CARMEL, Ind., Sept. 29, 2016 /PRNewswire/ -- CNO Financial
Group, Inc. (NYSE: CNO) announced today that its subsidiaries,
Bankers Conseco Life Insurance Company (BCLIC) and Washington
National Insurance Company (WNIC), are terminating reinsurance
agreements with Beechwood Re (BRe) and recapturing approximately
$550 million of closed block
long-term care liabilities.
As previously disclosed in a Form 8-K that was filed on
August 1, 2016, CNO had commenced an
independent third party audit of approximately $116 million (1) of Level 3 investments that were
held in trusts on behalf of BCLIC and WNIC. Based on the
information obtained in the audit, CNO, along with the New York
Department of Financial Services (NYDFS) and the Indiana Department
of Insurance (IDOI), have concluded that a significant portion of
the investments do not comply with applicable regulatory
requirements for assets supporting the reinsurance agreements. As
such, the NYDFS and IDOI directed BCLIC and WNIC, respectively, to
remedy the resultant deficiency.
In order to protect the interests of CNO, BCLIC, WNIC and their
respective stakeholders, the CNO companies have taken the following
actions:
- BCLIC and WNIC sent written notice to Wilmington Trust, N.A.
(Wilmington), as trustee to the reinsurance trusts, that BCLIC and
WNIC exercised their rights to immediately withdraw all assets from
the trusts, and instructed Wilmington to deliver the assets to
custodial accounts of BCLIC and WNIC.
- BCLIC and WNIC gave written notice to BRe that they are
terminating their reinsurance agreements with BRe, effective
immediately.
- BCLIC and WNIC recently expanded the scope of the audit to
include additional Level 3 investments with a reported amount of
approximately $90 million.
- BCLIC and WNIC commenced an arbitration proceeding and demanded
emergency relief, specifically, that BRe provide immediate access
to certain documents and information regarding the trust assets,
which will allow the audit of the aforementioned Level 3
investments to be concluded. BCLIC and WNIC are also seeking
compensatory, consequential and punitive damages from BRe as part
of the arbitration.
- BCLIC and WNIC have also commenced litigation against current
and former individual principals of BRe (Mark Feuer, Scott
Taylor and David Levy) for
the damages caused by their actions.
- The CNO companies are resuming responsibility for all aspects
of policyholder administration. We expect no impact to
policyholders as a result of these actions.
A recapture of this business requires CNO to revalue the assets
and liabilities based on valuation methodologies that are
consistent with the methodologies used by CNO to value its own
investments and insurance liabilities. While the audit of certain
Level 3 investments is still in progress, preliminary information
indicates that CNO would record an after-tax charge of
approximately $55 million, calculated
on a pro forma basis as if a recapture of this business had
occurred on June 30, 2016. The pro
forma estimated impacts of a recapture are summarized below
(dollars in millions):
Pro forma estimated
loss:
|
|
Estimated market value adjustments
related to:
|
|
Investments
included in the initial scope of the audit
|
$(50)
|
Other Level 3
investments
|
(30)
|
Write-off of estimated receivables
due from BRe
|
(18)
|
Increase in insurance liabilities
consistent with CNO valuation
|
|
assumptions
(primarily related to interest rates)
|
(60)
|
Expenses incurred
|
(7)
|
Reported amount of assets held in
trusts in excess of liabilities
|
95
|
|
|
Estimated loss
before income tax benefit
|
(70)
|
|
|
Estimated income tax
benefit
|
15
|
|
|
Estimated pro
forma net loss
|
$(55)
|
The estimated pro forma net loss is based on numerous
assumptions, including our current best estimate of the fair value
of investments and the amount of insurance liabilities expected to
be received as a result of the recapture. These estimated values
are based on information currently available to us and may change
based on, among other factors: (i) additional information we
may obtain; (ii) the actual fair value of the related investments
on the recapture date; and (iii) actual assumptions used to value
the insurance liabilities.
After the adjustments summarized above, the remaining value of
the Level 3 investments is $200
million (1) (including $67
million of investments included in the initial scope of the
audit, $65 million included in the
additional scope of the audit, and $68
million of other investments).
As a result of the recapture, related charge and additional
capital required to support the assets and liabilities of this
business, CNO will contribute approximately $200 million to its insurance subsidiaries.
Approximately one-half of this contribution is attributable to the
expected reduction in statutory surplus reflecting the charge
recognized upon the recapture of the business; and approximately
one-half is attributable to the expected increase in risk-based
capital primarily affecting the additional credit and investment
concentration risk associated with the trust assets. After giving
effect to this contribution, CNO expects to have approximately
$175 million of cash and investments
at the holding company as of September 30,
2016, and expects its consolidated risk-based capital ratio
to be approximately 450%.
In order to increase its excess capital position at the holding
company, CNO has suspended its share repurchase program for the
remainder of 2016. As of September 29,
2016, CNO had repurchased $203.0
million of common stock in 2016 at an average price of
$17.37 per share. A recapture of the
business is not expected to have a material impact to the ongoing
free cash flow generation of the company, which is currently
estimated at $75 million per
quarter.
About CNO Financial Group
CNO Financial Group, Inc. (NYSE: CNO) is a holding
company. Our insurance subsidiaries – principally Bankers Life
and Casualty Company, Colonial Penn Life Insurance Company and
Washington National Insurance Company – primarily serve
middle-income pre-retiree and retired Americans by helping them
protect against financial adversity and provide for a more secure
retirement. For more information, visit CNO online at
www.CNOinc.com.
