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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 For the fiscal year ended December
31, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number: 1-9250
Conseco, Inc.
Indiana No. 35-1468632
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State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
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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
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Common Stock, No Par Value New York Stock Exchange, Inc.
8-1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
10-1/2% Senior Notes due 2004 New York Stock Exchange, Inc.
9.16% Trust Originated Preferred Securities New York Stock Exchange, Inc.
8.70% Trust Originated Preferred Securities New York Stock Exchange, Inc.
9% Trust Originated Preferred Securities New York Stock Exchange, Inc.
9.44% Trust Originated Preferred Securities New York Stock Exchange, Inc.
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 27, 2001): $4,266,010,577
Shares of common stock outstanding as of March 27, 2001: 337, 584,736
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement for the 2001 annual meeting of shareholders are
incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS OF CONSECO.
Conseco, Inc. ("we", "Conseco", or the "Company") is a financial services
holding company with subsidiaries operating throughout the United States. Our
insurance subsidiaries develop, market and administer supplemental health
insurance, annuity, individual life insurance and other insurance products. Our
finance subsidiaries originate, securitize and service manufactured housing,
home equity, retail credit and floorplan loans. Conseco's operating strategy is
to grow its business by focusing its resources on the development and expansion
of profitable products and strong distribution channels, to seek to achieve
superior investment returns through active asset management and to control
expenses.
During 2000, we announced several courses of action with respect to
Conseco Finance Corp. ("Conseco Finance"), a wholly owned subsidiary of Conseco,
as well as our intent to sell our individual and group major medical insurance
lines and certain non-strategic assets held at the parent company level. These
actions are designed to reduce parent company debt over time and are an integral
part of the restructuring of the bank debt which occurred during the third
quarter of 2000. The actions with respect to Conseco Finance include: (i) the
sale, closing or runoff of five units (i.e., asset-based lending, vendor
leasing, bankcards, transportation and park construction); (ii) efforts to
better utilize existing assets so as to increase cash; and (iii) cost savings
and restructuring of ongoing businesses such as the streamlining of loan
origination operations in the manufactured housing and home equity lending
divisions. The actions with respect to the sale of certain non-strategic assets
include the sales of our investment in the wireless communication company,
TeleCorp PCS Inc. ("TeleCorp"), our interest in the riverboat casino in
Lawrenceberg, Indiana, and our subprime auto loan portfolio.
Several elements of the plans we previously announced have already been
completed:
(i) We completed the restructuring of the operations of Conseco
Finance;
(ii) We completed the restructuring of our bank debt;
(iii) We have made significant progress in achieving our asset
liquidation and monetization transaction goals. Through March 1,
2001, we have completed transactions which generated cash proceeds
in excess of $1.5 billion; and
(iv) On November 7, 2000, A.M. Best upgraded the financial strength
ratings of our principal life insurance subsidiaries to A-
(Excellent) from B++ (Very Good). The return of these ratings to A-
(Excellent) satisfies a covenant in the amended bank credit
facilities, well before the required date of March 31, 2001.
The Company believes that additional courses of action to be completed in
2001 will generate additional cash proceeds of $.7 billion during 2001 (in
addition to the $.5 billion already completed in 2001). The course of actions
described above had a significant effect on the Company's operating results
during 2000.
In recent years, Conseco has been active in efforts to increase the
familiarity and overall preference for our brand. We believe that in a
competitive marketplace like financial services, companies that can
differentiate themselves through a familiar brand can obtain full value for
their products; sell more efficiently and command greater customer loyalty;
recruit and retain talent more easily; better withstand and weather inevitable
business crises; and have better access to the financial markets and the capital
they need in order to grow. Our advertising campaign is designed to introduce
consumers to the Conseco brand, to our product line and to the benefits of doing
business with Conseco.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Our executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and our telephone number is (317) 817-6100.
Data in Item 1 are provided as of December 31, 2000, or for the year then
ended (as the context implies), unless otherwise described.
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MARKETING AND DISTRIBUTION
Insurance
Our insurance products are sold through three primary distribution
channels - career agents, professional independent producers and direct
marketing.
Conseco seeks to retain the loyalty of its agency force by providing
marketing and sales support; electronic and automated access to account and
commission information; and marketing and training tools. We also have
introduced new products like equity-indexed annuities (1996) and multibucket
flexible premium annuities (which provide for various earnings strategies under
one product) (1999). We are also seeking to reduce our agents' administrative
burden, increase their productive sales time and get them the information they
need faster and more reliably. The Conseco Online Information System ("COINS")
enables agents to track policy and commission information and order materials at
their convenience. Many of our marketing companies and agents use COINS.
Our insurance subsidiaries collectively hold licenses to market our
insurance products in all fifty states, the District of Columbia, and certain
protectorates of the United States. Sales to residents of the following states
accounted for at least 6 percent of our 2000 collected premiums: California (9.6
percent), Illinois (8.0 percent), Florida (8.0 percent), and Texas (6.8
percent).
We believe that people purchase most types of life insurance, accident
and health insurance and annuity products only after being contacted and
solicited by an insurance agent. Accordingly, the success of our distribution
system is largely dependent on our ability to attract and retain agents who are
experienced and highly motivated.
A description of the primary distribution channels follows:
Career Agents. This agency force of approximately 5,300 agents working
from 172 branch offices, permits one-on- one contacts with potential
policyholders and promotes strong personal relationships with existing
policyholders. The career agents sell primarily Medicare supplement and
long-term care insurance policies, senior life insurance and annuities. In 2000,
this distribution channel accounted for $1,528.1 million, or 24 percent, of our
total collected premiums. These agents sell only Conseco policies and typically
visit the prospective policyholder's home to conduct personalized "kitchen-
table" sales presentations. After the sale of an insurance policy, the agent
serves as a contact person for policyholder questions, claims assistance and
additional insurance needs.
Professional Independent Producers. This distribution channel consists of
a general agency and insurance brokerage distribution system comprised of
approximately 130,000 independent licensed agents doing business in all fifty
states. In 2000, this channel accounted for $4,648.3 million, or 73 percent, of
our total collected premiums.
Professional independent producers are a diverse network of independent
agents, insurance brokers and marketing organizations. Marketing companies
typically recruit agents for Conseco by advertising our products and commission
structure through direct mail advertising or through seminars for insurance
agents and brokers. These organizations bear most of the costs incurred in
marketing our products. We compensate the marketing organizations by paying them
a percentage of the commissions earned on new sales generated by the agents
recruited by such organizations. Certain of these marketing organizations are
specialty organizations that have a marketing expertise or a distribution system
relating to a particular product, such as flexible-premium annuities for
educators. During 1999 and 2000, Conseco purchased four organizations that
specialize in marketing and distributing supplemental health products. In 2000,
these four organizations accounted for $228.5 million, or 3.6 percent, of our
total collected premiums.
Direct Marketing. This distribution channel is engaged primarily in the
sale of "graded benefit life" insurance policies. In 2000, this channel
accounted for $188.0 million, or 3 percent, of our total collected premiums.
During 2000, we reacquired the name "Colonial Penn" (the former brand name these
products were sold under prior to our acquisition of this business), which will
be used to market these products in the future.
Finance
Our finance group, with nationwide operations and managed finance
receivables of $46.6 billion at December 31, 2000, is one of America's largest
consumer finance companies, with leading market positions in retail home equity
mortgages, home improvement loans, private label credit cards and manufactured
housing lending. Originations to
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customers in the following states accounted for at least 5.0 percent of our 2000
originations: Texas (9.0 percent), California (7.4 percent), Florida (5.2
percent), Illinois (5.1 percent) and Michigan (5.0 percent).
During 2000, 61 percent of our finance products were marketed indirectly
to customers through intermediary channels such as dealers, contractors,
retailers and correspondents. The remaining products were marketed directly to
our customers through our regional offices and service centers. A description of
the primary distribution channels follows:
Dealers, Contractors, Retailers and Correspondents. Manufactured housing,
home improvement and home equity receivables are purchased from and originated
by selected dealers and contractors after being underwritten and analyzed via
one of the Company's automated credit scoring systems at one of our regional
service centers. During 2000, these marketing channels accounted for the
following percentages of total loan originations: 86 percent of manufactured
housing, 57 percent of home improvement, 24 percent of home equity, 97 percent
of consumer finance and 100 percent of equipment finance.
Regional Service Centers, Retail Satellite Offices and Telemarketing
Center. We market and originate manufactured housing loans through 33 regional
offices and 3 origination and processing centers. We originate home equity loans
through a system of 128 retail satellite offices and 6 regional centers. We also
market private label retail credit products through selected retailers and
process the contracts through Conseco Bank, Inc. ("Conseco Bank"), a Utah
industrial loan company, and through Green Tree Retail Services Bank, Inc.
("Retail Bank"), a South Dakota limited purpose credit card bank, both of which
are wholly owned subsidiaries of the Company. We also utilize direct mail to
originate home improvement loans and home equity loans. During 2000, these
marketing channels accounted for the following percentages of total loan
originations: 14 percent of manufactured housing, 43 percent of home
improvement, 76 percent of home equity, 3 percent of consumer finance and 100
percent of retail credit contracts.
Insurance Products
Supplemental Health
Supplemental health products include Medicare supplement, long-term care
and specified-disease insurance products distributed through our career agency
force and professional independent producers. During 2000, we collected Medicare
supplement premiums of $931.0 million, long-term care premiums of $836.0
million, specified-disease premiums of $371.1 million and other supplemental
health premiums of $125.8 million. Medicare supplement, long-term care,
specified disease and other supplemental health premiums represented 15 percent,
13 percent, 6 percent and 2 percent, respectively, of our total premiums
collected in 2000.
The following describes the major supplemental health products:
Medicare supplement. Medicare is a two-part federal health insurance
program for disabled persons and senior citizens (age 65 and older). Part A of
the program provides protection against the costs of hospitalization and related
hospital and skilled nursing home care, subject to an initial deductible,
related coinsurance amounts and specified maximum benefit levels. The deductible
and coinsurance amounts are subject to change each year by the federal
government. Part B of Medicare covers doctors bills and a number of other
medical costs not covered by Part A, subject to deductible and coinsurance
amounts for "approved" charges.
