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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, 2001 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
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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 22, 2002): $1,269,203,288
Shares of common stock outstanding as of March 22, 2002: 346,002,814
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement for the 2002 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. We are one of the largest life and health insurance companies in
America, with over $5.5 billion of annual premium and asset accumulation product
collections during 2001 (excluding discontinued lines of business) and more than
$24 billion of insurance related investments at December 31, 2001. Our finance
subsidiaries originate, securitize and service manufactured housing, home equity
and retail credit extension. Conseco Finance Corp. ("Conseco Finance"), our
subsidiary, is one of America's largest consumer finance companies, with leading
market positions in manufactured housing lending, retail home equity mortgages,
home improvement loans and private label credit cards. At December 31, 2001, we
had managed finance receivables of $43.0 billion. We are currently in the
process of exiting the major medical insurance business as well as reducing the
size of our floorplan lending business. 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 the last two years, Conseco has taken a number of actions
designed to reduce parent company debt and increase the efficiency of our
business operations. The actions with respect to Conseco Finance include: (i)
the sale, closing or runoff of several business units (including asset-based
lending, vendor leasing, bankcards, transportation and park construction and
floorplan lending); (ii) monetization of certain on-balance sheet financial
assets through sales or as collateral for additional borrowings; and (iii) cost
savings and restructuring of ongoing businesses such as streamlining of credit
origination operations in the manufactured housing and home equity divisions. In
early 2002, Conseco Finance announced its decision to reduce the size of its
floorplan lending business. The actions with respect to our life insurance
segment include: (i) the planned sale, reinsurance or other transactions with
respect to our variable insurance business; (ii) planned reinsurance
transactions of various insurance blocks; and (iii) the division of our
insurance segment into two operating groups: the first, based in Carmel,
Indiana, includes our professional independent producer distribution channel and
the other, based in Chicago, Illinois, includes our career agents and direct
marketing distribution channels. With respect to all of our business segments,
we have initiated actions to improve productivity and quality through our
"Process Excellence" program. Through a combination of reduced expenses, revenue
enhancement projects and better deployment of capital, the Process Excellence
improvements are intended to help us achieve our financial goals. Other planned
changes include moving a significant number of jobs to India, where a
highly-educated, low-cost, English-speaking labor force is available. We have
also completed the sale of certain non-strategic assets, such as our interest in
the riverboat casino in Lawrenceburg, Indiana and our subprime auto loan
portfolio.
Our recent efforts have been primarily focused on generating cash to
meet our 2002 debt service commitments. We believe that our existing available
cash and the cash flow to be generated from operations and other transactions
will be sufficient to allow us to meet our debt obligations through 2002. We
have taken a number of actions over the last two years to reduce parent company
debt and increase the efficiency of our business operations. However, our
results for future periods are subject to numerous uncertainties. Our current
debt service obligations (including scheduled principal payments) may exceed the
cash flows available to the parent. We may not be able to improve or sustain
positive cash flows from operations or to continue to generate cash from other
transactions such as asset sales, reinsurance transactions or financing
transactions, which could significantly affect our liquidity. Failure to
generate sufficient cash flows from operations, asset sales or financing
transactions could have a material adverse effect on our liquidity.
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, 2001, or for the year
then ended (as the context implies), unless otherwise described.
MARKETING AND DISTRIBUTION
Insurance
Our insurance products are sold through three primary distribution
channels - professional independent producers (many of whom sell one or more of
our product lines exclusively), career agents 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
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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 5 percent of our 2001 collected premiums: California (9.0
percent), Florida (8.3 percent), Illinois (7.8 percent), Texas (7.3 percent) and
Michigan (5.1 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 is as follows:
Professional Independent Producers. This distribution channel consists
of a general agency and insurance brokerage distribution system comprised of
independent licensed agents doing business in all fifty states, the District of
Columbia, and certain protectorates of the United States. In 2001, this channel
accounted for $3,881.6 million, or 67 percent, of our total collected premiums.
If a significant number of agents changed to other providers, it would have a
material adverse effect on our business.
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 2001,
these four organizations accounted for $246.7 million, or 4.3 percent, of our
total collected premiums.
Career Agents. This agency force of approximately 4,700 agents working
from 165 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 2001,
this distribution channel accounted for $1,709.6 million, or 30 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.
Direct Marketing. This distribution channel is engaged primarily in
the sale of "graded benefit life" insurance policies. In 2001, this channel
accounted for $187.2 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 we
now use to market these products.
