CNO Alleges Fraud in Lawsuit Against Life Reinsurer Beechwood Re
October 4, 2016 by David Pilla
CARMEL, Ind. – Two insurance subsidiaries of CNO Financial Group Inc. are terminating reinsurance agreements with Beechwood Re, and filing a lawsuit against the life reinsurer as the units look to recapture about $550 million of closed block long-term care liabilities they say were funded in a fraudulent manner.
The CNO subsidiaries, Bankers Conseco Life Insurance Co. and Washington National Insurance Co., are taking the actions based on what CNO said is information gathered from an independent third-party audit and findings by the New York Department of Financial Services and the Indiana Department of Insurance.
In a Sept. 29 Form 8-K filing with the U.S. Securities and Exchange Commission CNO said Bankers Conseco Life and Washington National filed a complaint in U.S. District Court for the Southern District of New York against Mark Feuer, Scott Taylor and David Levy, which CNO described as “current and former principals” of Beechwood Re, “for the damages caused by their actions.”
Feuer is Beechwood Re’s current chief executive officer and Taylor the company’s current president.
“The complaint asserts claims against the defendants for, among other things, breach of fiduciary duty, fraud, and violation of the Racketeer Influenced and Corrupt Organizations Act,” CNO said in its filing.
“There have been no losses, including to CNO, and Beechwood has acted properly at all times,” Beechwood Re said in a emailed response to a request for comment. “Beechwood will take every possible step to refute these false claims and regrets CNO’s inappropriate decision to file a meritless lawsuit filled with baseless innuendo as a method of gaining leverage in a business negotiation.”
According to the complaint, the Beechwood Re executives and Platinum Partners LP, an investment fund manager, used investment funds improperly to fund reinsurance contracts.
In the complaint, Levy allegedly at one point “left Platinum to become the chief investment officer of Beechwood,” then around December 2014 he left Beechwood and “immediately returned to Platinum, after having breached his fiduciary duties by serving Platinum’s interests while he was Beechwood’s CIO.”
CNO spokeswoman Barbara Ciesemier said the company has no comment beyond its release and SEC filing.
An effort to reach Platinum Partners for comment was not immediately successful.
CNO said it is estimating a pro forma net loss and resulting after-tax charge of $55 million related to the issue. That estimated loss is calculated as if a recapture of the business involved had occurred on June 30, the group said.
As a result of the possible recapture, CNO said it will contribute about $200 million to its insurance subsidiaries to support the assets and liabilities of the affected business.
CNO added that to increase its excess capital position at the holding company, it has suspended its share repurchase program for the rest of 2016. “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,” the group said.
CNO said the commencement of its audit was disclosed on Aug. 1 in a Form 8-K filing with the U.S. Securities and Exchange Commission, related to $116 million of Level 3 investments that were held in trusts on behalf of BCLIC and WNIC. CNO said based on the information obtained in the audit, the company and the New York and Indiana regulators “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.”
CNO said it and its subsidiaries are taking steps to withdraw their assets from the relevant reinsurance trusts. CNO has also given notice to Beechwood Re that it and its subsidiaries are terminating their reinsurance contracts effective immediately.
Bankers Conseco and Washington National are also expanding the scope of the CNO audit to include additional investments with a reported amount of about $90 million.
The CNO subsidiaries have also begun “an arbitration proceeding and demanded emergency relief, specifically, that BRe provide immediate access to certain documents and information regarding the trust assets” to allow the audit of the relevant investments to be concluded.
Bankers Conseco and Washington National “are also seeking compensatory, consequential and punitive damages from BRe as part of the arbitration,” CNO said.
CNO also said its companies are “resuming responsibility for all aspects of policyholder administration. We expect no impact to policyholders as a result of these actions.”
Feuer said in an April interview with Best’s News Service that the CNO transaction was an example of Beechwood Re’s willingness to help other companies offload blocks of business (Best’s News Service, April 14, 2016). He noted at the time that in early 2014, CNO subsidiaries ceded $550 million of reserves and $40 million of other capital associated with closed blocks of long-term care insurance to Beechwood Re.
Bankers Conseco Life Insurance Co. and Washington National Insurance Co. have current Best’s Financial Strength Ratings of A- (Excellent).
Shares of CNO Financial Group Inc. (NYSE: CNO) were trading at $15.23 on the afternoon of Sept. 30, down 2.06% from the previous close.
(By David Pilla, news editor, BestWeek: David.Pilla@ambest.com)