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as deductibles,
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. Our Medicare supplement plans automatically adjust coverage to reflect
changes in Medicare benefits. In marketing these products, we concentrate on
individuals who have recently become eligible for Medicare by reaching the age
of 65. We offer a higher first-year commission for sales to these policyholders
and competitive premium pricing. Approximately 35 percent of new sales of
Medicare supplement policies are to individuals who are reaching the age of 65.
Long-term care. Long-term care products provide coverage, within
prescribed limits, for nursing home, home healthcare, or a combination of both
nursing home and home healthcare expenses. The long-term care plans are sold
primarily to retirees and, to a lesser degree, to older self-employed
individuals and others in middle-income levels.
Current nursing home care policies cover incurred and daily fixed-dollar
benefits available with an elimination period (which, similar to a deductible,
requires the insured to pay for a certain number of days of nursing home care
before the insurance coverage begins), subject to a maximum benefit. Home
healthcare policies cover the usual and customary
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charges after a deductible and are subject to a daily or weekly maximum dollar
amount, and an overall benefit maximum. We monitor the loss experience on our
long-term care products and, when necessary, apply for rate increases in the
states in which we sell such products.
Specified-disease products. These policies generally provide fixed or
limited benefits. Cancer insurance and heart/stroke products are guaranteed
renewable individual accident and health insurance policies. Payments under
cancer insurance policies are generally made directly to, or at the direction
of, the policyholder following diagnosis of, or treatment for, a covered type of
cancer. Heart/stroke policies provide for payments directly to the policyholder
for treatment of a covered heart disease, heart attack or stroke. The benefits
provided under the specified-disease policies do not necessarily reflect the
actual cost incurred by the insured as a result of the illness; benefits are not
reduced by any other medical insurance payments made to or on behalf of the
insured.
Approximately 76 percent of our specified-disease policies in force
(based on a count of policies) are sold with return of premium or cash value
riders. The return of premium rider generally provides that after a policy has
been in force for a specified number of years or upon the policyholder reaching
a specified age, the Company will pay to the policyholder, or a beneficiary
under the policy, the aggregate amount of all premiums paid under the policy,
without interest, less the aggregate amount of all claims incurred under the
policy.
Annuities
Annuity products include equity-indexed annuity, variable annuity,
traditional fixed rate annuity and market value- adjusted annuity products sold
through both career agents and professional independent producers. During 2000,
we collected annuity premiums of $2,255.7 million, or 35 percent of our total
premiums collected.
The following describes the major annuity products:
Equity-indexed annuity products. These products accounted for $643.5
million, or 10 percent, of our total premiums collected in 2000. The
accumulation value of these annuities is credited with interest at an annual
minimum guaranteed average rate over the term of the contract of 3 percent (or,
including the effect of applicable sales loads, a 1.7 percent compound average
interest rate over the term of the contracts), but the annuities provide for
potentially higher returns based on a percentage (the "participation rate") of
the change in the Standard & Poor's Corporation ("S&P") 500 Index during each
year of their term. The Company has the discretionary ability to annually change
the participation rate which currently ranges from 55 percent to 70 percent and
may include a first-year "bonus", similar to the bonus interest described below
for traditional fixed rate annuity products, which generally ranges from 20
percent to 55 percent. The minimum guaranteed values are equal to: (i) 90
percent of premiums collected for annuities for which premiums are received in a
single payment (single premium deferred annuities "SPDAs"), or 75 percent of
first year and 87.5 percent of renewal premiums collected for annuities which
allow for more than one payment (flexible premium deferred annuities "FPDAs");
plus (ii) interest credited on such percentage of the premiums collected at an
annual rate of 3 percent. The annuity provides for penalty-free withdrawals of
up to 10 percent of premium in each year after the first year of the annuity's
term. Other withdrawals from SPDA products are generally subject to a surrender
charge of 9 percent over the eight year contract term at which time the contract
must be renewed or withdrawn. Other withdrawals from FPDA products are subject
to a surrender charge of 12 percent to 20 percent in the first year, declining
1.2 percent to 1.3 percent each year, to zero over a 10 to 15 year period,
depending on issue age. We purchase S&P 500 Index Call Options ("S&P 500 Call
Options") in an effort to hedge potential increases to policyholder benefits
resulting from increases in the S&P 500 Index to which the product's return is
linked.
Other fixed rate annuity products. These products include SPDAs, FPDAs
(excluding the equity-indexed products) and single-premium immediate annuities
("SPIAs"). These products accounted for $740.7 million, or 11 percent, of our
total collected premiums in 2000. Our SPDAs and FPDAs typically have an interest
rate (the "crediting rate") that is guaranteed by the Company for the first
policy year, after which, we have the discretionary ability to change the
crediting rate to any rate not below a guaranteed minimum rate. The guaranteed
rate on annuities written recently ranges from 3.0 percent to 4.5 percent, and
the rate on all policies in force ranges from 2.5 percent to 6.0 percent. The
initial crediting rate is largely a function of: (i) the interest rate we can
earn on invested assets acquired with the new annuity fund deposits; (ii) the
costs related to marketing and maintaining the annuity products; and (iii) the
rates offered on similar products by our competitors. For subsequent adjustments
to crediting rates, we take into account the yield on our investment portfolio,
annuity surrender assumptions, competitive industry pricing and the crediting
rate history for particular groups of annuity policies with similar
characteristics.
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Approximately 52 percent of our new annuity sales have been "bonus"
products. The initial crediting rate on these products specifies a bonus
crediting rate ranging from 1 percent to 5 percent of the annuity deposit for
the first policy year only. After the first year, the bonus interest portion of
the initial crediting rate is automatically discontinued, and the renewal
crediting rate is established. As of December 31, 2000, crediting rates on our
outstanding traditional annuities were at an average rate, excluding bonuses, of
4.4 percent.
The policyholder is typically permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to his or her account (the
"accumulation value"), subject in virtually all cases to the assessment of a
surrender charge for withdrawals in excess of specified limits. Most of our
traditional annuities provide for penalty-free withdrawals of up to 10 percent
of the accumulation value each year, subject to limitations. Withdrawals in
excess of allowable penalty- free amounts are assessed a surrender charge during
a penalty period which generally ranges from five to 12 years after the date a
policy is issued. The initial surrender charge is generally 6 percent to 12
percent of the accumulation value and generally decreases by approximately 1 to
2 percentage points per year during the penalty period. Surrender charges are
set at levels to protect the Company from loss on early terminations and to
reduce the likelihood of policyholders terminating their policies during periods
of increasing interest rates. This practice lengthens the effective duration of
policy liabilities and enables the Company to maintain profitability on such
policies.
SPIAs accounted for $60.8 million, or 1.0 percent, of our total collected
premiums in 2000. SPIAs are designed to provide a series of periodic payments
for a fixed period of time or for life, according to the policyholder's choice
at the time of issue. Once the payments begin, the amount, frequency and length
of time for which they are payable are fixed. SPIAs often are purchased by
persons at or near retirement age who desire a steady stream of payments over a
future period of years. The single premium is often the payout from a terminated
annuity contract. The implicit interest rate on SPIAs is based on market
conditions when the policy is issued. The implicit interest rate on the
Company's outstanding SPIAs averaged 6.9 percent at December 31, 2000.
Recently, the Company introduced its multibucket annuity product which
provides for different rates of cash value growth based on the experience of a
particular market strategy. Earnings are credited to this product based on the
market activity of a given strategy, less management fees, and funds may be
moved between cash value strategies. Portfolios available include high-yield
bond, investment-grade bond, convertible bond and guaranteed-rate portfolios.
During 2000, this product accounted for $139.8 million, or 2.2 percent, of our
total collected premiums.
Variable annuity products. Variable annuities accounted for $871.5
million, or 14 percent, of our total premiums collected in 2000. Variable
annuities, sold on a single-premium or flexible-premium basis, differ from fixed
annuities in that the principal value may fluctuate, depending on the
performance of assets allocated pursuant to various investment options chosen by
the contract owner. Variable annuities offer contract owners a fixed or variable
rate of return based upon the specific investment portfolios into which premiums
may be directed.
Life
Life products include traditional, universal life and other life
insurance products. These products are currently sold through career agents,
professional independent producers and direct response marketing. During 2000,
we collected $934.2 million, or 15 percent, of our total collected premiums from
life products.
Interest-sensitive life products. These products include universal life
products that provide whole life insurance with adjustable rates of return
related to current interest rates. They accounted for $483.5 million, or 7.6
percent, of our total collected premiums in 2000 and are marketed through
professional independent producers and, to a lesser extent, career agents. The
principal differences between universal life products and other
interest-sensitive life insurance products are policy provisions affecting the
amount and timing of premium payments. Universal life policyholders may vary the
frequency and size of their premium payments, and policy benefits may also
fluctuate according to such payments. Premium payments under other
interest-sensitive policies may not be varied by the policyholders, and as a
result, are designed to reduce the administrative costs typically associated
with monitoring universal life premium payments and policy benefits.
Traditional life. These products accounted for $450.7 million, or 7.1
percent, of our total collected premiums in 2000. Traditional life policies,
including whole life, graded benefit life and term life products, are marketed
through professional independent producers, career agents and direct response
marketing. Under whole life policies, the policyholder generally pays a level
premium over an agreed period or the policyholder's lifetime. The annual premium
in a whole life policy is generally higher than the premium for comparable term
insurance coverage in the early years of the policy's life, but is generally
lower than the premium for comparable term insurance coverage in the later years
of the
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policy's life. These policies, which continue to be marketed by the Company on a
limited basis, combine insurance protection with a savings component that
increases in amount gradually over the life of the policy. The policyholder may
borrow against the savings generally at a rate of interest lower than that
available from other lending sources. The policyholder may also choose to
surrender the policy and receive the accumulated cash value rather than
continuing the insurance protection. Term life products offer pure insurance
protection for a specified period of time - typically 5, 10 or 20 years.
Traditional life products also include graded benefit life insurance
products. Graded benefit life products accounted for $66.2 million, or 1.0
percent, of our total collected premiums in 2000. Graded benefit life insurance
products are offered on an individual basis primarily to persons age 50 to 80,
principally in face amounts of $350 to $10,000, without medical examination or
evidence of insurability. Premiums are paid as frequently as monthly. Benefits
paid are less than the face amount of the policy during the first two years,
except in cases of accidental death. Graded benefit life policies are marketed
using direct response marketing techniques. New policyholder leads are generated
primarily from television and print advertisements.