Finance
Our finance group, with nationwide operations and managed finance
receivables of $43.0 billion at December 31, 2001, 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 credit. Originations to customers in the following states accounted for
at least 5 percent of our 2001 originations: Texas (8.5 percent), California
(8.2 percent), Florida (6.4 percent) and Michigan (5.2 percent). Unless
otherwise noted, references to loans we have made may include the purchase by us
of credit contracts between dealers and buyers.
During 2001, 43 percent of our finance products came indirectly from
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 is as 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 2001, these
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marketing channels accounted for the following percentages of total loan
originations: 93 percent of manufactured housing, 72 percent of home improvement
and 6 percent of home equity.
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 subsidiaries of the Company. We also utilize direct mail to originate home
improvement loans and home equity loans. During 2001, these marketing channels
accounted for the following percentages of total loan originations: 7 percent of
manufactured housing, 28 percent of home improvement, 94 percent of home equity
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 2001, we collected
Medicare supplement premiums of $975.1 million, long-term care premiums of
$888.3 million, specified-disease premiums of $374.8 million and other
supplemental health premiums of $109.3 million. Medicare supplement, long-term
care, specified disease and other supplemental health premiums represented 17
percent, 15 percent, 7 percent and 2 percent, respectively, of our total
premiums collected in 2001.
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 27 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 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 jurisdictions in
which we sell such products. We depend on regulatory approval to increase our
premiums on these products. If we are unable to raise premiums, it could have a
material adverse effect on our business.
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.
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Approximately 74 percent of our specified-disease policies inforce
(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 inforce 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.
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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 2001,
we collected annuity premiums of $1,744.2 million, or 30 percent of our total
premiums collected. Sales of annuities are affected by the financial strength
ratings assigned to our insurance subsidiaries by independent rating agencies.
See "Competition" below.
The following describes the major annuity products:
Equity-indexed annuity products. These products accounted for $381.6
million, or 7 percent, of our total premiums collected in 2001. 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 80 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 $954.0 million, or 17 percent, of our
total collected premiums in 2001. 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 4.0 percent, and
the rate on all policies inforce ranges from 3.0 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.
Approximately 61 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 7 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, 2001, 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 is intended to lengthen the
effective duration of policy liabilities and enable the Company to maintain
profitability on such policies.
SPIAs accounted for $70.5 million, or 1.2 percent, of our total
collected premiums in 2001. 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
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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 6.7 percent at December 31, 2001.
The Company also offers 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
2001, this product accounted for $181.7 million, or 3.1 percent, of our total
collected premiums.
Variable annuity products. Variable annuities accounted for $408.6
million, or 7 percent, of our total premiums collected in 2001. 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 2001,
we collected $949.6 million, or 16 percent, of our total collected premiums from
life products. Sales of certain life products are affected by the financial
strength ratings assigned to our insurance subsidiaries by independent rating
agencies. See "Competition" below.
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 $510.0 million, or 8.8
percent, of our total collected premiums in 2001 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 $439.6 million, or 7.6
percent, of our total collected premiums in 2001. 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 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 $107.6 million, or 1.9
percent, of our total collected premiums in 2001. 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
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available, and most policies require certain utilization review procedures. The
profitability of this business depends largely on the overall persistency of the
business inforce, claim experience and expense management. We have previously
announced our intent to sell or exit these lines of business. During 2001, we
collected $737.1 million, or 13 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 2001, we originated $2.5
billion of contracts for manufactured housing purchases, or 22 percent of our
total originations. At December 31, 2001, our managed receivables included $25.6
billion of contracts for manufactured housing purchases, or 59 percent of total
managed receivables. A manufactured home is a structure, transportable in one or
more sections, 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.
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, 2001,
93 percent of our manufactured housing loan originations were purchased from
dealers and 7 percent were originated directly by us.
Our manufactured housing contracts are secured by either the
manufactured home or, in the case of land-and-home contracts, by a lien on the
real estate where the manufactured home is permanently affixed. In 2001,
approximately 27 percent of our manufactured housing originations were for
land-and-home contracts. Customers who finance their homes with us are required
to make a minimum down payment of 5 percent. For manufactured housing
originations, the average loan-to-value ratio was approximately 88 percent in
2001.
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. We perform monthly audits on samples of new loan originations to
measure adherence to our underwriting policies and procedures.
Mortgage Services. Products within this category include home equity
and home improvement loans. During 2001, we originated $3.0 billion of contracts
for these products, or 27 percent of our total originations. At December 31,
2001, our managed receivables included $11.9 billion of contracts for home
equity and home improvement loans, or 28 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 and broker
originators throughout the United States. The retail offices are responsible for
originating, processing and funding the loan transaction. Underwriting of the
application is handled through central locations. Subsequently, loans are
re-underwritten on a test basis by a third party to 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 2001, approximately 94 percent of our home equity finance loans
were originated directly with the borrower. The remaining finance volume was
originated through a few correspondent lenders. The Company decreased the volume
of loans originated through the correspondent channel in 2000.
