stable earnings free of significant special charges;

--GAAP interest coverage ratio above 6x;

--NAIC risk based capital (RBC) ratio above 350%

Key rating triggers that could lead to a return to stable outlook or downgrade include:

--Combined NAIC RBC ratio less than 300% and operating leverage above 20x;

--Deterioration in operating results;

--Decline in fixed charge coverage to below 3x;

--Significant increase in credit-related impairments;

--Financial leverage above 30%

Fitch expects that over the next few years, CNO will attempt to migrate its capital structure away from secured senior debt to unsecured senior debt. CNO currently has no unsecured debt outstanding. However, during this transition, the mix of secured versus unsecured debt may fluctuate. Currently, the rating for any CNO senior unsecured debt would be one notch lower than standard due to the large level of secured debt in the capital structure. Fitch would expect to narrow the notching of CNO's unsecured debt relative to the IDR as the mix in secured debt declines below 25%.

Fitch has affirmed the following ratings:

CNO Financial Group, Inc.

--IDR at 'BB+';

--Senior secured bank credit facility (tranches of $250 million and $425 million due Sept. 30, 2016 and 2018, respectively) at 'BB+';

--$275 million senior secured note 6.375% due Oct. 1, 2020 at 'BB+'.

Bankers Life and Casualty Company

Bankers Conseco Life Insurance Company

Colonial Penn Life Insurance Company

Washington National Insurance Company

--IFS at 'BBB'.

The Rating Outlook is Positive.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sep 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=958355

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Contacts

Fitch Ratings
Primary Analyst
Andrew Davidson, CFA
Senior Director
+1-312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie A. Burke, CPA, CFA
Managing Director
+1-312-368-3158
or
Committee Chairperson
Martha Butler
Senior Director
+1-312-368-3191
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Davidson, CFA
Senior Director
+1-312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Julie A. Burke, CPA, CFA
Managing Director
+1-312-368-3158
or
Committee Chairperson
Martha Butler
Senior Director
+1-312-368-3191
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com