Individual and Group Major Medical
Sales of our individual and group major medical health insurance products
are targeted to self-employed individuals, small business owners, large
employers and early retirees. Various deductible and coinsurance options are
available, and most policies require certain utilization review procedures. The
profitability of this business depends largely on the overall persistency of the
business in force, claim experience and expense management. We have previously
announced our intent to sell these lines of business. During 2000, we collected
$910.6 million, or 14 percent, of our total collected premiums from these
products.
Finance Products
Manufactured Housing. Our finance subsidiaries provide financing for
consumer purchases of manufactured housing. During 2000, we originated $4.4
billion of contracts for manufactured housing purchases, or 26 percent of our
total originations. At December 31, 2000, our managed receivables included $26.3
billion of contracts for manufactured housing purchases, or 56 percent of total
managed receivables. Manufactured housing or a manufactured home is a structure,
transportable in one or more sections, which is designed to be a dwelling with
or without a permanent foundation. Manufactured housing does not include either
modular housing (which typically involves more sections, greater assembly and a
separate means of transporting the sections) or recreational vehicles.
The majority of sales contracts for manufactured home purchases are
financed on a conventional basis. Federal Housing Administration and Veterans'
Administration contracts represent less than 1 percent of our manufactured
housing originations and 1 percent of our total servicing portfolio.
Manufactured housing contracts are generally subject to minimum down payments of
at least 5 percent of the amount financed and have terms of up to 30 years.
Through our regional service centers, we purchase manufactured housing
contracts from dealers located throughout the United States. Our regional
service center personnel solicit dealers in their region. If the dealer wishes
to utilize our financing, the dealer completes an application. Upon approval, a
dealer agreement is executed. We also originate manufactured housing installment
loan agreements directly with customers. For the year ended December 31, 2000,
86 percent of our manufactured housing loan originations were purchased from
dealers and 14 percent were originated directly by us.
Customers' credit applications for new manufactured homes are reviewed in
our service centers. If the application meets our guidelines, we generally
purchase the contract after the customer has moved into the manufactured home.
We use a proprietary automated credit scoring system to evaluate manufactured
housing contracts. The scoring system is statistically based, quantifying
information using variables obtained from customer credit applications and
credit reports.
Mortgage Services. Products within this category include home equity and
home improvement loans. During 2000, we originated $4.4 billion of contracts for
these products, or 26 percent of our total originations. At December 31, 2000,
our managed receivables included $13.3 billion of contracts for home equity and
home improvement loans, or 29 percent of total managed receivables.
We originate home equity loans through 128 retail satellite offices and 6
regional centers, and through a network of correspondent lenders throughout the
United States. The satellite offices are responsible for originating,
processing, underwriting and funding the loan transaction. Subsequently, loans
are re-underwritten on a test basis by a third party to
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ensure compliance with our credit policy. After the loan has closed, the loan
documents are forwarded to our loan servicing center. The servicing center is
responsible for handling customer service and performing document handling,
custodial, quality control and collection functions.
During 2000, approximately 76 percent of our home equity finance loans
were originated directly with the borrower. The remaining finance volume was
originated through approximately 220 correspondent lenders. The Company ceased
using the correspondent channel in September 2000. However, from time to time,
the Company may make whole-loan portfolio purchases.
Typically, home equity loans are secured by first or second liens. Homes
used for collateral in securing home equity loans may be either residential or
investor owned, one-to-four-family properties having a minimum appraised value
of $25,000. During 2000, approximately 76 percent of the loans originated were
secured by first liens. The average loan to value for loans originated in 2000
was approximately 91 percent. The majority of our home equity loans are fixed
rate closed-end loans. We periodically purchase adjustable rate loans from our
correspondent network. Adjustable rate loans accounted for 19 percent of our
home equity finance volume during 2000.
We originate the majority of our home improvement loan contracts
indirectly through a network of home improvement contractors located throughout
the United States. We review the financial condition, business experience and
qualifications of all contractors through which we obtain loans.
We finance both conventional home improvement contracts and contracts
insured through the Federal Housing Administration Title I program. Such
contracts are generally secured by first, second or, to a lesser extent, third
liens on the improved real estate. We also implemented an unsecured conventional
home improvement lending program for certain customers which generally allows
for loans of $2,500 to $15,000. Unsecured loans account for less than 2 percent
of our home improvement servicing portfolio.
Typically, an approved contractor submits the customer's credit
application and construction contract to our centralized service center where an
analysis of the creditworthiness of the customer is made using a proprietary
credit scoring system. If it is determined that the application meets our
underwriting guidelines, we typically purchase the contract from the contractor
when the customer verifies satisfactory completion of the work.
We also originate home improvement loans directly with borrowers. After
receiving a mail solicitation, the customer calls our telemarketing center and
our sales representative explains the available financing plans, terms and rates
depending on the customer's needs. The majority of the loans are secured by a
second or third lien on the real estate of the customer. Direct distribution
accounted for approximately 43 percent of the home improvement finance
originations during 2000.
The types of home improvements we finance include exterior renovations
(such as windows, siding and roofing); pools and spas; kitchen and bath
remodeling; and room additions and garages. We may also extend additional credit
beyond the purchase price of the home improvement for the purpose of debt
consolidation.
Private Label Credit Card. During 2000, we originated $2.6 billion of
private label credit card receivables through our bank subsidiaries, or 15
percent of our total originations. At December 31, 2000, our managed receivables
included $1.8 billion of contracts for credit card loans, or 4 percent of total
managed receivables.
Private label credit card programs are offered to select retailers. We
review the credit of individual customers seeking credit cards utilizing an
automated credit scoring system administered in one of our processing centers.
ACQUISITIONS
Since 1982, Conseco has acquired 19 insurance groups and related
businesses and two finance companies. We continue to regularly investigate
acquisition opportunities in the industries in which we operate. These
acquisitions have been responsible for the Company's growth in recent years. The
Company's current plans are to grow and improve the profitability of its
businesses, rather than growing through acquisitions.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolios of Conseco's
subsidiaries. CCM had approximately $31.2 billion of assets (at fair value)
under management at December 31, 2000, of which $23.7 billion were assets of
Conseco's subsidiaries and $7.5 billion were
8
assets owned by other parties. Our 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 our business; investment
income is a significant component of our total revenues. Profitability of many
of our insurance products is significantly affected by spreads between interest
yields on investments and rates credited on insurance liabilities. Although
substantially all credited rates on SPDAs and FPDAs may be changed annually,
changes in crediting rates may not be sufficient to maintain targeted investment
spreads in all economic and market environments. In addition, competition and
other factors, including the impact of the level of surrenders and withdrawals,
may limit our ability to adjust or to maintain crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions. As of
December 31, 2000 the average yield, computed on the cost basis of our
investment portfolio, was 7.2 percent, and the average interest rate credited or
accruing to our total insurance liabilities (excluding interest rate bonuses for
the first policy year only and excluding the effect of credited rates
attributable to variable or equity-indexed products) was 4.9 percent.
We manage the equity-based risk component of our equity-indexed annuity
products by: (i) purchasing S&P 500 Call Options in an effort to hedge such
risk; and (ii) adjusting the participation rate to reflect the change in the
cost of such options (such cost varies based on market conditions). Accordingly,
we are able to focus on managing the interest rate spread component of these
products.
We seek to balance the duration of our invested assets with the expected
duration of benefit payments arising from our insurance liabilities. At December
31, 2000, the adjusted modified duration of fixed maturities and short-term
investments was approximately 6.4 years and the duration of our insurance
liabilities was approximately 6.5 years.
For information regarding the composition and diversification of the
investment portfolio of our subsidiaries, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations -
Investments" and the notes to our consolidated financial statements.
COMPETITION
Our businesses operate in a highly competitive environment. The financial
services industry consists of a large number of companies, some of which are
larger and have greater financial resources, broader and more diversified
product lines and larger staffs than those of Conseco. An expanding number of
banks, securities brokerage firms and other financial intermediaries also market
insurance products or offer competing products, such as mutual fund products,
traditional bank investments and other investment and retirement funding
alternatives. We also compete with many of these companies and others in
providing services for fees. In most areas, competition is based on a number of
factors, including pricing, service provided to distributors and policyholders
and ratings. Conseco's subsidiaries must also compete with their competitors to
attract and retain the allegiance of dealers, vendors, contractors,
manufacturers, retailers and agents.
In the finance industry, operations are affected by consumer demand which
is influenced by regional trends, economic conditions and personal preferences.
Competition in the finance industry is primarily among banks, finance companies
(or finance divisions of manufacturers), savings and loan associations and
credit unions. Competition is based on a number of factors, including service,
the credit review process, the integration of financing programs and the ability
to manage the servicing portfolio in changing economic environments.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The provisions of the
Omnibus Budget Reconciliation Act of 1984 and the work of the National
Association of Insurance Commissioners ("NAIC") (an association of state
regulators and their staffs) have resulted in standardized policy features for
Medicare supplement products. This increases the comparability of such policies
and may intensify competition based on factors other than product features. See
"Underwriting" and "Governmental Regulation." In addition to the products of
other insurance companies, our health insurance products compete with health
maintenance organizations, preferred provider organizations and other health
care-related institutions which provide medical benefits based on contractual
agreements.
Marketing companies, agents who market insurance products, school
districts, financial institutions and policyholders use the financial strength
ratings assigned to an insurer by independent rating agencies as one factor in
determining which insurer's products to market or purchase. As of December 31,
2000, all of our primary life insurance companies had an "A- (Excellent)" rating
by A.M. Best Company ("A.M. Best"). A.M. Best ratings for the industry currently
range from "A++ (Superior)" to "F (In Liquidation)." Publications of A.M. Best
indicate that the "A" and "A-" ratings are assigned to those
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companies that, in A.M. Best's opinion, have, on balance, excellent financial
strength, operating performance and market profile when compared to the
standards established by A.M. Best and have demonstrated a strong ability to
meet their ongoing obligations to policyholders. A.M. Best ratings consider the
financial strength of the rated company and are not a rating of the investment
worthiness of the rated company.