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 2001, approximately 81 percent of the loans
originated were secured by first liens. The average loan to value for loans
originated in 2001 was approximately 90 percent. Approximately 97 percent of our
home equity loan originations during 2001 were fixed rate closed-end loans.
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.
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We finance conventional home improvement contracts generally secured by
first, second or, to a lesser extent, third liens on the improved real estate.
We also finance unsecured conventional home improvement loans (generally from
$2,500 to $15,000).
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 28 percent of the home improvement loan
originations during 2001.
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 2001, we originated $3.6 billion of
private label credit card receivables primarily through our bank subsidiaries,
or 32 percent of our total originations. At December 31, 2001, our managed
receivables included $2.7 billion of contracts for credit card loans, or 6
percent of total managed receivables.
We originate private label credit card receivables through contractual
relationships with selected retailer and dealer partners. Our core relationships
are with retailers and dealers of home improvement products, powersports
vehicles (motorcycles, all-terrain-vehicles, snowmobiles and personal
watercraft) and outdoor power equipment.
We perform an initial review on all retailer and dealer partners as
well as periodic monitoring of their financial condition. Credit card
applications are generated primarily through retail and dealer outlets and the
internet. We utilize a proprietary automated credit scoring system to review the
credit of individual customers seeking credit cards. We periodically monitor
payment behavior trends within our credit card portfolio through the use of
automated portfolio management tools. If we make poor credit decisions with
respect to our partners and borrowers, it could have a material adverse effect
on our business.
ACQUISITIONS
Since 1982, Conseco has acquired 19 insurance groups and related
businesses and Green Tree Financial Corporation (renamed "Conseco Finance
Corp.") 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 grow 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 $32.6 billion of assets (at fair value)
under management at December 31, 2001, of which $24.3 billion were assets of
Conseco's subsidiaries and $8.3 billion were 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. We
are subject to the risk that our investments will decline in value. This has
occurred in the past and may occur again. During 2001, we recognized other than
temporary declines in value on our investments in Sunbeam Corp., Enron Corp.,
Crown Cork & Seal Company Inc., Global Crossing Ltd., and KMart Corp., among
others.
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, 2001 the average yield, computed on the cost basis of our
investment portfolio, was 7.0 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 5.0 percent.
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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, 2001, the adjusted modified duration of fixed maturities and
short-term investments was approximately 6.7 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
Each of the markets in which we operate is highly competitive. The
financial services industry consists of a large number of companies, some of
which are larger and have greater capital, technological and marketing
resources, access to capital at a lower cost, 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 finance
companies, commercial banks, thrifts, other financial institutions, mortgage
brokers, credit unions and manufacturers and vendors. 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 has intensified competition based on factors other than product features.
See "Underwriting" and "Governmental Regulation." In addition to the products of
other insurance companies, commercial banks, thrifts, mutual funds and broker
dealers, our insurance products compete with health maintenance organizations,
preferred provider organizations and other health care-related institutions
which provide medical benefits based on contractual agreements.
An important competitive factor for life insurance companies is the
ratings they receive from nationally recognized rating organizations. Agents,
insurance brokers and marketing companies who market our products and
prospective purchasers of our products use the ratings of our insurance
subsidiaries as one factor in determining which insurer's products to market or
purchase. Ratings have the most impact on our annuity and interest-sensitive
life insurance products. Our principal insurance subsidiaries are currently
rated "A-(Excellent)" by A.M. Best Company, and Standard & Poor's Corporation
has given our principal insurance subsidiaries a claims-paying ability rating of
"BB+(Marginal)." A.M. Best ratings for the industry currently range from
"A++(Superior)" to "F (In Liquidation)" and some companies are not rated. A.M.
Best's ratings and Standard & Poor's claims-paying ability ratings are based
upon factors relevant to policyholders, agents and intermediaries and are not
directed toward the protection of investors. Such ratings are not
recommendations to buy, sell or hold securities. A.M. Best and Standard & Poor's
each reviews its ratings from time to time. On October 3, 2001, A.M. Best placed
our insurance subsidiaries' ratings "under review with negative implications."
We cannot provide any assurance that the ratings of our insurance subsidiaries
will remain at their current level. If such ratings are downgraded, sales of our
insurance products could fall significantly and existing policy holders may
redeem or lapse their policies, causing a material and adverse impact on our
financial results and liquidity.
