CNO Says Assets Hard to Value at Platinum-Tied Insurer Trust

  • Deal with Beechwood has $302 million of Level 3 assets
  • Insurer declines as Evercore cites risk to share buybacks

CNO Financial Group Inc. said the majority of the investments held in a trust with Beechwood Re, the reinsurer tied to to embattled hedge fund Platinum Partners, are in the category of the most-difficult-to-value assets.

About $302 million of the $591 million assets in the trust are considered Level 3, meaning market prices are so scarce that companies use internal models to gauge their value, CNO said Monday in a regulatory filing. Level 1 assets, for which market prices are most readily available, accounted for $58 million, and Level 2 for $231 million. A quarterly report from Beechwood at the end of June also showed that the trusts held a $6.8 million loan to a Platinum-managed fund, the filing shows.

CNO Chief Financial Officer Erik Helding said last week that the Carmel, Indiana-based company was increasing its oversight of a 2014 deal to transfer some long-term care risks to Beechwood, after a Wall Street Journal article detailed a relationship between the reinsurer and the hedge fund. Platinum was raided by federal agents in June after prosecutors alleged that a manager bribed a union chief. CNO said Monday that it expects to finish an audit this quarter of some of the Level 3 assets.

‘Some Connection’

“While we do not believe any of the assets which are the initial focus of the audit are direct investments in Platinum, the information available to us has indicated that some or all of these assets may bear some connection to Platinum or to parties which have had some past or present association with Platinum,” CNO said in the filing.

The assets are evaluated quarterly by Duff & Phelps and annually by KPMG, and the reinsurer has the resources to meet its commitments, Davidson Goldin, a spokesman for Beechwood, said in a phone interview. He said CNO’s review is part of a regularly scheduled audit.

CNO may scale back share repurchases until there is more clarity about the assets, Tom Gallagher, an analyst at Evercore Partners Inc., said in a note to investors. A spokeswoman for CNO said the company doesn’t comment on analyst speculation.

‘Reasonable Probability’

Given the uncertainty about asset valuations, there is a “reasonable probability” that the reinsurance agreement will be reversed, Gallagher wrote, a move known as a recapture that could transfer risk from the long-term care policies back to CNO. The worst-case scenario would be a cost of about $250 million before taxes for CNO, he wrote.

“While this would be a manageable event for the company, given its solid capital position, it would likely require moderation of its pace of capital return,” Gallagher wrote.

CNO dropped 2.6 percent to $16.91 at 11:49 a.m. in New York after declining 5.5 percent last week.

“There is a zero percent chance of anything being recaptured because everything is over-collateralized, independently valued and backed up by Beechwood’s $2.4 billion balance sheet,” said Goldin, the spokesman for the company.

The Journal article on July 25 stated that family-member trusts of some hedge-fund executives held a stake in Beechwood. Family members of Platinum executives no longer hold investments in Beechwood, Goldin said last week.

Credit Risk

The CNO units that ceded the risks to the Cayman Islands-based entity are domiciled in Indiana and New York, and Beechwood Re isn’t accredited by either of those states or graded by ratings firm A.M. Best, according to the filing. Because of its non-accredited status, trusts must be over-collateralized by 7 percent.

“Future payments into the trusts to maintain collateral requirements are subject to the ability and willingness of the reinsurer to honor its obligations,” CNO said. “In the event of default by Beechwood Re, we would be exposed to credit risk if the collateral held in the trusts cannot be realized or is liquidated at prices that are not sufficient to recover the full amount of the reinsurance receivables.”

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