Fitch Affirms CNO Financial's Insurance Subsidiary Ratings
CHICAGO -- March 12, 2013
Fitch Ratings has affirmed the ratings assigned to CNO Financial Group, Inc.'s
(CNO Financial) insurance subsidiaries and debt issues. At the same time, the
holding company Issuer Default Rating (IDR) has been upgraded one notch to
'BB'. The Rating Outlook is Stable. See the full ratings list at the end of
KEY RATING DRIVERS
The upgrade of CNO Financial's IDR reflects a 'technical' decision linked to
Fitch's rating criteria to narrow notching relative to its insurance
subsidiary ratings, and reflects the company's progress over the past year to
transition closer to a more traditional holding company capital structure.
The affirmation of all other ratings tied to CNO Financial and its insurance
subsidiaries reflect Fitch's view that the company's balance sheet
fundamentals and recent financial performance remain in line with
CNO Financial's pre-tax operating earnings decreased about 17% to $284 million
in 2012, but would have increased 4% after adjusting for the effects of
Accounting Standards Update 2010-26 (ASU-2010-26) on 2011 earnings. Pre-tax
operating earnings are adjusted for the impact of losses on extinguishment of
debt, changes in its deferred tax valuation allowance and the fair value of
embedded derivatives. Pre-tax operating earnings also include the negative
impact of $41 million in 2012 litigation settlements, which Fitch views as a
CNO Financial's 2012 statutory earnings were $350 million, just slightly below
earnings of $367 million for 2011. Total adjusted statutory capitalization
(TAC) of $1.8 billion at Dec. 31, 2012 was up $36 million or 2% from year-end
2011 and reported RBC was up 9 percentage points to 367%. Operating leverage
of approximately 13.2 times (x) at Dec. 31, 2012 also improved from 14.7x at
year-end 2011. Fitch believes the company will continue to make incremental
improvements in capital as it generates good statutory earnings.
Fitch expects the GAAP interest coverage ratio to return to the 5x range in
2013 after falling to 2.1x in 2012 due to the negative immediate earnings
effects of the recapitalization, and litigation settlement mentioned above.
The expected range is consistent with 2011 and the rating category guidelines.
CNO Financial's financial leverage increased to approximately 20.7% (excluding
Accumulated Other Comprehensive Income) at Dec. 31, 2012 from 16.3% at
year-end 2011, although it remains below Fitch's ratings guidelines for the
current rating level and should decrease in 2013 as debt is retired.
Approximately half the increase was partially due to extra debt taken on to
recapitalize the company, which lowered cost of debt and extended debt
maturities, but also increased debt. The other half is due to restatement of
2011 financials for the retrospective effects of ASU-2010-26.
The company's total financings and commitments (TFC) ratio is slightly above
average at 0.69x. Most of the TFC is derived from CNO Financial's use of $1.65
billion in Federal Home Loan Bank borrowing to generate investment income from
a spread income program, counteracting the low interest rate environment.
Key rating triggers that could lead to an upgrade include:
--Continued generation of stable earnings free of significant special charges;
--Expansion of margin versus existing covenant requirements;
--GAAP interest coverage ratio and NAIC risk based capital (RBC) above 6x and
Key rating triggers that could lead to a downgrade include:
--Combined NAIC RBC ratio less than 300% and operating leverage above 20x;
--Deterioration in operating results;
--Significant increase in credit-related impairments in 2013;
--Financial leverage above 30% and Total Financing and Commitments ratio above
Fitch expects that over the next few years, CNO Financial will attempt to
migrate its capital structure away from secured debt to unsecured senior debt.
During this transition, the mix of secured versus unsecured debt may
fluctuate. Fitch does not expect to change its current notching of CNO
Financial's secured and unsecured debt relative to the IDR in reaction to such
fluctuations in the secured and unsecured mix. Currently, CNO's secured debt
benefits by one notch, and the unsecured debt is lower by one notch, compared
to how Fitch would traditionally rate unsecured senior debt when there is no
secured debt in the capital structure.
At the end of this transition, Fitch will revisit its debt issue notching. In
addition, Fitch does not anticipate any further changes in CNO Financial's IDR
based on changes in the company's mix of secured and unsecured debt
Fitch has upgraded the following rating:
CNO Financial Group, Inc.
--IDR to 'BB' from 'BB-'.
Fitch has affirmed the following ratings:
CNO Financial Group, Inc.
--$293 million 7% senior unsecured convertible note ($93 million outstanding
at Dec. 31, 2012) due Dec. 30, 2016 at 'B+';
--Senior secured bank credit facility (Tranches of $250 million and $425
million due Sept. 30, 2016 and 2018, respectively) at 'BB';
--$275 million senior secured note 6.375% due Oct. 1, 2020 at 'BB'.
Bankers Life and Casualty Company
Bankers Conseco Life Insurance Company
Colonial Penn Life Insurance Company
Washington National Insurance Company
--Issuer Financial Strength (IFS) at 'BBB'.
Conseco Life Insurance Company
--IFS at 'BB+'.
The Outlook for all the above ratings is Stable:
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology -- Amended
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Bruce Cox, +1-312-606-2316
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Julie Burke, +1-312-368-3158
Martha Butler, +1-312-368-3191
Brian Bertsch, +1-212-908-0549
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