A.M. Best Affirms CNO Ratings - Analyst Blog
November 07 2011 - 11:31AM
Zacks
On Friday, rating agency A.M. Best Co. affirmed the credit and
debt ratings of CNO Financial Group Inc. (CNO) 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),
Unum Group (UNM) and Torchmark
Corp. (TMK). 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.
AFLAC INC (AFL): Free Stock Analysis Report
CNO FINL GRP (CNO): Free Stock Analysis Report
TORCHMARK CORP (TMK): Free Stock Analysis Report
UNUM GROUP (UNM): Free Stock Analysis Report
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