Fitch Affirms CNO Financial’s Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed all the ratings assigned to CNO Financial Group, Inc. (CNO Financial) and its subsidiaries, and assigned ratings to CNO's recent debt issuance and new bank credit facility. The Rating Outlook is Stable. See the full ratings list at the end of this release.

Today's rating action follows a full review of CNO Financial and reflects the positive steps taken by the company over the past year to improve its capital structure and earnings profile. The rating action also considers the stabilized economic environment and improved financial markets, which has had a positive impact on CNO Financial's investment results and portfolio valuation.

Over the past month, CNO Financial has refinanced its outstanding bank debt through the issuance of $275 million of senior secured debt and a new $375 million bank credit facility. Fitch believes that the refinancing has improved CNO Financial's capital structure by diversifying its funding sources, extending debt maturities, and easing certain covenants. The company's pro forma financial leverage remains unchanged at approximately 21%, and remains in line with Fitch's expectation of 20%-30%. CNO Financial's total financings and commitments (TFC) ratio was 0.43 at Sept. 30, 2010, which is consistent with industry norms and rating expectations.

Fitch believes the emerging stability of CNO Financial's earnings profile and ability to manage losses in its investment portfolio will play an important role in the company's ability to avoid covenant violations. The company has now produced six consecutive quarters of positive operating earnings. This consistency is an improvement over previous results. Fitch expects the GAAP interest coverage ratio to be in the 3 times (x)-4x times range in 2010 and into 2011.

As of Sept. 30, 2010, the tightest covenant levels were under the statutory capital and interest coverage covenants. The covenant minimums for these measures were $1.2 billion and 1.75x versus actual results of $1.5 billion and 2.9x, respectively. A reasonable level of margin exists under the capital covenant and the company has some flexibility in managing intercompany capital flows which affect covenant calculations. CNO Financial and its non-insurance subsidiaries held unrestricted cash of $190 million at Sept. 30, 2010.

Based on Fitch's detailed analysis of CNO Financial's investment portfolio using its stress-testing methodology, Fitch's projection for gross investment losses before any offsetting gains is in the range of $200 million-$250 million through 2011.

Key rating drivers that could lead to an upgrade include:

--Continued generation of stable earnings free of significant special charges.

--Improved cushion versus covenant requirements, particularly interest coverage and consolidated surplus.

--GAAP interest coverage ratio of 4x-5x and consolidated surplus of $1.65 billion.

--Decreased financial leverage ratio below 15%.

Key rating drivers that could lead to a downgrade include:

--GAAP interest coverage ratio less than 2x.

--Increased investment losses beyond Fitch's expectations.

--A decline in statutory capital adequacy.

--A consolidated surplus below $1.2 billion.

--Increased equity credit adjusted leverage above 30%.

Fitch has assigned the following ratings:

CNO Financial Group, Inc.

--$375 million senior secured bank credit facility due Sept. 30, 2016 'B+'/RR4';

--$275 million senior secured note 9% due Jan. 15, 2018 'B+'/RR4'.

Fitch has affirmed the following ratings with a Stable Outlook:

CNO Financial Group, Inc.

--Issuer Default Rating (IDR) at 'B+';

--Senior secured debt at 'B+/RR4';

--Senior unsecured debt at 'B-/RR6';

--$293 million 7% due Dec. 30, 2016 at 'B-/RR6'.

Bankers Life and Casualty Company

--Insurer Financial Strength (IFS) at 'BBB-'.

Conseco Life Insurance Company

Bankers Conseco Life Insurance Company

Colonial Penn Life Insurance Company

Washington National Insurance Company

--IFS at 'BB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Aug. 16, 2010);

--'Life Insurance Ratings Criteria' (March 24, 2010);

--'Insurance Industry: Global Notching Methodology and Recovery Analysis' (Dec. 29, 2009);

--'Fitch's Approach to Rating Insurance Groups' (Dec. 14, 2010).

Applicable Criteria and Related Research:

Insurance Industry: Global Notching Methodology and Recovery Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493114

Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506285

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766

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Fitch Ratings
Primary Analyst:Bruce Cox, +1-312-606-2316
Director
Fitch, Inc.
70 W. Madison
Chicago, IL 60670
or
Secondary Analyst:Julie Burke, +1-312-368-3158
Managing Director
or
Committee Chairperson:Martha Butler, +1-312-368-3191
Senior Director
or
Media Relations:Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Source: Fitch Ratings