The stock of CNO Financial Group Inc.
(CNO - Free Report
) slipped to a 52-week low of $14.65 after the company revealed last week that it is severing ties with Beechwood Re or BRe.
Two of the subsidiaries of the company – Bankers Conseco Life Insurance Company (BCLIC) and Washington National Insurance Company (WNIC) – have terminated their reinsurance deal with BRe. This severance came after BRe was found guilty of not complying with insurance company guidelines by investing CNO funds in hedge fund Platinum Partners which is in troubled waters.
The news came on Sep 29 and dragged down the stock by 5.2% over the last three trading days.
Back in 2014, Beechwood had agreed with CNO Financial to take on some risks tied to long-term care policies initiated by the latter. 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 bring 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 this will not have any impact on policyholders, we believe the bottom line will suffer due to the cessation of share buyback.
The company has also commenced litigation against current and former individual principals of Beechwood Re – Mark Feuer, Scott Taylor and David Levy – for damages caused by their actions.
Also in August, Fitch Ratings placed the ratings of CNO Financial as negative, on concerns that the agreement with Beechwood might lead to losses that would lead to capital drain. Thus investors fear a negative rating action as well.
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