Fitch Places CNO Financial Group on Rating Watch Negative

CHICAGO--()--Fitch Ratings has placed the ratings of CNO Financial Group Inc. (CNO) on Rating Watch Negative. The rating action follows recent reports of links between Beechwood Re Ltd. (Beechwood), a reinsurer of CNO Financial Group, Inc.'s (CNO) closed block long-term care business, and Platinum Partners, a hedge fund that is currently under investigation by federal authorities and is reportedly in the process of liquidating its funds.

KEY RATING DRIVERS

The Rating Watch reflects Fitch's concerns with regard to any potential adverse effect on CNO's consolidated capital strength that may arise as a result of its reinsurance agreement with Beechwood in light of recent reports.

Two of CNO's insurance operating subsidiaries, Washington National Insurance Company (WNIC) and Bankers Conseco Life Insurance Company (BCLIC), entered into 100% coinsurance agreements with Beechwood covering a total of approximately $495 million in long-term care reserves in December 2013. CNO reported ceded insurance liabilities of $527 million related to the Beechwood agreement at June 30, 2016.

The agreements require related insurance reserves to be secured by assets in trust with an over collateralization of 7%. The trust assets are also subject to investment guidelines and periodic true-ups. In late June 2016, CNO initiated an audit of the valuation of Level 3 assets in the trust, the value of which has historically been provided by a recognized valuation service based, in part, on unobservable inputs which CNO could not independently verify. CNO expects to complete the audit during the third quarter 2016.

If the assets are found to be inadequate relative to the 107% collateral requirement, Fitch believes that Beechwood would be required to true up the collateral, and if it were unable to do so, the ceded business could be recaptured by WNIC and BCLIC. Fitch is concerned that such a recapture could have a significant adverse effect on the capital adequacy of WNIC and BCLIC.

Fitch will continue to monitor developments around this matter and will take rating action as warranted by emerging information.

RATING SENSITIVITIES

Key rating triggers that could lead to an affirmation of all ratings include:

--Resolution of any potential shortfall of assets held in trusts as security for insurance liabilities associated with CNO's reinsurance agreement with Beechwood;

--No material deterioration in other credit metrics.

Key rating triggers that could lead to a downgrade include:

--A significantly adverse resolution to the reinsurance matter discussed above;

--Combined NAIC RBC ratio less than 325% and operating leverage above 20x;

--Deterioration in operating results;

--Decline in fixed charge coverage to below 5x;

--Significant increase in credit-related impairments;

--Financial leverage above 30%.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Negative:

CNO Financial Group, Inc.

--IDR 'BBB-';

--4.50% senior unsecured notes due May 30, 2020 'BB+';

--5.25% senior unsecured notes due May 30, 2025 'BB+'.

Bankers Life and Casualty Company

Bankers Conseco Life Insurance Company

Colonial Penn Life Insurance Company

Washington National Insurance Company

--IFS 'BBB+'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009904

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Nelson Ma, CFA
Director
+1-212-908-0273
or
Committee Chairperson
Martha Butler, CFA
Senior Director
+1-312-368-3191
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Bradley S. Ellis, CFA
Director
+1-312-368-2089
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Nelson Ma, CFA
Director
+1-212-908-0273
or
Committee Chairperson
Martha Butler, CFA
Senior Director
+1-312-368-3191
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com