Fitch Affirms CNO's Ratings

Fitch Ratings reiterated the issuer default rating (“IDR”) of ‘BB-’of CNO Financial Group Inc. ( CNO - Analyst Report ) .

Concurrently, the rating agency affirmed the insurer financial strength (“IFS”) at 'BBB' of Bankers Life and Casualty Company, Bankers Conseco Life Insurance Company, Colonial Penn Life Insurance Company and Washington National Insurance Company, the company’s insurance subsidiaries. Also, Conseco Life Insurance Company’s IFS was affirmed at 'BB+.'

Additionally, Fitch Ratings also reiterated the debt ratings of $293 million 7% due 2016 at 'B+,' senior secured bank credit facility due 2016 at 'BB' and $275 million senior secured note 9% due 2018 at 'BB.'

The outlook for all ratings remains stable.

CNO Financial Group has solid earnings generation as well as capitalization. The company’s statutory earnings in the first quarter of 2012 was $94 million, up 9% from the year-ago period. Total adjusted statutory capitalization was $1.8 billion at March 31, 2012, with risk based capitalization (RBC) of 335% at March 31, 2012.

Operating leverage also improved to 13x at March end from 14.7x at 2011 end. The rating agency believes that with the company continuing to deliver strong statutory earnings, capital will will show signs of improvement.

Also, the rating agency remains optimistic on the company’s improving financial flexibility. CNO Financial paid dividend in the first quarter of 2012 for the first time since 2002 and also lowered the debt level.

Fitch noted that the company has been generating quarterly earnings over the past three years, reflecting lower investment losses and steady flow of earnings. Though net income in the first quarter of 2012 decreased year over year, the decline was due largely to lawsuits and regulatory settlements. Therefore, Fitch considers these resolutions to be favorable. Fitch estimates the GAAP interest coverage ratio to be approximately 5x in 2012.

Fitch stated that a rating upgrade is likely if CNO Financial continues to generate strong earnings, maintains GAAP interest coverage ratio above 6x and NAIC RBC above 350% and has a debt structure comparable with peer life insurance companies.

However, the rating will be subjected to downgrade if operational performance declines, credit related impairments shoots up, NAIC RBC ratio falls below 300%, operating leverage crosses the 20x mark, financial leverage moves above 30% and total financings and commitments ratio goes beyond 0.65x.

CNO Financial competes with AFLAC Inc. ( AFL - Analyst Report ) and Torchmark Corp. ( TMK - Analyst Report ) .

We retain our Neutral long term recommendation on CNO Financial. The quantitative Zacks #3 Rank (short term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.