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
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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, 2001, 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 inforce and
reinsurance assumed represented 2.2 percent of net combined life insurance
inforce. At December 31, 2001, the total ceded business inforce of $26.4 billion
was primarily ceded to insurance companies rated "A- (Excellent)" or better by
A.M. Best. Our principal reinsurers at December 31, 2001 were American Founders
Life Insurance Company, American Long Term Care Reinsurance Group, Connecticut
General Life Insurance Company, Employers Reassurance Corporation, General &
Cologne Life Re of America, Gerling Global Life Reinsurance Company, Lincoln
National Life Insurance Company, Munich American Reassurance Company, Reliance
Standard Life Insurance Company, RGA Reinsurance Company, Scottish Re US, Inc.,
Security Life of Denver Insurance Company and Swiss Re Life and Health America
Inc. No other single reinsurer assumes greater than 2 percent of the total ceded
business inforce.
In the first quarter of 2002, we completed a reinsurance agreement
pursuant to which we are ceding 80 percent of the inforce traditional life
business of our subsidiary, Bankers Life & Casualty Company, to Reassure America
Life Insurance Company (rated A++ by A.M. Best). The total insurance liabilities
ceded pursuant to the contract are approximately $400 million. The reinsurance
agreement and the related dividends of $110.5 million have been approved by the
appropriate state insurance departments and will be paid to the parent company.
The ceding commission approximated the amount of the cost of policies purchased
and cost of policies produced related to the ceded business.
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We have also entered into a reinsurance agreement pursuant to which we
are ceding 100 percent of the traditional life and interest-sensitive life
insurance business of our subsidiary, Conseco Variable Insurance Company, to
Protective Life Insurance Company (rated A+ by A.M. Best). The total insurance
liabilities ceded pursuant to the contract are approximately $470 million. The
agreement is subject to regulatory approval. Upon receipt of all regulatory
approvals, our insurance subsidiary will receive a ceding commission of $49.5
million. The ceding commission approximated the amount of the cost of policies
purchased and the cost of policies produced related to the ceded business.
We are currently exploring possible reinsurance transactions related
to other blocks of our insurance business to generate additional cash to meet
our debt obligations in 2002 and beyond.
EMPLOYEES
At December 31, 2001, Conseco, Inc. and its subsidiaries had
approximately 14,300 employees, including: (i) 5,500 employees supporting our
insurance operations; (ii) 7,200 employees supporting our finance operations;
and (iii) 1,600 employees in India (who provide services to our insurance and
finance operations and third party clients). None of our employees is covered by
a collective bargaining agreement. We believe that we have excellent relations
with our employees.
GOVERNMENTAL REGULATION
Our finance and insurance businesses are subject to extensive
regulation and supervision in the jurisdictions in which we operate. Such
regulation and supervision is primarily for the benefit and protection of our
customers, and not for the benefit of our investors or creditors. Our finance
operations are subject to regulation by federal, state and local government
authorities, as well as to various laws and judicial and administrative
decisions, that impose requirements and restrictions affecting, among other
things, our loan originations, credit activities, maximum interest rates,
finance and other charges, disclosure to customers, the terms of secured
transactions, collection, repossession and claims-handling procedures, multiple
qualification and licensing requirements for doing business in various
jurisdictions, and other trade practices. Although we believe that we are in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, it is possible that more restrictive laws, rules or
regulations will be adopted in the future that could make compliance more
difficult or expensive, restrict our ability to originate or sell loans, further
limit or restrict the amount of interest and other charges earned on loans
originated by us, further limit or restrict the terms of loan agreements, or
otherwise adversely affect our business or prospects.
The Financial Services Modernization Act of 1999 contains privacy
provisions and introduces controls over the transfer and use of individuals'
nonpublic personal data by financial institutions, including finance companies,
insurance companies and insurance agents. 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 jurisdictions 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. Because of limits on the payment of dividends and surplus
debenture payments from our insurance subsidiaries, not all of our consolidated
cash flows from operations are available to the parent company to service its
debt. 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.
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Most states have either enacted legislation or adopted administrative
regulations which affect the acquisition (or sale) 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. 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 has adopted a revised manual of statutory accounting
principles in a process referred to as codification. Such principles are
summarized in the Accounting Practices and Procedures Manual. The revised manual
was 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 resulted in changes to the accounting practices that our insurance
subsidiaries use to prepare their statutory-basis financial statements. The
impact of these changes increased our insurance subsidiaries' statutory-based
capital and surplus by approximately $198 million as of January 1, 2001.
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.
Model laws and regulations of the NAIC include: (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,
2001. The aggregate RBC ratio for our insurance subsidiaries was greater than
235 percent at December 31, 2001.
