A.M. Best Co. has upgraded the financial strength rating (FSR) to B++ (Good) from B+ (Good) and issuer credit ratings (ICR) to “bbb” from “bbb-” for the key life/health subsidiaries of CNO Financial Group, Inc. (CNO Financial) (Carmel, IN) [NYSE: CNO]. Concurrently, A.M. Best has upgraded the ICR and existing senior debt ratings to “bb” from “bb-” of CNO Financial. The outlook for these ratings is stable. Additionally, A.M. Best has assigned a debt rating of “bb” to CNO Financial’s forthcoming issuance of $250 million senior secured notes due 2020. The assigned outlook is stable. (See below for a detailed listing of companies and ratings.) The upgrades reflect the favorable trends in CNO Financial’s operating earnings, core product sales and risk-adjusted capitalization. In addition, A.M. Best acknowledges the significant progress made by CNO Financial’s management in executing its strategic business plan. The growth in earnings has been attributable to CNO Financial’s diverse revenue streams from its insurance subsidiaries. Improved revenue across several business segments—driven by agent growth, timely rate increases and the addition of new products—also have contributed to the group’s higher profitability. CNO Financial’s enhanced operating results, combined with its better investment performance, have facilitated growth in the insurance subsidiaries’ risk-adjusted capitalization. A.M. Best notes that Bankers Life and Casualty Company, the group’s lead operating entity, has seen considerable improvement in its capitalization over the past 12 to 18 months. The rating actions also reflect the success CNO Financial has had in focusing on markets where true competitive advantages are achievable while, at the same time, actively managing risk. This strategy included exiting/de-emphasizing non-core product lines through divestiture and/or reinsurance, considerable expense reductions and, most recently, initiating a recapitalization plan. A.M. Best views favorably CNO Financial’s planned debt restructuring, which will enhance financial flexibility by reducing its cost of capital and improving its debt maturity profile. Moreover, A.M. Best believes the company’s ability to maintain solid profitability and foster capital growth has better positioned CNO Financial with respect to its credit agreement.
The recapitalization plan consists of four-year and six-year term loans for $250 million and $400 million, respectively, as well as a proposed private offering of $250 million of senior secured notes due 2020. CNO Financial plans to use the roughly $900 million in proceeds to pay off $224 million in outstanding borrowings under its existing credit agreement, repurchase up to all of its $275 million 9% notes and the majority (approximately $200 million) of its 7% convertible debentures. Although CNO Financial’s debt-to-capital ratio would increase temporarily to roughly 20% on a pro forma basis, it would decline due to expected scheduled amortization. CNO Financial’s interest coverage measures, which are currently sufficient, also will benefit from the ongoing debt paydowns.While sales in CNO Financial’s life insurance and supplemental health lines have generally increased, A.M. Best has observed declining premium trends in the company’s annuity operations. Persistent low interest rates are expected to keep annuity sales depressed in the near to medium term, consistent with some of the organization’s competitors. A.M. Best notes that, despite the sluggish economy, CNO Financial has reported favorable persistency and has generally maintained its target spreads within its annuity business segment. Although CNO Financial’s business profile has improved, A.M. Best remains concerned regarding the sustainability of earnings across key product lines given low interest rates and the likelihood of lower net investment income. While CNO Financial’s investment portfolio has been de-risked in recent years, the potential for additional asset impairments remains given its exposure to commercial mortgages, commercial mortgage-backed securities (CMBS) and below investment grade bonds. A.M. Best notes that CNO Financial’s direct mortgage loans are fairly well diversified and that the collateral underlying its CMBS portfolio is performing better than in prior years with respect to delinquencies and cumulative losses. A.M. Best also has affirmed the FSR of B- (Fair) and ICR of “bb-” of Conseco Life Insurance Company (CLIC) (Carmel, IN). The outlook for both ratings is stable. CLIC’s ratings recognize its modest operating profitability and improvement in risk-adjusted capitalization, tempered by its declining premiums and decreasing net investment income as the business in CLIC runs off. A.M. Best believes it is important for management to continue to actively manage CNO Financial’s legacy blocks of business, including the challenge of securing rerates, to facilitate profitability in these lines. Additionally, A.M. Best believes the level of support that CNO Financial will provide to CLIC in the future remains uncertain, noting that CLIC’s current level of risk-adjusted capitalization is satisfactory for its ratings.
The FSR has been upgraded to B++ (Good) from B+ (Good) and the ICRs to “bbb” from “bbb-” for the following key life/health subsidiaries of CNO Financial Group, Inc. The outlook for all ratings is stable.
- Bankers Life and Casualty Company
- Colonial Penn Life Insurance Company
- Bankers Conseco Life Insurance Company
- Washington National Insurance Company