We believe that we are able to compete effectively because: (i) we
emphasize a number of specialized distribution channels, where the ability to
respond rapidly to changing customer needs yields a competitive edge; (ii) we
are experienced in establishing and cultivating relationships with the unique
distribution networks and the independent marketing companies operating in these
specialized markets; (iii) we can offer competitive rates as a result of our
operating efficiencies and higher-than-average investment yields achieved by
applying active investment portfolio management techniques; and (iv) we have
reliable policyholder administrative services, supported by customized
information technology systems.
INSURANCE UNDERWRITING
Under regulations promulgated by the NAIC and adopted as a result of the
Omnibus Budget Reconciliation Act of 1990, we are prohibited from underwriting
our Medicare supplement policies for certain first-time purchasers. If a person
applies for insurance within six months after becoming eligible by reason of
age, or disability in certain limited circumstances, the application may not be
rejected due to medical conditions. Some states prohibit underwriting of all
Medicare supplement policies. For other prospective Medicare supplement
policyholders, such as senior citizens who are transferring to Conseco's
products, the underwriting procedures are relatively limited, except for
policies providing prescription drug coverage.
Before issuing long-term care or comprehensive major medical products to
individuals and groups, we generally apply detailed underwriting procedures
designed to assess and quantify the insurance risks. We require medical
examinations of applicants (including blood and urine tests, where permitted)
for certain health insurance products and for life insurance products which
exceed prescribed policy amounts. These requirements are graduated according to
the applicant's age and may vary by type of policy or product. We also rely on
medical records and the potential policyholder's written application. In recent
years, there have been significant regulatory changes with respect to
underwriting individual and group major medical plans. An increasing number of
states prohibit underwriting and/or charging higher premiums for substandard
risks. We monitor changes in state regulation that affect our products, and
consider these regulatory developments in determining where we market our
products.
Most of our life insurance policies are underwritten individually,
although standardized underwriting procedures have been adopted for certain low
face-amount life insurance coverages. After initial processing, insurance
underwriters review each file and obtain the information needed to make an
underwriting decision (such as medical examinations, doctors' statements and
special medical tests). After collecting and reviewing the information, the
underwriter either: (i) approves the policy as applied for, or with an extra
premium charge because of unfavorable factors; or (ii) rejects the application.
We underwrite group insurance policies based on the characteristics of the group
and its past claim experience. Graded benefit life insurance policies are issued
without medical examination or evidence of insurability. There is minimal
underwriting on annuities.
REINSURANCE
Consistent with the general practice of the life insurance industry, our
subsidiaries enter into both facultative and treaty agreements of indemnity
reinsurance with other insurance companies in order to reinsure portions of the
coverage provided by our insurance products. Indemnity reinsurance agreements
are intended to limit a life insurer's maximum loss on a large or unusually
hazardous risk or to diversify its risk. Indemnity reinsurance does not
discharge the original insurer's primary liability to the insured. The Company's
reinsured business is ceded to numerous reinsurers. We believe the assuming
companies are able to honor all contractual commitments, based on our periodic
review of their financial statements, insurance industry reports and reports
filed with state insurance departments.
As of December 31, 2000, the policy risk retention limit was generally
$.8 million or less on the policies of our subsidiaries. Reinsurance ceded by
Conseco represented 21 percent of gross combined life insurance in force and
reinsurance assumed represented 5.0 percent of net combined life insurance in
force. At December 31, 2000, the total ceded business in force of $27.5 billion
was primarily ceded to insurance companies rated "A- (Excellent)" or better by
A.M. Best. Our principal reinsurers at December 31, 2000 were General & Cologne
Life Insurance Company, Connecticut General Life Insurance Company, Employers
Reassurance Corporation, Life Reassurance Corporation of America, Lincoln
National Life Insurance Company, Reliance Standard Life Insurance Company, RGA
Reinsurance Company, Security Life
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of Denver and Swiss Re Life and Health America. No other single reinsurer
assumes greater than 3 percent of the total ceded business in force.
EMPLOYEES
At December 31, 2000, Conseco, Inc. and its subsidiaries had
approximately 14,300 employees, including: (i) 7,000 employees supporting our
insurance operations; and (ii) 7,300 employees supporting our finance
operations. None of our employees is covered by a collective bargaining
agreement. We believe that we have excellent relations with our employees.
GOVERNMENTAL REGULATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Financial Modernization Act"), which significantly
modifies the regulation of financial services companies. The Financial
Modernization Act allows full affiliations among banks, insurance companies,
securities firms and other financial services companies, that could result in
increased consolidation of, and competition among, these firms. In addition, the
Financial Modernization Act contains privacy provisions relating to the
protection, transfer and use of the nonpublic personal information of consumers.
Consumer privacy laws containing expanded provisions also have been adopted, or
are under consideration, in a number of states.
Insurance
Our insurance subsidiaries are subject to regulation and supervision by
the insurance regulatory agencies of the states in which they transact business.
State laws generally establish supervisory agencies with broad regulatory
authority, including the power to: (i) grant and revoke business licenses; (ii)
regulate and supervise trade practices and market conduct; (iii) establish
guaranty associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; (x) perform financial, market conduct and other
examinations; (xi) define acceptable accounting principles; (xii) regulate the
type and amount of permitted investments; and (xiii) limit the amount of
dividends and surplus debenture payments that can be paid without obtaining
regulatory approval. Our insurance subsidiaries are subject to periodic
examinations by state regulatory authorities. We do not expect the results of
any ongoing examinations to have a material effect on the Company's financial
condition.
Most states have also enacted regulations on the activities of insurance
holding company systems, including acquisitions, extraordinary dividends, the
terms of surplus debentures, the terms of affiliate transactions and other
related matters. Currently, the Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in the
domiciliary states of the insurance subsidiaries (Arizona, Illinois, Indiana,
New York, Pennsylvania and Texas), and they routinely report to other
jurisdictions.
Most states have either enacted legislation or adopted administrative
regulations which affect 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: (i) the
acquisition of 10 percent or more of the outstanding shares of an insurance
company domiciled in the state; or (ii) the acquisition of 10 percent or more of
the outstanding stock of an insurance holding company whose insurance subsidiary
is domiciled 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. These regulations require the acquirer to file detailed
information concerning the acquiring parties and the plan of acquisition, and to
obtain administrative approval prior to the acquisition. In many states,
however, an insurance authority may determine that control does not exist, even
in circumstances in which a person owns or controls 10 percent or a greater
amount of securities.
The NAIC revised the Accounting Practices and Procedures Manual in a
process referred to as Codification. The revised manual is effective January 1,
2001. The domiciliary states of our insurance subsidiaries have adopted the
provisions of the revised manual or, with respect to some states, adopted the
manual with certain modifications. The revised manual has changed, to some
extent, prescribed statutory accounting practices and will result in changes to
the accounting practices that our insurance subsidiaries use to prepare their
statutory-basis financial statements. However, we believe the impact of these
changes to our insurance subsidiaries' statutory-based capital and surplus as of
January 1, 2001, will not be significant.
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The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation, privacy laws and federal taxation, do affect
the insurance business. Legislation has been introduced from time to time in
Congress that could result in the federal government assuming some role in
regulating the companies or allowing combinations between insurance companies,
banks and other entities.
On the basis of statutory statements filed with state regulators
annually, the NAIC calculates certain financial ratios to assist state
regulators in monitoring the financial condition of insurance companies. A
"usual range" of results for each ratio is used as a benchmark. In the past,
variances in certain ratios of our insurance subsidiaries have resulted in
inquiries from insurance departments to which we have responded. Such inquiries
did not lead to any restrictions affecting our operations.
In recent years, the NAIC has developed several model laws and
regulations including: (i) investment reserve requirements; (ii) risk-based
capital ("RBC") standards; (iii) codification of insurance accounting
principles; (iv) additional investment restrictions; (v) restrictions on an
insurance company's ability to pay dividends; and (vi) product illustrations.
The NAIC is currently developing new model laws or regulations, including
product design standards and reserve requirements.
The RBC standards establish capital requirements for insurance companies
based on the ratio of the company's total adjusted capital (defined as the total
of its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its RBC (such ratio is referred to herein as the "RBC ratio").
The standards are designed to help identify companies which are under
capitalized and require specific regulatory actions in the event an insurer's
RBC ratio falls below specified levels. Each of our life insurance subsidiaries
has more than enough statutory capital to meet the standards as of December 31,
2000. The aggregate RBC ratio for our insurance subsidiaries was greater than
240 percent at December 31, 2000.
The NAIC has adopted model long-term care policy language providing
nonforfeiture benefits and has proposed a rate stabilization standard for
long-term care policies. Various bills are proposed from time to time in the
U.S. Congress which would provide for the implementation of certain minimum
consumer protection standards for inclusion in all long- term care policies,
including guaranteed renewability, protection against inflation and limitations
on waiting periods for pre- existing conditions. Federal legislation permits
premiums paid for qualified long-term care insurance to be treated as tax-
deductible medical expenses and for benefits received on such policies to be
excluded from taxable income.
In addition, our insurance subsidiaries are required under guaranty fund
laws of most states in which we transact business, to pay assessments up to
prescribed limits to fund policyholder losses or liabilities of insolvent
insurance companies. Assessments can be partially recovered through a reduction
in future premium taxes in some states.
Most states mandate minimum benefit standards and loss ratios for
accident and health insurance policies. We are generally required to maintain,
with respect to our individual long-term care policies, minimum anticipated loss
ratios over the entire period of coverage of not less than 60 percent. With
respect to our Medicare supplement policies, we are generally required to attain
and maintain an actual loss ratio, after three years, of not less than 65
percent. We provide, to the insurance departments of all states in which we
conduct business, annual calculations that demonstrate compliance with required
minimum loss ratios for both long-term care and Medicare supplement insurance.
These calculations are prepared utilizing statutory lapse and interest rate
assumptions. In the event that we fail to maintain minimum mandated loss ratios,
our insurance subsidiaries could be required to provide retrospective refunds
and/or prospective rate reductions. We believe that our insurance subsidiaries
currently comply with all applicable mandated minimum loss ratios.
NAIC model regulations, adopted in substantially all states, created 10
standard Medicare supplement plans (Plans A through J). Plan A provides the
least extensive coverage, while Plan J provides the most extensive coverage.