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.
13
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.
During recent years, the health insurance industry has experienced
substantial changes, primarily caused by healthcare legislation. Recent federal
and state legislation and legislative proposals relating to healthcare reform
contain features that could severely limit or eliminate our ability to vary our
pricing terms or apply medical underwriting standards with respect to
individuals which could have the effect of increasing our loss ratios and
decreasing our profitability. In particular, Medicare reform and legislation
concerning prescription drugs could affect our ability to price or sell our
products.
In addition, proposals currently pending in Congress and some state
legislatures may also affect our financial results. These proposals include the
implementation of minimum consumer protection standards for inclusion in all
long term care policies, including: guaranteed premium rates; protection against
inflation; limitations on waiting periods for pre-existing conditions; setting
standards for sales practices for long term care insurance; and guaranteed
consumer access to information about insurers, including lapse and replacement
rates for policies and the percentage of claims denied. Enactment of any of
these proposals could affect our financial results.
The United States Department of Health and Human Services has issued
regulations under the Health Insurance Portability and Accountability Act
("HIPAA") relating to standardized electronic transaction formats, code sets and
the privacy of member health information. These regulations and any
corresponding state legislation, will affect the Company's administration of
health insurance.
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
14
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 and other charges and fees
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, unregulated.
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 certain substantive protection such as a three day right to
cancel certain credit transactions, including certain of the loans originated by
the Company.
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, a reverse mortgage transaction, or an open-end
credit plan) which (1) has total origination fees in excess of the greater of
eight percent of the loan amount, or $480, 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.
15
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. It is possible that more restrictive laws, rules or regulations
will be adopted in the future and will 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.
We have internal controls designed to manage the risks associated with
our finance activities. However, there is a risk that one employee or more will
circumvent these controls, as has occurred at other financial institutions.
16
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.
Recently, Congress enacted legislation to lower marginal tax rates,
reduce the federal estate tax gradually over a ten-year period, with total
elimination of the federal estate tax in 2010, and increase contributions that
may be made to individual retirement accounts and 401(k) accounts. While these
tax law changes will sunset at the beginning of 2011 absent future congressional
action, they could in the interim diminish the appeal of our annuity and life
insurance products. Additionally, Congress has considered, from time to time,
other possible changes to the U.S. tax laws, including elimination of the tax
deferral on the accretion of value within certain annuities and life insurance
products. It is possible that further tax legislation will be enacted which
would contain provisions with possible adverse effects on our annuity and life
insurance products.
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, 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.
At December 31, 2001, Conseco had net federal income tax loss
carryforwards of $1,176.3 million available (subject to various statutory
restrictions) for use on future tax returns. These carryforwards will expire as
follows: $2.4 million in 2003; $11.2 million in 2004, $4.9 million in 2005; $.7
million in 2006; $7.9 million in 2007; $7.5 million in 2008; $10.5 million in
2009; $4.6 million in 2010; $5.7 million in 2011; $10.1 million in 2012; $43.9
million in 2013; $6.9 million in 2014; $144.7 million in 2016; $24.0 million in
2017; $242.0 million in 2018; $159.1 million in 2019; and $490.2 million in
2020. The following restrictions exist with respect to the utilization of
portions of the loss carryforwards: (i) $142.8 million attributable to certain
acquired companies, may be used only to offset the taxable income of those
companies; and (ii) $1,033.5 million is available to offset income from certain
life insurance subsidiaries, our finance subsidiaries and other non-life
insurance subsidiaries. We believe that the Company will be able to fully
utilize the net federal income tax loss carryforwards before they expire. None
of the carryforwards is available to reduce the future tax provision for
financial reporting purposes.
No valuation allowance has been established since it is more likely
than not that the Company will obtain full benefit of all deferred income tax
assets based on our evaluation of the Company's anticipated future taxable
income.
ITEM 2. PROPERTIES.
Headquarters. Our headquarters is located on a 172-acre corporate
campus in Carmel, Indiana, immediately north of Indianapolis. The 11 buildings
on the campus contain approximately 919,000 square feet of space and house
Conseco's executive offices and certain administrative operations of its
subsidiaries.
Insurance operations. Our professional independent producer
distribution channel operations are administered from our Carmel, Indiana
headquarters. 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 seven years. We also lease
approximately 130,000 square feet of warehouse space in a second Chicago
facility; this lease has a remaining life of
17
approximately 18 months. Conseco owns an office building (currently listed for
sale) in Kokomo, Indiana (93,000 square feet), and two office buildings
(currently listed for sale) 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 231 sales offices in various states totaling approximately 503,750 square
feet; these leases are short-term in length, with remaining lease terms ranging
from one to six years.
