Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1993 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the transition period from to
Commission file number: 0-11164
CONSECO, INC.
Indiana No. 35-1468632
---------------------- ------------------------------
State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 573-6100
-------------------------------------- ---------
Address of principal executive offices Telephone
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, No Par Value New York Stock Exchange, Inc.
8-1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
$3.25 Series D Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of common stock held by nonaffiliates (computed as of
March 7, 1994): $1,320,947,980
Shares of common stock outstanding as of March 7, 1994: 26,171,939
DOCUMENTS INCORPORATED BY REFERENCE: The Registrant's definitive proxy
statement for the annual meeting of shareholders to be held June 7, 1994 is
incorporated by reference into Part III of this Report.
2 PART I
------
ITEM 1. BUSINESS OF CONSECO.
Background
Conseco, Inc. ("Conseco" or the "Company") is a specialized financial
services holding company which primarily makes controlling strategic
investments in insurance companies and related businesses, manages the
operations of those businesses to increase their value, provides services to
acquired companies and other businesses, and seeks to realize the increase in
value that its management brings to such companies through sale or
restructuring. The insurance companies in which Conseco has made investments
develop, market, issue and administer primarily annuity, individual health
insurance and life insurance products. Conseco provides administrative, data
processing and investment management services to affiliated and nonaffiliated
companies. The Company's operating strategy is to consolidate and streamline
the administrative functions of the acquired companies, to improve their
investment yields through active asset management by a centralized investment
operation and to eliminate their unprofitable products and distribution
channels.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Its executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and its telephone number is (317) 573-6100.
Conseco's earnings result from three different activities: (i) the operations
of life insurance companies; (ii) services provided to affiliates and
nonaffiliates for fees; and (iii) the acquisition and restructuring of life
insurance companies, currently through Conseco Capital Partners II, L.P ("CCP
II"). Major ownership interests of insurance companies include: (i) Bankers
Life Holding Corporation ("BLH") and its subsidiaries; (ii) Western National
Corporation ("WNC") and its subsidiary, Western National Life Insurance Company
("Western National"), both of which were wholly owned until WNC's initial
public offering ("IPO") completed February 15, 1994; (iii) CCP Insurance, Inc.
and its subsidiaries ("CCP"), in which Conseco has a 40 percent ownership
interest and which is accounted for under the equity method and (iv) wholly
owned life insurance subsidiaries, Bankers National Life Insurance Company
("Bankers National"), National Fidelity Life Insurance Company ("National
Fidelity") and Lincoln American Life Insurance Company ("Lincoln American").
During 1990, Conseco formed Conseco Capital Partners, L.P. (the
"Partnership"), which raised and invested $99.5 million of capital. Of this
amount approximately half was provided by the Company and the balance by other
investors. A wholly owned subsidiary of Conseco was the sole general partner
of the Partnership. The Partnership was the Company's vehicle for effecting
acquisitions of the following insurance companies: Great American Reserve
Insurance Company ("Great American Reserve") in June 1990, Jefferson National
Life Insurance Company ("Jefferson National") in November 1990, Beneficial
Standard Life Insurance Company ("Beneficial Standard") in March 1991 and
Bankers Life and Casualty Company ("Bankers Life") in November 1992. In July
1992, CCP, a holding company organized for the Partnership's first three
acquisitions, completed an IPO of 8.0 million common shares, generating net
proceeds to CCP of $111.2 million. Great American Reserve, Jefferson National
and Beneficial Standard are collectively referred to herein as the "CCP
Companies." On March 25, 1993, BLH, a holding company organized for Bankers
Life, completed an IPO of 19.6 million common shares at $22 per share. BLH
and Bankers Life are collectively referred to herein as "Bankers."
On February 15, 1994, WNC completed an IPO of 37,202,500 shares, which
included 2,300,000 shares sold by WNC and 34,902,500 shares sold by Conseco.
After this IPO, Conseco continues to own 40 percent of the outstanding common
stock of WNC. In addition, Conseco sold 150,000 shares to the President of WNC
at the initial public offering price, less underwriting discounts and
commissions. Net pretax proceeds to Conseco from the sale of WNC shares and
related transactions totaled $537.9 million. WNC and Western National are
collectively referred to herein as "Western." Effective January 1, 1994,
Western is included in Conseco's financial statements on the equity method.
The IPO and related transactions are further described in Note 16 to the
consolidated financial statements.
On February 2, 1994, Conseco announced the closing of the formation of CCP
II, a partnership which will invest in acquisitions of specialized annuity,
life and accident and health insurance companies and related businesses. As
of January 31, 1994, 36 investors had committed a total of $624 million of
capital to the new partnership in a private placement (see "Acquisitions and
Restructuring").
As used herein the terms "Conseco" or the "Company" refer to Conseco, Inc.
and its consolidated subsidiaries, unless the context otherwise requires.
3
INVESTMENTS IN LIFE INSURANCE COMPANIES
The following describes Conseco's major ownership interests in life
insurance companies and the business of these companies.
BANKERS
Bankers, which had total assets of approximately $4 billion at December 31,
1993, markets health and life insurance and annuity products primarily to
senior citizens through over 200 branch offices and approximately 3,300 career
agents. Most of Bankers' agents sell only Bankers' policies. Approximately
56 percent of the $1,464.7 million of direct premiums collected by Bankers in
1993 were from the sale of individual health insurance, principally Medicare
supplement and long-term care policies. Bankers believes that its success in
the individual health insurance market is attributable in large part to its
career agency force, which permits one-on-one contacts with potential
policyholders and builds loyalty to Bankers among existing policyholders. Its
efficient and highly automated claims processing system is designed to
complement its personalized marketing strategy by stressing prompt payment of
claims and rapid responses to policyholder inquiries.
Conseco owns 30.4 million common shares of BLH, or 56 percent of its
outstanding common shares. At December 31, 1993, the BLH shares owned by
Conseco had a net carrying value of $518.8 million, a fair value of
approximately $652.8 million and a cost of $313.1 million.
WESTERN
Western, which had total assets of $8.4 billion at December 31, 1993,
develops, markets and issues annuity products through niche distribution
channels. Approximately 98 percent of the $563.0 million of direct premiums
collected in 1993 were from the sale of annuity products. Western National
markets single premium deferred annuities ("SPDAs") to the savings and
retirement markets through financial institutions (principally banks and
thrifts), flexible premium deferred annuities ("FPDAs") to the tax-qualified
retirement market and single premium immediate annuities ("SPIAs") primarily
to the structured settlement market.
Western National was a wholly owned subsidiary of Conseco from its
acquisition in 1987 to the completion of the initial public offering of WNC,
Western National's parent, on February 15, 1994. After the offering Conseco
continues to own 40 percent of the common stock of WNC. The sale of common
stock of WNC and related transactions generated net pretax proceeds to Conseco
of $537.9 million, which were used to repay a $200 million senior unsecured
loan and for other general corporate purposes. Conseco will record, in the
first quarter of 1994, a one-time, after-tax gain of approximately
$43 million as a result of the IPO and related transactions.
CCP
CCP, which had $5.3 billion of assets at December 31, 1993, is a
specialized insurance holding company whose subsidiaries market, issue and
administer annuity, life and employee benefit-related insurance products
through diversified cost-effective distribution channels. These channels
consist of educator market specialists who sell tax-qualified annuities
and certain employee benefit-related insurance products primarily to school
teachers and administrators, professional independent producers who sell
various annuity and life insurance products aimed primarily at the retirement
market and financial institutions that sell SPDAs to their depositors through
employee agents. Approximately 74 percent of the $451.0 million of total
premiums collected in 1993 were from the sale of annuity products.
Conseco owns 11.6 million shares of CCP, or 40 percent of CCP's common
shares outstanding. At December 31, 1993, the CCP shares owned by Conseco had
a net carrying value of approximately $244.3 million, a fair value of
approximately $322.1 million and a cost of $102.8 million.
4
CONSECO'S WHOLLY OWNED INSURANCE SUBSIDIARIES
Conseco's wholly owned insurance subsidiaries (excluding Western) had total
assets of approximately $1.0 billion at December 31, 1993. They have
profitable in-force blocks of many different annuity and life products, but do
not currently actively market their products.
Total premiums collected by these companies during 1993 were $148.2
million, including $61.8 million of premium from guaranteed investment
contracts and deposit funds maintained by subsidiaries of the Company.
SERVICES PROVIDED TO AFFILIATES AND NONAFFILIATES FOR FEES
Various combinations of services, including investment management, mortgage
origination and servicing, policy administration, data processing, product
marketing and executive management services, are provided to all affiliates and
to unaffiliated clients. In addition, subsidiaries of Conseco earn fees by:
(i) providing marketing services to financial institutions related to the
distribution of insurance and investment products and (ii) distributing
property and casualty insurance products through independent agencies. Total
fees from affiliates and nonaffiliates were $49.0 million, $30.2 million and
$22.4 million in 1993, 1992 and 1991, respectively. To the extent these
services are provided to entities that are included in the
financial statements on a consolidated basis, the intercompany fees are
eliminated in consolidation. Growth in this activity results from new clients
(both affiliated and others) and from increases in the fee-producing activities
conducted for such clients.
ACQUISITIONS AND RESTRUCTURING
Conseco believes that the consolidation of the U.S. life insurance industry
will continue, and Conseco intends to participate in this process. Conseco
believes that, under appropriate circumstances, it is more advantageous to
acquire companies with large books of in-force life and health insurance and
annuities than to produce new business because initial underwriting costs have
already been incurred and mature business is generally less likely to
terminate, making more predictable profit analysis possible.
Since Conseco commenced operations in 1982, it has acquired 11 life
insurance companies, the first seven as wholly owned subsidiaries and the last
four through the first partnership. Recent acquisition activity is described
in Notes 1 and 2 to the consolidated financial statements. All acquisitions
have been accounted for as purchases. Therefore, activities of acquired
companies have been included in the results of operations commencing with the
date of purchase. Of the first seven companies acquired by Conseco, three were
subsequently sold and four remained as wholly owned subsidiaries at December
31, 1993. One of the four (Western National) was partially disposed of in
February 1994 when Conseco sold 60 percent of its interest in a public offering
as described in Note 16 to the consolidated financial statements. The first
three companies acquired in the first partnership are now wholly owned
subsidiaries of CCP, in which Conseco holds a 40 percent interest. The final
acquisition of the first partnership is now a wholly owned subsidiary of BLH,
in which Conseco holds a 56 percent interest.
5
Following is a summary of the major acquisitions by Conseco and the
Partnership since 1982:
Purchase Price
Including Fees
Year Company Acquired and Costs Acquired By
---- ---------------- --------- -----------
(Dollars in millions)
1982 Security National Life Insurance Company $ 1.3 Conseco
1983 Consolidated National Life Insurance Company 4.2 Conseco
1985 Lincoln American 25.0 Conseco
1986 Lincoln Income Life Insurance Company 32.3 Conseco
1986 Bankers National 117.6 Conseco
1987 Western National 261.7 Conseco
1989 National Fidelity 68.4 Conseco
1990 Great American Reserve 135.0 Partnership
1990 Jefferson National 171.0 Partnership
1991 Beneficial Standard 141.1 Partnership
1992 Bankers Life 600.0 Partnership
On February 2, 1994, Conseco announced the closing of the formation of CCP
II, a partnership which will invest in acquisitions of specialized annuity,
life and accident and health insurance companies and related businesses. As
of January 31, 1994, 36 investors had committed a total of $624 million of
capital to the new partnership in a private placement. Commitments to the new
partnership include $100 million from Conseco, $25 million from Bankers, $25
million from CCP, $50 million from Western and $36 million from the executive
officers and directors of Conseco and its affiliates. A subsidiary of Conseco
is the sole managing general partner of CCP II.
OPERATIONS
Conseco reduces operating expenses by centralizing, standardizing and more
efficiently performing many functions common to most life insurance companies,
such as underwriting and policy administration, accounting and financial
reporting, marketing, regulatory compliance, actuarial services and asset
management.
Conseco's centralized management techniques resulted in significant
employee reductions and expense savings in the nine insurance companies
acquired between 1985 and 1992. The ratio of aggregate operating expenses
(excluding commissions) to premiums collected for these nine companies was
reduced from 11 percent for the last year prior to acquisition to 7.4 percent
for the second full year (or in Bankers' case, the first full year) following
acquisition. The ratio of such expenses to total assets of these companies
decreased from 3.4 percent to 1.9 percent in the same periods.
The administration of Bankers' individual health insurance, unlike that
of life insurance or annuities, involves a high volume of claims processing,
multiple contacts with policyholders and generally higher operational costs.
In 1993, Bankers processed more than four million policyholder claims. Bankers
has developed an efficient and highly automated policyholder administration
operation to minimize the costs of such large volume processing and deliver a
high level of service to its policyholders. Bankers' state-of-the-art
processing techniques stress prompt payment of claims. In most cases, Bankers
mails its policyholders' checks within a week of receiving a claim. Bankers
believes that its efficiency and promptness in processing policyholder claims
have been a major reason for its strong reputation for service and the above
average persistency of its Medicare supplement products. Conseco (through
certain of its wholly owned subsidiaries) provides Bankers certain investment
advisory, executive consulting, data processing, accounting, legal, mortgage
loan servicing and origination, and other services.
During 1993, Bankers implemented several measures to enhance efficiency
and reduce operating costs, including relocating its office space, which
previously was scattered in 27 separate buildings totaling approximately
750,000 square feet in three separate locations in the Chicago area. The
6
scattering of Bankers' employees resulted in logistical complexities,
difficult communications and control and additional operating costs. In the
fourth quarter of 1993, Bankers relocated to approximately 300,000 square feet
of office space on two floors of a single facility in downtown Chicago pursuant
to a 15-year lease agreement. Bankers entered into a 10-year lease for
approximately 100,000 square feet of warehouse space in a facility also located
in Chicago.
Prior to WNC's IPO, Western had no full-time employees, and all of
Western's daily operations were handled by Conseco pursuant to agreements
between Western and Conseco. After the completion of the IPO, Western employs
approximately 150 people, including certain former Conseco employees who work
at the Western Annuity Center in Amarillo, Texas. To maintain operational
efficiencies, Western will continue to contract with Conseco and its
subsidiaries for investment advisory, data processing, mortgage loan servicing
and origination and other services.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolios of Conseco's wholly
owned subsidiaries, Western, CCP, Bankers and other nonaffiliated clients.
CCM had approximately $19 billion of assets at fair value under management at
December 31, 1993, of which $15.9 billion were assets of affiliated companies
and $3.1 billion were assets of nonaffiliated companies. CCM's investment
philosophy is to maintain a largely investment grade fixed-income portfolio,
provide adequate liquidity for expected liability durations and other
requirements and maximize total return through active investment management.
Investment activities are an integral part of the Company's business;
investment income is a significant component of the Company's total revenues.
Profitability is significantly affected by spreads between interest yields on
investments and rates credited on insurance liabilities. Substantially all
credited rates on single premium deferred annuities and flexible premium
deferred annuities may be changed annually. As of December 31, 1993, the
average yield on the Company's investment portfolio was 8.2 percent and the
average interest rate credited on the Company's total liability portfolio was
6.5 percent.
The Company balances the duration of its invested assets with the expected
duration of benefit payments arising from insurance liabilities. At December
31, 1993, the adjusted modified duration of fixed maturities, trading
securities and short-term investments was 5.7 years.
For information regarding the composition and diversification of the
investment portfolio of Conseco's subsidiaries, see Management's Discussion and
Analysis - "Investments" and Note 3 to the consolidated financial statements.
COMPETITION
The life insurance industry is highly competitive and consists of a large
number of insurance companies, some of which have substantially greater
financial resources, broader and more diversified product lines and larger
staffs than those of Conseco and its investees. Competition also is
encountered from the expanding number of banks, securities brokerage firms
and other financial intermediaries which market insurance products and offer
competing products, such as savings accounts and securities. Additionally,
when Conseco's acquisition partnerships bid on companies they wish to acquire,
they typically are in competition with other entities.
A significant portion of Western National's annuity sales currently is made
through banks and thrifts, which are presently precluded by state and federal
regulation from issuing insurance directly. Some federal regulatory agencies,
members of Congress and representatives of the banking industry have advocated
legislative and regulatory changes to broaden the ability of banks to
participate in the direct sale and underwriting of insurance products. If such
changes were to occur, Western National could be faced with increased
competition in its markets or the loss of certain marketing relationships.
7
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the ratings of an insurer as
one factor in determining which insurer's annuity to market or purchase.
Bankers Life, Western National and the principal insurance subsidiaries of CCP
are rated "A (Excellent)" by A.M. Best. Ratings for the industry currently
range from "A++ (Superior)" to "C- (Fair)". Publications of A.M. Best indicate
that the "A" rating is assigned to those companies that, in A.M. Best's
opinion, have achieved excellent overall performance when compared to the norms
of the insurance industry and that generally have demonstrated a strong ability
to meet their respective policyholder and other contractual obligations. In
evaluating a company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity as well as the company's
book of business, the adequacy and soundness of its reinsurance, the quality
and estimated market value of its assets, the adequacy of its reserves and the
experience and competency of its management. A.M. Best's ratings are based
upon factors relevant to policyholders, agents, insurance brokers and
intermediaries. In addition, Western National and Bankers Life have claims
paying ability ratings of AA- from Duff & Phelps Credit Rating Company ("Duff
& Phelps") and the three CCP Companies have claims paying ability ratings
of A+ from Duff & Phelps. Duff & Phelps' claims paying ability ratings range
from "AAA (Highest claims paying ability)" to "DD (Company is under an order
of liquidation)." The AA- rating represents "Very high claims paying ability"
and the A+ rating represents "High claims paying ability." At present, Western
National also has a claims paying rating of A+ from Standard & Poor's
Corporation and a financial strength rating of Baa2 from Moody's Investor
Service, Inc. Generally, rating agencies base their ratings on information
furnished to them by the issuer and on investigations, studies and
assumptions by the rating agencies. There is no assurance that any particular
rating will continue for any given period of time or that it will not be
changed or withdrawn entirely if, in the judgement of the rating agency,
circumstances so warrant.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The standardized
policy features for Medicare supplement products mandated by the Omnibus Budget
Reconciliation Act of 1984 and the National Association of Insurance
Commissioners increase the comparability of such policies and may intensify
competition based on factors other than product features. See "Investments in
Life Insurance Companies - Bankers" and "Regulation."
The Company believes that the insurance companies it invests in are able
to compete effectively because they: (i) emphasize specialized distribution
channels where the ability to respond rapidly to changing customer needs yields
a competitive edge; (ii) are experienced in establishing and cultivating
relationships with the unique distribution networks and the independent
marketing companies operating in these specialized markets; (iii) can offer
competitive premium rates as a result of their lower-than-average operating
costs and increased investment yields achieved by applying active investment
portfolio management techniques; and (iv) have reliable policyholder
administrative services supported by customized data processing systems.
UNDERWRITING
Under current regulations, insurance companies are prohibited from
underwriting Medicare supplement policies for certain first time purchasers.
Under these rules, if a person applies for insurance within six months of
becoming eligible for Medicare by reason of age, the person may not be rejected
due to medical conditions. For other prospective policyholders, such as senior
citizens who are transferring to Bankers' products, the underwriting procedures
are relatively limited.
Long-term care and comprehensive major medical products generally require
detailed underwriting procedures designed to assess and quantify the insurance
risks before such policies are issued to individuals and groups. Certain
health and life insurance products require medical examinations of applicants
(including blood and urine tests, where permitted). These requirements are
graduated according to the applicant's age and may vary by policy type. The
Company also relies on medical records and each potential policyholder's
written application for insurance products, which is generally prepared
under the supervision of a trained agent. The Company uses information from
the application and, in some cases, inspection reports, physician statements
8
or medical examinations to determine whether a policy should be issued as
applied for, issued with reduced coverage under a health rider or rejected.
Group accident and health policies are underwritten based on the
characteristics of the group and its past claim experience.
Underwriting with respect to SPDAs and FPDAs is minimal. The Company
carefully examines specific information on structured settlement annuitants to
develop specific schedules of payments to injured persons, frequently pursuant
to legal judgements or insurance settlements. Agents obtain detailed medical
information about an annuitant, including test results and medical history.
Such information is evaluated by the medical director who provides a life
expectancy which is equated to an age higher than the current age of the
annuitant. The price of the annuity is developed using the "higher" age and
a mortality table, taking into consideration the Company's expectations about
current and future investment performance.
Substantially all the life insurance policies issued by the Company's
subsidiaries are underwritten individually, although standardized underwriting
procedures have been adopted for certain coverages. After initial processing,
each file is reviewed and the information needed to make an underwriting
decision (such as medical examinations, doctors' statements and special
medical tests) is obtained. After the information is collected and reviewed,
the Company either issues the policy as applied for, issues the policy with an
extra premium charge because of unfavorable factors, or rejects the
application.
REINSURANCE
Consistent with the general practice of the life insurance industry, the
Company's subsidiaries reinsure portions of the coverage provided by their
insurance products with other insurance companies under agreements of indemnity
reinsurance. The Company's subsidiaries also assume reinsurance from other
insurers. Reinsurance assumed is accounted for in the same manner as direct
business.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. Indemnity reinsurance does not discharge the original
insurer's primary liability to the insured, but it is the practice of insurers
(subject to certain limitations of state insurance statutes) to account
for risks which have been reinsured with other approved companies, to the
extent of the reinsurance, as though they are not risks for which the original
insurer is liable. The Company's reinsured business is ceded to numerous
reinsurers; the amount of business ceded to any one reinsurer is not material.
The policy risk retention limit of Conseco's subsidiaries on the life of
one individual does not exceed $.8 million as of December 31, 1993.
Reinsurance ceded by Conseco's subsidiaries represented 8 percent of gross
combined life insurance in force at December 31, 1993. Reinsurance assumed by
Conseco's subsidiaries represented .5 percent of net combined life insurance
in force at December 31, 1993.
The Company also has ceded policy liabilities under assumption reinsurance
agreements where all obligations under the insurance contracts have been ceded
to another company. Accordingly, the insurance liabilities related to such
policies are not reported in the balance sheet. The Company believes the
assuming companies are able to honor all contractual commitments under the
assumption reinsurance agreements, based on the Company's periodic reviews of
their financial statements, insurance industry reports and reports filed with
state insurance departments.
At December 31, 1993 and 1992, reinsurance receivables with carrying values
of $398.5 million and $420.0 million, respectively, were associated with
annuity business ceded to an unaffiliated company and retroceded on
substantially identical terms to an ICH affiliate. Bankers provides
administrative, data processing and general management services related to the
reinsured business in exchange for annual fees based on a percentage of
reinsured reserves. Additionally, Bankers is entitled to experience refunds
based on the investment performance of assets supporting the annuity reserves.
9
During the first quarter of 1993, Bankers recaptured certain participating
life insurance policies (having assets approximately equal to insurance
liabilities of $182.0 million) that had previously been ceded to an affiliate
of ICH, from whom Bankers was acquired in 1992. Recapture fees of $15.5
million were capitalized as a component of cost of policies purchased.
In a few instances, Bankers has reinsured blocks of insurance to an
unrelated insurer to provide funds for enhancing surplus and for other
purposes. Under these surplus relief arrangements, statutorily determined
profits on the reinsured business are accelerated through the reinsurer's
payment of ceding commissions representing the present value of profits on
the business over the reinsurance period. At December 31, 1993, Bankers Life's
statutory capital and surplus included approximately $2.9 million of benefits
from this financial reinsurance. No benefit was recognized under generally
accepted accounting principles ("GAAP").
EMPLOYEES
As of March 7, 1994, Conseco had approximately 3,140 employees, including
approximately 1,600 home office employees and 450 branch office employees of
Bankers. None of the Company's employees are covered by a collective
bargaining agreement. Conseco believes that it has excellent relations with
its employees. Approximately 150 employees formerly employed by Conseco became
employees of WNC after the initial public offering of WNC's common stock on
February 15, 1994.
GOVERNMENTAL REGULATION
General
Life insurance companies are subject to regulation and supervision by the
states in which they transact business. The laws of the various states
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating
trade practices, establishing guaranty associations, licensing agents,
approving policy forms, filing premium rates on certain business, setting
reserve requirements, determining the form and content of required financial
statements, determining the reasonableness and adequacy of capital and surplus
and prescribing the maximum concentrations of certain classes of investments.
Most states also have enacted legislation which regulates insurance holding
company systems, including acquisitions, extraordinary dividends, the terms of
surplus debentures, the terms of affiliated transactions, and other related
matters. Currently, the Company and its insurance subsidiaries are registered
as a holding company system pursuant to such legislation in Texas, Missouri,
Tennessee, California and Illinois and routinely report to other jurisdictions.
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, can significantly affect the insurance
business. Recently, increased scrutiny has been placed upon the insurance
regulatory framework and a number of state legislatures have considered or
enacted legislative proposals that alter, and in many cases increase, state
authority to regulate insurance companies and holding company systems. In
addition, legislation has been introduced in Congress which could result in the
federal government assuming some role in the regulation of the insurance
industry.
The National Association of Insurance Commissioners ("NAIC"), an
association of state regulators and their staffs, attempts to coordinate the
state regulatory process and continually re-examines existing laws and
regulations and their application to insurance companies. Recently, this
re-examination has focused on insurance company investment and solvency issues
and has resulted in new interpretations of certain existing laws, the
development of certain new laws and the implementation of certain non-statutory
guidelines. The NAIC has formed committees and appointed advisory groups to
study and formulate regulatory proposals on such diverse issues as the use of
surplus debentures, accounting for reinsurance transactions and the adoption
of risk-based capital ("RBC") rules. In addition, in connection with its
accreditation of states to conduct periodic company examinations, the NAIC has
encouraged states to adopt model NAIC laws on specific topics, such as holding
company regulations and the definition of extraordinary dividends. It is not
possible to predict the future impact of changing state and federal regulation
on the operations of the Company.
The NAIC adopted RBC requirements, effective December 31, 1993, to evaluate
the adequacy of statutory capital and surplus in relation to investment and
insurance risks associated with: (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
The RBC formula is designed as an early warning tool to help state regulators
identify possible weakly capitalized companies for the purpose of initiating
regulatory action. In addition, the formula defines a new minimum capital
standard which supplements the prevailing system of low, fixed minimum capital
and surplus requirements on a state-by-state basis.
10
The new RBC requirements provide for four different levels of regulatory
attention depending on the ratio of the company's total adjusted capital
(defined as the total of its statutory capital, surplus and asset valuation
reserve and 50 percent of apportioned dividends) to its RBC. The "Company
Action Level" is triggered if a company's total adjusted capital is less
than 100 percent but greater than or equal to 75 percent of its RBC, or if
total adjusted capital is less than 125 percent of RBC and a negative trend has
occurred. The trend test calculates the greater of any decrease in the margin
(i.e., the amount in dollars by which a company's total adjusted capital
exceeds its RBC) between the current year and the prior year and
between the current year and the average of the past three years, and assumes
that the decrease could occur again in the coming year. If a similar decrease
in the margin in the coming year would result in an RBC of less than 95
percent, then the Company Action Level would be triggered. At the Company
Action Level, a company must submit a comprehensive plan to the regulatory
authority which discusses proposed corrective actions to improve its capital
position. The "Regulatory Action Level" is triggered if a company's total
adjusted capital is less than 75 percent but greater than or equal to 50
percent of its RBC. At the Regulatory Action Level, the regulatory authority
will perform a special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized Control Level" is
triggered if a company's total adjusted capital is less than 50 percent but
greater than or equal to 35 percent of its RBC, and the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control. The "Mandatory Control Level" is triggered if a company's
total adjusted capital is less than 35 percent of its RBC, and the regulatory
authority is mandated to place the company under its control. Calculations
using the NAIC formula at December 31, 1993, indicated that the ratios of the
total adjusted capital to RBC for all of Conseco's primary subsidiaries and
investees were greater than twice the Company Action Level.
Texas recently adopted its own RBC requirements, the stated purpose of
which is to require a minimum level of capital and surplus to absorb the
financial, underwriting, and investment risks assumed by an insurer. Under
Texas' RBC regulations, Western National and Bankers National, as
Texas-domiciled companies, must maintain a minimum level of capital and surplus
determined by a calculation formula contained in the Texas Regulations.
Additionally, two insurance subsidiaries of CCP are domiciled in Texas. Texas'
RBC requirements differ from those adopted by the NAIC in two principal
respects: (i) the elements used to determine minimum RBC levels in the
respective calculation formulas differ and (ii) the Texas Regulations do not
contain "Action Levels" (like those adopted by the NAIC) prescribing certain
corrective actions if RBC threshold levels are not met. However, the
Commissioner of the Texas Insurance Department does have the power to take
similar corrective actions if a company does not maintain the required minimum
level of capital and surplus. Under the Texas Regulations, an insurer has met
RBC requirements if its admitted assets exceed its liabilities by at least 3
percent. At December 31, 1993, the admitted assets of each of the Conseco
subsidiaries and CCP subsidiaries domiciled in Texas exceeded liabilities by
more than twice the required 3 percent level.
Most states have enacted legislation or adopted administrative regulations
affecting the acquisition of control of insurance companies as well as
transactions between insurance companies and persons controlling them. The
nature and extent of such legislation and regulations vary from state to state.
Most states, however, require administrative approval of the acquisition of 10
percent or more of the outstanding shares of an insurance company incorporated
in the state or the acquisition of 10 percent or more of the outstanding stock
of an insurance holding company whose insurance subsidiary is incorporated in
the state. The acquisition of 10 percent of such shares is generally deemed
to be the acquisition of "control" for the purpose of the holding company
statutes and requires not only the filing of detailed information concerning
the acquiring parties and the plan of acquisition, but also administrative
approval prior to the acquisition. In many states, an insurance authority may
find that "control" in fact does not exist in circumstances in which a person
owns or controls either a lesser or a greater amount of securities.
As part of their routine regulatory oversight process, insurance
departments approximately once every three years conduct periodic detailed
examinations ("Triennial Examinations") of the books, records and accounts of
insurance companies-domiciled in their states. Such Triennial Examinations are
11
generally conducted in cooperation with the departments of two or three other
states under guidelines promulgated by the NAIC. The Company expects Western
National and Bankers to each receive a Triennial Examination in 1994.
Health Care
Federal and state regulations have had, and are expected to continue to
have, the effect of increasing the regulation of Medicare supplement plans in
all states. Recent NAIC rules: (i) require minimum loss ratios of at least 75
percent for group policies and 65 percent for individual policies; (ii) create
10 standardized benefit plans to promote comparability; (iii) guarantee
renewability of policies; (iv) prohibit insurers from underwriting for health
conditions or claims experience policy applications from persons who first
become eligible for Medicare by reason of age; and (v) impose restrictions on
commissions payable to agents. The NAIC rules also require insurance companies
to file annual requests for premium increases, rather than relying on automatic
escalation provisions. As of November 1, 1993, all states have adopted the
NAIC rules.
