CNO Financial’s debt restructuring, which was viewed favorably by A.M. Best, enhanced the organization’s 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 the organization with respect to covenants within its credit facility. CNO Financial’s debt-to-capital ratio, which is now under 20%, will continue to decline due to its expected scheduled amortization. The organization’s interest coverage, which A.M. Best views to be sufficient for its current rating level, also has benefited from the ongoing amortization of debt.While sales of CNO Financial’s life insurance and supplemental health products have generally increased, A.M. Best has observed declining premium trends within some of its core lines of business, including annuity and long-term care (LTC) operations. Prior to 2013, persistent low interest rates had kept annuity sales depressed, consistent with industry trends. A.M. Best notes that the decline in LTC is largely due to a shift towards shorter-term care products. A.M. Best notes that, despite the uncertain economy, CNO Financial has been experiencing favorable persistency and has generally maintained its target spreads in its annuity business segment. With regard to its long-term care product line, premiums remain lower due to more of an overall market shift to short-term care products, in addition to offering reduced benefits, including the elimination of lifetime benefits, for newly issued long-term care policies. Although CNO Financial’s business profile has improved with the growth in its life insurance business segment, A.M. Best remains cautious regarding the sustainability of earnings across key product lines given the persistent low interest rate environment and the associated potential for lower net investment income. A.M. Best also notes the potential for additional asset impairments given CNO Financial’s exposure to commercial mortgages, commercial mortgage-backed securities (CMBS) and below investment grade bonds. However, this risk is partially mitigated by the fact that the company has been actively de-risking its investment portfolio since the economic crisis, and its direct mortgage loans continue to perform well and remain fairly well diversified. Additionally, the collateral underlying its CMBS portfolio is performing better than in prior years as evident by the reduction in delinquencies and cumulative losses.
Factors that could result in favorable rating actions for CNO Financial and its key life/health operating companies over the near to medium term include a continued diversification in business mix, sizeable growth in risk-adjusted capitalization and sustained earnings growth. Factors that could lead to negative rating actions include sizeable realized losses, operating losses or significant deterioration in risk-adjusted capitalization.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 consistent net investment income and improved investment performance, tempered by its significant decline in capitalization and declining premiums as the business in CLIC runs off. A.M. Best notes that management continues to actively manage its legacy blocks of business, including the challenge of securing re-rates to facilitate profitability in these lines of business. Additionally, A.M. Best will be closely monitoring CLIC’s risk-adjusted capitalization due to the sizeable decrease in 2012, together with its volatile performance history. The FSR of B++ (Good) and ICRs of “bbb” have been affirmed for the following key life/health subsidiaries of CNO Financial Group, Inc.:
- Bankers Life and Casualty Company
- Colonial Penn Life Insurance Company
- Bankers Conseco Life Insurance Company
- Washington National Insurance Company