CNO Financial Group Inc. on Thursday said that two of its subsidiaries were terminating agreements with reinsurer Beechwood Re, after regulators in two states said that many assets managed by Beechwood were not compliant with insurance company guidelines because of exposure to troubled hedge fund manager Platinum Partners.
CNO said in a filing with the U.S. Securities and Exchange Commission that subsidiaries Bankers Conseco Life Insurance Company and Washington National Insurance Company were terminating reinsurance agreements with Beechwood and recapturing approximately $550 million of long-term care liabilities, essentially bringing the risk of the policies back in-house.
The issue stems from Beechwood’s putting CNO’s money into Platinum’s hedge funds and related investments. Platinum, based in New York and led by Mark Nordlicht, is in the process of liquidating its main funds amid dual federal probes and the arrest in June of a longtime associate.
Carmel, Indiana-based CNO, whose stock has already declined more than 15 percent on news of its Platinum exposure, estimated it would lose about $55 million, pending an audit by year-end of hard-to-value assets, which it believes were incorrectly priced by Beechwood.
CNO reported that state insurance departments in New York and Indiana concluded after an investigation that many assets managed by Beechwood for the CNO units were not compliant with conservative investment guidelines required for insurance companies. On Thursday, the regulators said CNO should immediately take corrective action, a seemingly impossible task given that some of the assets could take months or years to sell.
Also on Thursday, the CNO subsidiaries sued three current and former Beechwood executives in U.S. District Court for the Southern District of New York, accusing them of breach of fiduciary duty, fraud and violation of the Racketeer Influenced and Corrupt Organizations Act.
The suit alleges that Platinum executives provided Beechwood with $100 million in start-up capital and took minority ownership stakes, and that Beechwood in turn invested CNO’s assets into Platinum’s funds and related risky businesses, which were in need of capital.
“Beechwood’s massive and risky investments with Platinum … was the goal of the fraudulent scheme hatched by the Defendants and others to bamboozle institutional investors like Plaintiffs out of their money by tricking them into indirectly investing with Platinum,” the suit said.
The three people named as defendants are Beechwood Chief Executive Moshe “Mark” Feuer, President Scott Taylor and David Levy, who worked as an investment executive at Beechwood between positions at Platinum. Reuters revealed in April that Levy had returned to Platinum following an investment at Beechwood that appeared to benefit the hedge fund firm.
Beechwood, in an emailed statement to Reuters, said: “There have been no losses, including to CNO, and Beechwood has acted properly at all times.”
“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,” it added.
A spokesman for Platinum declined to comment.
A spokeswoman for CNO declined to comment beyond a press release and its SEC filing.
CNO said in the release that it would contribute approximately $200 million to its insurance subsidiaries as a safeguard and had suspended its share repurchase program for the rest of the year. The company added that it expected no impact to policyholders.
Reuters reported on Sept. 16 that another insurer, Senior Health Insurance Company of Pennsylvania, had at least $100 million of its assets tied to Platinum thanks to Beechwood. Losses were not expected thanks to an investment return guarantee from Beechwood and executive buy-outs of some of the difficult-to-exit positions.