Numerous proposals have been introduced in Congress and the state
legislatures aimed at reforming the current health care system. Proposals have
included, among other things: (i) modifications to the existing employer-based
insurance system; (ii) a quasi-regulated system of "managed competition" among
health plans; and (iii) a single payer, public program. Changes in health care
policy could significantly affect Bankers' business. For example, federal
comprehensive major medical or long-term care programs, if proposed and
implemented, could partially or fully replace some of Bankers' current
products. However, the institution of such programs also could create new
marketplace opportunities for supplemental insurance similar to Bankers'
Medicare supplement policies. Some reform proposals also could: (i)
standardize major medical or long-term care coverages; (ii) impose mandated or
targeted loss ratios or rate regulation; (iii) require the use of community
rating or other means that limit the ability of insurers to differentiate among
risks; or (iv) mandate utilization review or other managed care concepts to
determine what benefits would be paid by insurers. If adopted, these or other
proposals could increase the level of competition among health insurers. In
addition, changes could be made in Medicare that could necessitate revisions
in Bankers' Medicare supplement products. Other potential initiatives,
designed to tax insurance premiums or shift medical care costs from government
to private insurers, could have an adverse effect on Bankers' business,
although such taxes and costs might be offset in whole or in part by increasing
premiums. Depending on their form, proposals designed to reduce health care
costs could reduce benefits payable by Bankers. Bankers is unable to predict
what changes to the country's health care system will be enacted, and if
enacted, their scope and effect on Bankers' business. However, Bankers
continues to believe that the opportunity for its products will grow under any
realistic and affordable health care reform scenario.
FEDERAL INCOME TAXATION
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted on
August 10, 1993. The most significant provision of the Act affecting the
Company was the increase in the corporate income tax rate to 35 percent from
34 percent, effective for taxable income reported for the year 1993. As a
result of the increase in the tax rate, the Company recognized additional tax
expense of $8.9 million, consisting of: (i) $5.6 million related to income in
1993; (ii) $1.9 million related to a one-time adjustment to accumulated
deferred taxes relating to prior years' income; and (iii) $1.4 million related
to unrealized appreciation of securities at the date the new law was enacted.
In addition, the equity in earnings of CCP was reduced by approximately $1.6
million as a result of the Company's share of the additional tax expense
recorded by CCP related to the increase in the tax rate. The impact of other
provisions of the Act was not material.
The annuity and life insurance products marketed and issued by Conseco's
subsidiaries generally provide the policyholder with an income tax advantage,
as compared to other saving investments such as certificates of deposit and
bonds, in that income taxation on the increase in value of the product is
deferred until receipt by the policyholder. With other savings investments,
the increase in value is taxed as earned. Life insurance benefits which accrue
12
prior to the death of the policyholder and annuity benefits are generally not
taxable until paid, and life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably as
opposed to the economic accrual methods, which tend to accelerate taxable
income into earlier years and which are required for other investments. The
tax advantage for annuities and life insurance is provided in the Internal
Revenue Code ("IRC"), and is generally followed in all states and other United
States taxing jurisdictions. Accordingly, it is subject to change by Congress
and the legislatures of the respective taxing jurisdictions.
Conseco's insurance company subsidiaries are taxed as life insurance
companies under the IRC. During 1990, the taxation of life insurance companies
was changed to require a portion of the expenses incurred in selling insurance
products to be deducted over a period of years, as opposed to immediate
deduction in the year incurred. This change, although not affecting tax
expense on the Company's financial statements because it affects only the
timing of the deductions, does have the effect of increasing the Company's tax
for statutory accounting purposes. This, in turn, reduces statutory surplus
and, accordingly, decreases the amount of cash dividends that may be paid by
the life insurance subsidiaries. For 1993, the increase in the Company's
current tax due to this change was $25.5 million.
The Company had regular tax loss carryforwards at December 31, 1993, of
approximately $94.9 million, portions of which begin expiring in 1999.
ITEM 2. PROPERTIES.
The Company's principal operations are located on a 150-acre corporate
campus in Carmel, Indiana, immediately north of Indianapolis. These facilities
contain approximately 416,000 square feet of space in seven buildings which
contain Conseco's executive offices and certain administrative operations of
its subsidiaries. These facilities include significant capacity for future
growth.
Bankers currently leases 300,000 square feet of executive office and
administration space in a single facility in downtown Chicago under a 15-year
lease agreement. Bankers also leases approximately 100,000 square feet of
warehouse space in a second Chicago facility under a 10-year lease agreement.
Bankers leases approximately 208 sales offices totaling approximately 340,000
square feet. All of the sales office leases are short-term in length, with
remaining lease terms ranging from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Conseco and its subsidiaries are involved in lawsuits
which are primarily related to their operations. Most of these lawsuits
involve claims under insurance policies or other contracts of the Company.
Even though Conseco may be contesting the validity or extent of its liability
in response to such lawsuits, the Company has established reserves in its
consolidated financial statements which approximate its estimated potential
liability or cost of defense. Accordingly, none of the lawsuits currently
pending, either individually or in the aggregate, is expected to have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
OPTIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Officer Positions with Conseco, Principal
Name and Age(a) Since Occupation and Business Experience (b)
- - ---------------- ----- --------------------------------------
Stephen C. Hilbert, 48 1979 Since 1979, Chairman of the Board and Chief Executive Officer, since 1988,
President, and from 1979 to 1986, Secretary of Conseco.
Ngaire E. Cuneo, 43 1992 Since 1992, Executive Vice President of Corporate Development; from 1986
to 1992, Senior Vice President and Corporate Officer of General Electric
Capital Corporation.
Rollin M. Dick, 62 1986 Since 1986, Executive Vice President, Chief Financial Officer and Director,
and from 1988 to 1989, Treasurer, of Conseco.
Donald F. Gongaware, 58 1985 Since 1985, Executive Vice President and Director and, since 1989, Chief
Operations Officer of Conseco.
Lawrence W. Inlow, 43 1986 Since 1986, Executive or Senior Vice President, Secretary and General
Counsel of Conseco.
Walter T. Kirkbride, 47 1987 Since 1987, Executive Vice President and Chief Investment Officer of
Conseco.
___________________
(a) The executive officers serve as such at the discretion of the Board of Directors and are elected at the annual meeting of the
Board.
(b) Business experience is given for at least the last five years.
14
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The common stock of Conseco (trading symbol "CNC") has been listed for
trading on the New York Stock Exchange (the "NYSE") since 1986. The following
table sets forth the quarterly dividends paid per share and the ranges of high
and low sales prices per share on the NYSE for the last two fiscal years, based
upon information supplied by the NYSE. All applicable share and per share data
in this Form 10-K have been adjusted for the two-for-one stock splits
distributed on July 1, 1991 and April 1, 1992.
Period Market Price Dividend
------ ------------
High Low Paid
---- --- ----
1992:
First Quarter $41-1/2 $30-5/8 $0.020
Second Quarter 36-1/4 20-5/8 0.020
Third Quarter 32-1/2 24-1/4 0.020
Fourth Quarter 47-3/8 29-1/4 0.020
1993:
First Quarter 73-5/8 45-3/8 0.025
Second Quarter 67-3/8 44-5/8 0.025
Third Quarter 75-1/4 57-3/4 0.025
Fourth Quarter 75-3/4 53-1/2 0.125
As of March 7, 1994, there were approximately 14,700 holders of record of
the outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
In October 1988, the Company's Board of Directors adopted a policy of
paying regular quarterly cash dividends on its common stock. The first such
dividend was $.0125 per share. Subsequent dividends, which were increased to
$.015 per share effective with the dividend paid October 1, 1990, to $.02 per
share effective with the dividend paid October 1, 1991, to $.025 per share
effective with the dividend paid January 4, 1993, and to $.125 per share
effective with the dividend paid October 1, 1993, have been paid on the first
business day of each calendar quarter, after review by the Board of
Directors of the Company's interim operating results. The Company's general
policy continues to be to retain most of its earnings. Retained earnings have
been used to finance the growth and development of the Company's business
through acquisitions or otherwise and to finance the repurchase of its common
stock on those occasions when the Company has believed that the use of funds
for stock repurchases would not interfere with other cash needs and that its
shares were undervalued in the market.
In February 1993 the Company issued $287.5 million liquidation value Series
D Cumulative Convertible Preferred Stock ("Preferred Stock"), on which
dividends ($3.25 per share) are cumulative from the date of original issue and
are payable quarterly, commencing April 15, 1993. The terms of the Preferred
Stock prohibit the payment of cash dividends on capital stock ranking junior
to the Preferred Stock if the Company is not current in its dividend payments
on the Preferred Stock. During 1993, the Company paid dividends of $13.5
million on the Preferred Stock and is current on its payments.
The principal operating subsidiaries of Conseco are life insurance
companies organized under state laws and subject to regulation by state
insurance departments. These laws and regulations limit the ability of
insurance subsidiaries to make cash dividends, loans or advances to a holding
company such as Conseco. However, these laws generally permit the payment,
without prior approval, of annual dividends which in the aggregate do not
exceed the greater of (or in some states the lesser of): (i) the subsidiary's
prior year net gain from operations; or (ii) 10 percent of surplus at the prior
year-end, both computed on the statutory basis of accounting prescribed for
insurance companies.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
Years Ended December 31,
-----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
OPERATING DATA
Premiums collected $2,140.1 $1,464.9 $1,648.7 $1,361.4 $937.9
Insurance policy income 1,293.8 378.7 280.8 152.8 198.9
Investment activity:
Net investment income 896.2 888.6 921.4 581.7 417.7
Net trading income 93.1 35.9 50.7 6.0 14.3
Net realized gains 149.5 124.3 123.3 4.5 22.9
Total revenues 2,636.0 1,523.9 1,391.8 753.3 662.7
Income before income taxes,
minority interest and
extraordinary charge 610.2 330.0 223.2 65.3 70.2
Earnings excluding realized
investment gains
and extraordinary charge(b) 301.9 162.7 84.0 39.0 32.1
Extraordinary charge on
extinguishment
of debt, net of tax 11.9 5.3 5.0 - -
Net income 297.0 169.5 116.0 41.7 47.2
Preferred dividends 20.6 5.5 6.8 5.6 8.3
Earnings applicable to
common stock 276.4 164.0 109.2 36.1 38.9
PER SHARE DATA
Net income, primary $ 9.45 $ 5.43 $ 4.10 $1.37 $1.75
Net income, fully diluted 8.77 5.40 4.02 1.36 1.26
Earnings excluding realized
investment gains
and extraordinary charge(b) 8.92 5.18 2.89 1.25 .81
Dividends declared per common
share .30 .085 .070 .055 .05
Book value per common
share outstanding 33.78 21.86 15.44 5.83 4.30
Shares outstanding at year-end 25.3 24.9 24.7 20.6 25.2
Average fully diluted
shares outstanding 33.5 29.6 25.4 25.4 33.1
BALANCE SHEET DATA
Total assets $13,749.3 $11,772.7 $11,832.4 $8,371.1 $5,267.1
Long-term debt for which
Conseco is
directly liable 413.0 163.2 177.6 268.9 300.3
Notes payable of BLH, not direct
obligations of Conseco(c) 290.3 392.0 - - -
Notes payable related to
CCP Companies,
not direct obligations
of Conseco - - 319.3 258.1 -
Shareholders' equity 1,142.6 594.3 431.6 180.2 158.3
(a) For periods beginning with their acquisitions and ending June 30, 1992,
the financial statements of the CCP Companies were consolidated with the
financial statements of Conseco. With the completion of the initial public
offering by CCP, the Company no longer had unilateral control to direct all of
CCP's activities and therefore, no longer consolidates the financial statements
of the CCP Companies with the financial statements of Conseco. As of November
1, 1992, the Company began to include in its financial statements the newly
acquired Partnership subsidiary, Bankers. Comparison of consolidated financial
information in the above table is significantly affected by the various
Partnership acquisitions and the deconsolidation of the CCP Companies effective
July 1, 1992. Refer to the notes to consolidated financial statements included
elsewhere herein for a description of business combinations.
(b) Represents net income excluding net realized gains and extraordinary
charge, less applicable expenses, amortization, changes in future policy
benefits, taxes and minority interest.
(c) Represents notes issued by BLH in connection with the acquisition of
Bankers Life.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion highlights the material factors affecting the
results of operations and the significant changes in balance sheet items. This
discussion should be read in conjunction with the accompanying consolidated
financial statements, the notes thereto and the financial statistics appearing
elsewhere herein.
The comparison of 1993, 1992 and 1991 balances in the consolidated
financial statements is largely affected by the transactions described in Note
1 "Significant Accounting Policies - Basis of Presentation" and Note 2
"Acquisitions" to the consolidated financial statements.
RESULTS OF OPERATIONS
Conseco's earnings result from three different activities:
- The operations of life insurance companies;
- Services provided to affiliates and nonaffiliates for fees; and
- The acquisition and restructuring of life insurance companies, currently
conducted through CCP II.
Operations of Life Insurance Companies
Life insurance companies are included in Conseco's financial statements on
a consolidated basis if they are unilaterally controlled by Conseco (i.e.,
companies that are wholly owned by Conseco, companies that are over 50 percent
but less than 100 percent owned by Conseco, and companies that are over 50
percent owned by a partnership in which Conseco is the sole general partner).
Life insurance companies are included in Conseco's financial statements on an
equity basis if not so controlled (i.e., companies in which Conseco has a
significant interest but does not have unilateral control). Refer to Notes 1
and 2 of the consolidated financial statements for a description of changes
during the last three years in the composition of the companies included in
Conseco's consolidated financial statements.
Growth in this activity results from: (i) the acquisition of new companies;
(ii) changes in Conseco's ownership interest in the companies; and (iii)
changes in the profitability of such companies related to premiums received,
investment results, product profitability, expense levels and other factors.
Services Provided for Fees
Various combinations of services, including investment management, mortgage
origination and servicing, policy administration, data processing, product
marketing and executive management services, are provided to all affiliates and
other unaffiliated clients. In addition, subsidiaries of Conseco earn fees by:
(i) providing marketing services to financial institutions related to the
distribution of insurance and investment products and (ii) distributing
property and casualty insurance products through independent agencies.
Growth in this activity results from new clients (both affiliated and
others) and from increases in the fee-producing activities conducted for such
clients.
Acquisition and Restructuring of Life Insurance Companies
Since Conseco commenced operations in 1982, it has acquired 11 life
insurance companies, the first seven as wholly owned subsidiaries and the last
four through the first partnership. Recent acquisition activity is described
in Notes 1 and 2 to the consolidated financial statements. All acquisitions
have been accounted for as purchases. Therefore, activities of acquired
companies have been included in the results of operations commencing with the
date of purchase.
17
Of the first seven companies acquired as wholly owned subsidiaries by
Conseco, three were subsequently sold and four remained as wholly owned
subsidiaries at December 31, 1993. One of the four (Western National) was
partially disposed of in February 1994 when Conseco sold 60 percent of its
interest in a public offering as described in Note 16 to the consolidated
financial statements. The first three companies acquired in the first
partnership are now wholly owned subsidiaries of CCP, in which Conseco holds
a 40 percent interest. The final acquisition of the first partnership is now
a wholly owned subsidiary of BLH, in which Conseco holds a 56 percent interest.
Future acquisitions will be accomplished through CCP II, in which a
subsidiary of Conseco is the sole managing general partner. CCP II was formed
in early 1994 with commitments from 36 partners for $624 million of capital for
the purpose of completing acquisitions of insurance companies, building value
within such acquired companies and realizing such increased value for the
investing partners. Commitments to the new partnership include $100 million
from Conseco, $25 million from Bankers, $25 million from CCP, $50 million from
Western and $36 million from executive officers and directors of Conseco and
its affiliates.
Activities of companies acquired through the first partnership are recorded
in the segment related to operations of life insurance companies. Conseco also
provides services to those companies resulting in increased income in the fee
for service segment. Earnings are reflected in the acquisition and
restructuring segment when Conseco, as general partner, earns incentive
compensation related to the level of total returns to the partners in excess
of prescribed targets, and when restructuring gains are realized from the sale
of portions of the acquired entities.
18
Analysis of Net Income and Fully Diluted Earnings Per Share
The following table shows the sources of Conseco's net income (after tax
and minority interest) for the three years ended December 31, 1993,
disaggregated into the three earnings activities described in the preceding
section:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Operations of life insurance companies:
Bankers:
Operating earnings before
trading income $ 36.9 $ 4.8 $ -
Net trading income 6.9 .7 -
Net realized gains (losses) 2.9 (.1) -
Extraordinary charge (3.1) - -
------ ------ ------
Net income 43.6 5.4 -
------ ------ ------
Western:
Operating earnings before
trading income 93.4 80.6 56.8
Net trading income 32.1 16.5 15.7
Net realized gains 4.5 5.1 25.0
------ ------ ------
Net income 130.0 102.2 97.5
------ ------ ------
CCP:
Operating earnings before
trading income 34.6 23.2 10.9
Net trading income - 1.6 5.3
Net realized gains - 3.0 8.6
Extraordinary charge - (3.9) -
------ ------ ------
Net income 34.6 23.9 24.8
------ ------ ------
Wholly owned life companies excluding Western:
Operating earnings before
trading income 27.5 18.6 14.0
Net trading income 8.6 1.6 1.5
Net realized gains (losses) (1.3) 4.1 3.4
------ ------ ------
Net income 34.8 24.3 18.9
------ ------ ------
Life Re net income - 10.6 8.6
------ ------ ------
Total from operations of life insurance companies:
Operating earnings before
trading income 192.4 137.8 90.3
Net trading income 47.6 20.4 22.5
Net realized gains 6.1 12.1 37.0
Extraordinary charge (3.1) (3.9) -
------ ------ ------
Net income 243.0 166.4 149.8
------ ------ ------
Services provided for fees - net income 14.3 14.5 11.2
------ ------ ------
Acquisition and restructuring of life insurance
companies:
Incentive earnings allocation 22.3 3.6 -
Sale of stock 61.0 19.7 -
------ ------ ------
Net income 83.3 23.3 -
------ ------ ------
(continued on next page)
19
(continued from previous page)
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Corporate and other:
Operating expenses, net of revenues (15.1) (11.1) (7.3)
Interest expense (19.9) (22.2) (32.7)
Net trading loss (.7) - -
Net realized gains .9 - -
Extraordinary charge (8.8) (1.4) (5.0)
------ ------ ------
Net loss (43.6) (34.7) (45.0)
------ ------ ------
Consolidated earnings:
Operating earnings before
trading income 255.0 142.3 61.5
Net trading income 46.9 20.4 22.5
Net realized gains 7.0 12.1 37.0
Extraordinary charge (11.9) (5.3) (5.0)
------ ------ ------
Net income $297.0 $169.5 $116.0
====== ====== ======
20
The disaggregated earnings summarized in the preceding schedule resulted
in fully diluted earnings per share as follows:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Operations of life insurance companies:
Bankers:
Operating earnings before
trading income $1.10 $ .16 $ -
Net trading income .21 .02 -
Net realized gains .08 - -
Extraordinary charge (.09) - -
------ ------ ------
Net income 1.30 .18 -
------ ------ ------
Western:
Operating earnings before
trading income 2.74 2.59 2.07
Net trading income .93 .53 .56
Net realized gains .13 .16 .91
------ ------ ------
Net income 3.80 3.28 3.54
------ ------ ------
CCP:
Operating earnings before
trading income 1.03 .75 .36
Net trading income - .05 .18
Net realized gains - .09 .29
Extraordinary charge - (.11) -
------ ------ ------
Net income 1.03 .78 .83
------ ------ ------
Wholly owned life companies
excluding Western:
Operating earnings before
trading income .81 .59 .50
Net trading income .25 .06 .06
Net realized gains (.04) .13 .13
------ ------ ------
Net income 1.02 .78 .69
------ ------ ------
Life Re net income - .26 .21
------ ------ ------
Total from operations of life
insurance companies:
Operating earnings before
trading income 5.68 4.35 3.14
Net trading income 1.39 .66 .80
Net realized gains .17 .38 1.33
Extraordinary charge (.09) (.11) -
------ ------ ------
Net income 7.15 5.28 5.27
------ ------ ------
Services provided for fees - net income .42 .47 .41
------ ------ ------
Acquisition and restructuring of
life insurance companies:
Incentive earnings allocation .66 .12 -
Sale of stock 1.83 .66 -
------ ------ ------
Net income 2.49 .78 -
------ ------ ------
(continued on next page)
21
(continued from previous page)
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Corporate and other:
Operating expenses (.45) (.33) (.17)
Interest expense (.59) (.75) (1.29)
Net trading loss (.02) - -
Net realized gains .03 - -
Extraordinary charge (.26) (.05) (.20)
----- ----- -----
Net loss (1.29) (1.13) (1.66)
----- ----- -----
Consolidated earnings:
Operating earnings before trading income 7.55 4.52 2.09
Net trading income 1.37 .66 .80
Net realized gains .20 .38 1.33
Extraordinary charge (.35) (.16) (.20)
----- ----- -----
Net income $8.77 $5.40 $4.02
===== ===== =====
22
The following table further analyzes the changes in fully diluted earnings
per share in 1993 compared to 1992 and in 1992 compared to 1991 to identify the
increases (decreases) related to changes in income and the decreases related
to changes in the number of shares outstanding.
1993 1992
Compared to Compared to
1992 1991
---- ----
Fully diluted earnings per share:
Current year $8.77 $5.40
Prior year 5.40 4.02
----- -----
Net increase $3.37 $1.38
----- -----
----- -----
Increase (decrease) related to changes in income:
Operations of life insurance companies
Bankers $1.32 $ .21
Western 1.09 .28
CCP .41 .08
Wholly owned life insurance companies,
excluding Western .44 .22
Life Re (.26) .09
----- -----
Increase from operations of life
insurance companies 3.00 .88
Services provided for fees .02 .14
Acquisition and restructuring of life
insurance companies 2.07 .91
Corporate and other (.34) .34
Less effect of increase in federal income
tax rate (.23) -
----- -----
Total related to changes in income 4.52 2.27
Decrease related to issuances and repurchases
of common or common equivalent shares (1.15) (.89)
----- -----
Net increase $3.37 $1.38
===== =====
23
Additional Discussion of Consolidated Statement of Operations for the Three
Years Ended December 31, 1993:
The following tables and narratives summarize amounts reported in the
consolidated statement of operations for the three years ended December 31,
1993, disaggregated as previously described for Conseco's three earnings
activities. Many of the changes which occurred in the consolidated statement
of operations resulted from: (i) acquisitions of new affiliates; (ii)
restructurings that changed Conseco's percentage ownership in the affiliate;
and (iii) changes in control of the affiliates that affected the determination
of whether the affiliate was to be included in Conseco's statement of
operations under the consolidation or the equity method of accounting.
Operations of life insurance companies:
Bankers:
As Included in Prior to
Conseco's Consolidated Conseco's
Financial Statements Acquisition
-------------------- -----------
For the period
For the from acquisition Ten months
year ended through ended
December 31, December 31, October 31,
1993 1992 1992
---- ---- ----
(Dollars in millions)
Revenues:
Insurance policy income $1,200.7 $191.5 $ 944.1
Investment activity:
Net investment income 174.7 21.1 105.2
Net trading income 31.5 2.4 -
Net realized gains (losses) 43.6 7.0 (33.6)
Total revenues 1,450.5 222.5 1,013.8
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 864.3 120.1 720.3
Interest expense on annuities and
financial products 36.5 5.3 23.8
Interest expense on long-term debt 36.0 7.4 -
Amortization related to operations 116.9 25.6 79.4
Amortization related to realized gains 30.5 - -
Other operating costs and expenses 154.3 26.9 138.5
Income from continuing operations before
taxes, minority interest and
extraordinary charge 208.1 37.2 51.8
Income tax expense 80.2 14.9 5.9
Income from continuing operations
before minority interest 127.9 22.3 45.9
Minority interest 78.2 14.4 -
Extraordinary charge (net of minority
interest of $4.8 million) (3.1) - -
Income from continuing operations 46.6 7.9 45.9
Earnings from discontinued operations - - 16.6
Net income 46.6 7.9 62.5
Less preferred stock dividends 3.0 2.5 -
Earnings applicable to common stock 43.6 5.4 62.5
Summarized by component, all net of
applicable expenses, taxes and minority interest:
Operating earnings, excluding trading
income 36.9 4.8 73.7
Net trading income 6.9 .7 -
Net realized gain (loss) 2.9 (.1) (22.2)
Extraordinary charge on extinguishment
of debt (3.1) - -
Earnings from discontinued operations - - 11.0
Net income 43.6 5.4 62.5
24
General. Conseco's 1992 earnings reflected a 44 percent ownership interest
in BLH from November 1, 1992, the date Bankers was acquired by the Partnership.
In March 1993, BLH completed an IPO of its common stock, thus reducing
Conseco's ownership to 31 percent. On September 30, 1993, Conseco acquired
13.3 million additional common shares of BLH, increasing its ownership interest
to 56 percent. While all activities of Bankers are included in Conseco's
financial statements on a consolidated basis for all periods after November 1,
1992, the minority interest adjustment removes from Conseco's net income the
portion applicable to other owners so that net income reflects only Conseco's
applicable ownership interest (i.e., 44 percent during 1992 and the first
quarter of 1993, 31 percent during the second and third quarters of 1993
and 56 percent during the fourth quarter of 1993). To enhance comparability,
the amounts for the ten months ended October 31, 1992, (which was prior to the
Partnership's acquisition of Bankers) are separately presented.
At December 31, 1993, the BLH shares owned by Conseco had a net carrying
value of approximately $518.8 million, a market value of approximately $652.8
million and a cost of $313.1 million.
Insurance policy income. Insurance policy income increased $65.1 million,
or 5.7 percent, in 1993 over total insurance policy income in 1992. Bankers'
insurance policy income was comprised primarily of individual health premiums,
which increased as a result of new business, improved persistency and rate
increases.
Net investment income. Net investment income increased $48.4 million, or
38 percent, in 1993 over total net investment income in 1992. The increase was
due to the growth of invested assets as a result of (i) the recurring
operations, (ii) the recapture in 1993 of a reinsurance treaty with related
assets totaling $182 million and (iii) the capital transactions in connection
with BLH's IPO, as discussed in the accompanying notes to the consolidated
financial statements, partially offset by lower yields on the investment
portfolio. In addition, during 1993 fixed maturity investments were redeemed
prior to their scheduled maturity dates, resulting in additional investment
income of approximately $.8 million.
Net trading income. Net trading income (after applicable expenses,
minority interest and taxes) increased $6.2 million in 1993 compared to total
1992. Bankers' trading activities commenced in November 1992, after its
acquisition by the Partnership.
Net realized gains. Bankers sold approximately $2.2 billion of fixed
maturity investments in 1993, realizing gains (after applicable expenses,
amortization, minority interest and taxes) of $2.9 million. For the ten month
period ended October 31, 1992, realized investment losses included writedowns
primarily related to Bankers' mortgage-backed security portfolio of derivative
collateralized mortgage obligations, which portfolio was transferred to a trust
later acquired by ICH or sold to ICH prior to the acquisition of Bankers by the
Partnership.
Net realized gains relate to securities sold in response to changes in the
investment environment which created opportunities to enhance the risk profile
of the investment portfolio by replacing existing securities with alternative
securities without adversely affecting the quality of the portfolio or the
matching of expected maturities of assets and liabilities. The sales of these
securities at a gain followed by reinvestment of the proceeds at lower yields
may, absent other management action, tend to decrease future investment yields.
The Company believes, however, that the decreases in future investment yields
that may result from these sales will not have a significant effect on future
net income because: (i) additional amortization of the cost of policies
purchased and the cost of policies produced was recognized to reflect reduced
future yields (see the following paragraph); (ii) interest rates credited to
some products were reduced, diminishing the effect of the yield decrease on the
investment earnings spread; and (iii) the investment portfolio increased as a
result of reinvesting the realized gains.
The realization of investment gains affects the timing of the amortization
of cost of policies purchased and cost of policies produced. As a result of
net realized gains from the sales of fixed maturity investments in 1993,
amortization of cost of policies purchased and cost of policies produced was
increased by $21.0 million and $9.5 million, respectively.
25
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) increased $23.9 million, or 2.8 percent, in
1993 over the total amount in 1992. The increase related primarily to an
increase in premiums with mortality and morbidity features written by Bankers.
Purchase accounting adjustments were made to insurance liabilities
in conjunction with the acquisitions of Bankers made by the Partnership in
November 1992 and Conseco in September 1993 (as described in Note 2 to the
consolidated financial statements). The impact of these adjustments was that
insurance policy benefits (and change in future policy benefits) in 1993 were
lower than the amounts which would have been recorded had the accounting basis
of insurance liabilities been the same as in 1992. Such decline somewhat
offsets the increases described above. Loss ratios did not change
significantly.
Interest expense on long-term debt. Interest expense on long-term debt
increased $28.6 million in 1993 compared to the total amount in 1992. This
interest relates to debt incurred to finance the acquisition of Bankers by the
Partnership effective October 31, 1992. Therefore, interest expense was
incurred for a full year in 1993 compared to two months in 1992.
Other operating costs and expenses. Other operating costs and expenses
decreased $11.1 million, or 6.7 percent, in 1993 compared to the total amount
in 1992 as a result of cost reductions realized subsequent to the acquisition
of Bankers.
Extraordinary charge. In 1993 Bankers retired all of its junior notes,
prepaid a portion of its senior term loan and repurchased $20 million of its
Series B Senior Subordinated Notes, resulting in a net extraordinary charge of
$7.9 million, of which Conseco's share was $3.1 million.
Western:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Revenues:
Insurance policy income $ 21.8 $ 48.0 $ 43.9
Investment activity:
Net investment income 610.1 507.8 450.7
Net trading income 49.6 25.0 23.8
Net realized gains 92.7 72.4 62.2
Total revenues 774.2 653.2 580.6
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 121.2 130.2 125.9
Interest expense on annuities and
financial products 333.1 267.1 249.5
Amortization related to operations 16.5 16.3 11.3
Amortization and change in future policy
benefits related to realized gains 84.3 64.6 24.3
Other operating costs and expenses 8.4 12.1 14.2
Income before taxes 204.5 156.8 149.0
Income tax expense 74.5 54.6 51.5
Net income 130.0 102.2 97.5
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings, excluding
trading income 93.4 80.6 56.8
Net trading income 32.1 16.5 15.7
Net realized gains 4.5 5.1 25.0
Net income 130.0 102.2 97.5
26
General. Western's increased operating earnings principally reflected the
slightly widened spread between investment yields and policy crediting rates
on an increasing base of invested assets during the periods presented. The
increase in invested assets in 1993 was affected by: (i) the recapture of
reinsurance from subsidiaries of Conseco on March 31, 1993, resulting in an
increase of $1.3 billion in insurance liabilities and invested assets; and (ii)
the recapture of reinsurance from a nonaffiliated company on June 30, 1993,
resulting in an increase of $156.5 million in insurance liabilities and
invested assets.
