Fitch Affirms CNO Financial's IDR at 'BBB-'; Outlook Remains Positive
OREANDA-NEWS. Fitch Ratings has affirmed CNO Financial Group Inc.'s (CNO) 'BBB-' Issuer Default Rating (IDR) and the Insurer Financial Strength (IFS) ratings for CNO's core insurance subsidiaries at 'BBB+'. The Rating Outlook is Positive for all ratings. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation of CNO's ratings reflect the company's strong balance sheet fundamentals, improved financial flexibility and liability profile and recent financial performance that remains in line with Fitch's expectations.
The Positive Outlook reflects Fitch's view that CNO's ratings could be upgraded over the next 12-18 months based on the company's ability to sustain recent improvements in earnings profile and balance sheet fundamentals. The ratings continue to reflect the company's strong statutory capitalization and moderate financial leverage, both of which exceed median ratio guidelines for CNO current rating category.
Fitch considers CNO's financial flexibility to have been significantly enhanced by its May 2015 recapitalization in which it funded the repayment of approximately $775 million of secured debt with $825 million in newly issued senior unsecured debt. The general improvement in recent years in CNO's earnings stability and financial profile has resulted in generally improved financial flexibility. Financial leverage remains reasonable at approximately 20% at year-end 2015.
Primary rating concerns include CNO's large, albeit declining, exposure to its legacy individual long-term care (LTC) insurance business and challenges associated with the ongoing low interest rate environment. CNO has actively managed down its LTC insurance exposure through disposals, reinsurance, product design and systematic price increases over the last several years. The company continues to strengthen reserves as the size of the block declines.
The low interest rate environment continues to pressure CNO's earnings, but the company has been able to manage spread compression through lower crediting rates on interest-sensitive products, although the availability of this tool is diminishing as crediting rates move closer to contractual minimums.
Fitch considers CNO's statutory capitalization to be strong for its current rating. The consolidated RBC ratio under Fitch's consolidation methodology increased to 435% at year-end 2015, up from 415% at year-end 2014. Total adjusted capital growth has been consistent over the past two years, increasing 4.2% in both 2014 and 2015. Fitch expects CNO's RBC ratio to remain in the 400% to 425% range over the intermediate term.
CNO's earnings profile continues to show stability, despite pressure from low interest rates, and moderately increasing LTC benefit and supplemental health loss ratios in 2015. The company reported a modest 1% decline in pretax operating results in 2015 relative to 2014; however, these results included an incremental benefit of approximately $20 million in 2015 in its Bankers Life unit as a result of its comprehensive annual actuarial review. The modest decline in operating results was driven primarily by lower underwriting margin in the company's Medicare supplement, supplemental health and LTC businesses. Profitability as measured by return on equity (ROE) is seen as solid for the rating as reflected by the company's operating ROE of 7.2% for 2015 following 6.8% the prior year.
CNO's operating interest coverage is viewed as strong at 10.4x for 2015, down slightly from 10.7X for 2014 due to a modest decline in operating earnings and a slight increase in outstanding debt and interest expense.
Fitch considers CNO's overall investment credit quality to be good with less than 5% of bonds below investment grade at Dec. 31, 2015 on a statutory basis. This is slightly better than the life insurance industry average of 6%. However, nearly half of the investment-grade bond portfolio is 'BBB' level rated securities (47% of the portfolio at Dec. 31, 2015) compared to roughly a third for the broader industry. The elevated allocation to the 'BBB' category makes the portfolio potentially more vulnerable to ratings migration in an adverse economic scenario.
Key rating triggers that could lead to an upgrade for all ratings include:
--Consistent earnings without significant special charges and with operating return on equity above 8%.
--No material deterioration in other credit metrics.
Key rating triggers that could lead to a downgrade include:
--Combined NAIC RBC ratio less than 325% and operating leverage above 20x;
--Deterioration in operating results;
--Decline in fixed charge coverage to below 5x;
--Significant increase in credit-related impairments;
--Financial leverage above 30%.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
CNO Financial Group, Inc.
--IDR at 'BBB-';
--4.50% senior unsecured notes due May 30, 2020 at 'BB+';
--5.25% senior unsecured notes due May 30, 2025 at 'BB+'.
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 Positive.