August 15, 2017 / 2:42 PM / 2 years ago

Fitch Affirms CNO Financial's IFS Ratings at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, August 15 (Fitch) Fitch Ratings has affirmed the 'BBB-' Issuer Default Rating (IDR) and the Insurer Financial Strength (IFS) ratings for CNO's core insurance subsidiaries at 'BBB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS The affirmation of CNO's ratings reflects the company's good operating performance and business profile, strong investment profile, strong capitalization and moderate financial leverage. CNO maintains a profitable niche position selling annuities, life insurance and supplemental health insurance products in the middle-income and senior markets. Key competitive strengths include the company's well-established track record serving these markets and its controlled distribution system. A key rating concern is CNO's large proportional exposure to its underperforming legacy individual long-term care (LTC) insurance business, which has been impacted negatively by adverse underwriting results and low interest rates. The company has received and is actively pursuing premium rate increases on underperforming legacy in-force business as it deems necessary; however, such rate increases are subject to regulatory approval. Fitch notes that the company has taken significant steps to improve new business pricing and restructure benefit features to enhance profitability. Fitch considers CNO's financial performance and earnings to be good, with relatively low volatility in recent years. The company reported pretax operating earnings of $410 million in 2016, down from $423 million in 2015. In first half 2017 (1H17), pretax operating earnings increased to $214 million from $177 million for the same period in 2016. Despite strong performance trends in 1H17, Fitch expects CNO to continue to face earnings pressure driven by persistently low interest rates. Fitch considers CNO's overall portfolio credit quality to be good with slightly less than 6% of bonds below investment grade at year-end 2016 on a statutory basis. This is generally in line with the life insurance industry average of 6%. However, nearly half of the company's investment-grade bond portfolio is 'BBB' level rated securities (47% of the portfolio at year-end 2016) compared to roughly a third for the broader industry. The elevated allocation to the 'BBB' category makes the portfolio potentially more vulnerable to ratings migration in an adverse economic scenario. Fitch considers CNO's statutory capitalization to be strong for its current rating. The company's consolidated risk-based capital (RBC) ratio under Fitch's consolidation methodology was 436% at year-end 2016, up modestly from 435% at year-end 2015. The company attained a Prism score of 'Strong' based on Dec. 31, 2016 data. Fitch expects CNO's RBC ratio to remain above 400% over the intermediate term. The company's financial leverage ratio of approximately 19% at June 30, 2017 remains modestly below the average for the company's publicly traded industry peers. RATING SENSITIVITIES Key rating sensitivities that could lead to an upgrade for all ratings include: --Significant reduction in exposure to the company's legacy individual LTC insurance business; --Consistent earnings without significant special charges and with operating return on equity above 8%; --No material deterioration in other credit metrics. Key rating sensitivities that could lead to a downgrade include: --Combined NAIC RBC ratio less than 325% and a Prism score below 'Strong'; --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 affirmed the following ratings with a Stable Outlook: CNO Financial Group, Inc. --IDR at 'BBB-'; --4.50% senior unsecured notes due May 30, 2020 at 'BB+'; --5.25% senior unsecured notes due May 30, 2025 at 'BB+'. Bankers Life and Casualty Company Bankers Conseco Life Insurance Company Colonial Penn Life Insurance Company Washington National Insurance Company --IFS at 'BBB+'. Contact: Primary Analyst Bradley S. Ellis, CFA Director +1-312-368-2089 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Nelson Ma, CFA Director +1-212-908-0273 Committee Chairperson Martha Butler, CFA Senior Director +1-312-368-3191 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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