Insurance policy income. Insurance policy income related primarily to
premiums from products with mortality and morbidity features. Declines from
1992 to 1993 have resulted from decreased emphasis on generating new premiums
from such products.
Net investment income. Net investment income has increased over the last
three years because of the overall growth of invested assets resulting from
operations and the reinsurance recaptures described above, partially offset by
lower yields on the investment portfolio. In addition, during 1993, 1992 and
1991, fixed maturity investments were redeemed prior to their scheduled
maturity dates, resulting in additional investment income of approximately
$18.0 million, $12.8 million and $3.5 million, respectively.
Net trading income. The increases in net trading income (after applicable
expenses and taxes) in 1993 over the prior two years were primarily due to more
favorable market conditions for trading activities.
Net realized gains. Net realized gains (after applicable expenses,
amortization, change in future policy benefits and taxes) often fluctuate from
year to year. Western sold fixed maturity investments of $3.6 billion, $2.4
billion and $2.9 billion in 1993, 1992 and 1991, respectively.
The effect of sales of fixed maturities on the amortization of cost of
policies purchased and cost of policies produced is discussed above under
"Bankers." As a result of the net realized gains from the sales of fixed
maturity investments in 1993, 1992, and 1991, amortization of the cost of
polices purchased was increased by $14.0 million, $42.1 million and $13.1
million, respectively and amortization of the cost of policies produced was
increased by $33.2 million, $22.5 million and $11.2 million, respectively. In
addition, the realization of investment gains affected the timing of additions
to insurance liabilities, resulting in an increase of $37.1 million in 1993.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits), which relate solely to policies with
mortality and morbidity features, fluctuated very little over the last three
years, due to decreased emphasis on generating new premiums from such products.
Interest expense on annuities and financial products. Interest expense on
annuities and financial products has increased over the last three years as a
result of increased annuity deposits, offset by reduced interest rates credited
on these products. The average rate credited on all insurance liabilities was
6.4 percent, 7.6 percent and 8.1 percent at December 31, 1993, 1992 and 1991,
respectively. The decline in credited rates over this period resulted from the
lower interest rate environment. The 1993 increase in this expense was largely
affected by the reinsurance recapture by Western as discussed under "General"
above.
Other operating costs and expenses. The decreases in other operating costs
and expenses in 1993 from 1992 and in 1992 from 1991 were primarily due to
reduced guaranty fund assessments. The decrease in 1993 also reflected
decreased commissions on renewal premiums.
27
CCP:
Prior to July 1, 1992, Conseco exercised unilateral control over CCP;
therefore, the accounts of CCP were included in the consolidated financial
statements of Conseco. After CCP's IPO, Conseco no longer had unilateral
control over CCP and included CCP's results in its financial statements on the
equity, rather than the consolidation, method. The financial information below
summarizes the amounts included in Conseco's consolidated financial statements
and the total accounts of CCP for the three-year period.
For the years ended December 31,
---------------------------------------------------------------------
1993 1992 1991
---------------------------------------------------------------------
(Dollars in millions)
Included in Included in Included in
Total Conseco's Total Conseco's Total Conseco's
CCP Accounts CCP Accounts CCP Accounts
--- --------- --- -------- --- --------
Revenues:
Insurance policy income $127.8 $ - $139.5 $ 67.1 $161.9 $161.9
Investment activity:
Net investment income 412.9 - 380.4 187.0 318.1 318.1
Net trading income 24.3 - 15.6 5.0 17.4 17.4
Net realized gains 55.8 - 63.5 22.7 41.7 41.7
Equity in earnings of CCP - 37.4 - 15.8 - -
Equity in earnings of Bankers 1.2 - .7 - - -
Gain on sale of stock by Bankers 10.5 - - - - -
Total revenues 632.5 37.4 599.7 297.6 539.1 539.1
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 77.0 - 77.1 34.6 94.7 94.7
Interest expense on annuities
and financial products 243.5 - 251.1 124.5 217.1 217.1
Interest expense on long-term debt 16.1 - 26.1 17.9 39.0 39.0
Interest expense on short-term
investment borrowings 4.4 - 2.3 1.6 5.9 5.9
Amortization related to operations 29.4 - 23.2 13.4 24.5 24.5
Amortization and change in future
policy benefits related to
realized gains 36.4 - 45.9 13.7 18.0 18.0
Other operating costs and expenses 52.2 - 55.1 27.2 54.0 54.0
Income before taxes, minority
interest and extraordinary charge 173.5 37.4 118.9 64.7 85.9 85.9
Income tax expense 65.9 2.8 42.0 18.6 30.1 33.5
Income before minority interest
and extraordinary charge 107.6 34.6 76.9 46.1 55.8 52.4
Minority interest - - - 16.2 - 24.0
Extraordinary charge - - (8.8) (3.9) - -
Net income 107.6 34.6 68.1 26.0 55.8 28.4
Less preferred stock dividends - - 3.8 2.1 5.0 3.6
Earnings applicable to common stock 107.6 34.6 64.3 23.9 50.8 24.8
Summarized by component, all net
of applicable expenses, taxes and minority interest:
Operating earnings, excluding
trading income 81.1 34.6 55.4 23.2 28.6 10.9
Net trading income 15.8 - 10.1 1.6 11.5 5.3
Net realized gains 10.7 - 11.4 3.0 15.7 8.6
Extraordinary charge - - (8.8) (3.9) - -
Net income 107.6 34.6 68.1 23.9 55.8 24.8
CCP's earnings during the three years ended December 31, 1993, were
affected by: (i) a widened spread between investment yields and policy
crediting rates on an increasing base of invested assets; (ii) the reduced
interest expense resulting from the reduction in CCP's long-term debt through
scheduled and unscheduled principal payments and lower interest rates;
(iii) the purchase of Beneficial Standard in March 1991; and (iv) the
investment of the net proceeds (after prepayment of certain debt) from CCP's
IPO in July 1992 and its second public offering in September 1993. Conseco's
equity in the earnings of CCP during the three years ended December 31, 1993,
was affected by these factors and changes in Conseco's ownership interest in
CCP resulting from CCP's IPO and other transactions described in Note 4 to the
consolidated financial statements. In addition, in 1992, Conseco's equity in
the earnings of CCP included a $3.9 million extraordinary charge related to
CCP's prepayment of debt. At December 31, 1993, Conseco owned 40 percent of
the common stock of CCP. Such shares owned by Conseco had a net carrying value
of $244.3 million, a fair value of approximately $322.1 million and a total
cost to Conseco of $102.8 million.
28
CCP was a partner in the Partnership's investment in Bankers. In
conjunction with BLH's IPO, CCP's investment in the Partnership was exchanged
for approximately 2.8 percent of the common stock of BLH. Through the date of
the IPO, CCP had recognized equity in earnings of Bankers of $1.2 million and
$.7 million in 1993 and 1992, respectively. A gain on the sale of stock by BLH
of $10.5 million was recognized at the time of the exchange. After the IPO,
CCP's investment in BLH is carried at fair value, with any unrealized gain or
loss, net of income tax, included directly in shareholders' equity.
Conseco's direct ownership in BLH and its indirect ownership through CCP
represent a controlling interest. Accordingly, Conseco's investment in BLH is
accounted for using the consolidation method. Conseco's ownership interest
in Bankers through CCP is included in the "Bankers" segment. Conseco's
ownership interest in the gain recognized by CCP in conjunction with the IPO
is included in the "Acquisitions and Restructuring" segment.
Wholly owned insurance subsidiaries of Conseco, excluding Western:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Revenues:
Insurance policy income $ 72.3 $ 81.4 $ 79.6
Investment activity:
Net investment income 110.2 181.3 162.5
Net trading income 13.4 3.2 12.7
Net realized gains 11.5 22.2 21.4
Total revenues 207.4 288.1 276.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 82.3 90.0 92.9
Interest expense on annuities and
financial products 38.9 109.9 110.1
Amortization related to operations 7.6 16.2 15.4
Amortization related to realized gains 11.5 15.1 8.1
Other operating costs and expenses 12.0 18.2 15.9
Income before taxes 55.0 38.1 29.5
Income tax expense 20.2 13.8 10.6
Net income 34.8 24.3 18.9
Summarized by component, all net
of applicable expenses and taxes:
Operating earnings, excluding
trading income 27.5 18.6 14.0
Net trading income 8.6 1.6 1.5
Net realized gains (losses) (1.3) 4.1 3.4
Net income 34.8 24.3 18.9
Insurance policy income. Insurance policy income related primarily to
premiums from products with mortality and morbidity features and the recent
declines have resulted from decreased emphasis on generating new premiums from
such products.
29
Net investment income. Net investment income decreased from 1992 to 1993
because of the recapture of reinsurance by Western from Conseco's other wholly
owned life insurance subsidiaries on March 31, 1993, which resulted in a
decrease of $1.3 billion in insurance liabilities and invested assets. Net
investment income increased from 1991 to 1992 as a result of the overall growth
of invested assets resulting from operations. In addition, during 1993, 1992
and 1991 fixed maturity investments were redeemed prior to their scheduled
maturity dates, resulting in additional investment income of approximately $3.7
million, $7.5 million and $.4 million, respectively.
Net trading income. The increase in net trading income (after applicable
expenses and taxes) in 1993 over the prior two years was primarily due to more
favorable market conditions for trading activities.
Net realized gains. Net realized gains (after applicable expense,
amortization and taxes) often fluctuate from year to year. Fixed maturity
investments of $.6 billion, $.9 billion and $.6 billion were sold in 1993, 1992
and 1991, respectively.
The effect of sales of fixed maturities on the amortization of cost of
policies purchased and cost of policies produced is discussed above under
"Bankers." As a result of the net realized gains from the sales of fixed
maturity investments by Conseco's other wholly owned life insurance
subsidiaries in 1993, 1992 and 1991, amortization of the cost of policies
purchased was increased by $11.0 million, $7.9 million and $2.4 millon,
respectively, and amortization of the cost of policies produced was increased
by $.5 million and $7.2 million and $5.7 million, respectively.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) which relate solely to policies with
mortality and morbidity features have fluctuated over the last three years due
to the decreased emphasis on generating new premiums from such products.
Interest expense on annuities and financial products. Interest expense on
annuities and financial products decreased from 1992 to 1993 as a result of the
reinsurance recapture by Western National. Such expense increased from 1991
to 1992 as a result of increased annuity deposits, offset by reduced rates
credited on these products. The average rate credited on all insurance
liabilities was approximately 7.0 percent at December 31, 1993 and 1992, and
approximately 7.9 percent at December 31, 1991.
Amortization related to operations. Amortization related to operations
decreased in 1993 from 1992 as a result of the recapture of reinsurance, which
was previously discussed.
Other operating costs and expenses. The decrease in other operating costs
and expenses in 1993 from 1992 was primarily due to the reinsurance recapture
by Western National, which was previously discussed. The increase in other
operating costs and expenses in 1992 from 1991 was due to several factors
including increased guaranty fund assessments and compensation costs.
Life Re:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Equity in earnings of Life Re $ - $11.3 $9.3
Income tax expense - .7 .7
Net income attributable to
investment in Life Re - 10.6 8.6
Conseco's ownership interest in Life Re was sold in November 1992, thereby
terminating this source of income.
30
Services Provided for Fees:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Revenue:
Investment management $34.1 $25.0 $19.1
Commissions 9.4 1.7 1.4
Administrative services, net of
directly related expenses 5.5 3.5 1.9
Total revenue 49.0 30.2 22.4
Less intercompany eliminations (22.5) (17.3) (17.0)
Revenues reported 26.5 12.9 5.4
Net income attributable to:
Investment management 14.7 12.3 10.2
Commissions (4.0) (.1) (.3)
Administrative services 3.6 2.3 1.3
Net income 14.3 14.5 11.2
Conseco's fee revenues include: (i) fees for investment management and
mortgage origination and servicing; (ii) commissions earned for insurance and
investment product marketing and distribution; and (iii) administrative fees
for policy administration, data processing, product marketing and executive
management services. To the extent these services are provided to entities
that are included in the financial statements on a consolidated basis, the
intercompany fees are eliminated in consolidation.
In March 1993, Conseco acquired Marketing Distribution Systems Consulting
Group, Inc. and Subsidiaries ("Bankmark"), an insurance marketing company which
develops relationships with financial institutions to provide insurance
and investment products to their customers. Through Bankmark, financial
institutions can offer products from several insurance companies, including
Western National. After its acquisition by Conseco, Bankmark began a formal
program to actively expand its business by developing relationships with a few
large money-center banks to assist them in distributing retail insurance
products to their customers. As a result of the costs incurred in conjunction
with Bankmark's expansion efforts, Bankmark incurred a net loss of
approximately $3.7 million during the period from its acquisition through
December 31, 1993.
Growth in total fees during the last three years was the result of new
clients (both affiliated and others) and from growth in fee-producing
activities provided to such clients. Commission revenues of Bankmark,
subsequent to its acquisition in March 1993, totaled $7.4 million.
Acquisitions and Restructuring of Life Insurance Companies:
For the years ended December 31,
--------------------------------
1993 1992
---- ----
(Dollars in millions)
Incentive earnings allocation $ 36.6 $ 9.3
Gain on sale of stock 101.5 45.6
Total revenues 138.1 54.9
Income tax expense 54.8 31.6
Net income 83.3 23.3
31
The incentive earnings allocations were earned when total returns realized
by the other partners in the first partnership exceeded prescribed targets.
Such amounts were recorded: (i) in 1992 based on the returns resulting from the
value of the CCP shares distributed to the partners; and (ii) in 1993, based
on the value of BLH shares so distributed. Income from the sale of stock in
1992 resulted from Conseco's sale of its ownership in Life Re and from
Conseco's share of the gain realized from the public sale of shares by CCP.
The 1993 gain related to the public sale of shares by BLH.
Corporate and other:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Net investment income $12.4 $ 8.4 $10.0
Total revenues 14.1 9.3 10.9
Interest expense on long-term debt 30.6 33.7 49.5
Other operating costs and expenses 35.9 26.2 22.5
Income tax benefit 17.6 17.3 21.1
Expenses before extraordinary charge 34.8 33.3 40.0
Extraordinary charge on extinguishment
of debt 8.8 1.4 5.0
Net loss 43.6 34.7 45.0
These operations include financing costs for debt on which Conseco is
directly liable and the costs associated with the holding company operations.
The 32 percent decline in interest expense on long term debt from 1991 to
1992 was attributable to declines in long-term debt through scheduled and
unscheduled principal payments. Interest expense for 1993 reflected: (i) the
decline in long-term debt through scheduled and unscheduled principal payments;
(ii) the refinancing of 12.75 percent senior subordinated notes through the
issuance of 8.125 percent senior notes; and (iii) the $200 million senior
secured loan used to acquire additional shares of Bankers in September 1993
(such debt was repaid in February 1994 with a portion of the proceeds from the
IPO of WNC).
Other operating costs and expenses increased over the last three years
principally as the result of compensation expense based on the Company's
increased earnings.
SALES
Insurance policy income shown in the Company's consolidated statement of
operations in accordance with generally accepted accounting principles consists
of premiums received for policies which have life contingencies or morbidity
features. For annuity and universal life contracts without such features,
premiums collected are not reported as revenues, but rather are reported as
deposits to insurance liabilities. Revenues for products recognized as
deposits to insurance liabilities are recognized over time in the form of
investment income and surrender or other charges.
32
Premiums collected by Bankers. Total premiums collected in 1993 were
$1,464.7 million, of which $264.0 million were recorded as deposits to policy
liability accounts. This compares to $1,368.9 million collected and $233.3
million recorded as deposits to policy liability accounts in 1992. Bankers
amounts in 1992, which are used as a basis of comparison in this discussion,
include periods prior to Conseco's acquisition of Bankers in November 1992.
Collected premiums by type are provided in the following table for 1993 and
1992:
For the years ended
December 31,
--------------
1993 1992
---- ----
(Dollars in millions)
Individual health:
Medicare supplement $ 565.5 $ 524.9
Long-term care 114.9 103.5
Other 142.4 160.5
-------- --------
Total individual health 822.8 788.9
Annuities 239.1 187.0
Individual life and other 93.1 93.0
Group 309.7 300.0
-------- --------
Total $1,464.7 $1,368.9
======== ========
Total collected premiums of Medicare supplement policies accounted for 39
percent of total collected premiums in 1993 and 38 percent in 1992. During the
fourth quarter of 1992, Bankers assumed a block of Medicare supplement policies
from an unrelated insurer. Collected premiums in 1993 and 1992 included $16.9
million and $19.4 million, respectively, related to the assumed policies.
Bankers' new strategy of pricing Medicare supplement policies on an attained
age basis (which produces lower first year premiums which then increase
annually) and an increase in the proportion of policies sold with lesser
benefits caused annualized new business premiums from such new sales to
decrease to $79.6 million in 1993 compared to $83.0 million in 1992. However,
even with the new pricing strategy, Bankers' 1993 annualized new business
premiums were up 7.1 percent over 1992 sales of $74.3 million.
Long-term care plans accounted for 7.8 percent of total collected premiums
in 1993 and 7.6 percent in 1992. The increase was due to growth in new
business and a larger base of renewal premiums. Annualized new business
premiums were $21.5 million in 1993 and $18.1 million 1992.
Annuity premiums collected increased 28 percent in 1993 over 1992.
Virtually all of this increase related to sales of single premium deferred
annuities. The increase occurred because of an increased marketing emphasis
placed on annuity sales.
Collected premiums for other individual health products decreased 11
percent in 1993 compared to 1992, as anticipated, due to steps taken previously
to improve the profitability of the comprehensive major medical product
included in this category.
Premiums collected by Western. Total premiums collected were $563.0
million, $840.7 million and $1,267.5 million in 1993, 1992 and 1991,
respectively. The decline in total premiums collected was principally due to
decreased annuities sold through financial institutions reflecting: (i)
increased competition from other carriers (including those with higher
ratings); (ii) consumer purchases of alternative investments, such as variable
annuities and mutual funds, during these periods of low interest rates; and
(iii) Western's focus on maintaining profitability levels on single premium
deferred annuities. Western's principal emphasis is to generate profits
through adequate pricing of its insurance products and maintaining
appropriate investment spreads throughout the life of the policies sold. The
operating income of Western is primarily a function of its investment spread,
total invested assets and operating expenses. Accordingly, a change in
premiums collected in a single period does not directly cause income to change,
although continued increases or decreases in premiums may affect the rate of
growth of total assets on which investment spread is earned.
33
During 1993, Western entered into marketing agreements with several large
financial institutions who are expected to issue Western annuities in 1994.
Premiums collected by Conseco's wholly owned subsidiaries excluding
Western. Total premiums collected were $148.2 million, $82.6 million and $86.6
million in 1993, 1992 and 1991, respectively. During 1993, the Company
collected $61.8 million of premiums from guaranteed investment contracts and
deposit funds for qualified retirement plans maintained by a subsidiary of the
Company.
INVESTMENTS
The Company's investment strategy is to maintain a predominately
investment-grade fixed-income portfolio, provide adequate liquidity for
expected liability durations and other requirements and maximize total return
through active investment management. At December 31, 1993, the Company had
invested assets of approximately $11.7 billion. These assets were primarily
actively managed fixed maturities, credit-tenant loans, policy loans, trading
account securities, investment in CCP and short-term investments.
The following table shows Conseco's investment performance during the last
three years, including subsidiaries and Partnership companies from the date
each was acquired and including the CCP Companies until the date of
deconsolidation.
Years Ended December 31,
------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Weighted average invested assets
(excluding investment in CCP) $10,977.5 $9,524.5 $9,654.7
Net investment income 896.2 888.6 921.4
Percent earned 8.2% 9.3% 9.5%
A general decline in interest rates has reduced investment yields over the
past three years. Investment income is a significant component of the
Company's total revenues, but profitability is determined by spreads between
interest rates earned and rates credited on annuity contracts. At December 31,
1993, the average yield on the Company's investment portfolio was 8.2 percent
and the average interest rate credited on the Company's total liability
portfolio was 6.5 percent.
Actively Managed Fixed Maturities
Conseco's actively managed fixed maturity portfolio at December 31, 1993,
was comprised primarily of debt securities of the U.S. government, public
utilities and other corporations and mortgage-backed securities. Investments
in mortgage-backed securities included collateralized mortgage obligations
("CMO's") and mortgage-backed pass-through securities.
At December 31, 1993, the Company's fixed maturity portfolio (including
securities actively managed and held to maturity) had net unrealized gains of
$295.7 million (equal to approximately 3.0 percent of the portfolio's carrying
value), consisting of $384.3 million of unrealized gains and $88.6 million of
unrealized losses. Estimated fair values for fixed maturity investments were
determined based on estimates from nationally recognized pricing services,
broker-dealer market makers and internally developed methods.
As discussed in the notes to the consolidated financial statements, when
the carrying values of actively managed fixed maturity investments are adjusted
for changes in fair value, cost of polices purchased, cost of policies produced
and insurance liabilities are also adjusted to reflect the change in
amortization that would be needed had those fixed maturity investments actually
been sold at their fair values and the proceeds reinvested at current interest
rates.
Investments in fixed maturities that were rated below investment-grade as
determined by nationally recognized statistical rating organizations (or, if
not rated by such firms, with ratings below Class 2 assigned by the National
Association of Insurance Commissioners) were 5.1 percent of total invested
assets and 6.1 percent of total fixed maturity investments at December 31,
1993. The Company currently plans to maintain approximately the present
percentage of its portfolio in fixed maturities that are rated below
34
investment-grade. Investments in below investment-grade corporate debt
securities generally have greater risks than other corporate debt investments.
Risk of loss upon default by the borrower is greater with below
investment-grade corporate debt securities because these securities generally
are unsecured and often are subordinated to other creditors of the issuers, and
because the issuers usually have high levels of indebtedness and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment-grade issuers. The Company is aware
of this risk exposure and monitors its below investment-grade securities
closely.
The creditworthiness of each issuer whose securities are held in the
portfolio is evaluated periodically, with special attention to those securities
whose market values have declined materially for reasons other than changes in
interest rates or other general market conditions. Available evidence is
considered to evaluate the realizable value of the investment, including
specific conditions of the issuer and its ability to comply with the material
terms of the security. Evidence reviewed may include the recent operational
results and financial position of the issuer, information about its industry,
recent press releases and other information. A staff of experienced securities
analysts is employed in a variety of specialty areas. Among other
responsibilities, this staff compiles and reviews such evidence. If evidence
does not exist to support a realizable value equal to or greater than the
carrying value of the investment and such decline in market value is determined
to be other than temporary, the carrying amount is reduced to its net
realizable value, which becomes the new cost basis. The amount of the
reduction is reported as a realized loss. Any recovery of such reductions in
the cost basis of an investment will be recognized as a realized gain only upon
the sale, repayment or other disposition of the investment. The Company
recorded writedowns of investments of $7.9 million as a result of conditions
which arose in 1993 which caused the Company to conclude the issuer may be
unable to comply with the material terms of the security.
The carrying value and estimated fair value of fixed maturity investments
which were in substantive default (i.e., in default due to nonpayment of
interest or principal) as of December 31, 1993, were both $25.3 million, net
of recorded writedowns totaling $16.8 million. The Company had no fixed
maturity investment in technical (but not substantive) default, (i.e., in
default, but not as to the payment of interest or principal). There were no
other fixed maturity investments about which management has serious doubts as
to the ability of the issuer to comply on a timely basis with the material
terms of the instruments.
All mortgage-backed securities are subject to risks associated with
variable prepayments. This may result in these securities having a different
actual maturity than planned at the time of purchase. Securities that have a
carrying value greater than par which are backed by mortgages that prepay
faster than expected will result in an adjustment charged to investment income.
Those securities that have a carrying value less than par that prepay faster
than expected will result in an adjustment credited to investment income. The
degree to which a security is susceptible to either gains or losses is
influenced by the difference between its carrying value and par, the relative
sensitivity of the underlying mortgages backing the assets to prepayment in a
changing interest environment and the repayment priority of the securities in
the overall securitization structure.
The Company limits the extent of these risks by (i) purchasing securities
which are backed by collateral with lower prepayment sensitivity (such as
mortgages priced at a discount to par value and mortgages that are extremely
seasoned), (ii) avoiding securities whose values are heavily influenced by
changes in prepayments (such as interest-only and principal-only securities)
and (iii) concentrating on securities with prepayment protected structures
(such as planned amortization class ("PAC") CMOs. PAC instruments represented
approximately 44 percent of the Company's mortgage-backed securities at
December 31, 1993. The call-adjusted modified duration of the Company's
mortgage-backed securities at December 31, 1993, was 4.7 years.
If the Company determines that actively managed fixed maturity investments
will be disposed of, the security will be either (i) sold and the gain or loss
recognized or (ii) transferred to the trading account at its fair value. There
35
were no such transfers in 1993. During 1993, the Company sold actively managed
fixed maturity securities with a $6.4 billion book value, resulting in $168.3
million of investment gains (before related expenses, amortization and taxes).
The sales of fixed maturity securities that result in investment gains may,
absent any other management action, tend to decrease future interest yield on
the portfolio. The Company believes that the decreases in future interest
yields that may result because of these sales will not have a significant
effect on future net income because, as explained in Note 11 to the
consolidated financial statements, the Company reduced the balances of the cost
of policies purchased and cost of policies produced by a total of $89.2
million and increased insurance liabilities $37.1 million to reflect reduced
future yields, and because the Company has reduced interest rates credited to
products thereby widening the total spread earned on deposits and reserves.
During 1993, fixed maturity investments with par values totaling $1.2
billion were redeemed prior to the scheduled maturity date. Such redemptions
resulted in the recognition of additional investment income of approximately
$22.5 million.
Other investments
Credit-tenant loans are commercial loans which require the principal
tenant, or any guarantor of such tenant's obligations, to have a credit rating
at the time of origination of the loan of at least BBB or its equivalent. The
underwriting guidelines consider such factors as the lease term of the
property; the mortgagee's management ability, including business experience,
property management capabilities and financial soundness; and such economic,
demographic or other factors that may affect the income generated by the
property or its value. The underwriting guidelines also require a loan to
value ratio of 75 percent or less. Credit-tenant loans are carried at
amortized cost and were $326.9 million at December 31, 1993, or 2.8 percent of
total invested assets. The total estimated fair value of credit-tenant loans
was $325 million at December 31, 1993.
At December 31, 1993, the Company held mortgage loan investments with a
carrying value of $158.4 million (or 1.4 percent of total invested assets) and
a fair value of $175 million. Approximately 78 percent of the mortgage loan
investments were commercial loans.
Approximately 22 percent of the Company's mortgage loan balance consisted
of investments in junior and residual interests of CMOs. Investments in junior
and residual interests of CMOs are instruments that entitle the Company to the
projected excess cash flows arising from the difference between (i) the cash
flows required to make principal and interest payments on the related CMOs and
(ii) the actual cash flows received on the mortgage loan assets included in the
CMO portfolios. If prepayments vary from projections on the mortgage loan
assets included in such CMO portfolios, the total cash flows to the Company
from such residual interests could change from projected cash flows, resulting
in a gain or loss.
Non-current mortgage loans were not significant at December 31, 1993. The
Company realized losses of approximately $6.1 million on mortgage loans for the
year ended December 31, 1993, including $5.8 million from permanent write-downs
of residual interests in collateralized mortgage obligation investments. At
December 31, 1993, the Company had a loan loss reserve of $3.9 million.
Approximately 22 percent, 15 percent, 10 percent and 8 percent of the mortgage
loans were on properties located in Texas, New York, Virginia and Missouri,
respectively. No other state comprised greater than 7 percent of the mortgage
loan balance.
At December 31, 1993, the Company held trading account securities with a
carrying value of $105.8 million. Trading account securities are investments
that are purchased with the intent to be traded prior to their maturity or are
believed likely to be disposed of in the foreseeable future as a result of
market or issuer developments. Effective December 31, 1993, with
the Company's adoption of Statement of Financial Accounting Standards No. 115
("SFAS 115"), trading account securities are carried at estimated fair value,
with the changes in fair value reflected in the statement of operations. Prior
to the adoption of SFAS 115, unrealized gains or losses on trading account
securities were reflected as a component of shareholders' equity and not in the
statement of operations. The net unrealized gain on trading account securities
at December 31, 1993, recorded in trading income as a result of adopting SFAS
115, was immaterial.
Short-term investments totaled $666.4 million, or 5.7 percent of invested
assets at December 31, 1993, and consisted primarily of commercial paper and
repurchase agreements relating to government securities.
36
CONSOLIDATED FINANCIAL CONDITION
Changes in the Consolidated Balance Sheet of 1993 Compared to 1992
Changes in the Company's consolidated balance sheet of 1993 compared to
1992 reflected the operations of the Company and the capital and financing
transactions discussed below.
The increase in total investments resulted principally from: (i) the net
cash flow from operations; (ii) the net proceeds from the public offering of
5.75 million shares of Series D cumulative convertible preferred stock; (iii)
the net proceeds received by Bankers from its IPO; (iv) investments received
by Bankers related to the recapture of insurance polices ceded in prior years;
and (v) an increase in the net unrealized gains on actively managed fixed
maturities.
Additionally, as part of its investment strategy, the Company enters into
reverse repurchase agreements and dollar roll transactions to increase its
return on investments and improve liquidity. These transactions are accounted
for as short-term collateralized borrowings and are collateralized by pledged
securities with fair values approximately equal to the loan value.
The average amount of investment borrowings during 1993 was approximately $410
million compared to $215 million during 1992. The increase in investment
borrowings at December 31, 1993, contributed to the increase in the Company's
investments.
The investment in CCP increased during 1993 as a result of the Company's
equity in CCP's earnings and the purchase of additional shares of common stock
of CCP in September 1993, as described in Note 2 to the consolidated financial
statements.
Reinsurance receivables, which primarily represent liabilities ceded under
reinsurance agreements, decreased as a result of the recapture of insurance
policies that had previously been ceded to nonaffiliated companies as described
in Note 6 to the consolidated financial statements.
During 1993, goodwill increased as a result of: (i) the purchase of
additional shares of common stock of Bankers in September 1993; (ii) the
initial public offering of BLH and related transactions completed in March
1993; and (iii) the purchase of Bankmark in the first quarter of 1993. These
transactions are further described in Note 2 to the consolidated financial
statements.
Insurance liabilities increased primarily as a result of additional annuity
deposits and interest credited on annuity deposits, net of withdrawals.