Under NAIC regulations, Medicare insurers must offer Plan A, but may offer any
of the other plans at their option. Our insurance subsidiaries currently offer
nine of the model plans. We have declined to offer Plan J, due in part to its
high benefit levels and, consequently, high costs to the consumer.
Numerous proposals to reform the current health care system (including
Medicare) have been introduced in Congress and in various state legislatures.
Proposals have included, among other things, modifications to the existing
employer-based insurance system, a quasi-regulated system of "managed
competition" among health plans, and a single-payer, public program. Changes in
health care policy could significantly affect our business. For example, Federal
comprehensive major medical or long-term care programs, if proposed and
implemented, could partially or fully replace some of Conseco's current
products.
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A number of states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge for health care
coverages between new business and renewal business for similar demographic
groups. State legislation has also been adopted or is being considered that
would make health insurance available to all small groups by requiring coverage
of all employees and their dependents, by limiting the applicability of
pre-existing conditions exclusions, by requiring insurers to offer a basic plan
exempt from certain benefits as well as a standard plan, or by establishing a
mechanism to spread the risk of high risk employees to all small group insurers.
Congress and various state legislators have from time to time proposed changes
to the health care system that could affect the relationship between health
insurers and their customers, including external review.
We cannot predict with certainty the effect that any proposals, if
adopted, or legislative developments could have on our insurance businesses and
operations.
Finance
The Company's finance operations are subject to regulation by certain
federal and state regulatory authorities. A substantial portion of the Company's
consumer loans and assigned sales contracts are originated or purchased by
finance subsidiaries licensed under applicable state law. The licensed entities
are subject to examination by and reporting requirements of the state
administrative agencies issuing such licenses. The finance subsidiaries are
subject to state laws and regulations which in certain states: limit the amount,
duration and charges for such loans and contracts; require disclosure of certain
loan terms and regulate the content of documentation; place limitations on
collection practices; and govern creditor remedies. The licenses granted are
renewable and may be subject to revocation by the respective issuing authority
for violation of such state's laws and regulations. Some states have adopted or
are considering the adoption of consumer protection laws or regulations that
impose requirements or restrictions on lenders who make certain types of loans
secured by real estate.
In addition to the finance companies licensed under state law, both
Conseco Bank and Retail Bank, both of which are wholly owned subsidiaries of
Conseco, are under the supervision of, and subject to examination by, the
Federal Deposit Insurance Corporation. Conseco Bank is also supervised and
examined by the Utah Department of Financial Institutions. Retail Bank is
supervised and examined by the South Dakota Department of Banking. The ownership
of these entities does not subject the Company to regulation by the Federal
Reserve Board as a bank holding company. Conseco Bank has the authority to
engage generally in the banking business and may accept all types of deposits,
other than demand deposits. Retail Bank is limited by its charter to engage in
the credit card business and may issue only certificates of deposit in
denominations of $100,000 or greater. Conseco Bank and Retail Bank are subject
to regulations relating to capital adequacy, leverage, loans, loss reserves,
deposits, consumer protection, community reinvestment, payment of dividends and
transactions with affiliates.
A number of states have usury and other consumer protection laws which
may place limitations on the amount of interest charged on loans originated in
such state. Generally, state law has been preempted by federal law under the
Depositary Institutions Deregulation and Monetary Control Act of 1980 ("DIDA")
which deregulates the rate of interest, discount points and finance charges with
respect to first lien residential loans, including manufactured home loans and
real estate secured mortgage loans. As permitted under DIDA, a number of states
enacted legislation timely opting out of coverage of either or both of the
interest rate and/or finance charge provisions of the Act. States may no longer
opt out of the interest rate provisions of the Act, but could in the future opt
out of the finance charge provisions. To be eligible for federal preemption for
manufactured home loans, the Company's licensed finance companies must comply
with certain restrictions providing protection to consumers. In addition,
another provision of DIDA applicable to state-chartered insured depository
institutions permits both Conseco Bank and Retail Bank to export interest rates,
finance charges and certain fees from the states where they are located to all
other states, with the exception of Iowa which opted out of the Act during the
permitted time period. Interest rates, finance charges and fees in Utah and
South Dakota are, for the most part, deregulated.
The Company's operations are subject to Federal regulation under other
applicable federal laws and regulations, the more significant of which include:
the Truth in Lending Act ("TILA"); the Equal Credit Opportunity Act ("ECOA");
the Fair Credit Reporting Act ("FCRA"); the Real Estate Settlement and
Procedures Act ("RESPA"); the Home Mortgage Disclosure Act ("HMDA"); the Home
Owner Equity Protection Act ("HOEPA"); DIDA; and certain rules and regulations
of the Federal Trade Commission ("FTC Rules").
TILA and Regulation Z promulgated thereunder contain certain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of extensions of credit and
the ability to compare credit terms. TILA also provides consumers with a three
day right to cancel certain credit transactions, including certain of the loans
originated by the Company.
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ECOA requires certain disclosures to applicants for credit concerning
information that is used as a basis for denial of credit and prohibits
discrimination against applicants with respect to any aspect of a credit
transaction on the basis of sex, race, color, religion, national origin, age,
marital status, derivation of income from a public assistance program or the
good faith exercise of a right under TILA. ECOA also requires that adverse
action notices be given to applicants who are denied credit.
FCRA regulates the process of obtaining, using and reporting of credit
information on consumers. This Act also regulates the use of credit information
among affiliates.
RESPA regulates the disclosure of information to consumers on loans
involving a mortgage on real estate. The Act and related regulations also govern
payment for and disclosure of payments for settlement services in connection
with mortgage loans and prohibits the payment of referral fees for the referral
of a loan or related services.
HMDA requires reporting of certain information to the Department of
Housing and Urban Development, including the race and sex of applicants in
connection with mortgage loan applications. A lender is required to obtain and
report such information if the application is made in person, but is not
required to obtain such information if the application is taken over the
telephone.
HOEPA provides for additional disclosure and regulation of certain
consumer mortgage loans which are defined by the Act as "Covered Loans." A
Covered Loan is a mortgage loan (other than a mortgage loan to finance the
initial purchase of a dwelling) which (1) has total origination fees in excess
of the greater of eight percent of the loan amount, or $451, or (2) has an
annual percentage rate of more than ten percent higher than comparably maturing
United States treasury obligations. A number of the Company's home equity and
home improvement loans are Covered Loans under the Act.
The FTC Rules provide, among other things, that in connection with the
purchase of consumer sales finance contracts from dealers, the holder of the
contract is subject to all claims and defenses which the consumer could assert
against the dealer, but the consumer's recovery under such provisions cannot
exceed the amount paid under the sales contract.
In the judgment of the Company, existing federal and state law and
regulations have not had a material adverse effect on the finance operations of
the Company. There can, however, be no assurance that future law and regulatory
changes will not occur and will not place additional burdens on the Company's
finance operations.
The Company's commercial lending operations are not subject to material
regulation in most states, although certain states do require licensing. In
addition, certain provisions of ECOA apply to commercial loans to small
businesses.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by our
insurance subsidiaries generally provide the policyholder with an income tax
advantage, as compared to other savings investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until it is received by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits and life
insurance benefits, which accrue prior to the death of the policyholder, are
generally not taxable until paid. 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 methods used for some other investments which tend to accelerate
taxable income into earlier years. The tax advantage for annuities and life
insurance is provided in the Internal Revenue Code (the "Code"), and is
generally followed in all states and other United States taxing jurisdictions.
In addition, the interest paid on home equity and home improvement loans by
customers of Conseco Finance are generally tax deductible for individuals who
itemize their tax deductions.
From time to time, various tax law changes have been proposed that could
have an adverse effect on our business, including elimination of all or a
portion of the income tax advantage of certain insurance products and changes in
how life insurance companies are taxed; such changes could affect the
marketability of our products and increase the Company's current tax liability.
In addition, from time to time, various tax law changes have been proposed that
could increase the attractiveness of our products to certain consumers.
Our insurance company subsidiaries are taxed under the life insurance
company provisions of the Code. Provisions in the Code 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 provision
increases the tax for statutory accounting purposes,
14
which reduces statutory earnings and surplus and, accordingly, decreases the
amount of cash dividends that may be paid by the life insurance subsidiaries.
In certain securitization transactions, Conseco Finance utilizes a
special tax structure referred to as a Real Estate Mortgage Investment Conduit
("REMIC"). When this tax structure is used, the Company is required to account
for the transfer of the finance receivables into the securitization trust as a
sale (although for GAAP reporting purposes such transfers are accounted for as
collateralized borrowings). Additionally, since the Company retains the residual
interests of the REMIC, the REMIC tax rules require the Company to pay a minimum
amount of tax each year based on the taxable income of the retained residual
interest.
The Company has tax loss carryforwards ("NOLs") at December 31, 2000, of
approximately $1.1 billion. Such NOLs expire as follows: $41.4 million in the
next five years; $74.3 million in 2006 through 2011; $129.7 million in 2012;
$280.9 million in 2018; $165.3 million in 2019; and $431.9 million in 2020.
These NOLs are not eligible to offset the majority of the income of the
Company's life insurance subsidiaries, and certain of these NOLs may only offset
income from specific subsidiaries. Additionally, certain of these NOLs are
limited to an aggregate deductible amount in any one year. We, however, believe
that the Company will be able to fully utilize substantially all NOLs before
they expire.
ITEM 2. PROPERTIES.
Headquarters. Our headquarters is located on a 180-acre corporate campus
in Carmel, Indiana, immediately north of Indianapolis. The 12 buildings on the
campus (all but one of which are owned) contain approximately 956,000 square
feet of space and house Conseco's executive offices and certain administrative
operations of its subsidiaries.
Insurance operations. Our career agent operations are primarily
administered from a single facility of 300,000 square feet in downtown Chicago,
Illinois, leased under an agreement having a remaining life of eight years. We
also lease approximately 130,000 square feet of warehouse space in a second
Chicago facility; this lease has a remaining life of three years. Conseco owns
an office building in Kokomo, Indiana (93,000 square feet), and two office
buildings in Rockford, Illinois (total of 169,000 square feet), which serve as
administrative centers for portions of our insurance operations. Conseco owns
one office building in Philadelphia, Pennsylvania (127,000 square feet), which
serves as the administrative center for our direct response life insurance
operations; approximately 60 percent of this space is occupied by the Company,
with the remainder leased to tenants. Conseco also leases 244 sales offices in
various states totaling approximately 508,100 square feet; these leases are
short-term in length, with remaining lease terms ranging from one to five years.