Finance operations. Our finance operations are headquartered in St.
Paul, Minnesota in a building owned by the Company (120,000 square feet of which
are occupied by the Company). We lease additional space in downtown St. Paul
(185,000 square feet), which is used by our mortgage services and private credit
card divisions. We own a building in Rapid City, South Dakota (137,000 square
feet), which is used by our manufactured housing services units. We also lease
office space in Rapid City (75,000 square feet) which is used by our private
label credit card and retail bank servicing units. We also lease buildings in
Tempe, Arizona (200,000 square feet) and Atlanta, Georgia (96,000 square feet)
which serve as collection and service centers. Our finance operations lease 33
regional manufactured housing division offices and 128 mortgage services branch
offices across the United States; the lease terms generally range from three to
five years.
India operations. Our subsidiary in India (which specializes in
customer service and backroom outsourcing for our insurance and finance
operations and third party clients) currently has two operational buildings in
Noida, India, and one more under construction in Noida. One building has
approximately 40,000 square feet, and the second building has approximately
42,000 square feet. The building under construction is expected to contain
approximately 68,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
We and our subsidiaries are involved on an ongoing basis in lawsuits
(including purported class actions) relating to our operations, including with
respect to sales practices, and we and current and former officers and directors
are defendants in pending class action lawsuits asserting claims under the
securities laws and derivative lawsuits. The ultimate outcome of these lawsuits
cannot be predicted with certainty.
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 July 1995 to January 1998.
One action (Florida State Board of Admin. v. Green Tree Financial Corp., et. al,
Case No. 98-1162) was brought not on behalf of a class, but by the Florida State
Board of Administration, which invests and reinvests retirement funds for the
benefit of state employees. 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 of which pertains
to a purported class 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 Rule 10b-5 promulgated thereunder) 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, 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 dismissing 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. A three judge panel issued an opinion on October
25, 2001, reversing the United States District Court's dismissal order and
remanding the actions to the United States District Court. Pretrial discovery is
expected to commence in all three lawsuits approximately in April 2002. 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 in 2000 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 PRIDES" convertible preferred stock instruments
during the same alleged class periods. With four exceptions, in each of these
twenty-five cases
18
two former officers/directors of the Company were named as defendants. In each
case, the plaintiffs assert claims under Sections 10(b) (and Rule 10b-5
promulgated thereunder) 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 for the
Southern District of Indiana 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 securities by
Conseco Financing Trust VII. In each case, plaintiffs asserted claims under
Section 11 and Section 15 of the Securities Act of 1933, and 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 Conseco, Inc. securities cases have been consolidated into
one case in the United States District Court for the Southern District of
Indiana, captioned: "In Re Conseco, Inc. Securities Litigation", Case number
IP00-C585-Y/S. An amended complaint was filed on January 12, 2001, which asserts
claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, with respect to
common stock and various other securities issued by the Company and Conseco
Financing Trust VII. The Company filed a motion to dismiss the amended complaint
on April 27, 2001. On January 10, 2002, the Company entered into a Memorandum of
Understanding (the "MOU") to settle the consolidated securities cases that are
pending in the United States District Court for the Southern District of Indiana
for $120 million subject to court approval. Under the MOU, as amended on
February 12, 2002, $106 million was required to be placed in escrow by March 8,
2002; the remaining $14 million was to be paid in two installments: $6 million
by April 1, 2002, and $8 million by October 1, 2002 (all payments with interest
from January 25, 2002). The $106 million due on March 8, 2002, was not paid, for
reasons set forth in the following paragraph, and the MOU has expired by its
terms. Accordingly, and unless we are able to revive the settlement, the Company
intends to defend the securities lawsuit vigorously. The ultimate outcome cannot
be predicted with certainty.
We maintained certain directors' and officers' liability insurance
that was inforce at the time the Indiana securities and derivative litigation
(the derivative litigation is described below) was commenced and, in our view,
applies to the claims asserted in that litigation. The insurers denied coverage
for those claims, so we commenced a lawsuit against them on June 13, 2001, in
Marion County Circuit Court in Indianapolis, Indiana (Conseco, Inc., et. al. v.
National Union Fire Insurance Company of Pittsburgh, PA., Royal Insurance
Company of America, Westchester Fire Insurance Company, RLI Insurance, Greenwich
Insurance Company and Certain Underwriters at Lloyd's of London, Case No.