As described in Note 1 to the consolidated financial statements, Bankers
competed an IPO in March 1993. The net proceeds from the offering of $405.3
million were used, in part, to redeem all of the $52.2 million par value
Bankers' preferred stock held by minority interests. The change in minority
interest during 1993 was attributable to the minority interests' share of: (i)
the net increase in Bankers' shareholders' equity attributable to the IPO and
related transactions; and (ii) the results of Bankers' operations for the year,
offset by Conseco's purchase of additional common stock of Bankers in September
1993 and the redemption of Bankers' preferred stock.
Preferred stock increased in 1993 due to the public offering of 5.75
million shares of Senior D cumulative convertible preferred stock, net of the
retirement of all previously outstanding preferred stock.
The $12.6 million decline in common stock and additional paid-in-capital
was a result of the repurchase of 450,700 shares of common stock for $25.3
million as part of a stock repurchase program, $9.0 million of costs associated
with the public offering of preferred stock (as discussed above) and a $3.8
million increase in the nonvested portion of stock under employee stock and
deferred compensation plans. Offsetting these declines, 851,110 shares of
common stock were issued pursuant to the Company's stock option and deferred
compensation programs for net proceeds and tax benefits of $25.5
million and 274 Series D preferred shares were converted to 215 shares of
common stock. As a result of changes in common stock accounts, the number of
common shares outstanding increased 400,625 shares.
37
Financial Ratios
The following table sets forth selected debt ratios for each of the five
years ended December 31, 1993.
Years Ended December 31,
----------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
Ratio of earnings to fixed
charges 1.90X 1.50X 1.32X 1.16X 1.26X
Ratio of earnings to fixed
charges, excluding interest
on annuities and financial
products 6.96X 5.89X 3.41X 1.95X 2.49X
Ratio of earnings to fixed
charges on debt for which
Conseco is directly liable,
excluding interest on annuities
and financial products 8.34X 7.21X 3.67X 2.08X 2.49X
Ratio of earnings to fixed
charges and preferred
dividends 1.78X 1.47X 1.29X 1.14X 1.20X
Ratio of earnings to fixed
charges and preferred dividends,
excluding interest on
annuities and financial
products 4.72X 4.80X 2.95X 1.72X 1.94X
Ratio of earnings to fixed
charges and preferred dividends
for which Conseco is directly
liable, excluding interest
on annuities and financial
products 4.25X 5.66X 3.04X 1.79X 1.94X
Ratio of total debt (including
debt of CCP guaranteed by
Conseco until its retirement
in 1993) to equity and minority
interest .51X .94X .97X 2.67X 1.90X
Ratio of debt for which Conseco
is directly liable to equity .36X .27X .43X 1.53X 1.90X
Liquidity for Insurance Operations
Conseco's insurance operating companies generally provide adequate cash
flow from premium collections and investment income to meet their obligations.
The liabilities related to insurance policies are primarily long term and
generally are paid from future cash flows. Most of the assets, other than
policy loans and the investment in CCP, are invested in bonds and other
securities, substantially all of which are readily marketable. Although there
is no present need or intent to dispose of such investments, the life companies
could liquidate portions of the investments if such a need arose. To increase
their return on investments and improve liquidity, the life companies from time
to time will lend United States Treasury securities in reverse repurchase
agreements. The life companies may also lend mortgage-backed securities to
increase yield and income through the better financing rate typically found in
such dollar roll transactions, which are specialized forms of collateralized
lending involving mortgage-backed securities.
38
Of the companies' total insurance liabilities at December 31, 1993,
approximately 74 percent may be surrendered by the policyholder, of which 71
percent were subject to penalty if surrendered. Payment characteristics of the
insurance liabilities at December 31, 1993, were as follows (dollars in
millions):
Payments under contracts containing
fixed payment dates:
Due in one year or less $ 210.1
Due after one year through five years 784.3
Due after five years through ten years 874.7
Due after ten years 4,363.8
---------
Total gross payments whose payment
dates are fixed by contract 6,232.9
Less amounts representing future
interest on such contracts 4,205.8
---------
Insurance liabilities whose payment
dates are fixed by contract 2,027.1
Insurance liabilities whose payment
dates are not fixed by contract 8,771.2
---------
Total insurance liabilities $10,798.3
=========
Of the above insurance liabilities under contracts containing fixed payment
dates, approximately 35 percent related to payments that will be made on such
date only if the contract holder is living. Expected mortality is considered
in determining the amount of this liability. The remainder of the insurance
liabilities with fixed payment dates were payable regardless of the contract
holder's survival.
Approximately 29 percent of the insurance liabilities were subject to
interest rates, ranging from 3 percent to 12 percent, fixed for the life of the
contract. The remaining liabilities generally were subject to interest rates
that may be reset at least annually.
The Company believes that it has adequate short-term investments and
readily marketable investment grade securities to cover the payments under
contracts containing fixed payment dates plus any likely cash needs for all
other contracts. The Company's investment portfolio at December 31, 1993,
included $.2 billion of short-term investments (net of investment
borrowings), $.1 billion of trading account securities, $3.2 billion of U.S.
government/agency and mortgage-backed securities and $5.8 billion of
publicly-traded investment grade bonds. The Company believes that such
investments could be readily sold at or near carrying value or used to
facilitate borrowings under reverse repurchase agreements. At December 31,
1993, the Company's portfolio of bonds, notes and redeemable preferred stocks
had an aggregate unrealized gain of $295.7 million.
Liquidity of BLH
As a holding company whose principal assets are the securities of its
insurance subsidiaries, BLH's ability to meet debt service obligations and pay
operating expenses and dividends is dependent primarily on the receipt of
sufficient funds from its subsidiaries. Bankers Life Insurance Company of
Illinois ("BLI", the parent of Bankers Life) provides liquidity to BLH by
paying principal and interest on a surplus debenture and by paying dividends.
39
In connection with the acquisition of Bankers Life, BLH received a $500
million surplus debenture from BLI in exchange for funds provided to acquire
Bankers Life. The surplus debenture was approved by the Illinois Department
of Insurance ("DOI"). During 1993, BLI repaid principal of $15 million plus
accrued interest on the surplus debenture. Payments by BLI of principal and
interest on the surplus debenture may be made only when the DOI is satisfied
that the financial condition of BLI warrants that action, but such approval
may not be withheld if BLI submits satisfactory evidence of surplus of at least
the amount stipulated in the surplus debenture.
A summary of maturity dates and amounts (dollars in millions) of the
surplus debenture is shown below. Interest is payable quarterly generally at
prime plus two percent (8.0 percent at December 31, 1993).
1994 $ 25.0
1995 30.0
1996 30.0
1997 30.0
1998 30.0
Thereafter 340.0
------
Total $485.0
======
BLI's ability to service its obligation under the surplus debenture is
dependent upon its ability to receive dividends and tax sharing payments from
Bankers Life. Bankers Life may pay dividends up to $82.5 million without
regulatory approval during 1994.
Under an inter-company tax sharing agreement, Bankers Life remits tax
payments to BLI based upon its tax liabilities calculated on a separate company
basis.
At December 31, 1993, BLH's debt service obligations included a $110
million principal amount senior term loan payable in annual installments and
$180 million principal amount of senior subordinated notes due in 2002. Future
annual debt service requirements are discussed in Note 8 to the consolidated
financial statements.
At December 31, 1993, BLH had short-term investments of $21.4 million.
Conseco believes that BLH could generate additional liquidity, if needed in the
future, through equity offerings, debt issuance or by the conversion of
existing assets to cash, including the sale or transfer of existing blocks of
insurance through reinsurance arrangements.
BLH contributed $114 million of the proceeds from its IPO to the capital
of its subsidiaries. BLH believes its life subsidiaries are adequately
capitalized and will not require additional investment to maintain their
current operations.
BLH makes cash distributions for fees for administrative services provided
by Conseco's wholly owned subsidiaries and for dividend payments on common
stock to all its shareholders.
Liquidity of the Parent Company
The parent company (Conseco, Inc.) needs liquidity primarily to service its
debt, pay dividends on preferred and common stock and meet administrative
expenses. The wholly owned insurance subsidiaries (excluding Western),
Bankers, Western and CCP provide liquidity to the parent company by paying
dividends and fees for services provided. These operations generate adequate
cash flow to meet the needs of the parent company's normal operations.
The parent company also may issue debt or equity securities periodically
to fund internal expansion, acquisitions, investment opportunities and for the
retirement of debt and equity. Such transactions during 1993 included the
following:
- In January 1993, the Company completed a public offering of 5.75 million
shares of Series D Cumulative Convertible Preferred Stock at $50 per
share. Proceeds from the offering of approximately $278.5 million
(after underwriting and associated costs) were added to the Company's
general funds.
40
- In July 1993, the Company redeemed its $50.0 million stated value Series
B Preferred Stock.
- In February 1993, the Company completed a public offering of $200
million of 8.125 percent senior notes due in 2003. Proceeds from the
offering of $195.6 million (after original issue discount and
underwriting and other associated costs) were used to redeem all of the
Company's outstanding 12.75 percent senior subordinated notes and for
other general corporate purposes.
- In connection with Conseco's acquisition of additional shares of Bankers
common stock on September 30, 1993, a new $200 million senior term loan
was executed, with net proceeds to Conseco of $197.8 million (after fees
and other associated costs). This senior term loan was repaid with
proceeds from the IPO of WNC on February 15, 1994.
The following table shows the cash flow activity of the parent company and
its non-life subsidiaries from 1991 through 1993.
Years ended December 31,
------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Amounts received:
Interest on surplus debentures $ - $ 36.9 $ 38.8
Dividends from subsidiaries 3.8 72.0 60.0
Tax sharing payments from
subsidiaries 101.9 - -
Fees for shared costs from wholly
owned subsidiaries 15.4 12.5 10.4
Principal on surplus debentures - 41.4 12.4
Fees from CCP Companies and
Bankers 18.3 8.6 6.0
Fees from unaffiliated companies 20.4 13.3 9.0
Proceeds from the sale of stock of
Life Re - 64.0 -
Proceeds from the issuance of
equity securities 281.7 6.3 133.1
Proceeds from the issuance of
debt 393.4 - -
Repayment of debt and redemption
of preferred stock
by BLH and CCP 118.3 12.1 -
Amounts paid:
Parent company costs (62.9) (27.7) (23.7)
Interest on debt of Conseco (23.7) (21.5) (35.4)
Interest on amounts due from
Conseco to life subsidiaries (8.6) (10.3) (11.1)
Common and preferred dividends (23.0) (7.6) (8.3)
Investments in equity investments (59.5) - -
Investment in consolidated
subsidiaries (391.4) (129.7) (69.5)
Payments on debt, including
prepayments (180.0) (24.8) (101.2)
Repurchases of common stock (25.3) (49.4) (9.5)
Payments to retire preferred
stock (50.0) - (10.0)
Income taxes (91.1) - -
Other (12.8) (4.0) (3.6)
------- ------- ------
Change in short-term investments
of parent and its
non-life subsidiaries 24.9 (7.9) (2.6)
Short-term investments,
beginning of year 17.4 25.3 27.9
------- ------- ------
Short-term investments,
end of year $ 42.3 $ 17.4 $ 25.3
====== ====== ======
41
At December 31, 1993, the parent company and its non-life subsidiaries had
short-term investments of $42.3 million, of which $8.7 million was expended in
January 1994 for accrued interest and dividends. In addition, the life
subsidiaries are permitted to distribute $18.7 million to the parent company
in 1994. The parent company and its non-life subsidiaries had additional
investments in nonaffiliates of $52.2 million at December 31, 1993, which, if
needed, could be liquidated or contributed to the insurance subsidiaries.
Conseco believes that it could generate additional liquidity, if needed in the
future, through equity offerings, debt issuance or by the conversion of
existing assets to cash, including the sale of a partial interest
in its minority owned affiliates. As described in the notes to the
consolidated financial statements, on February 15, 1994, Conseco sold a 60
percent interest in WNC. Net pretax proceeds from the sale and related
transactions totaling $537.9 million were used to repay a $200 million senior
unsecured loan and for other general corporate purposes.
Statutory Limitations on Payments by Life Insurance Subsidiaries to their
Parent
As described in the preceding section, Conseco receives funds from its
wholly owned insurance subsidiaries from dividends and fees for shared
expenses. In connection with its acquisition of certain life insurance
subsidiaries, Conseco received surplus debentures from the subsidiaries and the
repayment terms were established and approved by the applicable regulatory
authorities at the time of each acquisition. All such surplus debentures with
Conseco's wholly owned insurance subsidiaries were eliminated by a contribution
to the statutory capital of such subsidiaries at December 31, 1992. Annual
dividends in excess of maximum amounts prescribed by state statutes (so-called
"extraordinary dividends") may not be paid without the approval of the
insurance commissioner of each state in which a life subsidiary is domiciled.
Statutory operating results and statutory surplus are governed by statutes
adopted by each state in which the subsidiaries do business; therefore,
statutory surplus bears no direct relationship to equity as determined under
generally accepted accounting principles ("GAAP"). With respect to new
business, statutory accounting practices require that (i) acquisition
costs and (ii) reserves for future guaranteed principal payments and interest
in excess of statutory rates be expensed in the year the new business is
written. These items cause a statutory loss ("surplus strain") on many
insurance products in the year they are issued. The Company designs its
products to minimize such first-year losses but certain products continue to
cause a statutory loss in the year written. The Company controls the amount
of new premiums written in order to manage the effect of such statutory surplus
strain.
Note 13 to the consolidated financial statements shows the difference
between pretax income reported using statutory accounting practices (before
deduction of expenses paid to affiliates and transfers to and from IMR and the
amortization of IMR) and GAAP as follows:
Statutory Income
Greater Than
Year GAAP Income
---- -----------
(Dollars in millions)
1993 $48.1
1992 72.0
1991 76.1
42
Insurance departments in the states where the Company's life insurance
subsidiaries are domiciled or do business require insurance companies to make
annual and quarterly filings. Prior to the 1992 annual statements, these
statutory filings required the establishment of the mandatory securities
valuation reserve ("MSVR"), an account designed to stabilize a
company's statutory surplus against fluctuations in the market value of stocks
and bonds, according to regulations prescribed by the NAIC. Effective for the
1992 annual statements, the NAIC replaced MSVR with two reserves, the interest
maintenance reserve ("IMR") and the asset valuation reserve ("AVR"). The new
regulations expanded reserve requirements to include all invested assets and
to distinguish between investment gains and losses resulting from changes in
interest rates and gains and losses resulting from changes in creditworthiness.
The IMR captures all investment gains and losses resulting from changes in
interest rates and provides for subsequent amortization of such amounts into
statutory net income on a basis reflecting the remaining lives of the assets
sold. The AVR captures investment gains and losses related to changes in
creditworthiness and is also adjusted each year based on a formula related to
the quality and loss experience of the Company's investment portfolio. Because
the AVR requires expanded reserves for mortgage loans, other invested assets
and short-term investments that were not previously considered in the MSVR, the
reserve amount required under these regulations increased. Such changes affect
the ability of the Company's insurance subsidiaries to reflect future
investment gains and losses in statutory earnings and surplus.
INFLATION
Inflation does not have a significant effect on Conseco's balance sheet due
to the minimal dollars invested in property and equipment and the absence of
inventories.
Medical cost inflation has had a significant impact on Bankers' operations.
These costs have continued to increase in recent years in excess of the
Consumer Price Index and similar increases will likely continue although
recently the rate of increase has declined. The impact on Bankers' operations
is dependent upon its ability to charge higher premium rates, which are subject
to approval by the insurance departments of each state in which Bankers sells
its products. Prior to the standardization of Medicare supplement plans,
approximately two-thirds of the states permitted rate plans with automatic
escalation clauses. This permitted Bankers, in periods following initial
approval, to adjust premium rates for changes in Medicare deductibles and
increases in medical cost inflation without refiling with the regulators.
Currently, all rate changes for the standardized plans must now be individually
approved by each state. Bankers' pricing of its new standardized supplement
plans reflects the impact of these filings and the lengthening of time required
to implement rate increases.
CHANGES IN ACCOUNTING PRINCIPLES
The Company adopted several new accounting standards during 1993.
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" ("SFAS 114"), requires that an impaired loan be
revalued at the present value of expected future cash flows discounted at the
loan's effective interest rate when it is probable that a creditor will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. The adoption of SFAS 114 had an immaterial impact on the
Company's financial position and results of operations.
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), requires the
Company to carry certain investments at current estimated fair value when there
is not a positive intent to hold such investments to maturity. The Company's
former policy was similar to that mandated by SFAS 115, with the most
significant exception being that unrealized gains and losses on trading account
securities, which had been included as an adjustment to shareholders' equity,
are recognized in income under the provisions of SFAS 115. The early adoption
of SFAS 115 as of December 31, 1993, resulted in an immaterial increase in
income from the unrealized gain on trading account securities.
In November 1992, the Financial Accounting Standards Board's Emerging
Issues Task Force concluded that for acquisitions after November 19, 1992, the
amortization method for cost of policies purchased should use an interest rate
comparable to the rates credited to the underlying products. Such method was
employed by the Company for the acquisition of 13.3 million common shares of
Bankers (as described in Note 2 to the consolidated financial statements) and
will be employed by the Company in future acquisitions.
43
OUTLOOK
As indicated throughout this report, Conseco intends to continue its
strategy of growth through its three principal sources of earnings: operations
of life insurance companies, provision of services for fees to the affiliated
companies and others, and acquisition and restructuring of life insurance
companies.
Growth Through Operations of Life Insurance Companies
Conseco's life insurance operations include: (i) Bankers, in which Conseco
has a 56 percent ownership interest; (ii) Western, in which Conseco has a 40
percent interest (wholly owned by Conseco until Western's IPO was completed on
February 15, 1994); (iii) CCP, in which Conseco has a 40 percent ownership
interest; and (iv) the wholly owned life insurance subsidiaries (excluding
Western), principally Bankers National and National Fidelity.
Conseco owns 30.4 million common shares of Bankers, or 56 percent of
Bankers' outstanding common shares. At December 31, 1993, the Bankers shares
owned by Conseco had a net carrying value of approximately $518.8 million, a
fair value of approximately $652.8 million (based on the closing price of
$21.50 per share) and a cost of $313.1 million. On March 8, 1994, Bankers
announced an increase in its quarterly cash dividend to 15 cents per share from
2 cents. During 1993, Bankers implemented several measures to enhance
efficiency and reduce operating costs, including the relocation of
its office space, which was previously scattered in 27 separate buildings.
Also during 1993, Bankers' agent force grew 7 percent and Bankers sold 3
percent more Medicare supplement policies than the prior year. The increased
sales of Medicare supplement policies provide Bankers with opportunities for
cross-selling in its niche market, senior citizens. As a result of
cross-selling, 1993 annualized new business premiums increased 19 percent for
long-term products and 27 percent for annuities. It is too early to analyze
what changes, if any, will occur in the business activity of Bankers as a
result of the current legislative debate on health care.
At December 31, 1993, Conseco owned 100 percent of Western. On February
15, 1994, Conseco sold a majority interest in Western through an IPO of 60
percent of the common stock of WNC. The offering of WNC generated net pretax
proceeds to Conseco of $537.9 million, which were used to repay a $200 million
senior unsecured loan and for other general corporate purposes. Conseco will
record, in the first quarter of 1994, a one-time, after-tax gain of
approximately $43 million as a result of the IPO. At February 15, 1994, the
WNC shares owned by Conseco had a fair value of approximately $330.6
million (based on the closing price of $13.25 per share) and a net carrying
value of approximately $270.0 million.
Premiums on SPDAs collected by Western decreased $262.8 million in 1993,
or 39 percent. The decline in premiums collected reflected primarily: (i)
increased competition from other carriers (including those with higher
ratings); (ii) increased competition from other investments and retirement
funding alternatives, such as variable annuities and mutual funds, during
these periods of low interest rates; and (iii) Western's focus on maintaining
profitability levels on SPDAs. Management believes that with the recent
marketing initiatives intended to address the decrease in SPDA premiums
collected, the trend of decreasing premiums will be reversed in 1994. In late
1993, Western entered into a significant sales agreement with
Oregon-based U.S. Bancorp to market Western's products through the bank's 400
branches in Northern California and the Pacific Northwest.
Conseco also owns 11.6 million shares, or 40 percent, of CCP's common
shares outstanding. At December 31, 1993, the CCP shares owned by Conseco had
a net carrying value of approximately $244.3 million, a fair value of
approximately $322.1 million (based on the closing price of $27.875 per share)
and a cost of $102.8 million. CCP has (i) a sizable and profitable block of
in-force business and (ii) a distribution system that has the potential to
generate growth in the 403(b) tax sheltered annuity market. Further, CCP
believes it has the financial strength to pursue an acquisition to complement
its internal growth.
Statutory surplus of the Company's insurance subsidiaries and investees is
believed to be adequate. Conseco expects that statutory earnings in 1994 will
exceed amounts needed by the holding companies for debt service and other
requirements. Such excesses will be available to increase statutory capital
of the life insurance subsidiaries and investees in order that their
internal growth can continue.
44
Services Provided for Fees
Conseco continues to provide various combinations of services to Bankers,
Western, CCP and the wholly owned subsidiaries (excluding Western) including
investment management, mortgage origination and servicing, policy
administration, data processing, product marketing and executive management
services. Additionally, Conseco provides such services to unaffiliated
insurance companies. It is the Company's intent to provide investment
management services to all companies acquired by CCP II, and to provide
administrative, data processing and other services to such companies when
appropriate. It is also the Company's intent to expand its service fee revenue
by seeking similar arrangements with other unaffiliated insurers in order to
profit from the Company's ability to administer products and investments
without the need to provide additional capital needed to support those
products. In March 1993, Conseco acquired Bankmark, an insurance marketing
company which develops relationships with financial institutions to provide
insurance and investment products to their customers. After its acquisition
by Conseco, Bankmark began a formal program to actively expand its business by
developing relationships with a few large money-center banks.
Acquisitions and Restructuring of Life Insurance Companies
On February 2, 1994, Conseco announced the closing of CCP II, a partnership
which will invest in acquisitions of specialized annuity, life and accident and
health insurance companies and related businesses, in which 36 investors
committed a total of $624 million of capital to the new partnership.
Commitments to the new partnership include $100 million from Conseco, $25
million from Bankers, $25 million from CCP, $50 million from Western and $36
million from executive officers and directors of Conseco and its affiliates.
A subsidiary of Conseco is the sole general partner.
The Company believes that a number of life insurance companies will be
available to be acquired in the next 10 years as a result of strategic
posturing and consolidation within the life industry. The Company expects to
participate in such acquisitions through CCP II using the capital provided by
the partnership, mezzanine capital that may be provided by the individual
partners of CCP II and others, and debt capital from various sources.
The Company believes there will be a period in the future when it will be
more difficult to obtain financing for acquisitions because of conditions in
the capital markets, causing a greater dependence on equity capital financing,
such as that obtained through CCP II. Conseco will actively seek alternative
capital sources, if needed, to finance acquisitions. Continuation of those
conditions in the capital markets may also affect the availability of
appropriate acquisition targets if sellers of insurance companies decide to
wait for more favorable conditions. In addition, Conseco's increased size and
evolving strategies will eliminate a number of potential acquisition candidates
who are either too small or inappropriate strategic targets. However, Conseco
believes it has the resources and capabilities to continue its strategy of
acquiring and restructuring life insurance companies. It also believes that
its past record of successfully acquiring, financing and operating
life insurance companies will be an advantage compared to others who may
attempt to acquire available candidates.
As part of its program of exploring opportunities to improve its capital
structure, Conseco continually reviews the need and desirability of
restructuring the existing debt and equity of the Company and its affiliates.
______________________________
45
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Index to Consolidated Financial Statements
PAGE
Report of Management. . . . . . . . . . . . . . . . . . . . . . . . 46
Report of Independent Accountants . . . . . . . . . . . . . . . . . 47
Consolidated Balance Sheet at December 31, 1993 and 1992. . . . . . 48
Consolidated Statement of Operations for the years ended
December 31, 1993, 1992 and 1991. . . . . . . . . . . . . . . . . 50
Consolidated Statement of Shareholders' Equity
for the years ended December 31, 1993, 1992 and 1991. . . . . . . 52
Consolidated Statement of Cash Flows for the years ended
December 31, 1993, 1992 and 1991. . . . . . . . . . . . . . . . . 53
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 55
46
REPORT OF MANAGEMENT
To Our Shareholders
Management of Conseco, Inc. is responsible for the reliability of the
financial information in this annual report. The financial statements are
prepared in accordance with generally accepted accounting principles and the
other financial information in this annual report is consistent with that of
the financial statements.
The integrity of the financial information relies in large part on
maintaining a system of internal control that is established by management to
provide reasonable assurance that assets are safeguarded and transactions are
properly authorized, recorded and reported. Reasonable assurance is based upon
the premise that the cost of controls should not exceed the benefits derived
from them.
Certain financial information presented depends upon management's estimates
and judgments regarding the ultimate outcome of transactions which are not yet
complete. Management believes these estimates and judgments are fair and
reasonable in view of present conditions and available information.
The Company engages independent accountants to audit its financial
statements and express their opinion thereon. They have full access to each
member of management in conducting their audits. Such audits are conducted in
accordance with generally accepted auditing standards and include a review of
internal controls, tests of the accounting records, and such other auditing
procedures as they consider necessary to express an opinion on the Company's
financial statements.
The Audit Committee of the Board of Directors, composed solely of
nonmanagement directors, meets periodically with management, internal auditors
and the independent accountants to review internal accounting control, audit
activities and financial reporting matters. The internal auditors and the
independent accountants have full and free access to the Audit
Committee.
/s/ STEPHEN C. HILBERT /s/ ROLLIN M. DICK
Stephen C. Hilbert Rollin M. Dick
Chairman of the Board, Executive Vice President and
President and Chief Financial Officer
Chief Executive Officer
47
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders
Conseco, Inc.
We have audited the accompanying consolidated balance sheet of Conseco,
Inc. and Subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1993. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Conseco, Inc.
and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1993, in conformity with generally accepted
accounting principles.
/s/COOPERS & LYBRAND
Indianapolis, Indiana
March 24, 1994
48
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1993 and 1992
(Dollars in millions)
ASSETS
1993 1992
---- ----
Investments:
Fixed maturities:
Actively managed at fair value (amortized
cost: 1993 - $9,525.4; 1992 - $7,348.8) $ 9,820.6 $ 7,495.2
Held to maturity at amortized cost (fair
value: 1993 - $1.6; 1992 - $19.4) 1.1 18.6
Equity securities at fair value
(cost: 1993 - $30.2; 1992 - $65.0) 30.3 71.6
Mortgage loans 158.4 178.0
Credit-tenant loans 326.9 150.6
Policy loans 190.0 184.3
Investment in CCP Insurance, Inc. 244.3 130.5
Other invested assets 64.2 53.0
Trading account securities 105.8 468.6
Short-term investments 666.4 666.6
Assets held in separate accounts 81.1 33.0
--------- ---------
Total investments 11,689.1 9,450.0
Accrued investment income 168.3 156.9
Reinsurance receivables 511.1 891.5
Cost of policies purchased 603.7 623.5
Cost of policies produced 258.6 310.8
Goodwill (net of accumulated amortization:
1993 - $14.3; 1992 - $8.8) 320.6 149.8
Property and equipment at cost
(net of accumulated depreciation: 1993 - $21.1
1992 - $15.4) 71.7 62.5
Other assets 126.2 127.7
--------- ---------
Total assets $13,749.3 $11,772.7
--------- ---------
--------- ---------
(continued on next page)
The accompanying notes are an integral part
of the consolidated financial statements.
49
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1993 and 1992
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
1993 1992
---- ----
Liabilities:
Insurance liabilities $10,798.3 $10,039.0
Income tax liabilities 118.2 81.4
Investment borrowings 427.7 207.3
Other liabilities 256.4 240.5
Liabilities related to separate accounts 79.0 31.0
Notes payable of Conseco 413.0 163.2
Notes payable of Bankers Life Holding Corporation,
not direct obligations of Conseco 290.3 392.0
--------- ---------
Total liabilities 12,382.9 11,154.4
--------- ---------
Minority interest 223.8 24.0
--------- ---------
Shareholders' equity:
Preferred stock 287.5 50.0
Common stock and additional paid-in capital
(no par value, 500,000,000 shares authorized,
shares issued and outstanding: 1993 - 25,311,773;
1992 - 24,911,148) 102.8 115.4
Unrealized appreciation of securities
(net of applicable deferred income taxes:
1993 - $41.8; 1992 - $17.3) 97.5 42.9
Retained earnings 654.8 386.0
--------- ---------
Total shareholders' equity 1,142.6 594.3
--------- ---------
Total liabilities and shareholders' equity $13,749.3 $11,772.7
--------- ---------
--------- ---------
The accompanying notes are an integral part
of the consolidated financial statements.
50
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions, except per share data)
1993 1992 1991
---- ---- ----
Revenues:
Insurance policy income $1,293.8 $ 378.7 $ 280.8
Investment activity:
Net investment income 896.2 888.6 921.4
Net trading income 93.1 35.9 50.7
Net realized gains 149.5 124.3 123.3
Fee revenue 26.5 12.9 5.4
Other income 1.4 1.5 .9
Equity in earnings of Life Re - 11.3 9.3
Equity in earnings of CCP Insurance, Inc. 37.4 15.8 -
Incentive earnings allocation from the Partnership 36.6 9.3 -
Gain on sale of stock by subsidiaries 101.5 9.2 -
Gain on sale of stock of Life Re - 36.4 -
------- ------- -------
Total revenues 2,636.0 1,523.9 1,391.8
------- ------- -------
Benefits and expenses:
Insurance policy benefits 1,007.8 334.7 276.2
Change in future policy benefits 60.0 40.2 37.2
Interest expense on annuities and
financial products 408.5 506.8 576.7
Interest expense on long-term debt 58.0 46.2 69.9
Interest expense on short-term
investment borrowings 10.6 8.8 17.1
Amortization related to operations 140.2 62.2 46.8
Amortization and change in future policy
benefits related to realized gains 126.3 93.4 50.4
Other operating costs and expenses 214.4 101.6 94.3
------- ------- -------
Total benefits and expenses 2,025.8 1,193.9 1,168.6
------- ------- -------
Income before income taxes, minority interest
and extraordinary charge 610.2 330.0 223.2
Income tax expense 223.1 124.6 78.2
------- ------- -------
Income before minority interest and
extraordinary charge 387.1 205.4 145.0
Less minority interest 78.2 30.6 24.0
------- ------- -------
(Continued on next page)
The accompanying notes are an integral part
of the consolidated financial statements.
