Credit rating giant Moody's Investors Service ("Moody's") recently upgraded the senior debt rating of CNO Financial Group, Inc. CNO from Ba1 to Baa3. Moreover, the ratings of the company’s U.S. operating units, namely Bankers Life and Casualty Company unit, Colonial Penn Life Insurance Company and Washington National Insurance Company were also raised from Baa1 to A3. All these actions were taken by the agency after CNO Financial announced the completion of its 100% coinsurance deal to reinsure its Bankers legacy (primarily 2002 and prior to that year) Nursing Home and Comprehensive LTC (Long Term Care) blocks to Wilton Re, Ltd.’s wholly-owned arm, Wilton Reassurance Company. The rating outlook is stable.
The parent company’s Corporate Family Rating (CFR) was also lifted to Baa3 from Ba1. However, it will be withdrawn because CFRs are generally not assigned at an investment grade level.
With this transaction, CNO Financial will cede nearly $2.7 billion of LTC reserves to Wilton Re, Ltd., and pay a negative ceding commission of around $825 million in the reinsurance deal along with spending approximately $660 million as a charge. The partnership is mainly aimed at lowering the risk profile of CNO Financial.
The credit rating agency states that the deal is credit positive for the company since it will reduce its exposure to the long-term care business, which the company has long sought for. It should, thus, improve the company’s risk profile, boosts capital adequacy in a stress scenario, and even reduce company complexity for the group. This should enable management focus on its operations and core business. The deal is further expected to reduce morbidity and longevity risk as well as decrease product and interest rate risk.
A lighter portfolio will lessen the number of assets and liabilities on the company’s balance sheet. Bankers Life and Casualty Company unit is funding the negative ceding allowance through capital infusion from existing liquidity as well as from other internal resources.
It is expected that CNO Financial will maintain financial flexibility through solid cash flow, dividend capability, and no debt maturities until 2019. But financial leverage should increase to around 25% after the closing of the deal because of loss of shareholders equity.
Factors That Can Drive Future Ratings
CNO Financials’ ratings can be upgraded if there is steady profitability with a consistent minimum return on capital of 8% excluding one-time items, steady earnings coverage of 6x, a sustained combined NAIC RBC ratio of at least 400%, profitable sales growth and a fine balance between life insurance and annuities along with better market share in life insurance and annuity businesses without increasing the risk profile of the liabilities.
Notably, the ratings can be downgraded if ROC or return on capital of the company lies below 4%, adjusted financial leverage is persistently above 30%, earnings coverage is below 4x and the combined NAIC RBC ratio (Company Action Level without diversification benefit) is less than 350%.
Shares of this Zacks Rank #2 (Buy) company have lost 11.2% in a year’s time, wider than its industry’s decline of 4%.
Other Stocks to Consider
Investors interested in the insurance sector might also take a look at a few other top-ranked stocks like The Navigators Group, Inc. NAVG, Alleghany Corporation Y and Cigna Corporation CI, each sporting a Zacks Rank #1 (Strong Buy).
Navigators Group underwrites marine, property and casualty plus professional liability insurance products and services in the United States as well as globally. The company managed to deliver positive results in three of the trailing four quarters with an average four-quarter positive surprise of 19.54%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Operating in the Reinsurance and Insurance segments, Alleghany Corporation offers related services in the United States as well as internationally. The company came up with an average three-quarter earnings surprise of 26.02%.
Cigna provides insurance and related products and services in the United States and internationally. The stock pulled off an average four-quarter beat of 8.22%.
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