CNO Financial Group, Inc. - Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K was filed on August 1, 2016, by CNO Financial Group, Inc. (CNO). The filing addresses "Other Events" (Item 8.01) concerning a 100% coinsurance agreement entered into in December 2013 between two of CNO's insurance subsidiaries (Washington National Insurance Company and Bankers Conseco Life Insurance Company) and Beechwood Re Ltd ("BRe"). The agreement ceded $495 million of long-term care reserves to BRe, a non-accredited reinsurer domiciled in the Cayman Islands.
Key Financial Metrics and Collateral Status
The filing does not provide consolidated revenue, profit, or cash flow metrics for CNO. It focuses exclusively on the financial status of the reinsurance trusts securing the ceded liabilities:
- Ceded Liabilities: Approximately $526.5 million as of June 30, 2016.
- Total Trust Assets (Fair Value): Approximately $591 million as of June 30, 2016.
- Asset Composition (Fair Value):
- Level 1 (Publicly traded): $58 million
- Level 2 (Observable inputs): $231 million
- Level 3 (Unobservable inputs): $302 million
- Specific Exposure: Trusts held a loan to a Platinum-managed fund with a reported value of approximately $6.8 million.
Material Changes and Recent Developments
On July 25, 2016, the Wall Street Journal reported that BRe had ties to Platinum Partners LP ("Platinum"), a hedge fund under federal investigation. The report alleged that Murray Huberfeld, a manager of Platinum arrested in connection with an alleged bribery scheme, used an office at Beechwood and that BRe employed his son-in-law. Additionally, reports indicated Platinum owed Beechwood approximately $70 million following restructured investment deals. In response to these reports, CNO commenced an audit in late June 2016 of the valuation of certain trust assets, specifically focusing on Level 3 securities with a reported value of approximately $126 million that may have connections to Platinum.
Outlook, Risks, and Management Commentary
CNO management states that while they do not believe the assets under initial audit are direct investments in Platinum, some may bear a connection to Platinum or associated parties. The valuation audit is expected to be substantially completed in the third quarter of 2016. Management has not yet concluded that any asset values should be adjusted, but explicitly states that no assurances can be given that an adjustment will not be required. If an adjustment is required, there is no assurance that BRe will be able to provide sufficient qualifying assets to cover any shortfall. CNO remains primarily liable to policyholders if BRe defaults. BRe is currently seeking consent from CNO's subsidiaries before engaging in any new investment transactions involving trust assets.
Key Facts for Investor Verification
- Verify the results of the ongoing valuation audit of the $126 million in Level 3 assets, specifically regarding their connection to Platinum Partners LP.
- Monitor whether BRe is able to provide additional collateral if the audit results in a downward valuation adjustment of trust assets.
- Assess the credit risk exposure given that BRe is non-accredited and not rated by A.M. Best, relying entirely on the market value of trust assets for security.
- Review the potential impact on CNO's statutory financial statements if the ceded business must be recaptured due to a BRe default.