51
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions, except per share data)
1993 1992 1991
---- ---- ----
Income before extraordinary charge 308.9 174.8 121.0
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest 11.9 5.3 5.0
------- ------ ------
Net income 297.0 169.5 116.0
Less preferred stock dividends 20.6 5.5 6.8
------- ------ ------
Earnings applicable to common stock $276.4 $164.0 $109.2
------- ------ ------
------- ------ ------
Earnings per common share and common equivalent share:
Primary:
Weighted average shares 29,245,000 29,479,000 24,918,000
Earnings before extraordinary charge $9.86 $5.59 $4.30
Extraordinary charge .41 .16 .20
----- ----- -----
Net income $9.45 $5.43 $4.10
----- ----- -----
----- ----- -----
Fully diluted:
Weighted average shares 33,495,000 29,603,000 25,416,000
Earnings before extraordinary charge $9.12 $5.56 $4.22
Extraordinary charge .35 .16 .20
----- ----- -----
Net income $8.77 $5.40 $4.02
----- ----- -----
----- ----- -----
The accompanying notes are an integral part
of the consolidated financial statements.
52
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions)
1993 1992 1991
---- ---- ----
Preferred stock:
Balance, beginning of year $ 50.0 $ 50.0 $ 60.0
Series D preferred shares issued 287.5 - -
Preferred shares redeemed (50.0) - (10.0)
-------- ------ ------
Balance, end of year $ 287.5 $ 50.0 $ 50.0
-------- ------ ------
-------- ------ ------
Common stock and additional paid-in capital:
Balance, beginning of year $ 115.4 $139.5 $ 14.5
Issuance of common stock, net - - 132.2
Amounts related to stock options and
employee benefit plans 6.4 7.4 2.3
Tax benefit related to issuance of shares
under employee benefit plans 15.3 17.9 -
Cost of shares acquired (25.3) (49.4) (9.5)
Cost of issuance of Series D preferred shares (9.0) - -
-------- ------ ------
Balance, end of year $ 102.8 $115.4 $139.5
-------- ------ ------
-------- ------ ------
Unrealized appreciation (depreciation) of securities:
Balance, beginning of year $ 42.9 $ 18.0 $(10.7)
Change in unrealized appreciation 54.6 24.9 28.7
-------- ------ ------
Balance, end of year $ 97.5 $ 42.9 $ 18.0
-------- ------ ------
-------- ------ ------
Retained earnings:
Balance, beginning of year $ 386.0 $224.1 $116.4
Net income 297.0 169.5 116.0
Dividends on common stock (7.6) (2.1) (1.5)
Dividends on preferred stock (20.6) (5.5) (6.8)
-------- ------ ------
Balance, end of year $ 654.8 $386.0 $224.1
-------- ------ ------
-------- ------ ------
Total shareholders' equity $1,142.6 $594.3 $431.6
-------- ------ ------
-------- ------ ------
The accompanying notes are an integral part
of the consolidated financial statements.
53
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions)
1993 1992 1991
---- ---- ----
Cash flows from operating activities:
Net income $ 297.0 $ 169.5 $ 116.0
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 235.4 161.5 107.2
Income taxes 5.6 1.2 19.6
Insurance liabilities 89.5 128.4 14.9
Interest credited to insurance liabilities 408.5 506.8 576.7
Fees charged to insurance liabilities (38.8) (55.3) (82.6)
Accrual and amortization of investment income (34.0) (56.8) (28.2)
Deferral of cost of policies produced (159.7) (83.2) (80.6)
Gain on sale of stock by subsidiaries (101.5) (9.2) -
Incentive earnings allocation from the Partnership (36.6) (9.3) -
Equity in earnings of Life Re - (11.3) (9.3)
Equity in earnings of CCP Insurance, Inc. (36.6) (15.6) -
Trading account securities 287.0 750.1 (375.5)
Minority interest 77.2 28.9 23.1
Extraordinary charge on extinguishment of debt 11.9 5.3 5.0
Other 21.7 (8.6) (18.4)
-------- -------- ------
Net cash provided by operating activities 1,026.6 1,502.4 267.9
-------- -------- ------
Cash flows from investing activities:
Sales of investments 6,386.2 4,155.3 4,648.0
Maturities and redemptions 1,428.9 1,044.8 619.4
Purchases of investments (9,703.4) (6,925.6) (6,173.6)
Purchase of additional shares of Bankers Life Holding Corporation (237.6) - -
Purchase of additional shares of CCP Insurance, Inc. (59.5) - -
Purchase of Bankmark (3.8) - -
Acquisition of Partnership companies - (203.0) (71.7)
Cash held by CCP Subsidiaries before public offering - (350.6) -
Other (25.7) (16.0) 3.8
-------- -------- ------
Net cash used by investing activities (2,214.9) (2,295.1) (974.1)
-------- -------- ------
(continued on next page)
The accompanying notes are an integral part
of the consolidated financial statements.
54
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions)
1993 1992 1991
---- ---- ----
Cash flows from financing activities:
Issuance of capital stock, net $ 281.7 $ 6.3 $ 133.1
Issuance of capital stock by subsidiaries, net 405.3 96.4 35.4
Issuance of debt of Conseco, net 393.4 - -
Issuance of debt of subsidiaries - not direct
obligations of Conseco, net - 584.4 76.5
Payments to retire equity securities (75.3) (49.4) (19.5)
Payments to retire equity securities of subsidiaries (52.2) (21.7) -
Payments on debt of Conseco (157.2) (23.8) (100.2)
Payments on debt of subsidiaries - not direct
obligations of Conseco (127.3) (291.2) (9.0)
Deposits to insurance liabilities 886.2 1,141.0 1,449.1
Investment borrowings 220.4 280.8 -
Withdrawals from insurance liabilities (563.9) (716.0) (830.2)
Dividends paid (23.0) (7.6) (8.3)
-------- -------- --------
Net cash provided by financing activities 1,188.1 999.2 726.9
-------- -------- --------
Net increase (decrease) in short-term investments (.2) 206.5 20.7
Short-term investments, beginning of year 666.6 460.1 439.4
-------- -------- --------
Short-term investments, end of year $ 666.4 $ 666.6 $ 460.1
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part
of the consolidated financial statements.
55
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Conseco, Inc. ("Conseco" or the "Company") is a specialized financial
services holding company which primarily makes controlling strategic
investments in insurance companies and related businesses, manages the
operations of those businesses to increase their value, provides services to
acquired companies and other businesses, and seeks to realize the increase in
value that its management brings to such companies through sale or
restructuring. The insurance companies in which Conseco has made investments
develop, market, issue and administer primarily annuity, individual health
insurance and life insurance products. Conseco provides administrative, data
processing and investment management services to affiliated and nonaffiliated
companies. The Company's principal wholly owned life insurance subsidiaries
are Western National Life Insurance Company ("Western National"), Bankers
National Life Insurance Company ("Bankers National") and National Fidelity Life
Insurance Company ("National Fidelity"). A majority interest of Western
National was sold on February 15, 1994 (see Note 16).
During 1990, Conseco formed the Partnership, which raised and invested
$99.5 million of capital, of which approximately half was provided by the
Company and the balance by other investors. A wholly owned subsidiary of
Conseco was the sole general partner of the Partnership. The Partnership was
the Company's vehicle for effecting the following acquisitions of insurance
companies: Great American Reserve Insurance Company ("Great American Reserve")
in June 1990, Jefferson National Life Insurance Company ("Jefferson National")
in November 1990, Beneficial Standard Life Insurance Company ("Beneficial
Standard") in March 1991 and Bankers Life and Casualty Company and its
subsidiary, Certified Life Insurance Company (collectively, "Bankers Life") in
November 1992. All acquisitions were accounted for as purchases and were
reflected in operations as of their effective dates. As sole general partner,
Conseco exercised unilateral control over the Partnership; therefore, the
accounts of the Partnership and its majority-owned subsidiaries were included
in the consolidated financial statements of Conseco and its wholly owned
subsidiaries in the periods prior to the Partnership's liquidation as of March
31, 1993. Intercompany accounts and transactions were eliminated.
See Note 2 for a description of the activities of the Partnership and
its acquired companies. As a result of the public offering in July 1992 by CCP
Insurance, Inc. ("CCP"), a newly organized holding company for the
Partnership's first three acquisitions, Conseco no longer had unilateral
control over those entities and ceased including the accounts of those
companies in its consolidated financial statements. CCP and its subsidiaries
are included in Conseco's financial statements on the equity basis since July
1, 1992.
As a result of the public offering in March 1993 by Bankers Life Holding
Corporation ("BLH"), a company formed by the Partnership to acquire Bankers
Life (collectively referred to herein as "Bankers"), Conseco no longer had
unilateral control of Bankers. However, after the acquisition by Conseco of
additional shares of BLH in September 1993, Conseco's ownership position in
Bankers increased to 56 percent. Accordingly, the accounts of Bankers have
been consolidated with Conseco's accounts in the accompanying consolidated
financial statements throughout 1993.
Because its former owner continued to own 40 percent of BLH following
the Partnership's acquisition of Bankers Life in 1992, it was necessary for the
Partnership and Conseco to account for that acquisition as a "step acquisition
transaction" in accordance with the guidance provided in Issue Number 88-16 of
the Emerging Issues Task Force of the Financial Accounting Standards Board
entitled "Basis in Leveraged Buyout Transactions." The step acquisition
accounting was also used by Conseco to account for its increased ownership in
Bankers acquired in September 1993. As a result, the assets and liabilities
of Bankers included in Conseco's 1993 consolidated balance sheet represent the
following combination of values: (i) the portion of Bankers' net assets
acquired by Conseco in the November 1992 acquisition made by the Partnership
is valued as of that acquisition date, (ii) the portion of Bankers' net assets
acquired in September 1993 is valued as of that date, and (iii) the portion of
Bankers' net assets owned by minority interests is valued based on Bankers'
consolidated financial statements.
56
The cost of Conseco's September 1993 purchase of BLH shares was
allocated to the assets and liabilities acquired based on a preliminary
determination of their fair values; accordingly, this allocation may be
adjusted upon final determination of such values. In management's opinion,
however, any adjustments to fair values are not expected to be material.
Certain amounts from prior periods were reclassified to conform to the
1993 presentation.
Investments
Fixed maturity investments are securities that mature more than one year
after they are issued and include bonds, notes receivable and preferred stocks
with mandatory redemption features. Equity securities include investments in
common stocks and non-redeemable preferred stock. Effective December 31, 1993,
the Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), and, accordingly, classifies its fixed maturity and equity securities
into the following three categories:
- Actively managed fixed maturity and equity securities are securities
that may be sold prior to maturity due to changes that might occur
in market interest rate risks, changes in the security's prepayment
risk, the management of income tax position, general liquidity needs,
and increase in loan demand, the need to increase regulatory capital,
changes in foreign currency risk or similar factors. Actively
managed securities are carried at fair value and the unrealized gain
or loss is recorded to shareholders' equity, net of tax and the
related adjustments described in the second following paragraph.
- Trading account securities are fixed maturity and equity securities
that are bought and held principally for the purpose of selling them
in the near term. Trading account securities are carried at
estimated fair value and the unrealized gain or loss is included as
a component of net trading income.
- All other fixed maturity securities are those securities which the
Company has the ability and positive intent to hold to maturity, and
are carried at amortized cost. The Company may dispose of such
securities under certain unforeseen circumstances, such as issuer
credit deterioration or regulatory requirements.
The above categories for classifying fixed maturity and equity
securities are consistent with the Company's policy prior to the adoption of
SFAS 115, with one exception that net unrealized gains and losses on trading
account securities, which had previously been recorded as an adjustment to
shareholders' equity, are now recognized as trading income under the provisions
of SFAS 115. The net unrealized gain on trading account securities at December
31, 1993, recorded in trading income as a result of adopting SFAS 115 was
immaterial.
Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased and the cost of policies
produced. When actively managed fixed maturity and equity securities are
stated at fair value, an adjustment is made to the cost of policies purchased
and the cost of policies produced equal to the change in amortization that
would have been recorded if such securities had been sold at their fair value
and the proceeds reinvested at current yields. Furthermore, if future yields
expected to be earned on such securities decline, it may be necessary to
increase certain insurance liabilities. Adjustments to such liabilities are
required when their balances, in addition to future net cash flows including
investment income, are insufficient to cover future benefits and expenses.
57
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax,
to shareholders' equity. The following table summarizes the effect of these
adjustments as of December 31, 1993:
Effect of Fair Value
Adjustment to
Balance Actively Managed Reported
before Adjustment Fixed Maturities Amount
----------------- ---------------- ------
(Dollars in millions)
Actively managed fixed maturities $ 9,525.4 $295.2 $ 9,820.6
Cost of policies purchased 635.8 (32.1) 603.7
Cost of policies produced 379.9 (121.3) 258.6
Insurance liabilities 10,759.2 39.1 10,798.3
Income tax liabilities 82.3 35.9 118.2
Minority interest 221.3 2.5 223.8
Unrealized appreciation of securities 33.2 64.3 97.5
Effective December 31, 1993, when the Company recognizes changes in
conditions that cause a fixed maturity investment to be transferred to a
different category (e.g., actively managed, held to maturity or trading), the
security is transferred to the new category at its fair value at the date of
the transfer. At the date of transfer, the security's unrealized gain or loss
is accounted for as follows:
- For transfers to the trading category, the unrealized gain or loss
is recognized in earnings;
- For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
- For transfers to actively managed from held to maturity, the
unrealized gain or loss is recognized in shareholders' equity; and
- For transfers to held to maturity from actively managed, the
unrealized gain or loss at the date of transfer continues to be
reported in shareholders' equity, but is amortized over the remaining
life of the security as an adjustment of yield.
Prior to adopting SFAS 115, the above investments were transferred to
the new category at the lower of cost or fair value at the date of transfer.
Unrealized losses were recognized upon such transfers; and unrealized gains
were deferred until the final disposition of the securities. Transfers between
categories in 1993 and 1992 and the resulting gains were immaterial.
Credit-tenant loans are loans for commercial properties which require
(i) the lease of the principal tenant to be assigned to the Company and to
produce adequate cash flow to fund substantially all the requirements of the
loan and (ii) the principal tenant or the guarantor of such tenant's
obligations to have an investment-grade credit rating at the time of
origination of the loan. These loans are also secured by the value of the
related property. The underwriting guidelines take into account such factors
as the lease term of the property; the borrower's management ability, including
business experience, property management capabilities and financial soundness;
and such economic, demographic or other factors that may affect the
income generated by the property or its value. The underwriting guidelines
also require a loan-to-value ratio of 75 percent or less.
Other invested assets (principally investments in unconsolidated limited
partnerships) are generally accounted for using the equity method.
58
Policy loans are stated at their current unpaid principal balance.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities less than three months and are carried
at amortized cost, which approximates estimated fair value. The company
considers all short-term investments to be cash equivalents. Mortgage and
credit-tenant loans are stated at amortized cost.
Fees received and costs incurred in connection with origination of
investments, principally mortgages and credit-tenant loans are deferred. Fees,
costs, discounts and premiums are amortized as yield adjustments over the
contractual life of the investments. Anticipated prepayments on
mortgage-backed securities are taken into consideration in determining
estimated future yields on such securities.
The specific identification method is used to account for the
disposition of investments. The differences between sale proceeds and carrying
values are reported as gains and losses on investments, or as adjustments to
investment income if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates mortgage loans, credit-tenant loans and
other securities based on current economic conditions, past credit loss
experience and other circumstances of the investee. Impaired loans are
revalued at the present value of expected cash flows discounted at the loan's
effective interest rate when it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the agreement.
A decline in a security's net realizable value that is other than temporary is
treated as a realized loss and the cost basis of the security is reduced to its
estimated fair value.
Separate Accounts
Separate accounts represent funds for which investment income and gains
or losses accrue directly to certain policyholders. The assets of these
accounts are legally segregated and are not subject to the claims which may
arise out of any other business of the Company. Separate account assets are
reported at market value since the underlying investment risks are assumed by
the contract holders. The related liabilities are recorded at amounts equal
to the underlying assets and the fair value of those liabilities is equal to
their carrying amount.
Cost of Policies Purchased
The cost of policies purchased represents the portion of the cost to
acquire a subsidiary that is attributable to the right to receive future cash
flows from insurance contracts existing at the date of acquisition of the
subsidiary. The value of cost of policies purchased is the actuarially
determined present value of the projected future cash flows from the acquired
policies.
The method used by the Company to value the cost of policies purchased
is consistent with the valuation methods used most commonly to value blocks of
insurance business, which is also consistent with the basic methodology
generally used to value assets. The method used by the Company is summarized
as follows:
- Identify the expected future cash flows from the blocks of business.
- Identify the risks inherent in realizing those cash flows (i.e., what
is the probability that the cash flows will be realized).
- Identify the rate of return that the Company believes it must earn
in order to accept the risks inherent in realizing the cash flows,
based on consideration of the factors summarized below.
- Determine the value of the policies purchased by discounting the
expected future cash flows by the discount rate the Company requires.
59
Expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date based on the collective judgment of the management of the
Company. Actual experience on purchased business may vary from projections due
to differences in renewal premiums collected, investment spread, investment
gains or losses, mortality and morbidity costs and other factors. These
variances from original projections, whether positive or negative, are included
in net income as they occur. To the extent that these variances indicate that
future cash flows will differ from those reflected in the scheduled
amortization of the cost of policies purchased, current and future amortization
is adjusted. For example, sales of fixed maturity investments that result in
a gain (or loss), but also reduce (or increase) the future investment spread
because the sale proceeds are reinvested at a lower (or higher) earnings rate,
cause amortization to increase (or decrease) reflecting the change in the
incidence of cash flows.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order for the Company to invest in
the business being acquired. In determining the rate of return to be used by
the Company, the following factors are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows as
described in the preceding paragraphs.
- The cost of capital to fund the acquisition.
- The perceived likelihood of changes in projected future cash flows
that might occur if there are changes in insurance regulations and
tax laws.
- The compatibility with other Company activities that may favorably
affect future cash flows.
- The complexity of the acquired company.
- Recent purchase prices (i.e., discount rates used in determining
valuations) on similar blocks of business.
After the cost of purchased policies is determined using the methods
described above, the amount is amortized based on the incidence of the expected
cash flows. For acquisitions made on or before November 19, 1992, the asset
is amortized with interest at the same rate used to determine the discounted
value of the asset. For acquisitions after November 19, 1992, including the
acquisition of additional shares of Bankers on September 30, 1993, the asset
is amortized using an interest rate comparable to the rate credited to the
underlying products. This amortization methodology is in accordance with the
conclusions reached by the Emerging Issues Task Force of the Financial
Accounting Standards Board in their November 19, 1992, meeting.
Recoverability of the cost of policies purchased is evaluated annually
by comparing the current estimate of expected future cash flows (discounted at
the rate of interest earned on invested assets) to the unamortized asset
balance by line of insurance business. If such current estimate indicates that
the existing insurance liabilities, together with the present value of future
net cash flows from the blocks of business purchased, will not be sufficient
to recover the cost of policies purchased, the difference is charged to
expense. Amortization is also adjusted for the current and future years to
reflect (i) the revised estimate of future cash flows and (ii) the revised
interest rate (but not greater than the rate initially used and not lower than
the rate of interest earned on invested assets) at which the discounted present
value of such expected future profits equals the unamortized asset balance.
60
Cost of Policies Produced
Costs of producing new business (primarily commissions and certain costs
of policy issuance and underwriting, net of fees charged to the policy in
excess of ultimate fees charged), which vary with and are primarily related to
the production of new business, are deferred to the extent recoverable from
future profits. Such costs are amortized with interest as follows:
- For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from these
contracts, discounted using the interest rate credited to the policy.
- For immediate annuities with mortality risks, in relation to the
present value of benefits to be paid.
- For traditional life and accident and health products, in relation
to future anticipated premium revenue using the same assumptions that
are used in calculating the insurance liabilities.
Recoverability of the unamortized balance of the cost of policies
produced is evaluated regularly. For universal life-type contracts and
investment-type contracts, the accumulated amortization is adjusted (whether
an increase or a decrease) whenever there is a material change in the estimated
gross profits expected over the life of a block of business in order to
maintain a constant relationship between cumulative amortization and the
present value (discounted at the rate of interest that accrues to the policies)
of expected gross profits. For most other contracts, the unamortized asset
balance is reduced by a charge to income only when the present value of future
cash flows, net of the policy liabilities, is not sufficient to cover such
asset balance.
Goodwill
The excess of the cost to acquire purchased companies over the net
assets acquired is recorded as goodwill and is amortized on the straight-line
basis over a 40-year period.
Property and Equipment
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation expense was $6.0 million, $3.7 million and $4.0
million for 1993, 1992 and 1991, respectively, computed using the straight-line
method over the estimated useful lives of the assets, which range from 3 to 50
years.
Insurance Liabilities, Recognition of Insurance Policy Income and
Related Benefits and Expenses
Reserves for universal life-type and investment-type contracts are based
on the contract account balance, if future benefit payments in excess of the
account balance are not guaranteed, or on the present value of future benefit
payments when such payments are guaranteed. Additions to insurance liabilities
are made if future cash flows including investment income are insufficient to
cover future benefits and expenses.
For investment contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit the Company or the insured to make changes in the
contract terms (such as single-premium whole life and universal life), premium
deposits and benefit payments are recorded as increases or decreases in a
liability account rather than as revenue and expense. Amounts charged against
the liability account for the cost of insurance, policy administration and
surrender penalties are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of the contract liability
account balance are charged to expense.
61
Reserves for traditional and limited-payment contracts are generally
calculated using the net level premium method and assumptions as to investment
yields, mortality, withdrawals and dividends. The assumptions are based on
projections of past experience and include provisions for possible unfavorable
deviation. These assumptions are made at the time the contract is issued or,
in the case of contracts acquired by purchase, at the purchase date.
For traditional insurance contracts, premiums are recognized as income
when due or, for short duration contracts, over the period to which the
premiums relate. Benefits and expenses are recognized as a level percentage
of earned premiums. Such recognition is accomplished through the provision for
future policy benefits and the amortization of deferred policy acquisition
costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments (when accounting for annuity contracts) or in relation
to insurance in force (when accounting for life insurance contracts).
Liabilities for incurred claims are determined using historical
experience and published tables for disabled lives and represent an estimate
of the present value of the remaining ultimate net cost of all reported and
unreported claims. Management believes these estimates are adequate. Such
estimates are reviewed continually and any adjustments are reflected in current
operations.
The liability for future policy benefits for accident and health
policies consists of active life reserves and the estimated present value of
the remaining ultimate net cost of incurred claims. The active life reserves
include unearned premiums and additional reserves. The additional reserves are
computed on the net level premium method using assumptions for future
investment yield, mortality and morbidity experience. The assumptions are
based on projections of past experience and reflect provisions for possible
adverse deviation.
For participating policies, the amount of dividends to be paid is
determined annually by the Company. The portion of the earnings allocated to
participating policyholders is included as an insurance liability.
Reinsurance
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of the benefits
paid by ceding reinsurance to other insurance enterprises or reinsurers under
excess coverage and coinsurance contracts. The Company has set its retention
limit for acceptance of risk on life insurance policies at various levels up
to $.8 million.
Assets and liabilities related to insurance contracts are reported
before the effects of reinsurance. Reinsurance receivables and prepaid
reinsurance premiums (including amounts related to insurance liabilities) are
reported as assets. Estimated reinsurance receivables are recognized in a
manner consistent with the liabilities related to the underlying reinsured
contracts. Such amounts have been presented in accordance with Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
Income Taxes
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. Additionally, this liability method of accounting for income
taxes requires the effect of a tax rate change on accumulated deferred income
taxes to be reflected in income in the period in which the change is enacted.
62
Minority Interest
The consolidated financial statements include all of the assets,
liabilities, revenues and expenses of the Partnership, its subsidiaries and
Bankers. A charge is made against consolidated income representing the share
of the earnings of these partially-owned entities allocable to the minority
interests. Shareholders' equity of such entities allocable to the minority
interests is shown separately on the consolidated balance sheet.
Development Cost
Market development and start-up costs are expensed as incurred. After
its acquisition by Conseco in March 1993, Marketing Distribution Systems
Consulting Group, Inc. and Subsidiaries ("Bankmark") began a program to expand
its business. Start-up costs of approximately $2.4 million were expensed in
1993 related to such program.
Earnings Per Share
All applicable share and per share data have been adjusted for the
two-for-one stock splits distributed on July 1, 1991 and April 1, 1992.
Primary net income per share is computed by dividing earnings, less preferred
dividend requirements and an adjustment for the dilutive securities of
affiliates and of subsidiaries of the Partnership, by the weighted average
number of common and common equivalent shares outstanding for the year. Fully
diluted net income per share is computed on that same basis, except (i) the
number of common equivalent shares related to stock options is based on the
year-end market value of the shares if that is more dilutive than the average
market value and (ii) the conversion of the convertible preferred stock into
common shares is assumed.
Fair Values of Financial Instruments
The following methods and assumptions are used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values for fixed maturity
securities (including redeemable preferred stocks) are based on quoted
market prices, where available. For fixed maturity securities not
actively traded, the estimated fair values are determined using values
obtained from independent pricing services or, in the case of private
placements, are determined by discounting expected future cash flows
using a current market rate applicable to the yield, credit quality and
maturity of the investments. The estimated fair values for equity
securities and trading account securities are based on quoted market
prices.
Short-term investments: The estimated fair values for short-term
investments are based on quoted market prices. The carrying amount
reported in the consolidated balance sheet for these instruments
approximates their estimated fair value.
Mortgage loans, credit-tenant loans and policy loans: The estimated
fair values of these loans are determined by discounting future expected
cash flows using interest rates currently being offered for similar
loans to borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Other invested assets: The estimated fair values of other invested
assets are determined using quoted market prices for similar
instruments.
63
Off-balance sheet interest rate guarantee and swaps: The estimated
fair value of the Company's interest rate guarantee contract and swap
agreements are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standings.
Insurance liabilities for investment contracts: The estimated fair
values of the Company's liabilities under investment-type insurance
contracts are determined using discounted cash flow calculations based
on interest rates currently being offered for similar contracts with
maturities consistent with those remaining for the contracts being
valued.
Investment borrowings and notes payable: The estimated fair values of
the Company's investment borrowings and notes payable are determined
using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amount of the Company's investment borrowings approximates
its estimated fair value.
2. ACQUISITIONS:
CCP Insurance, Inc.
As of March 31, 1991, the Partnership completed the acquisition of all
of the outstanding stock of Beneficial Standard for a purchase price of $141.1
million, including $.9 million of fees and other costs. The acquisition was
funded with $27.0 million of capital contributions from the Partnership and the
net proceeds of the following: a $79.5 million senior secured loan from
lending banks; a $9.5 million senior secured loan provided by the Company and
$40.0 million of preferred stock (including $17.9 million provided by the
Company).
In July 1992, CCP, a newly organized holding company for the
Partnership's first three acquisitions, completed an initial public offering
("IPO") of 8,010,700 shares of common stock, with net proceeds to CCP totaling
$111.2 million. The shares issued in the offering represented a 31 percent
ownership interest in the common stock outstanding of CCP. The remaining
ownership interest in CCP was held by Conseco and others who exchanged their
investments in the Partnership and its subsidiaries for common stock of CCP.
In September 1993, CCP completed a public offering in which CCP sold 3.0
million shares of its common stock and certain shareholders sold 6.5 million
shares of CCP common stock. Proceeds of approximately $80.9 million from the
offering of common shares by CCP (after underwriting and issuance costs) were
added to CCP's funds for general corporate purposes. CCP received no proceeds
from the sale of shares by the selling shareholders. In a separate
transaction, Conseco purchased 2.0 million shares of CCP common stock from the
selling shareholders for $53.6 million. In addition, Conseco purchased .3
million shares of CCP common stock in open market transactions for $5.9 million
during 1993. After these transactions, Conseco owns 40 percent of the common
stock of CCP.
The Partnership agreement provided incentive compensation to the general
partner in the form of transfers from the limited partners of a portion of
their returns in excess of prescribed targets. The distribution of CCP shares
to the limited partners in 1992 caused such targets to be exceeded, resulting
in incentive compensation of $6.1 million, net of tax of $3.2 million, to
Conseco. In addition, income in 1992 included $1.9 million, net of tax of $7.3
million, representing Conseco's percentage share in the increase in CCP's
shareholders' equity account attributable to the proceeds from the IPO.
Bankers Life Holding Corporation
On November 9, 1992, the Partnership acquired Bankers Life from I.C.H.
Corporation (I.C.H. Corporation and its subsidiaries are collectively referred
to herein as "ICH"). The acquisition was completed through BLH, a company
formed and controlled by the Partnership.
64
The purchase price of $600.0 million was funded with the net proceeds
of the following securities issued by BLH: $175.0 million senior loan from a
group of lending banks; $200.0 million senior subordinated notes; $45.0 million
payment-in-kind junior subordinated notes (including $8.3 million provided by
Conseco and $34.7 million provided by ICH); $158.3 million of payment-in-kind
preferred stock (of which $108.3 million was provided by Conseco and $50.0
million was provided by ICH); and $66.7 million of common stock of BLH,
including $16.7 million directly provided by ICH and $50.0 million provided by
the Partnership (including $25.5 million provided by Conseco and $9.6 million
provided by ICH). The notes are not direct obligations of Conseco. After this
acquisition, Conseco owned approximately 44 percent of the common equity
interest in BLH through direct investments and investments in the Partnership.
For accounting convenience, the acquisition was reported as of November 1,
1992, and adjustments were made to reflect financing costs for the period
between that date and the actual date of acquisition, November 9, 1992.
On March 25, 1993, BLH completed an IPO of 19.6 million shares of its
common stock at $22 per share. Proceeds from the offering of $405.3 million
(after underwriting and issuance costs) were used by BLH to redeem all
outstanding preferred stock, to retire all junior subordinated debt, to prepay
a portion of the senior debt and for other corporate purposes. After the
offering, Conseco owned 31 percent of the common shares of BLH. As a result
of the offering, Conseco recorded a one-time gain of $59.3 million (net of tax
of $39.9 million) in the first quarter of 1993, representing Conseco's direct
percentage share of the increase in Bankers' shareholders' equity account
attributable to the proceeds from the offering. In addition, Conseco recorded
a gain of $2.2 million (net of tax of $.1 million) in the first quarter of
1993, representing Conseco's indirect percentage share (through the Company's
ownership of CCP) of CCP's percentage share of the increase in Bankers'
shareholders' equity account attributable to the proceeds from the offering.
The Partnership agreement provided incentive compensation to Conseco as the
general partner in the form of transfers from the limited partners of a portion
of their returns in excess of prescribed targeted returns. The distribution
of BLH shares to the limited partners caused such targets to be exceeded,
resulting in incentive compensation to Conseco of $21.9 million, net of tax of
$14.7 million.