Finance operations. Conseco Finance Corp. headquarters are based in St.
Paul, Minnesota occupying approximately 120,000 square feet in a building owned
by the Company. In addition, the Mortgage Services division, including part of
its private label credit card, is housed in 185,000 square feet in a leased
facility in downtown St. Paul. The Company also owns a 131,000 square foot
building in Rapid City, South Dakota, where it houses part of their Manufactured
Housing Services units and leases an additional 75,000 square feet to
accommodate part of the servicing units of the private label credit cards and
retail bank operations. The Company also leases buildings in Tempe, Arizona and
Duluth, Georgia. Tempe has approximately 200,000 square feet where the
Manufactured Housing, Mortgage Services and Retail Credit Card divisions operate
their collections and service centers. Duluth, Georgia, has two buildings of
approximately 48,000 square feet each where the Manufactured Housing division
operates its eastern service center. The Manufactured Housing Division has 33
regional offices that are leased from three to five years. The Mortgage Services
Division leases 127 branch offices around the country, also on short term (3 - 5
year) leases. The Company leases offices in Alpharetta, Georgia and Clayton,
Missouri, for its Commercial Lending Division and a small office in Salt Lake
City for its Conseco Bank operations.
ITEM 3. LEGAL PROCEEDINGS.
Conseco Finance was served with various related lawsuits filed in the
United States District Court for the District of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities who
purchased common stock or options to purchase common stock of Conseco Finance
during alleged class periods that generally run from February 1995 to January
1998. One action (Florida State Board of Admin. v. Green Tree Financial Corp.,
Case No. 98-1162) did not include class action claims. In addition to Conseco
Finance, certain current and former officers and directors of Conseco Finance
are named as defendants in one or more of the lawsuits. Conseco Finance and
other defendants obtained an order consolidating the lawsuits seeking class
action status into two actions, one of which pertains to a purported class of
common stockholders (In re Green Tree Financial Corp. Stock Litig., Case No.
97-2666) and the other which pertains to a purported class action of stock
option traders (In re Green Tree Financial Corp. Options Litig., Case No.
97-2679). Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that Conseco Finance and the other defendants violated federal securities laws
by,
15
among other things, making false and misleading statements about the current
state and future prospects of Conseco Finance (particularly with respect to
prepayment assumptions and performance of certain loan portfolios of Conseco
Finance) which allegedly rendered Conseco Finance's financial statements false
and misleading. On August 24, 1999, the United States District Court for the
District of Minnesota issued an order to dismiss with prejudice all claims
alleged in the lawsuits. The plaintiffs subsequently appealed the decision to
the U.S. Court of Appeals for the 8th Circuit, and the appeal is currently
pending. The Company believes that the lawsuits are without merit and intends to
continue to defend them vigorously. The ultimate outcome of these lawsuits
cannot be predicted with certainty.
A total of forty-five suits were filed against the Company in the United
States District Court for the Southern District of Indiana. Nineteen of these
cases were putative class actions on behalf of persons or entities that
purchased the Company's common stock during alleged class periods that generally
run from April 1999 through April 2000. Two cases were putative class actions on
behalf of persons or entities that purchased the Company's bonds during the same
alleged class periods. Three cases were putative class actions on behalf of
persons or entities that purchased or sold option contracts, not issued by the
Company, on the Company's common stock during the same alleged class periods.
One case was a putative class action on behalf of persons or entities that
purchased the Company's "FELINE PRIDE" convertible preferred stock instruments
during the same alleged class periods. With four exceptions, in each of these
twenty-five cases two former officers/directors of the Company are named as
defendants. In each case, the plaintiffs assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the individual defendants violated the federal securities
laws by, among other things, making false and misleading statements about the
current state and future prospects of Conseco Finance (particularly with respect
to performance of certain loan portfolios of Conseco Finance) which allegedly
rendered the Company's financial statements false and misleading. The Company
believes that these lawsuits are without merit and intends to defend them
vigorously. The ultimate outcome of these lawsuits cannot be predicted with
certainty.
Eleven of the cases in the United States District Court were filed as
purported class actions on behalf of persons or entities that purchased
preferred securities issued by various Conseco Financing Trusts, including
Conseco Financing Trust V, Conseco Financing Trust VI, and Conseco Financing
Trust VII. Each of these complaints named as defendants the Company, the
relevant trust (with two exceptions), two former officers/directors of the
Company, and underwriters for the particular issuance (with one exception). One
complaint also named an officer and all of the Company's directors at the time
of issuance of the preferred stock by Conseco Financing Trust VII. In each case,
plaintiffs assert claims under Section 11 and Section 15 of the Securities Act
of 1933, and the eight complaints also asserted claims under Section 12(a)(2) of
that Act. Two complaints also asserted claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and one complaint also asserted a claim
under Section 10(b) of that Act. In each case, plaintiffs alleged that the
defendants violated the federal securities laws by, among other things, making
false and misleading statements, in Prospectuses and/or Registration Statements
related to the issuance of preferred securities by the Trust involved, regarding
the current state and future prospects of Conseco Finance (particularly with
respect to performance of certain loan portfolios of Conseco Finance) which
allegedly rendered the disclosure documents false and misleading.
All of the securities cases have now been consolidated into one case in
the United States District Court for the Southern District of Indiana,
captioned: "In Re Conseco, Inc. Securities Litigation", cause number
IP00-585-C-Y/S. An amended complaint was filed on January 12, 2001. The Company
intends to defend this lawsuit vigorously. The ultimate outcome cannot be
predicted with certainty.
Nine shareholder derivative suits were filed in United States District
Court. The complaints named as defendants the current directors, certain former
directors, certain non-director officers of the Company (in one case), and,
alleging aiding and abetting liability, certain banks which allegedly made loans
in relation to the Company's "Stock Purchase Plan" (in these cases). The Company
is also named as a nominal defendant in each complaint. Plaintiffs allege that
the defendants breached their fiduciary duties by, among other things,
intentionally disseminating false and misleading statements concerning the
acquisition, performance and proposed sale of Conseco Finance, and engaged in
corporate waste by causing the Company to guarantee loans that certain officers,
directors and key employees of the Company used to purchase stock under the
Stock Purchase Plan. These cases have now been consolidated into one case in the
United States District Court for the Southern District of Indiana, captioned:
"In Re Conseco, Inc. Derivative Litigation", cause number IP00655-C-Y/S. An
amended complaint is expected to be filed in April 2001. Three similar cases
have been filed in the Hamilton County Superior Court in Indiana. Schweitzer v.
Hilbert, et al., Cause No. 29001-0004CP251; Evans v. Hilbert, et al., Cause No.
29001-0005CP308 (both Schweitzer and Evans name as defendants certain
non-director officers); Gintel v. Hilbert, et al., Cause No. 29003-0006CP393
(naming as defendants, and alleging aiding and abetting liability as to, banks
which allegedly made loans in relation to the Stock Purchase Plan). The Company
believes that these lawsuits are without merit and intends to defend them
vigorously. The ultimate outcome of these lawsuits cannot be predicted with
certainty.
16
Conseco, Inc. and its subsidiaries, Conseco Services, LLC, Washington
National Insurance Company and United Presidential Life Insurance Company are
currently named defendants in a lawsuit filed in the Circuit Court of Claiborne
County, Mississippi, Cause No. CV-99-0106, and captioned "Carla Beaugez, Lois
Dearing, Lee Eaton and all other persons identified in the lawsuit v. Conseco,
Inc., Conseco Services, Inc., Washington National Company, United Presidential
Life Insurance Company and Larry Ratcliff." The claims of the eighty-seven
plaintiffs arise out of allegedly wrongful increases of the cost of insurance
and decrease in the credited interest rates on universal life policies issued to
the plaintiffs by United Presidential Life. The plaintiffs asserted claims
including negligent and intentional misrepresentation, fraudulent concealment,
fraudulent inducement, common law fraud, and deceptive sales practices. The
Company believes this lawsuit is without merit and is defending it vigorously.
The ultimate outcome of this lawsuit cannot be predicted with certainty.
Conseco Finance is a defendant in two arbitration proceedings in South
Carolina (Lackey v. Green Tree Financial Corporation, n/k/a Conseco Finance
Corp. and Bazzle v. Green Tree Financial Corporation, n/k/a Conseco Finance
Corp.) where the arbitrator, over Conseco Finance's objection, allowed the
plaintiffs to pursue purported class action claims in arbitration. The two
purported arbitration classes consist of South Carolina residents who obtained
real estate secured credit from Conseco Finance's Manufactured Housing Division
(Lackey) and Home Improvement Division (Bazzle) in the early and mid 1990s, and
did not receive a South Carolina specific disclosure form relating to selection
of attorneys in connection with the credit transactions. The arbitrator, in
separate awards issued on July 24, 2000, awarded a total of $26.8 million in
penalties and attorneys' fees. The awards were confirmed as judgements in both
Lackey and Bazzle. These matters are currently on appeal at the South Carolina
Supreme Court. Conseco Finance intends to vigorously challenge the awards and
believes that the arbitrator erred by, among other things, conducting class
action arbitrations without the authority to do so and misapplying South
Carolina law when awarding the penalties. The ultimate outcome of these
proceedings cannot be predicted with certainty.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in other lawsuits related to their operations. Although the ultimate
outcome of certain of such matters cannot be predicted, such lawsuits currently
pending against the Company or its subsidiaries are not expected, individually
or in the aggregate, to have a material adverse effect on the Company's
consolidated financial condition, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
17
Optional Item. Executive Officers of the Registrant.
Officer Positions with Conseco, Principal
Name and Age (a) Since Occupation and Business Experience (b)
------------ ----- ----------------------------------
Gary C. Wendt, 59............... 2000 Since June 2000, Chairman and Chief Executive Officer of Conseco
from 1999 to 2000, associated with Global Opportunity Advisors
(a private equity investment fund); from 1986 to 1998, Chairman
and Chief Executive Officer of GE Capital Services; from 1984 to
1986, President and Chief Operations Officer of GE Credit Corp.
