January 12, 2017 / 10:00 PM / 3 years ago

Fitch Removes CNO's Ratings From Rating Watch Negative; Affirms IDR at 'BBB-'

(The following statement was released by the rating agency) CHICAGO, January 12 (Fitch) Fitch Ratings has removed CNO Financial Group Inc.'s ratings (CNO) from Rating Watch Negative, and 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. Today's rating actions follow the company's announcement that it has recaptured the approximately $550 million closed-block long-term care business that was reinsured by Beechwood Re Ltd. (Beechwood) since late 2013, and has completed the audit of trust assets associated with the reinsured business, with final results generally in line with the $55 million net loss estimate provided in a Form 8-K filed by the company on Sept. 29, 2016. The 8-K also disclosed a $200 million capital contribution from CNO to insurance subsidiaries affected by the recapture. In a press release issued on Sept. 30, 2016, Fitch indicated that CNO's ratings would likely be affirmed with a Stable Outlook if the final outcome of the company's asset audit resulted in no material variance from those estimates. KEY RATING DRIVERS The affirmation of CNO's ratings reflects the company's strong balance sheet fundamentals, solid capitalization and financial flexibility, and recent financial performance which remains in line with Fitch's expectations. Primary rating concerns include CNO's large exposure to its legacy individual long-term care (LTC) insurance business and challenges associated with the ongoing low interest rate environment. The low interest rate environment continues to pressure CNO's earnings, but the company has been able to manage spread compression through lower crediting rates on interest-sensitive products, although the availability of this tool is diminishing as crediting rates move closer to contractual minimums. Fitch considers CNO's statutory capitalization to be strong for its current rating. The consolidated risk-based capital (RBC) ratio under Fitch's consolidation methodology increased to 435% at year-end 2015, up from 415% at year-end 2014. The company estimated its RBC ratio to be approximately 458% at Sept. 30, 2016. Total adjusted capital growth has been consistent over the past two years, increasing 4.2% in both 2014 and 2015. Fitch expects CNO's RBC ratio to remain above 400% over the intermediate term. CNO's earnings profile continues to generally show stability, despite pressure from low interest rates, and some upward pressure on medicare supplement benefit and supplemental health loss ratios in 2016. The company reported pre-tax operating earnings of $275 million through the first nine months of 2016, excluding the charge related to the recapture, essentially stable relative to the same period in 2015. Profitability as measured by return on equity (ROE) is seen as within expectations for the company's ratings as reflected by the company's operating ROE of 6.4% for the first three quarters of 2016. CNO's operating interest coverage is viewed as strong at 9.0x for the first nine months of 2016, down slightly from 9.1x for the same period in 2015. Fitch considers CNO's overall investment credit quality to be good with slightly less than 6% of bonds below investment grade at Sept. 30, 2016 on a statutory basis. This is generally in line with the life insurance industry average of 6%. However, nearly half of the investment-grade bond portfolio is 'BBB' level rated securities (47% of the portfolio at Sept. 30, 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. RATING SENSITIVITIES Key rating triggers that could lead to an upgrade for all ratings include: --Consistent earnings without significant special charges and with operating return on equity above 8%; --No material deterioration in other credit metrics; --Significant reduction in exposure to the company's legacy individual LTC insurance business. Key rating triggers that could lead to a downgrade include: --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 removed from Rating Watch Negative and 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: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017488 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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