On September 30, 1993, Conseco completed the acquisition of 13.3 million
shares of common stock of BLH from ICH for $287.6 million. The shares
purchased represented 25 percent of the outstanding shares of common stock of
BLH, increasing Conseco's ownership of shares of common stock of BLH to 56
percent. The purchase price for the shares acquired from ICH was paid by the
surrender for redemption of $50.0 million stated value of ICH preferred stock
owned by a Conseco subsidiary and the payment of $237.6 million in cash. The
cash payment was funded with available cash and the net proceeds from a $200.0
million senior unsecured loan. As described in Note 16, the loan was repaid
in February 1994, using the proceeds from the IPO of Western National
Corporation.
65
The closing price of BLH's shares on the New York Stock Exchange on
December 31, 1993, was $21.50 per share. This indicated a total fair value of
Conseco's investment in BLH of $652.8 million, compared to the cost to Conseco
totaling $313.1 million and net equity included in these consolidated financial
statements of $518.8 million. Shares held by the Company are not freely
tradable, and sale of such shares may require a registration statement with the
Securities and Exchange Commission.
Bankmark
In March 1993, Conseco acquired 95 percent of the outstanding common
stock of Bankmark for $6.1 million. Bankmark is an insurance marketing company
which develops marketing relationships with financial institutions to provide
insurance and investment products to their customers.
The acquisitions of CCP, Bankers and Bankmark described above were
recorded in the consolidated statement of cash flows as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Fixed maturities $ - $ (721.3) $(1,314.3)
Mortgage loans (.6) (22.5) (337.0)
Policy loans - (35.9) (66.5)
Investment in CCP Insurance, Inc. (59.5) - -
Trading account securities - (377.2) (43.0)
Other investments 50.0 (35.6) -
Cost of policies purchased (118.4) (516.0) (173.9)
Cost of policies produced 73.3 (152.9) -
Goodwill (154.6) (100.9) -
Reinsurance receivables - (638.7) -
Insurance liabilities 11.2 2,436.4 1,889.6
Tax liabilities 14.3 32.7 .5
Notes payable 12.1 - -
Minority interest (117.8) - -
Other (10.9) (71.1) (27.1)
------- -------- ----------
Cash used $(300.9) $ (203.0) $ (71.7)
------- -------- ----------
------- -------- ----------
66
Following are unaudited pro forma results of operations of the Company
as if the Partnership's acquisition of Bankers, the IPOs of BLH and CCP and
Conseco's subsequent purchases of additional shares of BLH and CCP had occurred
at the beginning of the periods presented. Prior operations of Bankmark are
not included in the following table since the effect is not material.
1993 1992
---- ----
(Dollars in millions, except per share amounts)
Revenues $2,497.0 $2,290.0
Income before extraordinary charge 242.8 189.7
Earnings before extraordinary charge
per common share and common
equivalent share:
Primary $7.60 $6.15
Fully diluted 7.14 6.12
3. INVESTMENTS:
The amortized cost, estimated fair value and carrying value of fixed
maturities were as follows at December 31, 1993:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---- ----- ------ ----- -----
(Dollars in millions)
Actively managed:
United States Treasury
securities and obligations
of United States government
corporations and agencies $ 76.5 $ 3.9 $ 2.0 $ 78.4 $ 78.4
Obligations of states and
political subdivisions 77.8 1.0 2.5 76.3 76.3
Debt securities issued
by foreign governments 2.9 .9 - 3.8 3.8
Public utility securities 2,255.1 80.6 28.2 2,307.5 2,307.5
Other corporate securities 4,029.7 206.8 38.3 4,198.2 4,198.2
Mortgage-backed securities 3,083.4 90.6 17.6 3,156.4 3,156.4
-------- ------ ----- -------- --------
Total actively managed 9,525.4 383.8 88.6 9,820.6 9,820.6
Held to maturity:
Obligations of states and
political subdivisions 1.1 .5 - 1.6 1.1
-------- ------ ----- -------- --------
Total fixed maturities $9,526.5 $384.3 $88.6 $9,822.2 $9,821.7
-------- ------ ----- -------- --------
-------- ------ ----- -------- --------
67
At December 31, 1992, the amortized cost and estimated fair value of
fixed maturities were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
---- ----- ------ ----- -----
(Dollars in millions)
Actively managed:
United States Treasury securities and
obligations of United States
government corporations
and agencies $ 91.1 $ 2.5 $ 1.8 $ 91.8 $ 91.8
Obligations of states and
political subdivisions 55.6 .5 .5 55.6 55.6
Debt securities issued by
foreign governments 2.5 .6 - 3.1 3.1
Public utility securities 1,841.1 50.9 7.9 1,884.1 1,884.1
Other corporate securities 2,870.8 65.0 43.9 2,891.9 2,891.9
Mortgage-backed securities 2,487.7 96.2 15.2 2,568.7 2,568.7
-------- ------ ----- -------- --------
Total activity managed 7,348.8 215.7 69.3 7,495.2 7,495.2
-------- ------ ----- -------- --------
Held to maturity:
Obligations of states and
political subdivisions 1.0 .4 - 1.4 1.0
Other corporate securities 17.6 .4 - 18.0 17.6
-------- ------ ----- -------- --------
Total held to maturity 18.6 .8 - 19.4 18.6
-------- ------ ----- -------- --------
Total fixed maturities $7,367.4 $216.5 $69.3 $7,514.6 $7,513.8
-------- ------ ----- -------- --------
-------- ------ ----- -------- --------
The following table sets forth the amortized cost and estimated fair
value of fixed maturities as of December 31, 1993, based upon the source of the
estimated fair value:
Estimated
Amortized Fair
Cost Value
---- -----
(Dollars in millions)
Nationally recognized pricing services $7,137.9 $7,383.5
Broker-dealer market makers 2,361.1 2,411.1
Internally developed methods (calculated based
on a weighted-average current market yield of 4.31 percent) 27.5 27.6
-------- --------
Total fixed maturities $9,526.5 $9,822.2
-------- --------
-------- --------
68
The following table sets forth the quality of total fixed maturity
investments as of December 31, 1993, classified in accordance with the highest
rating by a nationally recognized statistical rating organization or, as to
$69.1 million fair value of fixed maturities not rated by such firms, based on
ratings assigned by the National Association of Insurance Commissioners
("NAIC") as follows: for purposes of the table, NAIC Class 1 is included in
the "A" rating; Class 2, "BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and
below."
Percent of Percent of
Investment Rating Fixed Maturities Total Investments
----------------- ---------------- -----------------
AAA 34% 28%
AA 9 8
A 20 17
BBB+ 10 9
BBB 11 9
BBB- 10 8
--- --
Investment grade 94 79
--- --
BB+ 2 2
BB 1 1
BB- 1 1
B+ and below 2 1
--- --
Below investment grade 6 5
--- --
Total fixed maturities 100% 84%
--- --
--- --
Below investment grade fixed maturity investments, summarized by the
amount their amortized cost exceeds fair value, were as follows at December 31,
1993:
Estimated
Amortized Fair
Cost Value
---- -----
(Dollars in millions)
Amortized cost exceeds fair value by 15% or more $ 20.2 $ 16.6
Amortized cost exceeds fair value by 5%,
but not more than 15% 38.0 34.4
All others 524.3 546.7
------ ------
Total below investment grade
fixed maturity investments $582.5 $597.7
------ ------
------ ------
69
The amortized cost and estimated fair value of fixed maturities at
December 31, 1993, by contractual maturity, are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties and
because most mortgage-backed securities provide for periodic payments
throughout their lives.
Estimated
Amortized Fair
Cost Value
---- -----
(Dollars in millions)
Due in one year or less $ 23.4 $ 25.7
Due after one year through five years 184.1 185.7
Due after five years through ten years 1,216.1 1,256.0
Due after ten years 5,019.5 5,198.4
-------- --------
Subtotal 6,443.1 6,665.8
Mortgage-backed securities 3,083.4 3,156.4
-------- --------
Total fixed maturities $9,526.5 $9,822.2
-------- --------
-------- --------
Equity securities consisted of the following:
December 31, 1993 December 31, 1992
----------------- -----------------
Estimated Estimated
Fair Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in millions)
Common stock, principally
insurance companies $15.2 $15.3 $ 8.4 $24.0
Preferred stock, non-redeemable 15.0 15.0 56.6 47.6
----- ----- ----- -----
Total equity securities $30.2 $30.3 $65.0 $71.6
===== ===== ===== =====
70
Net investment income consisted of the following:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Fixed maturities $777.6 $762.2 $766.7
Equity securities 7.1 10.5 10.8
Mortgage loans 23.2 49.8 57.9
Credit-tenant loans 24.2 15.7 10.5
Policy loans 11.3 13.8 16.9
Other 23.8 8.6 3.5
Short-term investments 28.2 26.5 52.4
Separate accounts 5.9 6.1 7.9
------ ------ ------
Gross investment income 901.3 893.2 926.6
Investment expenses 5.1 4.6 5.2
------ ------ ------
Net investment income $896.2 $888.6 $921.4
------ ------ ------
------ ------ ------
The carrying value of investments not accruing investment income totaled
$19.6 million, $24.8 million and $36.8 million at December 31, 1993, 1992 and
1991, respectively.
The proceeds from sales of fixed maturity investments were $6.5 billion,
$4.2 billion and $4.8 billion for the years ended December 31, 1993, 1992 and
1991, respectively. The proceeds from the sales of trading account securities
were $10.0 billion, $6.7 billion and $5.6 billion for the years ended December
31, 1993, 1992 and 1991, respectively. In 1993, there were no sales of fixed
maturities classified as held to maturity, although some were called by the
issuer.
Realized gains (losses) from trading account securities, net of
investment expenses, were included in revenue as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Gross gains $129.5 $75.0 $68.7
Gross losses (26.4) (30.3) (10.7)
------ ----- -----
Net realized gains from trading
account securities before expenses 103.1 44.7 58.0
Trading expenses 10.0 8.8 7.3
------ ----- -----
Net trading income $ 93.1 $35.9 $50.7
------ ----- -----
------ ----- -----
71
Realized gains (losses), net of investment expenses, were included in
revenue as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Fixed maturities:
Gross gains $214.9 $141.4 $163.6
Gross losses (46.6) (16.4) (14.2)
Decline in net realizable value of
fixed maturities (7.9) - (18.7)
------ ------ ------
Net realized gains from fixed
maturities before expenses 160.4 125.0 130.7
Equity securities 10.4 3.8 .4
Mortgages (6.1) (6.7) .2
Other (2.1) 6.6 (2.5)
------ ------ ------
Net realized gains before expenses 162.6 128.7 128.8
Realized gain expenses 13.1 4.4 5.5
------ ------ ------
Net realized gains $149.5 $124.3 $123.3
------ ------ ------
------ ------ ------
72
Changes in unrealized appreciation (depreciation) on investments were as
follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Investments carried at amortized cost:
Fixed maturities held to maturity $ (.3) $(280.8) $456.5
------ ------- -------
------ ------- -------
Investments carried at estimated fair value:
Actively managed fixed maturities $148.8 $146.4 $ -
Equity securities (6.5) 18.8 6.0
Other investments 14.4 - -
Trading account securities (3.3) (42.0) 43.4
------ ------- -------
153.4 123.2 49.4
Equity in unrealized appreciation of CCP's investments 15.0 9.6 -
Less effect on other balance sheet accounts:
Cost of policies purchased (5.3) (26.8) -
Cost of policies produced (65.0) (56.3) -
Insurance liabilities (14.2) (24.9) -
Income tax liabilities (24.5) (8.2) (16.8)
Minority interest (4.8) 8.3 (3.9)
------ ------- -------
Change in unrealized appreciation of
investments carried at estimated fair value $ 54.6 $ 24.9 $ 28.7
------ ------- -------
------ ------- -------
73
Accumulated net appreciation of equity securities before tax as of
December 31, 1993, was $.1 million consisting of $.1 million of appreciation
and no depreciation.
The carrying value and fair value of fixed maturity investments in
default as to the payment of principal or interest totaled $25.3 million at
December 31, 1993, net of total recorded writedowns of $16.8 million. During
1991, the Company recorded $18.7 million of writedowns of fixed maturity
investments as a result of changes in conditions which caused the Company to
conclude the issuer may be unable to comply with the terms of the investment.
During 1992, the Company recorded no such writedowns. During 1993, the Company
recorded $7.9 million of such writedowns.
Investments in mortgage-backed securities at December 31, 1993, included
collateralized mortgage obligations ("CMOs") of $2,193.9 million and
mortgage-backed pass-through securities of $962.5 million. At December 31,
1993, the par value, amortized cost and estimated fair value of investments in
mortgage-backed securities summarized by interest rates on the underlying
collateral were comprised of the following:
Par Amortized Estimated
Value Cost Fair Value
----- ---- ----------
(Dollars in millions)
Pass-through securities:
Below 7% $ 467.7 $ 469.5 $ 465.8
7% - 8% 410.2 416.5 418.8
8% - 9% 26.1 26.2 27.3
Above 9% 46.5 46.6 50.6
Planned amortization class CMO instruments:
Below 7% 315.9 309.2 303.6
7% - 8% 574.9 557.1 572.4
8% - 9% 232.5 229.9 239.6
Above 9% 261.5 263.9 274.3
Other CMO instruments:
Below 7% 87.6 87.7 88.2
7% - 8% 71.2 69.5 70.6
8% - 9% 61.7 62.4 63.8
Above 9% 564.9 544.9 581.4
-------- -------- --------
Total mortgage-backed securities $3,120.7 $3,083.4 $3,156.4
-------- -------- --------
-------- -------- --------
At December 31, 1993, the balance of mortgage loans was comprised of 78
percent commercial loans and 22 percent junior and residual interests in
collateralized mortgage obligations. The total estimated fair value of
mortgage loans was approximately $175 million and $190 million at December 31,
1993 and 1992, respectively. Approximately 22 percent, 15 percent, 10 percent
and 8 percent of the mortgage loans were on properties located in Texas, New
York, Virginia and Missouri, respectively. No other state comprised greater
than 7 percent of the mortgage loan balance. At December 31, 1993, the Company
had an allowance for loss on mortgage loans of $3.9 million. During the year
ended December 31, 1993, the Company realized losses of $6.1 million on
mortgage loans, of which $5.8 million related to other than temporary declines
in the value of certain residual interests in collateralized mortgage
obligations.
At December 31, 1993 and 1992, the estimated fair values of
credit-tenant loans, policy loans and other invested assets were approximately
equal to their respective carrying values.
74
As part of its investment strategy, the Company enters into repurchase
agreements and dollar roll transactions to increase its return on investments
and improve liquidity. These transactions generally terminate after 30 days
and are accounted for as short-term collateralized borrowings. Such borrowings
averaged approximately $410 million during 1993 (compared to $215 million
during 1992) and were collateralized by mortgage-backed securities with fair
values approximately equal to the loan value.
In 1992, the Company entered into an interest rate guarantee contract
to convert the characteristics of certain investments to match those of related
insurance liabilities. The agreement expires in January 1995 and provides for
a constant yield on $100.0 million indexed to current rates on U.S. Treasuries.
The estimated fair value of the agreement was approximately $.1 million and $.9
million at December 31, 1993 and 1992, respectively, which was not recognized
in the accompanying consolidated balance sheet.
At December 31, 1993, the Company had outstanding interest rate swap
agreements which expire at various dates through 1999. Under the agreements,
the Company receives a fixed rate averaging 6.7 percent on $295.0 million and
pays a floating rate based on LIBOR. The estimated fair value of the
agreements was approximately $13.7 million at December 31, 1993, which was not
recognized in the accompanying consolidated balance sheet.
Life insurance companies are required to maintain certain amounts of
assets on deposit with state regulatory authorities. Such assets had an
aggregate carrying value of $27.0 million at December 31, 1993.
Investments in any entity in excess of 10 percent of shareholders'
equity at December 31, 1993, other than investments in affiliates and
investments issued or guaranteed by the U.S. government, substantially all of
which were actively managed fixed maturities, were as follows:
Estimated
Amortized Fair
Investment Cost Value
---------- ---- -----
(Dollars in millions)
News America Holding Corporation $149.8 $159.1
Commonwealth Edison Company 142.8 140.2
Texas Utilities Electric Company 126.9 128.4
GTE Corporation 120.1 128.2
Time Warner, Inc. 123.9 128.0
75
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
CCP
See Note 2 for a description of transactions affecting Conseco's
ownership of CCP.
Conseco's investment in 40 percent of the common stock of CCP is
included in the consolidated balance sheet on the equity basis at $244.3
million at December 31, 1993, representing the effect of the transactions
described in Note 2 plus equity in CCP's earnings. The closing price of CCP's
shares on the New York Stock Exchange on December 31, 1993, was $27.875 per
share, indicating a total fair value of the CCP shares owned by Conseco of
$322.1 million, compared to the total cost to Conseco of $102.8 million. A
substantial portion of the shares of CCP common stock held by Conseco are
subject to restrictions on trading.
76
The difference of $22.8 million between the carrying value of Conseco's
investment in CCP and the amount of its underlying equity in net assets is
amortized on the straight-line basis over a 40-year period. Financial
information of CCP at December 31, 1993 and 1992, for the year ended December
31, 1993, and for the six months ended December 31, 1992 (the period CCP and
its subsidiaries were included in Conseco's financial statements on the equity
basis) were as follows:
December 31,
------------------------------
1993 1992
---- ----
(Dollars in millions)
Financial position:
Total assets $5,298.1 $4,856.5
Total investments 4,872.5 4,373.7
Cost of policies purchased 175.5 247.9
Cost of policies produced 42.3 44.4
Total liabilities 4,734.2 4,522.7
Insurance liabilities 4,233.3 4,137.2
Notes payable 173.5 231.9
Common shareholders' equity 563.9 333.8
Amounts recorded by Conseco:
Investment in CCP $ 244.3 $ 130.5
Year Ended Six Months Ended
December 31, 1993 December 31, 1992
----------------- ------------------
(Dollars in millions)
Results of operations:
Total revenues $632.5 $318.0
Investment activity insurance policy income 127.8 72.4
Investment activity:
Net investment income 412.9 193.4
Net trading income 24.3 10.7
Net realized gains 55.8 40.7
Total benefits and expenses 459.0 249.9
Interest expense on annuities
and financial products 243.5 128.2
Interest expense on long-term debt 16.1 9.8
Income before income taxes and extraordinary charge 173.5 68.1
Income tax expense 65.9 24.4
Income before extraordinary charge 107.6 43.7
Extraordinary charge on extinguishment of debt, net of tax - 8.3
Net income 107.6 35.4
Amounts recorded by Conseco:
Equity in earnings before extraordinary charge $37.4 $15.8
Fees received for services provided by Conseco to CCP 10.6 4.5
Extraordinary charge - 3.9
Dividends received .8 .2
77
Life Re Corporation
At December 31, 1991, the Company owned a 31 percent equity interest
(after exercise of warrants held by others) in the common stock and $30.0
million of 12 percent junior preferred stock of Life Re Corporation ("Life
Re"), a company engaged in the life reinsurance business. In November 1992,
Life Re completed an initial public offering of its common stock and redeemed
all of the common and preferred stock held by the Company. As a result, a gain
of $15.2 million (net of tax of $21.2 million) was recorded in 1992. The
following amounts were recorded in Conseco's financial statements related to
the results of operations of Life Re:
1992 1991
---- ----
(Dollars in millions)
Equity in earnings of Life Re $11.3 $ 9.3
Net investment income received on preferred stock 3.0 3.6
Gain on sale of investment in Life Re 36.4 -
5. INSURANCE LIABILITIES:
Insurance liabilities consisted of the following:
Interest December 31,
Withdrawal Mortality Rate ----------------------
Assumption Assumption Assumption 1993 1992
---------- ---------- ---------- ---- ----
(Dollars in millions)
Future policy benefits:
Investment contracts N/A N/A (c) $ 7,114.4 $ 6,553.2
Limited-payment contracts None (a) (d) 1,583.9 1,357.7
Traditional life insurance Company
contracts experience (b) (e) 632.7 713.3
Universal life-type contracts N/A N/A (f) 341.0 337.4
Individual accident and health Company Company (g) 545.1 513.0
experience experience
Group life and health N/A N/A N/A 14.2 26.4
Unearned premiums N/A N/A N/A 189.4 183.2
Claims payable and other
policyholders' funds N/A N/A N/A 377.6 354.8
--------- ---------
Total insurance liabilities $10,798.3 $10,039.0
--------- ---------
--------- ---------
(a) Principally the 1984 United States Population Table.
(b) Principally modifications of the 1965 - 70 Basic, Select and Ultimate Tables.
(c) In both 1993 and 1992, approximately 94 percent of this liability represented account balances where
future benefits are not guaranteed and 6 percent represented the present value of guaranteed future benefits
determined using interest rates ranging from 3 percent to 12 percent.
(d) The weighted average rate was approximately 9 percent at December 31, 1993.
(e) The weighted average rate was approximately 7 percent at December 31, 1993.
(f) The weighted average rate was approximately 5 percent at December 31, 1993.
(g) The weighted average rate was approximately 7 percent at December 31, 1993.
78
Participating policies represented approximately 11 percent, 12 percent
and 14 percent of total life insurance in force at December 31, 1993, 1992 and
1991, respectively, and approximately 3 percent, 8 percent and 18 percent of
premium income for 1993, 1992 and 1991, respectively. Dividends on
participating policies amounted to $16.0 million, $11.1 million and $14.6
million in 1993, 1992 and 1991, respectively.
The sales of fixed maturity investments during 1993 reduced the expected
future yields on the investment of policyholder balances to the extent that
projected future cash flows on certain products were insufficient to cover
future benefits and expenses. Accordingly, additional estimated insurance
liabilities of $37.1 million were established by a charge to expense.
As described in Note 1, an adjustment was made to increase insurance
liabilities by $39.1 million related to recording unrealized gains on actively
managed fixed maturities.
The estimated fair value of the liabilities for investment contracts was
approximately equal to its carrying value at December 31, 1993 and 1992,
because interest rates credited on the vast majority of account balances
approximate current rates paid on similar investments and are not generally
guaranteed beyond one year. Fair values for the Company's insurance
liabilities other than those for investment contracts are not required to be
disclosed. However, the estimated fair values of liabilities for all insurance
contracts are taken into consideration in the Company's overall management of
interest rate risk, which minimizes exposure to changing interest rates through
the matching of investment maturities with amounts due under insurance
contracts.
6. REINSURANCE:
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $34.9 million, $41.9 million and $63.8 million in 1993, 1992 and
1991, respectively, and was deducted from insurance premium revenue. The
Company is contingently liable for claims reinsured if the assuming company is
unable to pay. Reinsurance recoveries netted against insurance policy benefits
totaled $41.9 million, $45.4 million and $68.1 million in 1993, 1992 and 1991,
respectively.
The Company has ceded blocks of insurance under reinsurance transactions
which represent financing arrangements and, in accordance with generally
accepted accounting principles, are not reflected in the accompanying
consolidated financial statements except for the risk fees paid to reinsurers.
Net statutory surplus provided by such treaties totaled $2.9 million and $11.2
million at December 31, 1993 and 1992, respectively. Risk fees paid to
reinsurers generally ranged from 2 percent to 4 percent of the net amount of
surplus provided.
79
The Company has also ceded policy liabilities under assumption
reinsurance agreements where all obligations under the insurance contracts have
been ceded to another company. Accordingly, insurance liabilities related to
such policies were not reported in the balance sheet. The Company believes the
assuming companies are able to honor all contractual commitments under the
assumption reinsurance agreements based on periodic reviews of financial
statements, insurance industry reports and reports filed with state insurance
departments.
At December 31, 1993 and 1992, reinsurance receivables with carrying
values of $398.5 million and $420.0 million, respectively, were associated with
annuity business ceded by Bankers to an unaffiliated company and retroceded on
substantially identical terms to an ICH affiliate. Bankers provides investment
management, administrative, data processing and general management services
related to the reinsured business in exchange for annual fees equal to .45
percent of reinsured reserves. Administrative fees earned were $1.8 million
and $.3 million for 1993 and the two months ended December 31, 1992,
respectively. Experience refunds including administrative fees, earned during
1993 and the two months ended December 31, 1992, were $3.2 million and $.3
million, respectively.
At December 31, 1992, insurance liabilities of approximately $182.0
million, were reinsured by Bankers with a subsidiary of ICH. During the first
quarter of 1993, Bankers recaptured the reinsured business with assets
approximately equal to the insurance liabilities. Recapture fees of $15.5
million were capitalized as a component of cost of policies purchased.
On June 30, 1993, the Company recaptured certain annuity business with
insurance liabilities of $156.5 million that had previously been reinsured with
an unaffiliated company. Assets with a fair value approximating the insurance
liabilities were transferred to the Company.
80
7. INCOME TAXES:
Income tax liabilities were comprised of the following:
December 31,
----------------------
1993 1992
---- ----
(Dollars in millions)
Deferred income tax liabilities:
Investments $ 67.9 $ 37.8
Cost of policies purchased and
cost of policies produced 275.8 250.3
Insurance liabilities (245.1) (224.5)
Other (17.9) (36.3)
Unrealized appreciation 41.8 17.3
Less net operating loss carryforward (33.2) (6.4)
------ ------
Deferred income tax liabilities 89.3 38.2
Current income tax liabilities 28.9 43.2
------ ------
Income tax liabilities $118.2 $ 81.4
------ ------
------ ------
Income tax expense was as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Current tax provision $162.9 $110.9 $75.5
Deferred tax provision 60.2 13.7 2.7
------ ------ -----
Income tax expense $223.1 $124.6 $78.2
------ ------ -----
------ ------ -----
Income tax expense differed from that computed at the applicable federal
statutory rate (35 percent during 1993 and 34 percent during 1992 and 1991) for
the following reasons:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Tax on income before income taxes
at statutory rates $213.6 $112.2 $75.9
Additional tax on unrealized gains and income from prior
periods related to increase in corporate income tax rate 3.3 - -
Nontaxable investment income and dividends received deduction (10.8) (.8) (12.8)
Undistributed earnings of affiliates 3.3 6.8 11.9
Nondeductible items 2.2 1.0 1.2
State taxes 11.9 4.2 -
Other (.4) 1.2 2.0
------ ------ -----
Income tax expense $223.1 $124.6 $78.2
------ ------ -----
------ ------ -----
81
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted
on August 10, 1993. The most significant provision of the Act affecting the
Company was the increase in the corporate income tax rate to 35 percent from
34 percent, effective for taxable income reported for the year 1993. As a
result of the increase in the tax rate, the Company recognized additional tax
expense of $8.9 million consisting of: (i) $5.6 million related to income of
1993; (ii) $1.9 million related to a one-time adjustment to accumulated
deferred taxes relating to prior years' income; and (iii) $1.4 million related
to unrealized appreciation of securities at the date the new law was enacted.
In addition, the equity in earnings of CCP was reduced by $1.6 million as a
result of the Company's share of the additional tax expense recorded by CCP
related to the increase in the tax rate. The impact of other provisions of the
Act was not material to the Company.
At December 31, 1993, federal income tax loss carryforwards of $94.9
million were available (subject to various statutory restrictions) for use on
future tax returns, portions of which begin expiring in 1999. Of the loss
carryforwards, $24.5 million may be used to offset income from the non-life
insurance companies only. None of the carryforwards are available to reduce
the tax provision for financial reporting purposes.
The Company's subsidiaries have deducted approximately $12.9 million on
their tax returns allocated to policyholders' surplus for which no provision
has been made for income taxes that may be payable if such amounts are used to
pay dividends to the shareholder or for certain other purposes.
The IRS has completed its examination of the Company for years through
1990. All amounts due have been paid or accrued.
8. NOTES PAYABLE:
Notes payable that are direct obligations of the Company at December 31,
1993 and 1992, were as follows:
Amount
Outstanding
Net of
Par Value Unamortized
---------------------------------- Discount and Estimated
Outstanding at Issuance Costs Fair Value at
December 31, at December 31, December 31,
Initially -------------------- -------------------- --------------------
Issued 1993 1992 1993 1992 1993 1992
------ ---- ---- ---- ---- ---- ----
(Dollars in millions)
Issued September 1993 $200.0 $200.0 $ - $198.0 $ - $200.0 $ -
Issued February 1993 200.0 200.0 - 195.8 - 208.0 -
Issued July 1987 255.0 - 139.8 - 135.9 - 147.7
Issued June 1989 34.0 14.4 23.8 13.2 21.3 14.9 24.0
Issued June 1990 6.0 6.0 6.0 6.0 6.0 6.5 6.0
------ ------ ------ ------ ------ ------
Total $420.4 $169.6 $413.0 $163.2 $429.4 $177.7
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
On September 30, 1993, the Company executed a $200 million senior
unsecured loan due to a group of banks as financing for Conseco's purchase of
common shares of Bankers as described in Note 2. As discussed in Note 16, on
February 15, 1994, the loan was repaid in full, resulting in an extraordinary
charge of $1.2 million (net of a $.6 million tax benefit) in the first quarter
of 1994.
82
In February 1993, the Company completed a public offering of $200
million of its 8.125 percent senior notes due in 2003. Proceeds from the
offering of approximately $195.6 million (after original issue discount and
other associated costs) were used to repurchase in open market transactions or
redeem the remaining outstanding 12.75 percent senior subordinated notes issued
in July 1987 and for general corporate purposes. The repurchase and redemption
of the senior subordinated notes resulted in an extraordinary charge of $8.4
million, net of a $4.3 million tax benefit, in 1993. The 8.125 percent
senior notes bear interest payable semi-annually on February 15 and August 15.
The notes are unsecured and rank pari passu with all other unsecured and
unsubordinated indebtedness of the Company. The notes are not redeemable prior
to maturity.
In June 1989, the Company, as partial acquisition financing for National
Fidelity, executed a senior promissory note payable in the amount of $34.0
million. The note was subsequently rewritten into two notes - one for $24.0
million and one for $10.0 million. The $10.0 million note was held by Great
American Reserve at the time Great American Reserve was acquired by the
Partnership in 1990. In March 1993, the Company redeemed the note held by
Great American Reserve at its current par value of $7.0 million, resulting in
an extraordinary charge of $.4 million (net of a $.3 million tax benefit).
In March 1994, the $24 million note was repaid in full resulting in an
extraordinary charge of $.8 million (net of a $.4 million tax benefit) in the
first quarter of 1994.
In June 1990, the Company, as partial acquisition financing for Great
American Reserve, executed a subordinated promissory note in the amount of $6.0
million. In March 1994, this note was repaid in full.
During 1992 and 1991, the Company purchased in the market or called
$20.0 million and $92.4 million, respectively, par value of senior subordinated
notes. These redemptions resulted in extraordinary charges of $1.4 million,
net of a $.7 million tax benefit, in 1992 and $5.0 million, net of a $2.6
million tax benefit, in 1991.
