On Friday, rating agency A.M. Best Co. affirmed the credit and debt ratings of CNO Financial Group Inc. (CNO - Analyst Report) and its subsidiaries. The company’s subsidiaries include Bankers Life and Casualty Company, Bankers Conseco Life Insurance Company, Colonial Penn Life Insurance Company, Washington National Insurance Company and Conseco Life Insurance Company.
A.M. Best affirmed the issuer credit ratings (ICR) of “bbb-” and financial strength ratings (FSR) of “B+” for all of CNO’s subsidiaries, except Conseco Life, along with ICR of “bb-” and FSR of “B-” for Conseco Life. Additionally, the rating agency affirmed the debt rating of “bb-” on CNO’s various outstanding 7.0% senior unsecured convertible debentures, due 2016 and 9.0% senior secured notes, due 2018.
Further, A.M. Best also affirmed the stable outlook for all the ratings. FSR of “B+” and “B-” can be translated into “good” and “fair”, respectively. The declining premium and investment incomes of Conseco Life set it apart from the other CNO subsidiaries and were the prime reasons for the lower ratings of the unit.
While Conseco Life’s current risk-adjusted capital is adequate for its ratings, A.M. Best remains concerned about the company’s modest profitability and uncertainty regarding CNO’s support to the unit in future.
The affirmation of CNO’s ratings is based on the company’s strategies of cost reduction and divestiture of non-core business units to focus on the core business, which has translated into consistent profitability and capital growth.
Additionally, the amendment of the company’s senior secured credit facility reduced the annual interest rates by 1.25%, thereby increasing financial flexibility. Moreover, CNO’s debt-to-capital ratio of 18% is substantially lower than the maximum of 30% acceptable under its banking facility covenant.
However, despite the positives, A.M. Best remains concerned about the high competition and unfavorable regulatory environment in the Medicare arena and supplemental health insurance markets, which limit the growth in these businesses.
Additionally, low interest rates put pressure on spread-based products, thereby increasing the possibility of riskier investments by CNO, in a bid to achieve its net yield objective.
Moreover, the company’s investment in commercial mortgage, commercial mortgage-backed securities and below investment grade bonds increase the risk of future assets impairment. The risk further increases due to the possibility of a double-dip recession, which may also lead to weakening of the credit position of CNO.
Overall, the ratings affirmation is a sign of CNO's financial stability and bodes well for the company, though some concerns require management attention. It will also boost investors' confidence after the increased investment gains in the third quarter, which also drove the bottom line.
CNO competes with AFLAC Inc. (AFL - Analyst Report), Unum Group (UNM - Analyst Report) and Torchmark Corp. (TMK - Analyst Report). The company carries a Zacks #2 Rank, which translates into a short-term Hold rating.
On Friday, the shares of CNO closed at $6.14, down 2.38%, on the New York Stock Exchange.