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CNO Financial Terminates Reinsurance Deal, Incurs Loss

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Two of the subsidiaries of CNO Financial Group, Inc. (CNO - Free Report) , Bankers Conseco Life Insurance Company (BCLIC) and Washington National Insurance Company (WNIC), have terminated their reinsurance deal with Beechwood Re (BRe). This severance came after the latter was found guilty of not complying with insurance company guidelines by investing CNO funds in hedge fund Platinum Partners which is in troubled waters.
 
Back in 2014, Beechwood agreed with CNO Financial to take on some risks tied to long-term care policies initiated by the later. Pursuant to the agreement CNO Financial agreed to cede more than $500 million in reserves tied to the contracts.
 
Consequently, the companies will be taking back approximately $550 million of long-term care liabilities. This will lead to bringing back the risk involved in these policies.
 
The termination will also lead to an after-tax charge of $55 million, resulting from the revaluation of assets and liabilities of the recaptured business.
 
In an effort to fortify its capital CNO Financial will contribute approximately $200 million to its insurance subsidiaries. It has also suspended its share repurchase program for rest of the year. Though the company made it clear that it will not have any impact on the policyholders, we believe the bottom line will suffer due to cessation of share buyback.
 
Additionally, CNO Financial is estimated to have approximately $175 million of cash and investments at the holding company as of Sep 30, 2016, and consolidated risk-based capital ratio to be approximately 450%, after contributing $200 million to its insurance subsidiaries.
 
The company has also commenced litigation against current and former individual principals of Beechwood Re - Mark Feuer, Scott Taylor and David Levy, for the damages caused by their actions.
 
This news though doesn’t come as a surprise since the company already disclosed at its second-quarter earnings conference call that it was scrutinizing a reinsurance arrangement with Beechwood Re, for its connection with hedge fund Platinum Partners.
 
Also in August, Fitch Ratings placed the ratings of CNO Financial as negative, on concerns that the agreement with Beechwood might cause losses which would lead to capital drain.
 
Zacks Rank
 
CNO Financial has a Zacks Rank #3 (Hold). Some better-ranked players are Wex Inc. (WEX - Free Report) , Equifax Inc. (EFX - Free Report) and Evertec Inc. (EVTC - Free Report) . Each of these carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Wex Inc. has seen a 0.8% rise in its 2016 Zacks Consensus Estimate to $4.02 earnings per share over the past 60 days. On average, the company delivered a positive earnings surprise of 3.9% in the trailing four quarters.
 
Equifax Inc. has seen a 0.4% rise in its 2016 Zacks Consensus Estimate to $5.30 earnings per share over the past 60 days. On average, the company delivered a positive earnings surprise of 4.4% in the trailing four quarters.
 
Evertec Inc. has seen a 1.2% rise in its 2016 Zacks Consensus Estimate to $1.66 earnings per share over the past 90 days. On average, the company delivered a positive earnings surprise of 1.22% in the trailing four quarters.

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