The following notes payable, which are not direct obligations of
Conseco, were issued by Bankers to finance its acquisition by the Partnership:
Amount
Outstanding
Net of
Par Value Unamortized
----------------------------- Discount and Estimated
Outstanding at Issuance Costs at Fair Value at
December 31, December 31, December 31,
Initially ----------------- ----------------- ---------------
Issued 1993 1992 1993 1992 1993 1992
------ ---- ---- ---- ---- ---- ----
(Dollars in millions)
Senior term loan $175.0 $110.0 $175.0 $106.4 $168.2 $110.0 $175.0
Senior subordinated notes 200.0 180.0 200.0 183.9 192.1 216.0 207.0
PIK subordinated notes 36.7 - 36.7 - 31.7 - 31.7
------ ------ ------ ------ ------ ------
Total $290.0 $411.7 $290.3 $392.0 $326.0 $413.7
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
83
The $175.0 million senior term loan is due to a group of banks with
principal due in varying amounts from 1994 through 1999. The interest rate is
based on either LIBOR plus an applicable margin or prime rate plus an
applicable margin for periods of one, two, three or six months as selected by
Bankers from time to time (such rate was 5.5 percent at December 31, 1993).
The applicable margin for the rate based on a prime rate will vary from .75
percent to 1.5 percent depending on the principal amount of the senior term
loan outstanding and a defined cash coverage ratio based generally on
cash flows relative to certain fixed charges. The applicable margin for the
LIBOR rate will vary from 2.0 percent to 2.75 percent depending on such
principal amount and ratio. Under the provisions of the note agreement, the
subsidiaries of Bankers are limited in the amount of dividends they may pay on
common stock and Bankers must comply with other covenants, including the
maintenance of specific financial ratios. The senior term loan has as
collateral the majority of the common stock of Bankers and the common stock and
surplus debentures issued by its life insurance subsidiary to BLH.
The $200.0 million senior subordinated notes bear interest at 13
percent, payable semi-annually on May 1 and November 1, are due November 1,
2002, and may be redeemed, at the Company's option, on or after November 1,
1997, at a redemption price initially at 106.5 percent and declining
thereafter. In December 1993, Bankers repurchased $20.0 million of the notes
in open market transactions for $24.0 million, resulting in an extraordinary
charge, net of tax, of $3.1 million. Conseco's share of this charge ($1.0
million) was included as an extraordinary charge in the consolidated financial
statements.
The PIK subordinated notes were subordinated in right of payment to the
prior payment in full of the senior term loan and, in certain circumstances,
the senior subordinated notes. In 1993, Bankers retired all of its PIK
subordinated notes totaling $38.3 million and prepaid $55.0 million of its
senior term loan. The repayment of this debt resulted in an extraordinary
charge for Bankers of $4.8 million, net of a $2.5 million tax benefit, in 1993.
Conseco's share of this charge ($2.1 million) was included as an extraordinary
charge in the consolidated financial statements.
A summary of the maturity dates of the various notes is as follows:
Par Value Par Value Notes
Notes Payable Payable of Par Value
of Conseco Bankers Total
---------- ------- -----
(Dollars in millions)
Repaid in the first quarter of 1994 $220.4 $ 11.0 $231.4
1994 - - -
1995 - 16.0 16.0
1996 - 18.0 18.0
1997 - 21.0 21.0
1998 - 22.0 22.0
Thereafter 200.0 202.0 402.0
------ ------ ------
Total par value $420.4 $290.0 $710.4
------ ------ ------
------ ------ ------
84
Certain notes payable, not direct obligations of Conseco, were issued
by subsidiaries of the Partnership to finance portions of the purchase prices
of Great American Reserve, Jefferson National and Beneficial Standard. In
connection with the IPO and recapitalization of CCP, a significant portion of
CCP's debt was retired, resulting in an extraordinary charge for CCP of $8.8
million, net of a $4.8 million tax benefit, in 1992. Conseco's share of this
charge ($3.9 million) was included as an extraordinary charge in the
consolidated financial statements in 1992. The remaining outstanding debt was
no longer consolidated in the Company's consolidated financial statements as
described in Note 1.
9. OTHER DISCLOSURES:
Leases
The Company rents office space, equipment and computer software under
noncancellable operating leases. Rental expense during 1993, 1992 and 1991,
amounted to $11.9 million, $6.2 million and $5.1 million, respectively. Future
required minimum rental payments as of December 31, 1993, were as follows
(dollars in millions):
1994 $ 15.1
1995 13.9
1996 12.9
1997 12.1
1998 11.5
Thereafter 87.6
------
Total $153.1
------
------
Employment Arrangements
Some officers of the Company are employed pursuant to long-term
employment agreements. One of these agreements provides for a base salary plus
an annual bonus equal to 3 percent of the Company's consolidated defined pretax
profits. This agreement renews annually for a five-year period unless either
party notifies the other, in which case the agreement expires five years from
the last renewal date. Additionally, a $1.9 million interest-free loan has
been granted to the officer with repayment due two years after termination of
the officer's employment contract.
During March of 1994, the Company's Board of Directors approved a
Performance-Based Compensation Bonus Plan (the "Bonus Plan") for certain
officers of the Company. This Bonus Plan is intended to comply with the
recently enacted Internal Revenue Code Section 162(m), which potentially limits
the deductibility of amounts paid to officers of public companies. The Bonus
Plan provides for the payment of bonuses based upon the Company's return on
equity and pretax profits. This Bonus Plan, to meet Section 162(m), must be
ratified by the Company's shareholders.
The Company has a qualified defined contribution plan in which
substantially all employees of the Company's wholly owned subsidiaries are
eligible to participate. Company contributions, which match certain voluntary
employee contributions to the plan, totaled $.3 million, $.9 million and $.1
million in the years ended December 31, 1993, 1992 and 1991, respectively, and
are in the form of Conseco's common stock. In addition, a stock bonus and
deferred compensation program was adopted for certain executives and directors
whereby the participants may voluntarily defer a portion of their compensation.
Company contributions vary based on the amount of the increase in earnings per
share of the Company and the amount of compensation of each participant. Each
year's contribution, which is in the form of Conseco's common stock, vests five
years later or upon certain other events. The cost of the program is charged
to expense over the vesting period and amounted to $2.3 million, $1.9 million
and $1.8 million in 1993, 1992 and 1991, respectively.
85
Bankers has a qualified defined contribution plan in which substantially
all of its employees are eligible to participate. Company contributions, which
match certain voluntary contributions to the plan, totaled $1.1 million and $.1
million in 1993 and 1992, respectively.
Bankers has a noncontributory unfunded deferred compensation plan for
qualifying members of its career agency force. Benefits are based on years of
service and career earnings. The amounts recognized in the consolidated
balance sheet for the agents deferred compensation plan were as follows:
December 31,
-----------------------
1993 1992
---- ----
(Dollars in millions)
Projected benefit obligation for services rendered to date
(vested benefits: 1993 - $26.5; 1992 - $22.9) $28.1 $27.2
Unrecognized net gain from effects of changes in assumptions .4 -
----- -----
Accrued liability for pension cost included in other liabilities $28.5 $27.2
----- -----
----- -----
Net pension costs included in other operating expenses consisted of the
following:
1993 1992
---- ----
(Dollars in millions)
Service cost for benefit earned during the period $ .7 $.2
Interest cost on projected benefit obligations 2.1 .4
---- ---
Pension cost included in other operating expenses $2.8 $.6
---- ---
---- ---
The weighted-average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7 percent and 5 percent, respectively, at
December 31, 1993, and 8 percent and 5 percent, respectively, at December 31,
1992.
86
During 1993, Bankers announced several changes to its postretirement plan
that: (i) established a maximum annual cost-sharing amount for Bankers; (ii)
eliminated Bankers' cost-sharing for certain future retirees; and (iii)
effective July 1, 1993, revised certain assumptions to the plan resulting in
a $41.5 million reduction to its accumulated post retirement benefit obligation
("APBO"). Such changes also resulted in a net unrecognized reduction to prior
service costs of $7.8 million and a net unrecognized gain of $1.3 million. The
APBO and net unrecognized amounts consist of the following:
December 31,
-----------------------
1993 1992
---- ----
(Dollars in millions)
Retirees $13.3 $33.4
Fully eligible active plan participants 7.2 16.8
Other active plan participants 4.0 12.8
----- -----
Total APBO 24.5 63.0
Unrecognized net reduction in prior service costs 7.4 -
Unrecognized net gain 1.3 -
----- -----
Accrued liability included in other liabilities $33.2 $63.0
===== =====
The net cost of providing these benefits, included in other operating
expenses, was comprised of the following:
December 31,
-----------------------
1993 1992
---- ----
(Dollars in millions)
Service cost $1.1 $ .1
Interest cost 1.4 .4
Amortization (.4) -
---- ----
Net periodic cost $2.1 $ .5
==== ====
The discount rate used in determining the accumulated postretirement
benefit obligation was 7 percent and 8 percent at December 31, 1993 and 1992,
respectively. The assumed annual increase in salary levels used in determining
the portion of the postretirement benefit obligation related to life benefits
was 5.2 percent and 5.3 percent at December 31, 1993 and 1992, respectively.
The average annual assumed rate of increase in the per capita cost of covered
benefits is 12 percent for 1994 and is assumed to decrease gradually to 5
percent for 2006 and remain at that level thereafter. Increasing the assumed
health care cost trend rates by 1 percentage point in each year would increase
the accumulated postretirement benefit obligation by $1.7 million at December
31, 1993, and the postretirement benefit cost by $.3 million for 1993.
Bankers has an incentive stock option plan which is authorized to grant
employees or directors options to purchase shares of common stock, stock
appreciation rights and limited rights (rights exercisable only in the event
of a tender offer for or acquisition of 25 percent or more of BLH's outstanding
common stock). The maximum number of shares of common stock which may be
issued under options and related rights granted under the plan is 3.5 million,
with an exercise price not less than the fair market value of the underlying
shares on the date of the grant. Options may become exercisable immediately
or over a period of time and remain exercisable for up to 10 years after grant.
During 1993, options for 820,000 shares of BLH common stock were granted to
employees at a price per share of $22.00 to $23.63. No rights have been
granted and no options are vested at December 31, 1993.
87
Litigation
From time to time, the Company and its subsidiaries are involved in
lawsuits which are related to their operations. In most cases, such lawsuits
involve claims under insurance policies or other contracts of the Company.
Even though the Company may be contesting the validity or extent of its
liability in response to such lawsuits, the Company has established reserves
in its consolidated financial statements which approximate its estimated
potential liability. Accordingly, none of the lawsuits currently pending,
either individually or in the aggregate, is expected to have a material effect
on the Company's consolidated financial condition or results of operations.
Related Party Transactions
A director of the Company is a principal in several entities that
received a total of approximately $8.3 million from the Company during the
three years ended December 31, 1993, for the sale of land and the construction
of facilities and approximately $2.7 million for management and rental of
offices. In 1989, the Company loaned the director $8.0 million on an
eight-year note with interest at the prime interest rate plus one percentage
point. The note is repayable in annual installments of $1.0 million and had
a balance of $2.0 million at December 31, 1993.
Minority Interest
Minority interest represents the interest of investors other than Conseco
in Bankers and included: (i) $295.0 million, which represented such interests
in the common equity of Bankers; and (ii) $(71.2), which represented the excess
of the value received by BLH for the issuance of common stock over the
historical accounting bases of the net assets of Bankers as described in Note
1.
10. SHAREHOLDERS' EQUITY:
Authorized preferred stock is 20,000,000 shares, of which 100,000 shares
of $55 Series B Redeemable Preferred Stock with a stated value of $50.0 million
($500 per share) were issued in 1987, 400,000 shares of Series C Preferred
Stock with a stated value of $10.0 million ($25 per share) were issued in 1990
and 5,750,000 shares of Series D Cumulative Preferred Stock with a stated value
of $287.5 million ($50 per share) were issued in January 1993 in a public
offering. The Series B and Series C preferred stocks were redeemed at their
stated values in 1993 and 1991, respectively. The Series D Cumulative
Preferred Stock is convertible at the holder's option into shares of common
stock at a conversion price of $63.75 per share, equivalent to a ratio of
approximately 0.7843 shares of common stock for each share of preferred stock.
Proceeds from the offering of approximately $278.5 million (after underwriting
and other associated costs) were used to redeem the Series B preferred stock
and were added to the Company's general funds. During 1993, 274 Series D
preferred shares were converted to 215 common shares.
88
Changes in the number of shares of common stock outstanding for the
years 1993, 1992 and 1991, were as follows:
1993 1992 1991
---- ---- ----
Balance, beginning of year 24,911,148 24,676,658 20,586,196
Shares issued in public offering - - 4,874,000
Stock options exercised 849,232 2,086,272 301,220
Common shares converted from
Series D preferred shares 215 - -
Shares issued under compensation
plans 1,878 85,444 19,004
Treasury stock purchased (450,700) (1,937,226) (1,103,762)
---------- ---------- ----------
Balance, end of year 25,311,773 24,911,148 24,676,658
---------- ---------- ----------
---------- ---------- ----------
Dividends declared on common stock for 1993, 1992 and 1991, were $.30,
$.085 and $.07 per common share, respectively.
The Company's 1983 employee stock option plan was authorized to grant
options to purchase up to 12.0 million shares of the Company's common stock at
a price not less than its market value on the date the option is granted. The
1983 stock option plan expired in December 1993. A new plan was adopted in
1994, subject to shareholder approval, which authorizes the granting of options
to purchase up to 6.0 million shares of the Company's common stock at a price
not less than its market value on the date the option is granted. The options
are exercisable for up to 10 years from date of grant and may become
exercisable immediately or over a period of time. The plan also permits
granting of stock appreciation rights.
Stock options granted were as follows:
Number of Shares
-----------------
Option Price 1993 1992 1991
------------ ---- ---- ----
Outstanding at January 1, $2.625 to $31.125 6,402,194 8,293,832 8,490,760
Granted during the year $2.375 to $56.375 1,461,400 - -
$25.375 to $31.125 - 216,490 -
$6.844 to $21.375 - - 113,612
Exercised during the year $2.625 to $26.875 (849,232) (2,086,272) (301,220)
Canceled during the year $3.063 to $53.250 (275,078) (21,856) (9,320)
--------- --------- ---------
Outstanding at December 31, $2.625 to $53.25 6,739,284 6,402,194 8,293,832
========= ========= =========
Portion thereof that
is exercisable at
December 31, $2.625 to $31.125 4,062,693 3,768,970 5,728,548
========= ========= =========
Available for future grant - 2,791,994 2,986,628
========= ========= =========
89
In addition to 12,699,284 shares of common stock reserved for issuance
under the 1983 and 1994 employee stock option plans, 711,764 shares of common
stock are reserved for issuance under the defined contribution and the stock
bonus and deferred compensation plans. The common stock account was reduced
by $8.5 million, consisting of the unearned portion of the incentive deferred
compensation program.
In February 1994, Conseco implemented an option exercise program under
which its chief executive officer and four of its executive vice presidents
exercised outstanding options to purchase approximately 3.6 million shares of
the Company's common stock. The options would otherwise have remained
exercisable until the years 1999 and 2000. As a result of the exercise, the
Company will be able to realize a tax deduction of approximately $200 million,
equal to the aggregate tax gain recognized by the executives as a result of the
exercise. The tax benefit together with the proceeds from exercise of the
options will be reflected as an increase to paid-in capital. The Company
withheld sufficient shares to cover federal and state taxes owed by the
executives as a result of the exercise transaction. Net of withheld shares,
the Company issued approximately 1.8 million shares of common stock to the
executives. The Company also granted to the executive officers new options to
purchase a total of 3,016,000 shares of the Company's common stock at $59.25
per share under the 1994 Stock Option and Incentive Plan to replace the shares
surrendered for taxes and the exercise price on this and other recent option
exercises and as the 1994 incentive grant to six executives.
In addition to the 1.8 million shares retired in February as described
in the preceding paragraph, the Company repurchased approximately 1.1 million
shares of its common stock for $65.5 million between January 1 and March 25,
1994, as part of its previously announced stock repurchase program.
11. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Direct premiums collected $2,169.9 $1,513.4 $ 1,899.8
Reinsurance assumed 6.0 2.2 15.2
Reinsurance ceded (35.8) (50.7) (266.3)
-------- -------- --------
Premiums collected, net of reinsurance 2,140.1 1,464.9 1,648.7
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities 887.5 1,143.4 1,451.1
-------- -------- --------
Premiums on products with mortality risk,
recorded as insurance policy income 1,252.6 321.5 197.6
Fees and surrender charges 38.8 55.3 82.6
Amortization of deferred policy fees 2.4 1.9 .6
-------- -------- --------
Insurance policy income $1,293.8 $ 378.7 $ 280.8
-------- -------- --------
-------- -------- --------
90
The five states with the largest shares of the subsidiaries' premiums
collected in 1993 were Illinois (15 percent), Texas (7.6 percent), Michigan
(6.7 percent), Indiana (5.8 percent) and New Jersey (5.8 percent). No other
state accounted for more than 5 percent of total collected premiums. Premiums
on reinsurance assumed of $6.0 million, $2.2 million and $15.2 million for the
years 1993, 1992 and 1991, respectively, were included in direct premiums in
the preceding table.
Other operating costs and expenses were as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Commission expense $ 31.6 $ 21.4 $ 28.7
Other 182.8 80.2 65.6
------ ------ -----
Other operating costs and expenses $214.4 $101.6 $94.3
------ ------ -----
------ ------ -----
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of the cost of policies purchased
and cost of policies produced. Sales of fixed maturity investments change the
incidence of profits on such policies because capital gains (losses) are
recognized currently and the expected future yields on the investment of
policyholder balances are reduced (increased). Accordingly, amortization of
the cost of policies purchased was increased by $46.0 million, $63.3 million
and $33.0 million in the years ended December 31, 1993, 1992 and 1991,
respectively, and amortization of the cost of policies produced was increased
by $43.2 million, $30.1 million and $17.4 million in the years ended December
31, 1993, 1992 and 1991, respectively.
The changes in the cost of policies purchased were as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Balance, beginning of year $623.5 $555.5 $460.3
Amounts acquired 3.8 527.1 169.2
Amortization:
Cash flow realized (181.1) (108.0) (129.0)
Interest added 115.8 69.4 98.2
Amounts related to gains on sales of investments (46.0) (63.3) (33.0)
Amounts related to fair value adjustment
of actively managed fixed maturities (5.3) (26.8) -
Transferred to cost of policies produced related to
exchanged health policies (25.4) - -
Amounts related to purchase of additional
shares of BLH 118.4 - -
Amounts related to deconsolidation of CCP - (330.4) -
Amounts related to business sold - - (10.2)
------ ------ ------
Balance, end of year $603.7 $623.5 $555.5
------ ------ ------
------ ------ ------
91
The changes in the cost of policies produced were as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Balance, beginning of year $310.8 $212.9 $152.4
Additions 168.8 89.7 89.8
Acquired historical basis of Bankers Life - 152.9 -
Amortization (69.4) (20.6) (12.6)
Amortization of deferred revenue 1.3 1.0 .7
Amounts related to gains on sales of investments (43.2) (30.1) (17.4)
Amounts related to fair value adjustment of
actively managed fixed maturities (65.0) (56.3) -
Transferred from cost of policies purchased related to
exchanged health policies 25.4 - -
Amounts related to purchase of additional
shares of BLH (73.3) - -
Amounts related to reinsurance treaty 3.2 - -
Amounts related to deconsolidation of CCP - (38.7) -
------ ------ ------
Balance, end of year $258.6 $310.8 $212.9
------ ------ ------
------ ------ ------
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize in 1994 approximately 13
percent of the cost of policies purchased balance at December 31, 1993, 11
percent in 1995, 10 percent in 1996, 9 percent in 1997, and 9 percent in 1998.
The average discount rate used to determine the amortization of the cost of
policies purchased prior to November 19, 1992, ranged from 15 percent to 20
percent during the three-year period ended December 31, 1993. The discount
rate for the cost of policies purchased thereafter is 7.5 percent.
12. CONSOLIDATED STATEMENT OF CASH FLOWS:
The following non-cash items were not reflected in the consolidated
statement of cash flows: in 1993, the surrender for redemption of $50.0
million stated value of ICH preferred stock in exchange for common shares of
Bankers (as described in Note 2 to the consolidated financial statements) and
the recapture of insurance liabilities and invested assets each totaling
approximately $338.5 million in connection with the recapture of reinsurance
as described in Note 6 to the consolidated financial statements.
Cash flows from operations included interest paid on debt of $58.8
million, $42.7 million and $63.9 million in 1993, 1992 and 1991, respectively.
Income taxes paid were $204.9 million, $108.5 million and $59.3 million in
1993, 1992 and 1991, respectively.
92
13. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from generally accepted
accounting principles. The Company's life insurance subsidiaries reported the
following amounts to regulatory agencies, after appropriate eliminations of
intercompany accounts among such subsidiaries:
December 31,
--------------------------
1993 1992
---- ----
(Dollars in millions)
Statutory capital and surplus $ 768.8 $434.7
Asset valuation reserve 94.7 84.7
Interest maintenance reserve 272.0 83.7
-------- ------
Total $1,135.5 $603.1
======== ======
In connection with the acquisition of Bankers, the capital of one of the
life insurance subsidiaries (Bankers Life Insurance Company of Illinois) was
increased by providing cash in exchange for a surplus debenture. The remaining
balance of the surplus debenture of $485.0 million at December 31, 1993, is
considered a part of statutory capital and surplus of the life insurance
subsidiary. Payments to BLH of principal and interest on the surplus debenture
may be made from available funds only with the approval of the Illinois
Department of Insurance when its Director is satisfied that the financial
condition of the subsidiary warrants that action. Such approval may not be
withheld provided the surplus of the subsidiary exceeds, after such payment,
approximately $128 million. Such subsidiary's surplus at December 31, 1993,
was $331 million.
Statutory accounting practices require that portions of surplus, called
the asset valuation reserve ("AVR") and the interest maintenance reserve
("IMR"), be appropriated and reported as liabilities. The purpose of these
reserves is to stabilize statutory surplus against fluctuations in the market
value of investments. The IMR captures all investment gains and losses on
debt instruments resulting from changes in interest rates and provides for
subsequent amortization of such amounts into statutory net income on a basis
reflecting the remaining life of the assets sold. The AVR captures investment
gains and losses related to changes in creditworthiness and is also adjusted
each year based on a formula related to the quality and loss experience of the
Company's investment portfolio.
93
Included in statutory capital and surplus shown above are the following
investments in affiliates, all of which are eliminated in the consolidated
financial statements prepared in accordance with generally accepted accounting
principles:
1993 1992
--------------------- ---------------------
Admitted Admitted
Asset Asset
Cost Value Cost Value
---- ----- ---- -----
(Dollars in millions)
9,098,476 shares of common stock of Conseco
purchased in open market transactions $ 30.7 $ - $30.7 $19.5
Notes of Conseco and its non-life
subsidiaries 63.0 42.4 88.9 80.6
2,314,737 shares of common stock of BLH
acquired from ICH in exchange for
preferred stock of ICH previously held 50.0 49.8 - -
Preferred stock of a non-life subsidiary 900.0 - - -
The following table compares the consolidated pretax income determined on
a statutory accounting basis with such income reported herein in accordance
with generally accepted accounting principles:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Life insurance subsidiaries:
Pretax income as reported on a statutory
accounting basis before deduction of
expenses paid to affiliates and
transfers to and from and amortization
of the IMR $566.8 $383.7 $376.4
Net effect of adjustments for generally
accepted accounting principles (48.1) (72.0) (76.1)
------ ------ ------
Pretax income, generally accepted
accounting principles 518.7 311.7 300.3
Non-life companies:
Interest expense (58.0) (46.2) (69.9)
Net gain on sale of stock of Life Re - 36.4 -
Equity in earnings of CCP Insurance, Inc. 37.4 15.8 -
Incentive earnings allocation from Partnership 36.6 9.3 -
Gain on sale of stock by subsidiaries 101.5 11.1 -
All other income and expense, net
(excluding amounts received from affiliates) (26.0) (8.1) (7.2)
------ ------ ------
Consolidated pretax income, generally accepted
accounting principles $610.2 $330.0 $223.2
====== ====== ======
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Net assets of the Company's
wholly owned life insurance subsidiaries, determined in accordance with
generally accepted accounting principles, aggregated approximately $1.0 billion
at December 31, 1993, of which approximately $18.7 million is available for
distribution to Conseco in 1994 without the permission of state regulatory
authorities.
94
Most states have adopted risk-based capital ("RBC") rules, effective
December 31, 1993, to evaluate the adequacy of statutory capital and surplus
in relation to investment and insurance risks. The RBC formula is designed as
an early warning tool to help state regulators identify possible weakly
capitalized companies for the purpose of initiating regulatory action.
At December 31, 1993, the ratios of total adjusted capital to RBC, as defined
by the rules, for all of Conseco's primary subsidiaries and investees were
greater than twice the level at which regulatory attention is triggered.
14. BUSINESS SEGMENT AND DISTRIBUTION CHANNELS:
Conseco's earnings result from three different activities: (i) the
operation of life insurance companies; (ii) services provided to both
affiliates and others for fees; and (iii) the acquisition and restructuring of
life insurance companies. Conseco's life insurance operations are primarily
conducted through BLH (which distributes Medicare supplement policies and other
life and health products to the senior citizens market through career agents,
most of whom sell only Bankers' products), Western National (which distributes
single premium deferred annuities through financial institutions and other
annuity products through personal producing general agents), CCP (which
distributes: (i) tax qualified annuities and certain employee benefit-related
products primarily to school teachers and administrators through educator
market specialists; and (ii) annuities and life insurance products through
other diversified cost effective distribution channels) and Conseco's other
wholly owned subsidiaries (which have profitable blocks of in-force life
business, although new sales are currently not being emphasized).
95
Financial information related to these activities is as follows:
1993 1992 1991
---- ---- ----
(Dollars in millions)
Premiums collected, net of reinsurance
BLH $ 1,436.9 $ 235.1 $ -
Western 561.0 833.3 1,118.3
CCP - 320.5 440.3
Conseco's other wholly owned insurance subsidiaries 142.2 76.0 90.1
--------- --------- ---------
Total $ 2,140.1 $ 1,464.9 $ 1,648.7
========= ========= =========
Revenues:
Insurance operations:
BLH $ 1,450.5 $ 222.5 $ -
Western 774.2 653.2 580.6
CCP 37.4 297.6 539.1
Conseco's other wholly owned insurance subsidiaries 207.4 288.1 276.2
Life Re - 11.3 9.3
--------- --------- ---------
Subtotal 2,469.5 1,472.7 1,405.2
Services provided for fees 49.0 30.2 22.4
Acquisition and restructuring of life insurance companies 138.1 54.9 -
Corporate and other 14.1 9.3 10.9
Eliminations (34.7) (43.2) (46.7)
--------- --------- ---------
Total $ 2,636.0 $ 1,523.9 $ 1,391.8
========= ========= =========
Income before income taxes, minority interest and extraordinary charge:
Insurance operations:
BLH $ 208.1 $ 37.2 $ -
Western 204.5 156.8 149.0
CCP 37.4 64.7 85.9
Conseco's other wholly owned insurance subsidiaries 55.0 38.1 29.5
Life Re - 11.3 9.3
--------- --------- ---------
Subtotal 505.0 308.1 273.7
Services provided for fees 22.5 22.2 17.1
Acquisition and restructuring of life insurance companies 138.1 54.9 -
Corporate and other (52.4) (50.6) (61.1)
Eliminations (3.0) (6.2) (6.5)
--------- --------- ---------
Total $ 610.2 $ 328.4 $ 223.2
========= ========= =========
Assets:
Insurance operations:
BLH $ 4,146.1 $ 3,367.5 $ -
Western 8,369.7 7,640.6 6,674.3
CCP 244.3 130.5 4,458.1
Conseco's other wholly owned insurance subsidiaries 993.7 2,072.7 2,121.7
--------- --------- ---------
Subtotal 13,753.8 13,211.3 13,254.1
Servicing companies 34.4 11.8 4.1
Corporate and other 1,892.1 995.5 764.3
Eliminations (1,931.0) (2,445.9) (2,190.1)
--------- --------- ---------
Total $13,749.3 $11,772.7 $11,832.4
========= ========= =========
96
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
Earnings per common share for each quarter are computed independently
of earnings per share for the year. Due to the transactions affecting the
weighted average number of shares outstanding in each quarter and due to the
uneven distribution of earnings during the year, the sum of the quarterly
earnings per share may not equal the earnings per share for the year.
1993
----
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share amounts)
Insurance policy income $319.5 $322.8 $324.7 $326.8
Revenues 751.6 619.0 628.7 636.7
Income before income taxes, minority interest
and extraordinary charge 251.1 112.8 123.0 123.3
Net income 131.5 51.4 52.2 61.9
Earnings per common share and common
equivalent share:
Primary:
Earnings before extraordinary charge $4.69 $1.55 $1.61 $1.99
Extraordinary charge .37 - - .03
----- ----- ----- -----
Net income $4.32 $1.55 $1.61 $1.96
===== ===== ===== =====
Fully diluted:
Earnings before extraordinary charge $4.31 $1.48 $1.53 $1.87
Extraordinary charge .33 - - .03
----- ----- ----- -----
Net income $3.98 $1.48 $1.53 $1.84
===== ===== ===== =====
97
1992
----
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share amounts)
Insurance policy income $ 65.6 $ 66.6 $ 32.4 $214.1
Revenues 362.9 375.3 296.8 488.9
Income before income taxes, minority interest
and extraordinary charge 69.0 64.3 70.1 126.6
Net income 35.3 35.0 39.4 59.8
Earnings per common share and common
equivalent share:
Primary:
Earnings before extraordinary charge $1.11 $1.08 $1.40 $2.01
Extraordinary charge .05 .01 .11 -
----- ----- ----- -----
Net income $1.06 $1.07 $1.29 $2.01
===== ===== ===== =====
Fully diluted:
Earnings before extraordinary charge $1.11 $1.08 $1.40 $2.00
Extraordinary charge .05 .01 .11 -
----- ----- ----- -----
Net income $1.06 $1.07 $1.29 $2.00
===== ===== ===== =====
Quarterly results of operations are based on numerous estimates,
principally related to policy reserves, the amortization of cost of policies
purchased, the amortization of cost of policies produced and income taxes.
Such estimates are revised quarterly and are ultimately adjusted to year-end
amounts. When such revisions are determined, they are reported as part
of operations of the current quarter.
16. SUBSEQUENT EVENTS:
Conseco Capital Partners II, L.P.