49C010106CP001467) seeking, among other things, a judicial declaration that
coverage for those claims exists. The primary insurance carrier, National Union
Fire Insurance Co. of Pittsburgh, PA, has paid its full $10 million in policy
proceeds toward the settlement of the securities litigation; in return, National
Union has been released from the coverage litigation pending in state court in
Marion County, Indiana. The first excess insurance carrier, Royal Insurance
Company ("Royal"), placed its full $15 million in policy proceeds into an escrow
under Royal's control, but reserved rights to continue to litigate coverage and
imposed an unacceptable condition on releasing the funds. The second excess
insurance carrier, Westchester Fire Insurance Company, committed to pay its full
$15 million in policy proceeds toward the settlement without a reservation of
rights, on condition that certain impairments to its subrogation rights be
removed from the MOU. The third excess insurance carrier, RLI Insurance Company
("RLI"), committed to pay its full $10 million in policy proceeds toward the
settlement subject to a reservation of rights, and on condition that Conseco
give RLI any security for its reservation of rights that Conseco gives to Royal.
The fourth excess insurance carrier, Greenwich Insurance Company, committed to
pay its full $25 million in policy proceeds toward the settlement without a
reservation of rights. In addition, the funding commitments of Westchester, RLI
and Greenwich were conditioned on each of the excess carriers below them paying
their respective policy limits in full toward the settlement. The final excess
carrier, Certain Underwriters at Lloyd's of London, refused to pay or to escrow
its $25 million in policy proceeds toward the settlement, although it has
advised the Company that it is continuing to investigate the Company's claim.
There can be no assurance that the insurance carriers, other than the primary
carrier, will in fact pay their policy proceeds toward the settlement even if
the case could still be settled on the terms reflected in the MOU. Because they
did not do so by March 8, 2002, the MOU described in the immediately preceding
paragraph expired. Should the settlement embodied in the MOU be lost, there can
19
be no assurance that the securities litigation can be resolved for $120 million,
and the Company will proceed with its coverage litigation in Marion County,
Indiana, against those carriers that caused the settlement to terminate. We
intend to pursue our coverage rights vigorously. However, the ultimate outcome
cannot be predicted with certainty.
Nine shareholder derivative suits were filed in 2000 in the United
States District Court for the Southern District of Indiana. 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 that allegedly made loans in relation to the
Company's "Stock Purchase Plan" (in three 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", Case Number IP00655-C-Y/S. An amended complaint
was filed on April 12, 2001, making generally the same allegations and
allegations of violation of the Federal Reserve Board's margin rules. Three
similar cases have been filed in the Hamilton County Superior Court in Indiana.
Schweitzer v. Hilbert, et al., Case No. 29D01-0004CP251; Evans v. Hilbert, et
al., Case No. 29D01-0005CP308 (both Schweitzer and Evans name as defendants
certain non-director officers); Gintel v. Hilbert, et al., Case No.
29003-0006CP393 (naming as defendants, and alleging aiding and abetting
liability as to, banks that allegedly made loans in relation to the Stock
Purchase Plan). The cases filed in Hamilton County have been stayed pending
resolution of the derivative suits filed in the United States District Court.
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.
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 and insurance agents 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
judgments in both Lackey and Bazzle. These cases have been consolidated into one
case and are currently on appeal before the South Carolina Supreme Court. Oral
argument was heard on March 21, 2002. Conseco Finance has posted appellate
bonds, including $20 million of cash, for these cases. 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 this proceeding cannot be predicted with certainty.
On January 15, 2002, Carmel Fifth, LLC ("Carmel"), an indirect, wholly
owned subsidiary of the Company, exercised its rights, pursuant to the Limited
Liability Company Agreement of 767 LLC, to require 767 Manager, LLC ("Manager"),
an affiliate of Donald J. Trump, to elect within 60 days, either to acquire
Carmel's interests in 767 LLC for $499.4 million, or sell its interests in 767
LLC to Carmel for $15.6 million (the "Buy/Sell Right"). 767 LLC is a Delaware
limited liability company that owns the General Motors Building, a 50-story
office building in New York, New York. 767 LLC is owned by Carmel and Manager.
On February 6, 2002, Mr. Trump commenced a civil action against the Company,
Carmel and 767 LLC in New York State Supreme Court, entitled Donald J. Trump v.
Conseco, Inc., et al. Plaintiff claims that the Company and Carmel breached an
agreement, dated July 3, 2001, to sell Carmel's interests to plaintiff for $295
million on or before September 15, 2001 (the "July 3rd Agreement").
Specifically, plaintiff claims that the Company and Carmel improperly refused to
accept a reasonable guaranty of plaintiff's payment obligations, refused to
complete the sale of Carmel's interest before the September 15, 2001 deadline,
repudiated an oral promise to extend the September 15 deadline indefinitely and
repudiated the July 3rd Agreement by exercising Carmel's Buy/Sell Right.
