Monday, January 23, 2017

No. 199: Platinum Partners and CNO Financial—An Update

On January 12, 2017, CNO Financial Group, Inc. filed an 8-K (significant event) report with the Securities and Exchange Commission (SEC). The report provides an update on CNO's relationship to Platinum Partners LP, a hedge fund. The U.S. Department of Justice has filed criminal charges against seven individuals associated with Platinum, the SEC has filed civil charges against Platinum and the same seven individuals, and CNO has filed a civil lawsuit against three individuals associated with Platinum. I wrote about these cases in No. 182 (posted October 7, 2016) and in No. 195 (January 3, 2017).

The 8-K Report
A press release, which is an exhibit attached to CNO's recent 8-K report, is entitled "CNO Financial Group Provides Update on Closed Block Long-Term Care Business." It is subtitled "Independent Audit Concluded; Majority of Assets Repositioned." Shown below is the full text of the press release, other than the "About CNO Financial Group" section and the "Cautionary Statement Regarding Forward-Looking Statements" section. Also, a footnote to the $5 million figure in the first paragraph below says it is an estimate that is subject to change.
CNO Financial Group, Inc. (NYSE:CNO) announced today that its subsidiaries, Washington National Insurance Company (WNIC) and Bankers Conseco Life Insurance Company (BCLIC), have concluded the independent audit of the assets recaptured in conjunction with the termination of the reinsurance agreements with Beechwood Re, Ltd. (BRe). In addition, CNO announced that it has successfully repositioned a significant portion of the recaptured assets. CNO expects to recognize pre-tax non-operating net realized losses totaling $5 million in the quarter ended December 31, 2016 related to the transferred investments (including the impacts of the audit findings and repositioning of the assets).
As previously disclosed, certain irregularities discovered regarding the relationship between BRe and Platinum Partners LP (Platinum), and questions concerning the valuation and appropriateness of the collateral deposited in reinsurance trust accounts by BRe, caused CNO to commence an independent audit on two subsets of investments with an estimated value of $125 million as of September 30, 2016. The audit of these investments was completed in the fourth quarter of 2016, and confirmed that the assets included in the initial scope of the audit bore some connection to Platinum or to parties that have had past or present associations with Platinum. The audit also concluded that, based upon information obtained, the assets included in the additional scope of the audit do not appear to have clear connections to Platinum or to parties that have had past or present associations with Platinum.
In addition, CNO and the auditor confirmed that many of the values that had been assigned to these investments by BRe, and summarized in reports by its valuation firm, were inaccurate due to the use of flawed methodologies and procedures. We recognized a $75.4 million pre-tax loss related to the termination of the reinsurance agreements in the quarter ended September 30, 2016 (including adjustments to certain of the values that had been assigned by BRe to the investments transferred to WNIC and BCLIC).
In connection with the termination of the reinsurance agreements, investments made by BRe with an estimated value of $505 million previously held in collateral trust accounts supporting the reinsured block were transferred to WNIC and BCLIC. In the quarter ended December 31, 2016, approximately 75 percent of these investments have been sold or redeemed, with the proceeds invested primarily in investment-grade securities to support the recaptured block of business.
A summary of the preliminary values for the remaining investments that were included in the independent audit as of December 31, 2016 is included in today's Form 8-K.
General Observations
The developments relating to CNO's relationship with Platinum are sufficiently complex that I decided to allow the full text of CNO's press release to speak for itself. A more detailed discussion is in the text of CNO's recent 8-K report.

The results of the civil and criminal charges against Platinum and its officials and former officials remain to be seen. Also, I do not know what impact these developments will have on Senior Health Insurance Company of Pennsylvania (SHIP), a long-term care insurance company in runoff. SHIP is a former subsidiary of Conseco, Inc., which is now CNO. SHIP, which is in fragile financial condition, is immersed in the Platinum situation along with CNO's current subsidiaries. I have written extensively about SHIP. For example, see No. 180 (September 19, 2016).

Available Material
I am offering a complimentary 8-page PDF consisting of CNO's recent 8-K report (5 pages) and the press release attached to the report as an exhibit (3 pages). Email and ask for the January 2017 package relating to CNO and Platinum.