The company's units are also recapturing about $550 million ofclosed block long-term care liabilities.
Previously, CNO had started an independent third-party of about $116 million ofLevel 3 investments that were held in trusts on behalf of the CNO units. Theaudit came after a Wall Street Journalreport that linked Beechwood to Platinum Partners LP, which is underinvestigation by federal prosecutors.
Based on the audit, the company, the New York State Department ofFinancial Services and the Indiana Department of Insurance decided that asignificant portion of the investments do not comply with applicable regulatoryrequirements for assets supporting the reinsurance agreements. The regulatorsdirected the CNO subsidiaries to remedy the resultant deficiency.
In addition, the CNO units sent written notice to Wilmington TrustNA, as trustee to the reinsurance trusts, that they exercised their rights toimmediately withdraw all assets from the trusts, and instructed WilmingtonTrust to deliver the assets to custodial accounts of the CNO units.
Bankers Conseco and Washington National recently expanded the scopeof the audit to include additional Level 3 investments amounting to about $90million.
The CNO units started an arbitration proceeding and demandedemergency relief, specifically that Beechwood provide immediate access tocertain documents and information regarding the trust assets, which will allowthe audit of the Level 3 investments to be concluded. They also seekcompensatory, consequential and punitive damages from Beechwood as part of thearbitration.
Bankers Conseco and Washington National have also started litigationagainst current and former individual principals of Beechwood — Mark Feuer,Scott Taylor and David Levy — for damages caused by their actions.
The company does not expect any impact to policyholders due to theseactions.
CNO said recapturing this business would require revaluation of theassets and liabilities based on valuation methodologies that are consistentwith methodologies used to value its own investments and insurance liabilities.
Based on preliminary information, the company expects to record anafter-tax charge of about $55 million, on a pro forma basis as if a recaptureof this business had occurred June 30.
After the adjustments, the remaining value of the Level 3investments is $200 million, including $67 million of investments included inthe initial scope of the audit, $65 million included in the additional scope ofthe audit, and $68 million of other investments.
CNO will contribute about $200 million to its insurance units due tothe recapture, related charge and additional capital required to support theassets and liabilities of this business.
Roughly one-half of the contribution is attributable to the expectedreduction in statutory surplus reflecting the charge recorded after recapturingthe business, and one-half is attributable to the expected increase inrisk-based capital mainly affecting the additional credit and investmentconcentration risk linked to the trust assets.
CNO expects to have about $175 million of cash and investments atthe holding company as of Sept. 30, and expects its consolidated risk-basedcapital ratio to be roughly 450% after giving effect to the contribution. Thecompany has also suspended its share repurchase program for the rest of 2016 toincrease its excess capital position at the holding company.