News Column

Fitch Upgrades CNO Financial's Debt Ratings & Affirms IFS; Outlook Positive

May 5, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded CNO Financial Group Inc.'s (CNO Financial) Issuer Default Rating (IDR) to 'BB+' from 'BB' and all its securities by one-notch. Fitch has affirmed the Insurer Financial Strength (IFS) ratings of CNO's core insurance subsidiaries at 'BBB'. The Rating Outlook is Positive for all ratings.

Concurrently, Fitch has maintained the 'BB+' IFS on Rating Watch Positive for Conseco Life Insurance Company (Conseco Life). A full list of rating actions follows at the end of this release.

Key Rating Drivers

The CNO Financial upgrade reflects a move to normal notching between holding company and insurance operating subsidiary ratings per Fitch's rating criteria. Favorable operating performance and improved capitalization have increased the cushion in key debt covenants and thus enhanced the company's financial flexibility.

Fitch's Positive Outlook on all ratings is driven by CNO Financial's increased profitability and fixed charge coverage as well as lower expected earnings volatility. Successful completion of the pending Conseco Life divestiture is also viewed favorably.

CNO Financial's profitability rebounded in 2013 to a double digit ROE of 11.9% and operating return on assets (ROA) improved to 79 basis points (bps). Operating results are more stable for the largest operating companies, Bankers Life and Casualty Company (Bankers Life) and Washington National Life Insurance Company, benefiting from strong annuity, Medicare supplement and supplemental health margins. Going forward, operating profitability and stability is expected to benefit from CNO Financial's disposal of the large majority of underperforming interest-sensitive life insurance and long-term care (LTC) insurance, reported in the OCB GAAP segment previously.

Fitch views CNO Financial's statutory capitalization as strong and financial leverage as moderate. Consolidated RBC ratio improved to 427% at March 31, 2014, after increasing to 410% at yearend 2013 from 367% at yearend 2012. The company's financial leverage was 17.6% at March 31, 2014 with the booking of the $298 million loss on the sale of Conseco Life after declining to 16.9% at year-end 2013 and from 21% for Dec. 31, 2012.

CNO Financial's debt service capabilities measured by GAAP based interest coverage improved to 6.3x for 2013 versus 2.1x for full-year 2012. Fitch expects fixed charge coverage to range from 6-8x excluding unusual items for 2014.

CNO Financial's overall bond quality is good, with approximately 13% of bonds below investment grade at Dec. 31, 2013 on a GAAP basis. However, the investment-grade bond portfolio is dominated by 'BBB' level rated securities at 48% of the portfolio making it potentially more vulnerable in a declining economic scenario to downgrade risk. CNO Financial has low exposure to directly placed commercial mortgages and alternative assets.

Conseco Life remains on Rating Watch Positive pending the close of its sale to Wilton Re.

RATING SENSITIVITIES:

Key rating triggers that could lead to an upgrade for all ratings include:

--Continued generation of stable earnings free of significant special charges;

--GAAP interest coverage ratio above 6x;

--NAIC risk based capital (RBC) ratio above 350%;

--Close of Conseco Life sale at expected terms.

Key rating triggers that could lead to a return to stable outlook or downgrade include:

--Combined NAIC RBC ratio less than 300% and operating leverage above 20x;

--Deterioration in operating results;

--Failure to close the Conseco Life sale;

--Significant increase in credit-related impairments;

--Financial leverage above 30%.

Fitch expects that over the next few years, CNO Financial will attempt to migrate its capital structure away from secured senior debt to unsecured senior debt. During this transition, the mix of secured versus unsecured debt may fluctuate. Fitch would expect to narrow the notching of CNO Financial's unsecured debt relative to the IDR as the mix in secured debt declines below 25%. Currently, CNO Financial's senior unsecured debt is one notch lower than standard due to the large level of secured debt in the capital structure.

RATING SENSITIVITIES FOR CONSECO LIFE INSURANCE COMPANY:

Fitch would upgrade the IFS rating of Conseco Life following the close of the transaction with the final rating based upon its evaluation of Conseco Life's capitalization, strategic importance to Wilton Re and degree of support.

Fitch could affirm the current 'BB+' IFS rating or reevaluate if the transaction fails to close.

Fitch has upgraded the following ratings:

CNO Financial Group, Inc.

--IDR upgraded to 'BB+' from 'BB';

--$4 million 7% senior unsecured convertible note due Dec. 30, 2016 upgraded to 'BB-' from 'B+';

--Senior secured bank credit facility (tranches of $250 million and $425 million due Sept. 30, 2016 and 2018, respectively) upgraded to 'BB+' from 'BB';

--$275 million senior secured note 6.375% due Oct. 1, 2020 upgraded to 'BB+' from 'BB'.

The Rating Outlook is Positive.

Fitch has affirmed the following ratings:

Bankers Life and Casualty Company

Bankers Conseco Life Insurance Company

Colonial Penn Life Insurance Company

Washington National Insurance Company

--IFS at 'BBB'.

The Rating Outlook is revised to Positive from Stable.

Fitch maintained the Rating Watch Positive on the following rating:

Conseco Life Insurance Company

--Insurer Financial Strength 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Andrew Davidson, CFA

Senior Director

+1 312-368-3144

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Julie A. Burke, CPA, CFA

Managing Director

+1 312-368-3158

or

Committee Chairperson

Martha Butler

Senior Director

+1 312-368-3191

or

Media Relations

Brian Bertsch, New York, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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Source: Business Wire