Charles B. Chokel, 47........... 2001 Since March 2001, Executive Vice President and Chief Financial
Officer of Conseco; from 1999 to 2000, Co-Chief Executive Officer
OF Progressive Corporation; from 1991 to 1998, Chief Financial
Officer of Progressive Corporation.
David K. Herzog, 45............. 2000 Since September 2000, Executive Vice President, General Counsel
and Secretary of Conseco; from 1980 to 2000 attorney with Baker
& Daniels (law firm).
Thomas J. Kilian, 50............ 1998 Since February 2000, President of Conseco; from 1998 to February
2000, Executive Vice President and Chief Operations Officer of
Conseco; since 1996, President of Conseco Services, LLC (responsible
for insurance operations, data processing, human resources and
administrative services for various Conseco subsidiaries); from 1989 to
1996, Senior Vice President of data processing for various Conseco
subsidiaries.
James S. Adams, 41.............. 1997 Since 1997, Senior Vice President, Chief Accounting Officer and
Treasurer of Conseco; from 1989 to present, Senior Vice President and
Treasurer of various Conseco subsidiaries.
Edward M. Berube, 53............ 1999 Since 2000, President and Chief Executive Officer of Bankers Life and
Casualty Company, a subsidiary of Conseco; from 1999 to 2000, Senior
Vice President and President-Insurance Group of Conseco; from 1997 to
1999, President and Chief Operating Officer of American Life Insurance
Company; from 1992 to 1997, President of CIGNA Financial Advisors
and Life Brokerage.
Maxwell E. Bublitz, 45.......... 1998 Since 1998, Senior Vice President, Investments of Conseco; from 1994
to present, President and Chief Executive Officer of Conseco Capital
Management, Inc., a subsidiary of Conseco.
Bruce A. Crittenden, 49......... 1999 Since 1999, Senior Vice President and President-Finance Group of
Conseco; from 2000 to present, President; from 1996 to 2000, Executive
Vice President, from 1997 to 2000, President, Retail/Mortgage Services
and Home Improvement Divisions, from 1995 to 1996, Senior Vice
President of Conseco Finance Corp., a subsidiary of Conseco.
David Gubbay, 48................ 2001 Since March 2001, Executive Vice President-Strategic Business
Development of Conseco; from 1999 to 2000, Executive Vice President-
Operations for Norwegian Cruise Line Ltd.; from 1997 to 1998, Senior
Vice President-Corporate Development/Mergers and Acquisitions for
Fortis, Inc.; from 1989 to 1996, Chairman and Chief Executive Officer of
Whitehall Group.
18
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(a) The executive officers serve as such at the discretion of the Board
of Directors and are elected annually.
(b) Business experience is given for at least the last five years.
19
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.
Period Market price
- ------ ------------------------ Dividend
High Low paid
---- --- ----
1999:
First Quarter......................................... $37.81 $26.81 $.1400
Second Quarter........................................ 35.31 28.00 .1400
Third Quarter......................................... 31.94 19.00 .1400
Fourth Quarter........................................ 24.75 16.56 .1500
2000:
First Quarter......................................... $18.50 $10.31 $.1500
Second Quarter........................................ 10.81 4.50 .0500
Third Quarter......................................... 11.69 7.00 .0500
Fourth Quarter........................................ 13.38 4.94 .0000
As of March 13, 2001, there were approximately 170,200 holders of the
outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
As part of our plan to strengthen our capital structure, the Board of
Directors suspended the cash dividend on our common stock subsequent to the
dividend paid in July of 2000. The amended bank credit facilities prohibit the
payment of cash dividends on our common stock until the Company has received
investment grade ratings on its outstanding public debt and the bank credit
facilities maturing in December 2001 are paid in full.
Our general policy is to retain most of our earnings. Retained earnings
have been used: (i) to finance the growth and development of the Company's
business through acquisitions or otherwise; (ii) to pay preferred stock
dividends; (iii) to pay distributions on the Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts; (iv) to reduce corporate
debt outstanding; (v) to repurchase common stock on those occasions when we have
determined that our shares were undervalued in the market and that the use of
funds for stock repurchases would not interfere with other cash needs; and (vi)
to pay dividends on common stock prior to their suspension in 2000.
We have paid all cumulative dividends on our preferred stock and
distributions on our Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts when due. We are prohibited from paying common
stock dividends if such payments are not current. Certain Conseco financing
agreements require the Company to maintain financial ratios which could also
limit our ability to pay dividends. Such financing agreements also restrict our
ability to repurchase common stock.
Our ability to pay dividends depends primarily on the receipt of cash
dividends and other cash payments from our finance and life insurance company
subsidiaries. Our life insurance companies are organized under state laws and
are 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 out of the subsidiary's earned surplus, without
prior approval, of dividends for any 12-month period which in the aggregate do
not exceed the greater of (or in a few states, the lesser of): (i) the
subsidiary's prior year net gain from operations; or (ii) 10 percent of surplus
attributable to policyholders at the prior year-end, both computed on the
statutory basis of accounting prescribed for insurance companies.
20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
Years ended December 31,
---------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Amounts in millions, except per share data)
STATEMENT OF OPERATIONS DATA
Insurance policy income..................................... $ 4,220.3 $4,040.5 $3,948.8 $3,410.8 $1,654.2
Gain on sale of finance receivables (b)..................... 7.5 550.6 745.0 779.0 400.6
Net investment income....................................... 3,920.4 3,411.4 2,506.5 2,171.5 1,505.3
Net investment gains (losses) from the sale of investments.. (358.3) (156.2) 208.2 266.5 60.8
Total revenues.............................................. 8,296.4 8,335.7 7,760.2 6,872.2 3,789.8
Interest expense:
Corporate................................................. 438.4 249.1 182.2 109.4 108.1
Finance and investment borrowings......................... 1,014.7 312.6 258.3 202.9 92.1
Total benefits and expenses................................. 9,658.2 7,184.8 6,714.5 5,386.5 2,974.0
Income (loss) before income taxes, minority interest,
extraordinary charge and cumulative effect of
accounting change......................................... (1,361.8) 1,150.9 1,045.7 1,485.7 815.8
Extraordinary charge on extinguishment of debt, net of tax.. 5.0 - 42.6 6.9 26.5
Cumulative effect of accounting change, net of tax.......... 55.3 - - - -
Net income (loss) (c)....................................... (1,191.2) 595.0 467.1 866.4 452.2
Preferred stock dividends .................................. 11.0 1.5 7.8 21.9 27.4
Net income (loss) applicable to common stock................ (1,202.2) 593.5 459.3 844.5 424.8
PER SHARE DATA (d)
Net income (loss), basic.................................... $(3.69) $1.83 $1.47 $2.72 $1.85
Net income (loss), diluted.................................. (3.69) 1.79 1.40 2.52 1.69
Dividends declared per common share......................... .100 .580 .530 .313 .083
Book value per common share outstanding..................... 11.95 15.50 16.37 16.45 13.47
Shares outstanding at year-end.............................. 325.3 327.7 315.8 310.0 293.4
Weighted average shares outstanding for diluted earnings.... 326.0 332.9 332.7 338.7 267.7
BALANCE SHEET DATA - PERIOD END
Total assets................................................ $58,589.2 $52,185.9 $43,599.9 $40,679.8 $28,724.0
Notes payable and commercial paper:
Corporate................................................. 5,055.0 4,624.2 3,809.9 2,354.9 1,094.9
Finance................................................... 2,810.9 2,540.1 1,511.6 1,863.0 762.5
Related to securitized finance receivables structured
as collateralized borrowings........................... 12,100.6 4,641.8 - - -
Total liabilities........................................... 51,810.9 43,990.6 36,229.4 34,082.0 23,810.2
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.............. 2,403.9 2,639.1 2,096.9 1,383.9 600.0
Other equity interests in subsidiaries.................... - - - - 97.0
Shareholders' equity ....................................... 4,374.4 5,556.2 5,273.6 5,213.9 4,216.8
OTHER FINANCIAL DATA (d) (e)
Premium and asset accumulation product collections (f)...... $ 7,158.6 $6,986.0 $6,051.3 $5,075.6 $3,280.2
Operating earnings (g)...................................... 135.2 749.2 841.1 991.8 467.5
Managed finance receivables................................. 46,585.9 45,791.4 37,199.8 27,957.1 20,072.7
Total managed assets (at fair value) (h).................... 95,720.6 98,561.8 87,247.4 70,259.8 59,084.8
Shareholders' equity, excluding accumulated other
comprehensive income (loss)............................... 5,025.4 6,327.8 5,302.0 5,013.3 4,180.2
Book value per common share outstanding, excluding
accumulated other comprehensive income (loss)............. 13.95 17.85 16.46 15.80 13.34
Delinquencies greater than 60 days as a percentage of
managed finance receivables............................... 1.76% 1.42% 1.19% 1.08% 1.08%
Net credit losses as a percentage of average managed
finance receivables....................................... 1.79% 1.31% 1.03% 1.05% .74%
21
- --------------------
(a) Comparison of selected supplemental consolidated financial data in the
table above is significantly affected by the following business
combinations accounted for as purchases: Washington National Corporation
(effective December 1, 1997); Colonial Penn Life Insurance Company and
Providential Life Insurance Company (September 30, 1997); Pioneer
Financial Services, Inc. (April 1, 1997); Capitol American Financial
Corporation (January 1, 1997); Transport Holdings Inc. (December 31,
1996); American Travellers Corporation (December 31, 1996); FINOVA
Acquisition I, Inc. (December 1, 1996); and Life Partners Group, Inc.
(July 1, 1996). All financial data have been restated to give retroactive
effect to the merger with Conseco Finance accounted for as a pooling of
interests.
(b) Subsequent to September 8, 1999, we no longer structure the
securitizations of the loans we originate in a manner that results in
gain-on-sale revenues. The gain recognized in 2000 was realized on the
sale of whole loans (with no interest retained by the Company). For more
information on this change, see "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations - Finance
Segment - General."