NOTE
(1)
|
Based on information
obtained subsequent to the filing of our August 1, 2016 Form 8-K,
we have determined that the reported amount of the Level 3
investments subject to the audit was $116 million (rather than the
$126 million reported in our previous Form 8-K). In addition, we
determined that $58 million, $253 million and $280 million of the
investments in the trust at June 30, 2016 consisted of Level 1,
Level 2 and Level 3 investments, respectively (rather than the $58
million, $231 million and $302 million of Level 1, Level 2 and
Level 3 investments, respectively, reported in our previous Form
8-K). After the pro forma market value adjustments of $80 million
described above, the remaining value of the Level 3 investments is
$200 million ($280 million minus $80 million).
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Cautionary Statement Regarding Forward-Looking
Statements. Our statements, trend analyses and
other information contained in this press release relative to
markets for CNO Financial's products and trends in CNO Financial's
operations or financial results, as well as other statements,
contain forward-looking statements within the meaning of the
federal securities laws and the Private Securities Litigation
Reform Act of 1995. Forward-looking statements typically are
identified by the use of terms such as "anticipate," "believe,"
"plan," "estimate," "expect," "project," "intend," "may," "will,"
"would," "contemplate," "possible," "attempt," "seek,"
"should," "could," "goal," "target," "on track," "comfortable
with," "optimistic," "guidance," "outlook" and similar words,
although some forward-looking statements are expressed differently.
You should consider statements that contain these words carefully
because they describe our expectations, plans, strategies and goals
and our beliefs concerning future business conditions, our results
of operations, financial position, and our business outlook or they
state other ''forward-looking'' information based on currently
available information. Assumptions and other important factors that
could cause our actual results to differ materially from those
anticipated in our forward-looking statements include, among other
things: (i) changes in or sustained low interest rates causing
reductions in investment income, the margins of our fixed annuity
and life insurance businesses, and sales of, and demand for, our
products; (ii) expectations of lower future investment earnings may
cause us to accelerate amortization, write down the balance of
insurance acquisition costs or establish additional liabilities for
insurance products; (iii) general economic, market and political
conditions, including the performance and fluctuations of the
financial markets which may affect the value of our investments as
well as our ability to raise capital or refinance existing
indebtedness and the cost of doing so; (iv) the ultimate outcome of
lawsuits filed against us and other legal and regulatory
proceedings to which we are subject; (v) our ability to make
anticipated changes to certain non-guaranteed elements of our life
insurance products; (vi) our ability to obtain adequate and timely
rate increases on our health products, including our long-term care
business; (vii) the receipt of any required regulatory approvals
for dividend and surplus debenture interest payments from our
insurance subsidiaries; (viii) mortality, morbidity, the increased
cost and usage of health care services, persistency, the adequacy
of our previous reserve estimates and other factors which may
affect the profitability of our insurance products; (ix) changes in
our assumptions related to deferred acquisition costs or the
present value of future profits; (x) the recoverability of our
deferred tax assets and the effect of potential ownership changes
and tax rate changes on their value; (xi) our assumption that the
positions we take on our tax return filings will not be
successfully challenged by the Internal Revenue Service; (xii)
changes in accounting principles and the interpretation thereof;
(xiii) our ability to continue to satisfy the financial ratio and
balance requirements and other covenants of our debt agreements;
(xiv) our ability to achieve anticipated expense reductions and
levels of operational efficiencies including improvements in claims
adjudication and continued automation and rationalization of
operating systems, (xv) performance and valuation of our
investments, including the impact of realized losses (including
other-than-temporary impairment charges); (xvi) our ability to
identify products and markets in which we can compete effectively
against competitors with greater market share, higher ratings,
greater financial resources and stronger brand recognition; (xvii)
our ability to generate sufficient liquidity to meet our debt
service obligations and other cash needs; (xviii) our ability to
maintain effective controls over financial reporting; (xix) our
ability to continue to recruit and retain productive agents and
distribution partners; (xx) customer response to new products,
distribution channels and marketing initiatives; (xxi) our
ability to achieve additional upgrades of the financial strength
ratings of CNO Financial and our insurance company subsidiaries as
well as the impact of our ratings on our business, our ability to
access capital and the cost of capital; (xxii) regulatory changes
or actions, including those relating to regulation of the financial
affairs of our insurance companies, such as the payment of
dividends and surplus debenture interest to us, regulation of the
sale, underwriting and pricing of products, and health care
regulation affecting health insurance products; (xxiii) changes in
the Federal income tax laws and regulations which may affect or
eliminate the relative tax advantages of some of our products or
affect the value of our deferred tax assets; (xxiv) availability
and effectiveness of reinsurance arrangements, as well as any
defaults or failure of reinsurers to perform; (xxv) the performance
of third party service providers and potential difficulties arising
from outsourcing arrangements; (xxvi) the growth rate of sales,
collected premiums, annuity deposits and assets; (xxvii)
interruption in telecommunication, information technology or other
operational systems or failure to maintain the security,
confidentiality or privacy of sensitive data on such systems;
(xxviii) events of terrorism, cyber attacks, natural disasters or
other catastrophic events, including losses from a disease
pandemic; (xxix) ineffectiveness of risk management policies and
procedures in identifying, monitoring and managing risks; and (xxx)
the risk factors or uncertainties listed from time to time in our
filings with the Securities and Exchange Commission. Other factors
and assumptions not identified above are also relevant to the
forward-looking statements, and if they prove incorrect, could also
cause actual results to differ materially from those
projected. All written or oral forward-looking statements
attributable to us are expressly qualified in their entirety by the
foregoing cautionary statement. Our forward-looking statements
speak only as of the date made. We assume no obligation to update
or to publicly announce the results of any revisions to any of the
forward-looking statements to reflect actual results, future events
or developments, changes in assumptions or changes in other factors
affecting the forward looking statements.
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SOURCE CNO Financial Group, Inc.