On February 2, 1994, Conseco announced the closing of Conseco Capital
Partners II, L.P., a partnership which will invest in privately negotiated
acquisitions of specialized annuity, life and accident and health insurance
companies and related businesses, in which 36 investors committed a total of
$624 million of capital. Commitments to the new partnership include $100
million from Conseco, $25 million from Bankers, $25 million from CCP, $50
million from Western and $36 million from executive officers and directors of
Conseco and its affiliates.
98
Initial Public Offering of Common Stock by Western National Corporation:
On February 15, 1994, Western National Corporation ("WNC") completed the
initial public offering of 37,202,500 shares of common stock, of which
2,300,000 shares were sold by WNC and 34,902,500 shares were sold by Conseco.
In addition, Conseco sold 150,000 shares to the President of WNC at the initial
public offering price less underwriting discounts and commissions. Prior to
the initial public offering, Western National and WNC were wholly owned
subsidiaries of Conseco. WNC was formed in October 1993 as a Delaware
corporation to be the holding company for Western National. In connection with
the organization of WNC and the transfer of the stock of Western National to
WNC by Conseco, WNC issued 60,000,000 shares of its common stock and a $150.0
million, 6.75 percent senior note due March 31, 1996 (the "Conseco Note") to
Conseco. On February 22, 1994, WNC completed a public offering of $150.0
million aggregate principal amount of its 7.125 percent senior notes due
February 15, 2004. The net proceeds from the offering of $147.5 million (after
original issue discount, underwriting discount and estimated offering expenses)
and certain proceeds from WNC's initial public offering of common stock were
used to repay the Conseco Note.
The shares issued in the offering and the related transaction represent
a 60 percent interest in WNC. The remaining common shares, which represent
a 40 percent interest, are held by Conseco. Net pretax proceeds to Conseco
from the repayment of the Conseco Note and the sale of WNC shares totaling
$537.9 million were used to repay a $200 million senior unsecured loan and for
other general corporate purposes. Effective January 1, 1994, WNC will be
included in Conseco's financial statements on the equity method. In the first
quarter of 1994 Conseco will report a one-time, after-tax gain of approximately
$43 million as a result of the transaction. At February 15, 1994, the WNC
shares owned by Conseco had a fair value of approximately $330.6 million (based
on the closing price of $13.25 per share) and a net carrying value of
approximately $270.0 million.
The following summarizes selected account balances of Western National
that are consolidated with the accounts of the Company in the accompanying
consolidated financial statements:
Years ended December 31,
-------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Results of operations data:
Revenues:
Insurance policy income $ 21.8 $ 48.0 $ 43.9
Investment activity:
Net investment income 610.1 507.8 450.7
Net trading income 49.6 25.0 23.8
Net realized gains 92.7 72.4 62.2
Total revenues 774.2 653.2 580.6
Benefits and expenses:
Insurance policy benefits 101.9 93.7 88.4
Interest expense on annuities and financial products 333.1 267.1 249.5
Amortization related to operations 16.5 16.3 11.3
Amortization and change in future policy benefits
related to realized gains 84.3 64.6 24.3
Income before taxes 204.5 155.2 147.8
Income tax expense 74.5 53.0 50.3
Net income 130.0 102.2 97.5
99
December 31,
----------------------
1993 1992
---- ----
(Dollars in millions)
Balance sheet data:
Total investments $7,918.1 $5,787.9
Total assets 8,369.7 7,640.6
Insurance liabilities 7,379.9 6,894.3
Total liabilities 7,608.8 7,018.3
Total shareholder's equity 760.9 622.3
The following unaudited pro forma balance sheet data are presented as if
the IPO of WNC and related transactions had occurred on December 31, 1993. The
pro forma statement of operations data are presented as if such transactions
had occurred on January 1, 1993 and assumes the net proceeds to Conseco from
the IPO and related transactions were invested to earn 3 percent per year
before income tax.
(Dollars in millions, except
per share data)
Pro forma balance sheet data as of December 31, 1993:
Investment in WNC $ 254.6
Total investments 4,317.7
Total assets 6,020.1
Total liabilities 4,628.9
Shareholders' equity 1,167.4
Pro forma statement of operations data for the year ended
December 31, 1993:
Revenues 1,942.9
Income before extraordinary charge 230.8
Earnings before extraordinary charge per common
share and common equivalent share:
Primary 7.19
Fully diluted 6.79
100
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
--------
The information required by Part III is hereby incorporated by reference
from the Registrant's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A within 120 days after December 31, 1993,
except that the information required by Item 10 regarding Executive Officers
is included herein under a separate caption at the end of Part I.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. Financial Statements. See Index to Financial Statements on page
47 for a list of financial statements included in this Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following the
signature page:
Schedule III -- Condensed Financial Information of Registrant (Parent
Company)
Schedule V -- Supplementary Insurance Information
Schedule VI -- Reinsurance
All other schedules are omitted because they are not applicable or are not
required, or because the required information is included in the consolidated
financial statements or notes thereto.
3. Exhibits. See Exhibit Index immediately preceding.
(b) Reports on Form 8-K. A report on Form 8-K dated September 30,
1993, was filed with the Commission to report under Item 2 the
acquisition of 13.3 million common shares of Bankers Life Holding
Corporation by Conseco. Form 8-K/A, Amendment No. 1 to this
report, was filed December 14, 1993, to report under Item 7b pro
forma consolidated financial information of Conseco, Inc. and
Subsidiaries.
A report on Form 8-K dated February 15, 1994 was filed with the
Commission to report under Item 2 the disposition of a majority
interest in Western National Corporation and to report under Item
7b pro forma financial information of Conseco and its
subsidiaries.
101
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, this 31st day of March, 1994.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
Stephen C. Hilbert, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title (Capacity) Date
--------- ---------------- ----
/s/ STEPHEN C. HILBERT Chairman of the Board, March 31, 1994
Stephen C. Hilbert President and Director
(Principal Executive Officer)
/s/ ROLLIN M. DICK Executive Vice President and Director March 31, 1994
Rollin M. Dick (Principal Financial Officer and
Principal Accounting Officer)
Michael G. Browning Director March 31, 1994
/s/LOUIS P. FERRERO Director March 31, 1994
Louis P. Ferrero
/s/ARTHUR M. GERBER Director March 31, 1994
Arthur M. Gerber
/s/ DONALD F. GONGAWARE Director March 31, 1994
Donald F. Gongaware
/s/ M. PHIL HATHAWAY Director March 31, 1994
M. Phil Hathaway
102
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and
Board of Directors
Conseco, Inc.
Our report on the consolidated financial statements of Conseco, Inc. and
Subsidiaries is included on page 47 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 100 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/COOPERS & LYBRAND
Indianapolis, Indiana
March 24, 1994
103
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE III
Condensed Financial Information of Registrant (Parent Company)
Balance Sheet
as of December 31, 1993 and 1992
(Dollars in millions)
ASSETS
1993 1992
---- ----
Short-term investments $ 17.7 $ 7.3
Actively managed fixed maturities 31.8 -
Equity securities 4.7 6.6
Trading account securities 6.6 -
Other invested assets 8.5 -
Investment in CCP Insurance, Inc. 244.3 130.5
Investment in Western (eliminated in consolidation) 760.9 622.3
Investment in wholly owned subsidiaries excluding Western
(eliminated in consolidation) 207.8 5.0
Investment in Bankers Life Holding Corporation
(eliminated in consolidation) 518.8 147.0
Receivable from subsidiaries (eliminated in consolidation) 15.1 11.6
Other assets 45.1 34.4
-------- ------
Total assets $1,861.3 $964.7
======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Income tax liabilities $ 92.4 $ 17.3
Notes payable 413.0 156.9
Note payable to affiliate - 6.3
Notes payable to subsidiaries (eliminated in consolidation) 58.2 80.6
Other liabilities due subsidiaries (eliminated in consolidation) 97.7 64.7
Other liabilities 57.4 44.6
-------- ------
Total liabilities 718.7 370.4
-------- ------
Shareholders' equity:
Preferred stock 287.5 50.0
Common stock and additional paid-in capital (no par value, 500,000,000
shares authorized, shares issued and outstanding: 1993 - 25,311,773;
1992 - 24,911,148) 102.8 115.4
Unrealized appreciation of securities (net of applicable deferred
income taxes: 1993 - $41.8; 1992 - $17.3) 97.5 42.9
Retained earnings 654.8 386.0
-------- ------
Total shareholders' equity 1,142.6 594.3
-------- ------
Total liabilities and shareholders' equity $1,861.3 $964.7
======== ======
The accompanying note is an integral part
of the condensed financial information.
104
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE III
Condensed Financial Information of Registrant (Parent Company)
Statement of Operations
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions)
1993 1992 1991
---- ---- ----
Revenues:
Net investment income $ 8.4 $ 3.6 $ 3.8
Dividends from subsidiaries (eliminated in consolidation) 18.6 82.2 70.6
Equity in earnings of CCP Insurance, Inc. 37.4 15.8 -
Equity in earnings of Life Re - 11.3 9.3
Fee and interest income from subsidiaries (eliminated in consolidation) 12.0 46.5 49.8
Gain on sale of stock of Life Re - 36.4 -
Gain on sale of stock by subsidiaries 101.5 9.2 -
Incentive earnings allocation 36.6 9.3 -
Other income 1.7 4.1 .9
------ ------ ------
Total revenues 216.2 218.4 134.4
------ ------ ------
Expenses:
Interest expense on long-term debt 22.8 22.8 36.2
Interest expense to subsidiaries (eliminated in consolidation) 7.8 10.9 13.3
Operating costs and expenses 40.4 29.0 25.0
Operating expenses of subsidiaries (eliminated in consolidation) .5 .5 .5
------ ------ ------
Total expenses 71.5 63.2 75.0
------ ------ ------
Income before income taxes, equity in undistributed
earnings of subsidiaries and extraordinary charge 144.7 155.2 59.4
Income tax expense (benefit) 44.2 31.5 (4.6)
------ ------ ------
Income before equity in undistributed earnings
of subsidiaries and extraordinary charge 100.5 123.7 64.0
Equity in undistributed earnings of subsidiaries 208.4 51.1 57.0
------ ------ ------
Income before extraordinary charge 308.9 174.8 121.0
Extraordinary charge on extinguishment of debt, net of tax 11.9 5.3 5.0
------ ------ ------
Net income 297.0 169.5 116.0
Less preferred stock dividends 20.6 5.5 6.8
------ ------ ------
Earnings applicable to common stock $276.4 $164.0 $109.2
====== ====== ======
The accompanying note is an integral
part of the condensed financial information.
105
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE III
Condensed Financial Information of Registrant (Parent Company)
Statement of Cash Flows
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions)
1993 1992 1991
---- ---- ----
Cash flows from operating activities:
Net income $297.0 $169.5 $116.0
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of consolidated subsidiaries (208.4) (51.1) (57.0)
Equity in undistributed earnings of equity investments (36.6) (26.9) (9.3)
Gain on sale of stock by subsidiaries (101.5) (9.2) -
Incentive earnings allocation from the Partnership (36.6) (9.3) -
Income taxes 39.3 1.1 .2
Extraordinary gain on extinguishment of debt 11.9 5.3 5.0
Other 11.8 3.0 (4.9)
------ ------- ------
Net cash provided (used) by operating activities (23.1) 82.4 50.0
------ ------- ------
Cash flows from investing activities:
Redemption of debt and preferred stock by subsidiaries 118.3 53.5 12.4
Sales and maturities of investments 45.5 10.1 -
Sale of investment in Life Re - 42.6 -
Investments in consolidated subsidiaries (391.4) (129.7) (69.5)
Purchases of investments (76.2) - -
Investments in equity investments (59.5) - -
------ ------- ------
Net cash used by investing activities (363.3) (23.5) (57.1)
------ ------- ------
Cash flows from financing activities:
Issuance of equity securities, net 281.7 6.3 133.1
Issuance of debt, net 393.4 - -
Payments on debt (180.0) (24.8) (101.2)
Payments to retire equity securities (75.3) (49.4) (19.5)
Dividends paid (23.0) (7.6) (8.3)
------ ------- ------
Net cash provided (used) by financing activities 396.8 (75.5) 4.1
------ ------- ------
Net decrease in short-term investments 10.4 (16.6) (3.0)
Short term investments, beginning of year 7.3 23.9 26.9
------ ------- ------
Short term investments, end of year $ 17.7 $ 7.3 $ 23.9
====== ======= ======
The accompanying note is an
integral part of the condensed financial information.
106 CONSECO, INC. AND SUBSIDIARIES
SCHEDULE III
Note to Condensed Financial Information
Basis of Presentation
The condensed financial information should be read in conjunction with the
consolidated financial statements of Conseco, Inc. The condensed financial
information includes the accounts and activity of the Parent Company and its
non-insurance subsidiaries which act as the holding companies for the Company's
life insurance subsidiaries and equity investment in CCP Insurance, Inc.
107
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE V
Supplementary Insurance Information
(Dollars in millions)
Amortization
of
Cost of Policies Insurance Cost of Policies
Produced and Insurance Net Policy Benefits Produced and Other
Cost of Policies Insurance Policy Investment and Cost of Policies Operating
Segment Purchased Liabilities Income Income Expenses(1) Purchased(2) Expenses(3)
- - ------- --------- ----------- ------ ------ ----------- ------------ -----------
1993
- - ----
Bankers $680.6 $ 2,756.7 $1,200.7 $174.7 $ 900.8 $143.5 $198.1
Western 146.8 7,379.9 21.8 610.1 454.3 63.7 51.7
CCP - - - - - - -
Conseco's other
wholly owned
subsidiaries 34.9 661.7 72.3 110.2 121.2 17.6 13.6
Services provided
for fees - - - - - - 25.1
Corporate and
other - - - 12.4 - - 66.5
Eliminations - - (1.0) (11.2) - (.9) (29.4)
------ --------- -------- ------ -------- ------ ------
Total $862.3 $10,798.3 $1,293.8 $896.2 $1,476.3 $223.9 $325.6
====== ========= ======== ====== ======== ====== ======
1992
- - ----
Bankers $661.2 $ 2,490.2 $191.5 $ 21.1 $125.4 $ 25.2 $ 34.7
Western 165.2 6,894.3 48.0 507.8 397.3 80.9 18.2
CCP - - 67.1 187.0 159.1 26.1 47.7
Conseco's other
wholly owned
subsidiaries 107.9 1,996.9 81.4 181.3 199.9 29.9 20.2
Services provided
for fees - - - - - - 7.6
Corporate
and other - - - 8.4 - - 59.9
Eliminations - (1,342.4) (9.3) (17.0) - (9.5) (28.7)
------ --------- ------ ------ ------ ------ ------
Total $934.3 $10,039.0 $378.7 $888.6 $881.7 $152.6 $159.6
====== ========= ====== ====== ====== ====== ======
1991
- - ----
Bankers $ - $ - $ - $ - $ -
Western 43.9 450.7 375.4 35.6 20.6
CCP 161.9 318.1 311.8 40.5 100.9
Conseco's other
wholly owned
subsidiaries 79.6 162.5 203.0 22.1 21.6
Services provided
for fees - - - - 5.0
Corporate and other - 10.0 - - 72.0
Eliminations (4.6) (19.9) (.1) (4.4) (35.4)
----- ------ ------ ------ -----
Total $280.8 $921.4 $890.1 $93.8 $184.7
====== ====== ====== ===== ======
(1) Includes insurance policy benefits, change in future policy benefits and interest expense on annuities and financial products.
(2) Includes additional amortization related to gains on sales of investments.
(3) Includes interest expense on long-term debt, interest expense on short-term investment borrowings, change in future policy
benefits related to realized gains and other operating costs and expenses.
108
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE VI
Reinsurance
for the years ended December 31, 1993, 1992 and 1991
(Dollars in millions)
1993 1992 1991
---- ---- ----
Life insurance in force:
Direct $21,554.5 $22,916.9 $22,522.1
Assumed 89.8 108.0 1,693.5
Ceded (1,754.1) (2,383.9) (3,784.8)
--------- --------- ---------
Net insurance in force $19,890.2 $20,641.0 $20,430.8
========= ========= =========
Percentage of assumed to net .5% .5% 8.3%
========= ========= =========
Premiums recorded as revenue for generally
accepted accounting principles:
Direct $1,282.4 $361.2 $246.2
Assumed 6.0 2.2 15.2
Ceded (35.8) (41.9) (63.8)
-------- ------ ------
Net premiums $1,252.6 $321.5 $197.6
======== ====== ======
Percentage of assumed to net .5% .7% 7.7%
======== ====== ======
109
EXHIBIT INDEX
Annual Report on Form 10-K
of Conseco, Inc.
Exhibit
No. Document
- - ------- --------
2.1 Stock Purchase and Redemption Agreement dated September 11, 1993 by and between I.C.H.
Corporation and Bankers National Life Insurance Company was filed with the Commission as
Exhibit 2.1 to the Registrant's Report on Form 8-K dated September 30, 1993, and is incorporated
herein by this reference.
2.2 Letter Agreement dated September 11,1993 between the Registrant and I.C.H. Corporation was
filed with the Commission as Exhibit 2.2 to the Registrant's Report on Form 8-K dated September
30, 1993, and is incorporated herein by this reference.
3.1 Amended and Restated Articles of Incorporation of the Registrant were filed with the Commission
as Exhibit 3.1 to the Registration Statement on Form S-2, No. 33-8498; Articles of Amendment
thereto, as filed September 9, 1988 with the Indiana Secretary of State, were filed with the
Commission as Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K for 1988; and
Articles of Amendment thereto, as filed June 13, 1989 with the Indiana Secretary of State, were
filed with the Commission as Exhibit 3.1.2 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1989, and Articles of Amendment thereto, as filed June 29, 1993 with
the Indiana Secretary of State, were filed with the Commission as Exhibit 3.1.3 to the Registrant's
Report on Form 10-Q for the quarter ended June 30, 1993, and is incorporated herein by this
reference.
3.2 Amended and Restated By-Laws of the Registrant effective February 10, 1986 were filed with the
Commission as Exhibit 3.2 to its Registration Statement on Form S-1, No. 33-4367, and an
Amendment thereto was filed with the Commission as Exhibit 3.2.1 to Amendment No. 2 to its
Registration Statement on Form S-1, No. 33-4367; and are incorporated herein by this reference.
4.8 Indenture dated as of February 18, 1993, between the Registrant and Shawmut Bank Connecticut,
National Association, as Trustee, for the 8 1/8 percent Senior Notes due 2003, was filed with the
Commission as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for 1992, and is
incorporated herein by this reference.
4.11 Articles of Amendment to the Registrant's Articles of Incorporation as filed January 22, 1993,
with the Indiana Secretary of State establishing the designations, rights and preferences of the
Series D Cumulative Convertible Preferred Stock were filed with the Commission as Exhibit 4.11
to the Registrant's Annual Report on Form 10-K for 1992, and is incorporated herein by this
reference.
10.1.2 Employment Agreement dated January 1, 1987, between the Registrant and Stephen C. Hilbert
was filed with the Commission as Exhibit 10.1.2 to the Registrant's Annual Report on Form 10-K
for 1986, and Amendment No. 1 thereto were filed with the Commission as Exhibit 10.1.2 to the
Registrant's Annual Report on Form 10-K for 1987; and are incorporated herein by this reference.
10.1.3 Employment Agreement dated July 1, 1991, between the Registrant and Rollin M. Dick was filed
with the Commission as Exhibit 10.1.3 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.4 Employment Agreement dated July 1, 1991, between the Registrant and Donald F. Gongaware
was filed with the Commission as Exhibit 10.1.4 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991, and is incorporated herein by this reference.
10.1.5 Employment Agreement dated July 1, 1991, between the Registrant and Lawrence W. Inlow was
filed with the Commission as Exhibit 10.1.5 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991, and is incorporated herein by this reference.
110
Exhibit
No. Document
- - ------- --------
10.1.7 Employment Agreement dated July 1, 1991, between the Registrant and Walter T. Kirkbride was
filed with the Commission as Exhibit 10.1.7 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991 and is incorporated herein by this reference.
10.1.9 Secured Promissory Note of Stephen C. Hilbert and Pledge Agreement between the Registrant and
Stephen C. Hilbert dated February 25, 1988, were filed with the Commission as Exhibit 10.1.9
to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1988, and are
incorporated herein by this reference.
10.1.10 Employment Agreement dated August 17, 1992, between the Registrant and Ngaire E. Cuneo was
filed with the Commission as Exhibit 10.1.10 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1992, and is incorporated herein by this reference.
10.8 The Registrant's Stock Option Plan was filed with the Commission as Exhibit B to its definitive
Proxy Statement dated December 10, 1983; Amendment No. 1 thereto was filed with the
Commission as Exhibit 10.8.1 to its Report on Form 10-Q for the quarter ended June 30, 1985;
Amendment No. 2 thereto was filed with the Commission as Exhibit 10.8.2 to its Registration
Statement on Form S-1, No. 33-4367; Amendment No. 3 thereto was filed with the Commission
as Exhibit 10.8.3 to the Registrant's Annual Report on Form 10-K for 1986; Amendment No. 4
thereto was filed with the Commission as Exhibit 10.8 to the Registrant's Annual Report on Form
10-K for 1987; Amendment No. 5 thereto was filed with the Commission as Exhibit 10.8 to the
Registrants's Report on Form 10-Q for the quarter ended September 30, 1991; and are
incorporated herein by this reference.
10.8.2 ConsecoSave Plan dated as of January 1, 1993, was filed with the Commission as Exhibit 10.8.2
to the Registrant's Annual Report on Form 10-K for 1992, and is incorporated herein by this
reference.
10.8.3 The Registrant's Cash Bonus Plan was filed with the Commission as Exhibit 10.8.3 to the
Registrant's Report on Form 10-Q for the quarter ended March 31, 1989, and is incorporated
herein by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred Compensation Program was filed with
the Commission as Exhibit 10.8.4 to the Registrant's Annual Report on Form 10-K for 1992, and
is incorporated herein by this reference.
*10.8.5 Amendment of ConsecoSave Plan.
*10.8.6 Conseco Performance - Based Compensation Bonus Plan for Executive Vice Presidents.
10.18.6 Assignment of Real Estate Purchase Agreement dated April 20, 1992 between Lincoln Income
Life Insurance Company and Browning Construction, Inc. was filed with the Commission as
Exhibit 10.8.6 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1992,
and is incorporated herein by this reference.
10.18.7 Assignment of Real Estate Purchase Agreement dated April 20, 1992 between Lincoln Income
Life Insurance Company and Browning Construction, Inc. was filed with the Commission as
Exhibit 10.8.7 to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1992,
and is incorporated herein by this reference.
111
Exhibit
No. Document
- - ------- --------
10.18.9 Promissory Note of Michael Browning dated January 1, 1990 in the principal amount of
$8,000,000 and Collateral Assignment of Corporate Stock evidencing a collateralized loan from
Lincoln Income Life Insurance Company were filed with the Commission as Exhibit 10.18.9 to
the Registrant's Report on Form 10-Q for the quarter ended March 31, 1990, and are incorporated
herein by this reference.
10.18.10 Construction agreement dated April 2, 1992 between Lincoln Income Life Insurance Company and
Browning Construction, Inc. was filed with the Commission as Exhibit 10.8.10 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 1992, and is incorporated herein by this
reference.
10.18.18 Contract for Purchase of Real Estate dated December 1, 1992, between Lincoln Income Life
Insurance Company and Technology Center Associates, L.P. was filed with the Commission as
Exhibit 10.18.18 to the Registrant's Annual Report on Form 10-K for 1992, and is incorporated
herein by this reference.
10.18.19 Contract for Purchase of Real Estate and Building dated December 1, 1992, between Lincoln
Income Life Insurance Company and Technology Center Associates, L.P. was filed with the
Commission as Exhibit 10.18.19 to the Registrant's Annual Report on Form 10-K for 1992, and
is incorporated herein by this reference.
*10.18.20 Construction Agreement dated February 7, 1994 between the Registrant and Browning
Construction, Inc.
*10.18.21 Agency Agreement dated December 17, 1993 between Bankers National Life Insurance Company
and Browning Investments, Inc.
*10.18.22 Agreement to Assign Contract for Purchase of Real Estate dated January 7, 1994 between Bankers
National Life Insurance Company and Carmel Drive Realty, Inc.
*10.18.23 Contract for Purchase of Real Estate dated January 7, 1994 between Bankers National Life
Insurance Company and Meridian Mile Associates, L.P.
*10.18.24 Development Agreement dated January 7, 1994 between Bankers National Life Insurance
Company and Browning Investments, Inc.
*10.18.25 Construction Agreement dated July 29, 1993 between Bankers National Life Insurance Company
and Browning Construction, Inc.
10.23 Aircraft Lease Agreement dated December 22, 1988, between General Electrical Capital
Corporation and Conseco Investment Holding Company was filed with the Commission as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for 1988, and is incorporated herein by
this reference.
*10.23.1 Amendment to Aircraft Lease Agreement dated December 22, 1988, between General Electric
Capital Corporation and Conseco Investment Holding Company.
10.24 Aircraft Lease Agreement dated April 26, 1991 between General Electric Capital Corporation and
Conseco Investment Holding Company was filed with the Commission as Exhibit 10.29 to the
Registrant's Report on Form 10-Q for the quarter ended September 31, 1991, and is incorporated
herein by this reference.
*10.24.1 Amendment to Aircraft Lease Agreement dated April 26, 1991, between General Electric Capital
Corporation and Conseco Investment Holding Company.
*10.25 Aircraft Lease Purchase Agreement dated December 28, 1993, between MetLife Capital
Corporation and Conseco Investment Holding Company.
112
Exhibit
No. Document
- - ------- --------
10.30 Stock Acquisition Agreement dated February 20, 1992, relating to Bankers Life and Casualty
Company was filed with the Commission, as Exhibit 10.30 to the Registrant's Annual Report on
Form 10-K for 1991 and Amendments thereto were filed with the Commission as Exhibit 2 to the
Registrant's Report on Form 8-K dated November 20, 1992; and are incorporated herein by this
reference.
10.31 Helicopter Lease Agreement dated April 9, 1992 between General Electric Capital Corporation
and Conseco Investment Holding Company was filed with the Commission as Exhibit 10.31 to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 1992, and is incorporated herein
by this reference.
*10.32 Aircraft Lease Agreement dated October 6, 1993, between General Electric Capital Corporation
and Conseco Investment Holding Company and the associated Assignment Agreement dated
October 25, 1993, between General Electric Capital Corporation and Nationsbanc Leasing
Corporation.
*10.33.1 U.S. Purchase Agreement dated February 8, 1994 among Western National Corporation, Conseco
Investment Holding Company, Conseco, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Dean Witter Reynolds Inc., Goldman, Sachs & Co. and Ladenburg,
Thalmann and Co., Inc. as representatives of the several underwriters named therein.
*10.33.2 International Purchase Agreement dated February 8, 1994 among Western National Corporation,
Conseco Investment Holding Company, Conseco, Inc., and Merrill Lynch International Limited,
Dean Witter International Ltd., Goldman Sachs International Limited and Ladenburg, Thalmann
& Co. Inc., as Lead Managers of the several managers named therein.
*10.34 Separation Agreement dated February 8, 1994 between Conseco, Inc. and Western National
Corporation
*11.1 Computation of Earnings Per Share - Primary.
*11.2 Computation of Earnings Per Share - Fully Diluted.
*12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
*12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends for Which Conseco
is Directly Liable.
*21 List of Subsidiaries.
*23 Consent of Independent Accountants
*Filed herewith
113
Exhibit
No. Document
- - ------- --------
Executive Compensation Plans and Arrangements
10.1.2 Employment Agreement dated January 1, 1987, between the Registrant and Stephen C. Hilbert
was filed with the Commission as Exhibit 10.1.2 to the Registrant's Annual Report on Form 10-K
for 1986, and Amendment No. 1 thereto were filed with the Commission as Exhibit 10.1.2 to the
Registrant's Annual Report on Form 10-K for 1987; and are incorporated herein by this reference.
10.1.3 Employment Agreement dated July 1, 1991, between the Registrant and Rollin M. Dick was filed
with the Commission as Exhibit 10.1.3 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.4 Employment Agreement dated July 1, 1991, between the Registrant and Donald F. Gongaware
was filed with the Commission as Exhibit 10.1.4 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991, and is incorporated herein by this reference.
10.1.5 Employment Agreement dated July 1, 1991, between the Registrant and Lawrence W. Inlow was
filed with the Commission as Exhibit 10.1.5 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991, and is incorporated herein by this reference.
10.1.7 Employment Agreement dated July 1, 1991, between the Registrant and Walter T. Kirkbride was
filed with the Commission as Exhibit 10.1.7 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991 and is incorporated herein by this reference.
10.1.9 Secured Promissory Note of Stephen C. Hilbert and Pledge Agreement between the Registrant and
Stephen C. Hilbert dated February 25, 1988, were filed with the Commission as Exhibit 10.1.9
to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1988, and are
incorporated herein by this reference.
10.1.10 Employment Agreement dated August 17, 1992, between the Registrant and Ngaire E. Cuneo was
filed with the Commission as Exhibit 10.1.10 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1992, and is incorporated herein by this reference.
10.8 The Registrant's Stock Option Plan was filed with the Commission as Exhibit B to its definitive
Proxy Statement dated December 10, 1983; Amendment No. 1 thereto was filed with the
Commission as Exhibit 10.8.1 to its Report on Form 10-Q for the quarter ended June 30, 1985;
Amendment No. 2 thereto was filed with the Commission as Exhibit 10.8.2 to its Registration
Statement on Form S-1, No. 33-4367; Amendment No. 3 thereto was filed with the Commission
as Exhibit 10.8.3 to the Registrant's Annual Report on Form 10-K for 1986; Amendment No. 4
thereto was filed with the Commission as Exhibit 10.8 to the Registrant's Annual Report on Form
10-K for 1987; Amendment No. 5 thereto was filed with the Commission as Exhibit 10.8 to the
Registrants's Report on Form 10-Q for the quarter ended September 30, 1991; and are
incorporated herein by this reference.
10.8.2 ConsecoSave Plan dated as of January 1, 1993, was filed with the Commission as Exhibit 10.8.2
to the Registrant's Annual Report on Form 10-K for 1992, and is incorporated herein by this
reference.
10.8.3 The Registrant's Cash Bonus Plan was filed with the Commission as Exhibit 10.8.3 to the
Registrant's Report on Form 10-Q for the quarter ended March 31, 1989, and is incorporated
herein by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred Compensation Program was filed with
the Commission as Exhibit 10.8.4 to the Registrant's Annual Report on Form 10-K for 1992, and
is incorporated herein by this reference.
*10.8.5 Amendment of ConsecoSave Plan.
*10.8.6 Conseco Performance - Based Compensation Bonus Plan for Executive Vice Presidents.