(c) Net income (loss) includes the following:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in millions)
Net investment gains (losses), net of tax and
other items....................................... $(198.1) $(111.9) $ (32.8) $ 44.1 $ 11.2
Impairment charge, net of tax........................ (324.9) (349.2) (355.8) (117.8) -
Special charges, net of tax.......................... (518.3) - (148.0) - -
Provision for losses related to loan guarantees,
net of tax........................................ (150.0) (11.9) - - -
Venture capital income (loss), net of amortization,
expenses and taxes................................ (99.4) 170.0 - - -
Amounts related to major medical lines of business
we intend to sell and other non-recurring items,
net of tax........................................ 13.6 147.3 205.2 (44.8) 17.4
Cumulative effect of accounting change, net of tax... (55.3) - - - -
Extraordinary charge on extinguishment of debt,
net of tax........................................ (5.0) - (42.6) (6.9) (26.5)
Refer to "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" and the notes to the consolidated
financial statements for additional discussion of the above items.
(d) All share and per-share amounts have been restated to reflect the
two-for-one stock splits paid on February 11, 1997 and April 1, 1996.
(e) Amounts under this heading are included to assist the reader in analyzing
the Company's financial position and results of operations. Such amounts
are not intended to, and do not, represent insurance policy income, net
income, shareholders' equity or book value per share prepared in
accordance with generally accepted accounting principles ("GAAP").
(f) Includes premiums received from universal life products and products
without mortality or morbidity risk. Such premiums are not reported as
revenues under GAAP and were $2,731.1 million in 2000; $3,023.3 million
in 1999; $2,585.7 million in 1998; $2,099.4 million in 1997; and $1,881.3
million in 1996. Also includes deposits in mutual funds totaling $794.2
million in 2000; $479.3 million in 1999; $87.1 million in 1998; and $19.9
million in 1997.
(g) Represents net income excluding the items described in note (c) above.
(h) Includes: (i) all of the Company's assets; (ii) the total finance
receivables managed by Conseco Finance applicable to the holders of
asset-backed securities sold by Conseco Finance in securitizations
structured in a manner that resulted in gain-on-sale revenue (adjusted
for the interests retained by the Company); and (iii) the total market
value of the investment portfolios managed by the Company for others of
$7.5 billion, $11.4 billion, $11.2 billion, $5.1 billion and $12.6
billion at December 31, 2000, 1999, 1998, 1997 and 1996, respectively.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
In this section, we review the consolidated financial condition of
Conseco at December 31, 2000 and 1999, the consolidated results of operations
for the three years ended December 31, 2000, and where appropriate, factors that
may affect future financial performance. Please read this discussion in
conjunction with the accompanying consolidated financial statements, notes and
selected consolidated financial data.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by Conseco with the Securities and
Exchange Commission, press releases, presentations by Conseco or its management
or oral statements) relative to markets for Conseco's products and trends in
Conseco's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
"should," "could," "goal," "target," "on track," "comfortable with,"
"optimistic" and other similar expressions, constitute forward-looking
statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are subject to known and unknown risks, uncertainties
and other factors which may cause actual results to be materially different from
those contemplated by the forward-looking statements. Such factors include,
among other things: (i) general economic conditions and other factors, including
prevailing interest rate levels, stock and credit market performance and health
care inflation, which may affect (among other things) Conseco's ability to sell
its products, its ability to make loans and access capital resources and the
costs associated therewith, the market value of Conseco's investments, the lapse
rate and profitability of policies, and the level of defaults and prepayments of
loans made by Conseco; (ii) Conseco's ability to achieve anticipated synergies
and levels of operational efficiencies; (iii) customer response to new products,
distribution channels and marketing initiatives; (iv) mortality, morbidity,
usage of health care services and other factors which may affect the
profitability of Conseco's insurance products; (v) performance of our
investments; (vi) changes in the Federal income tax laws and regulations which
may affect the relative tax advantages of some of Conseco's products; (vii)
increasing competition in the sale of insurance and annuities and in the finance
business; (viii) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales and
underwriting of insurance products, regulation of the sale, underwriting and
pricing of products, and health care regulation affecting health insurance
products; (ix) the outcome of Conseco's efforts to sell assets and reduce,
refinance or modify indebtedness and the availability and cost of capital in
connection with this process; (x) actions by rating agencies and the effects of
past or future actions by these agencies on Conseco's business; and (xi) the
risk factors or uncertainties listed from time to time in Conseco's filings with
the Securities and Exchange Commission.
Consolidated results and analysis
The net loss applicable to common stock of $1,202.2 million in 2000, or
$3.69 per diluted share, included: (i) net investment losses (net of related
costs, amortization and taxes) of $198.1 million, or 61 cents per share; (ii) an
impairment charge of $324.9 million (net of an income tax benefit of $190.8
million), or $1.00 per share, related to the Company's interest-only securities
and servicing rights; (iii) special charges of $518.3 million (net of an income
tax benefit of $181.0 million), or $1.59 per share, as summarized in note 9 to
the consolidated financial statements entitled "Special Charges"; (iv) the
provision for loss of $150.0 million (net of an income tax benefit of $80.5
million), or 46 cents per share, related to the Company's guarantee of bank
loans made to directors, officers and key employees to purchase shares of
Conseco common stock; (v) a loss of $99.4 million, or 31 cents per share,
related to our venture capital investment in TeleCorp; (vi) net income of $13.6
million, or 4 cents per share, related to the major medical lines of business
which we intend to sell and other non- recurring items; (vii) the cumulative
effect of an accounting change of $55.3 million (net of an income tax benefit of
$29.8 million), or 17 cents per share, related to new requirements for the
valuation of interest-only securities; and (viii) an extraordinary charge of
$5.0 million (net of an income tax benefit of $2.7 million), or 1 cent per
share, related to the early retirement of debt.
Net income applicable to common stock of $593.5 million in 1999, or $1.79
per diluted share, included: (i) net investment losses (net of related costs,
amortization and taxes) of $111.9 million, or 34 cents per share; (ii) an
impairment charge of $349.2 million (net of an income tax benefit of $205.1
million), or $1.05 per share, to reduce the value of interest- only securities
and servicing rights; (iii) the provision for loss of $11.9 million (net of an
income tax benefit of $7.0 million), or 3 cents per share, related to the
aforementioned guarantee of bank loans; (iv) a gain of $170.0 million, or 51
cents per share, related to our venture capital investment in TeleCorp; and (v)
the net income of $147.3 million, or 44 cents per share, related to the major
medical lines of business we intend to sell and other non-recurring items. The
aforementioned special and impairment charges are explained in more detail in
the notes to the accompanying consolidated financial statements.
23
Net income applicable to common stock of $459.3 million in 1998, or $1.40
per diluted share, included: (i) net investment losses (net of related costs,
amortization and taxes) of $32.8 million, or 10 cents per share; (ii) an
impairment charge (net of an income tax benefit of $193.6 million) of $355.8
million, or $1.08 per share, to reduce the value of interest- only securities
and servicing rights; (iii) special charges (net of taxes) of $148.0 million, or
44 cents per share, related primarily to costs incurred in conjunction with the
merger with Conseco Finance (the "Merger") accounted for as a pooling of
interests; (iv) income of $205.2 million, or 62 cents per share, related to the
major medical lines of business we intend to sell and other non-recurring items;
and (v) an extraordinary charge (net of taxes) of $42.6 million, or 13 cents per
share, related to the early retirement of debt.
Total revenues included net investment losses of $358.3 million and
$156.2 million in 2000 and 1999, respectively, and net investment gains of
$208.2 million in 1998. Total revenues, excluding net investment gains (losses),
were up 1.9 percent in 2000 over 1999, and up 12 percent in 1999 over 1998.
We evaluate the performance and determine future earnings goals based on
operating earnings which are defined as income before: (i) net investment gains
(losses)(less that portion of amortization of cost of policies purchased and
cost of policies produced and income taxes relating to such gains (losses));
(ii) the venture capital income (loss) related to our investment in TeleCorp;
(iii) special items not related to the continuing operations of our businesses
(including impairment charges to reduce the value of interest-only securities
and servicing rights, special charges and the provision for losses related to
loan guarantees); and (iv) the net income (loss) related to the major medical
lines of business we intend to sell. The criteria used by management to
identify the items excluded from operating earnings include whether the item:
(i) relates to other than the continuing operations of our businesses; (ii) is
infrequent; (iii) is material to net income (loss); (iv) results from
restructuring activities; (v) results from a change in the regulatory
environment; and/or (vi) relates to the sale of an investment or the change in
estimated market value of our venture capital investments. The non-operating
items may vary from period to period and since these items are determined based
on management's discretion, inconsistencies in the application of the criteria
may exist. Operating earnings are determined by adjusting GAAP net income for
the above mentioned items. While these items may be significant components in
understanding and assessing our consolidated financial performance, we believe
that the presentation of operating earnings enhances the understanding of our
results of operations by highlighting net income attributable to the normal,
recurring operations of the business and by excluding events that materially
distort trends in net income. However, operating earnings are not a substitute
for net income determined in accordance with GAAP.
Results of operations by segment for the three years ended December 31,
2000:
The following tables and narratives summarize our operating results by
business segment.
2000 1999 1998
---- ---- ----
(Dollars in millions)
Operating earnings from continuing operations before goodwill
amortization and taxes:
Insurance and fee-based segment operating earnings.............. $ 818.1 $1,187.6 $1,310.2
Finance segment operating earnings.............................. 156.8 588.3 584.0
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Subtotal........................................................ 974.9 1,775.9 1,894.2
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Holding company activities:
Corporate expenses................................................ (67.5) (64.4) (123.8)
Interest and dividends, net of corporate investment income........ (651.8) (451.6) (329.1)
Allocation of interest and dividends to finance segment........... 126.9 63.1 16.8
--------- -------- --------
Operating earnings from continuing operations before taxes and
goodwill amortization......................................... 382.5 1,323.0 1,458.1
Taxes .............................................................. (141.6) (476.9) (527.7)
--------- -------- --------
Operating earnings from continuing operations before
goodwill amortization....................................... 240.9 846.1 930.4
Goodwill amortization................................................ (105.7) (96.9) (97.1)
--------- -------- --------
Operating earnings from continuing operations
applicable to common stock.................................. 135.2 749.2 833.3
Non-operating items, net of tax:
Net realized losses............................................. (198.1) (111.9) (32.8)
Venture capital income (loss)................................... (99.4) 170.0 -
Impairment charge............................................... (324.9) (349.2) (355.8)
Provision for losses related to loan guarantees...........