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CNO says assets hard to value at Platinum-linked insurer trusts

August 1, 2016
Carmel-based CNO Financial Group Inc. said the majority of the investments held in a trust with Beechwood Re—the reinsurer tied to to embattled hedge fund Platinum Partners—are in the category of the most-difficult-to-value assets.
 
About $302 million of the $591 million assets in the trust are considered Level 3, meaning market prices are so scarce that companies use internal models to gauge their value, CNO said Monday in a regulatory filing. Level 1 assets, for which market prices are most readily available, accounted for $58 million, and Level 2 for $231 million. A quarterly report from Beechwood at the end of June also showed that the trusts held a $6.8 million loan to a Platinum-managed fund, the filing shows.
 
CNO Chief Financial Officer Erik Helding said last week that the company was increasing its oversight of a 2014 deal to transfer some long-term care risks to Beechwood, after a Wall Street Journal article detailed a relationship between the reinsurer and the hedge fund. Platinum was raided by federal agents in June after prosecutors alleged that a manager bribed a union chief. CNO said Monday that it expects to finish an audit this quarter of some of the Level 3 assets.
 
“While we do not believe any of the assets which are the initial focus of the audit are direct investments in Platinum, the information available to us has indicated that some or all of these assets may bear some connection to Platinum or to parties which have had some past or present association with Platinum,” CNO said in the filing.
 
CNO shares dropped 2.8 percent, to $16.98 each, Monday morning, after declining 5.5 percent last week. The Journal article on July 25 stated that family-member trusts of some hedge-fund executives held a stake in Beechwood. Family members of Platinum executives no longer hold investments in Beechwood, a spokesman for the reinsurer said Wednesday.
 
The CNO units that ceded the risks to the Cayman Islands-based entity are domiciled in Indiana and New York, and Beechwood Re isn’t accredited by either of those states or graded by ratings firm A.M. Best, according to the filing. Because of its non-accredited status, trusts must be over-collateralized by 7 percent.
 
“Future payments into the trusts to maintain collateral requirements are subject to the ability and willingness of the reinsurer to honor its obligations,” CNO said. “In the event of default by Beechwood Re, we would be exposed to credit risk if the collateral held in the trusts cannot be realized or is liquidated at prices that are not sufficient to recover the full amount of the reinsurance receivables.”
 
Ryan Krueger, an analyst at Keefe Bruyette and Woods, wrote last week that everything appears to be fine at this point with Beechwood. If “issues” at Platinum spill over to the reinsurer, that could lead to a reversal of the reinsurance deal, known as a recapture, which could transfer $550 million of risk back to CNO.
 
“There is a zero percent chance of anything being recaptured because everything is over-collateralized, independently valued and backed up by Beechwood’s $2.4 billion balance sheet,” Davidson Goldin, a spokesman for the Beechwood, said by phone.
 
Beechwood’s assets are evaluated quarterly by Duff & Phelps and annually by KPMG, Goldin said. He said CNO’s review is part of a regularly scheduled audit.CNO Financial Group Inc. said the majority of the investments held in a trust with Beechwood Re, the reinsurer tied to to embattled hedge fund Platinum Partners, are in the category of the most-difficult-to-value assets.
 
About $302 million of the $591 million assets in the trust are considered Level 3, meaning market prices are so scarce that companies use internal models to gauge their value, CNO said Monday in a regulatory filing. Level 1 assets, for which market prices are most readily available, accounted for $58 million, and Level 2 for $231 million. A quarterly report from Beechwood at the end of June also showed that the trusts held a $6.8 million loan to a Platinum-managed fund, the filing shows.
 
CNO Chief Financial Officer Erik Helding said last week that the Carmel, Indiana-based company was increasing its oversight of a 2014 deal to transfer some long-term care risks to Beechwood, after a Wall Street Journal article detailed a relationship between the reinsurer and the hedge fund. Platinum was raided by federal agents in June after prosecutors alleged that a manager bribed a union chief. CNO said Monday that it expects to finish an audit this quarter of some of the Level 3 assets.
 
“While we do not believe any of the assets which are the initial focus of the audit are direct investments in Platinum, the information available to us has indicated that some or all of these assets may bear some connection to Platinum or to parties which have had some past or present association with Platinum,” CNO said in the filing.
 
CNO dropped 2.2 percent to $16.98 at 9:43 a.m. in New York, after declining 5.5 percent last week. The Journal article on July 25 stated that family-member trusts of some hedge-fund executives held a stake in Beechwood. Family members of Platinum executives no longer hold investments in Beechwood, a spokesman for the reinsurer said Wednesday.
 
The CNO units that ceded the risks to the Cayman Islands-based entity are domiciled in Indiana and New York, and Beechwood Re isn’t accredited by either of those states or graded by ratings firm A.M. Best, according to the filing. Because of its non-accredited status, trusts must be over-collateralized by 7 percent.
 
“Future payments into the trusts to maintain collateral requirements are subject to the ability and willingness of the reinsurer to honor its obligations,” CNO said. “In the event of default by Beechwood Re, we would be exposed to credit risk if the collateral held in the trusts cannot be realized or is liquidated at prices that are not sufficient to recover the full amount of the reinsurance receivables.”
 
Ryan Krueger, an analyst at Keefe Bruyette and Woods, wrote last week that everything appears to be fine at this point with Beechwood. If “issues” at Platinum spill over to the reinsurer, that could lead to a reversal of the reinsurance deal, known as a recapture, which could transfer $550 million of risk back to CNO.
 
“There is a zero percent chance of anything being recaptured because everything is over-collateralized, independently valued and backed up by Beechwood’s $2.4 billion balance sheet,” Davidson Goldin, a spokesman for the Beechwood, said by phone.
 
Beechwood’s assets are evaluated quarterly by Duff & Phelps and annually by KPMG, Goldin said. He said CNO’s review is part of a regularly scheduled audit.
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