Plaintiff asserts claims for breach of contract, breach of the implied covenant
of good faith and fair dealing, promissory estoppel, unjust enrichment and
breach of fiduciary duty. Plaintiff is seeking compensatory and punitive damages
of approximately $1 billion and declaratory and injunctive relief blocking
Carmel's Buy/Sell Right. The Company believes that this lawsuit is without merit
and intends to defend it vigorously.
We have received a claim from the heirs of a former officer, Lawrence
Inlow, asserting that unvested options to purchase 756,248 shares of our common
stock should have been vested at Mr. Inlow's death. If such options had been
vested, the heirs claim that the options would have been exercised, and the
resulting shares of common stock would have been sold for a gain of
approximately $30 million based upon a stock price of $58.125 per share, the
highest stock price during the alleged exercise period of the options. We
believe the claim of the heirs is without merit. If the heirs proceed with their
claim, we will defend it vigorously.
20
On March 27, 2002, seven holders of our bank debt filed a lawsuit in
the United States District Court for the Northern District of Illinois (AG
Capital Funding Partners LP, et al. v. Conseco, Inc., Case No. 02C2236). On
March 20, 2002, we amended our credit facilities to provide, in part, that in
the event of certain asset sales, we are not obligated to prepay amounts
borrowed under the credit agreement until we have received in excess of $352
million of net proceeds from those sales. The holders assert that 100% of the
holders of the bank debt must vote in favor of an amendment of the provisions
relating to the triggering of mandatory prepayments. We believe that the
amendment of the mandatory prepayment provisions of the credit agreement
complied with the terms of the credit agreement and we believe this lawsuit is
without merit and intend to defend this lawsuit vigorously. The ultimate outcome
of these proceedings cannot be predicted with certainty. Except with respect to
the mandatory prepayment provisions of the credit agreement, this lawsuit does
not challenge any other portion of the March 20, 2002 amendment to the credit
agreement.
In addition, the Company and its subsidiaries are involved on an
ongoing basis in other lawsuits (including purported class actions) related to
their operations. These actions include a purported nationwide class action
regarding the marketing, sale and renewal of home health care and long term care
insurance policies that has been settled (along with two related California-only
purported class actions) pending final approval by the court, one action brought
by the Texas Attorney General regarding long term care policies, three purported
nationwide class actions involving claims related to "vanishing premiums," and
two purported nationwide class actions involving claims related to "modal
premiums" (the alleged imposition and collection of insurance premium surcharges
in excess of stated annual premiums). The ultimate outcome of all of these other
legal matters pending against the Company or its subsidiaries cannot be
predicted, and, although such lawsuits are not expected to individually have a
material adverse effect on the Company, such lawsuits could have, in the
aggregate, a material adverse effect on the Company's consolidated financial
condition, cash flows or results of operations.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
22
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, 60............... 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.
William J. Shea, 54............. 2001 Since September 2001, President and Chief Operating Officer of
Conseco. Since March 6, 2002, acting Chief Financial Officer of
Conseco. From 1998 to 2001, Chairman of the Board of Demoulas
Supermarkets, Inc.; from 1999 to 2000, CEO of View Tech, Inc.
(integrated videoconferencing); and from 1993 to 1998, Vice Chairman
and Chief Financial Officer of BankBoston Corporation.
David K. Herzog, 46............. 2000 Since September 2000, Executive Vice President,
General Counsel and Secretary of Conseco; from
1980 to 2000, attorney with Baker & Daniels (law firm).
James S. Adams, 42.............. 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.
Maxwell E. Bublitz, 46.......... 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.
David Gubbay, 49................ 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.
- -------------------
(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.
23
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
---- --- ----
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
2001:
First Quarter......................................... $18.60 $11.69 $.0000
Second Quarter........................................ 20.20 13.05 .0000
Third Quarter......................................... 16.20 5.25 .0000
Fourth Quarter........................................ 7.40 2.51 .0000
The closing market price for a share of our common stock on March 22,
2002 was $3.76. As of March 22, 2002, there were approximately 166,100 holders
of the outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
The Company does not anticipate declaring or paying dividends on its
common stock in the foreseeable future.
We have paid all 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 limit our ability to pay dividends. Such financing agreements also
restrict our ability to repurchase common stock. Dividends on our Series F
Preferred Stock are paid in additional shares of Series F Preferred Stock during
periods dividends on common stock are not paid.
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.
24
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
Years ended December 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Amounts in millions, except per share data)
STATEMENT OF OPERATIONS DATA
Insurance policy income..................................... $4,065.7 $ 4,220.3 $4,040.5 $3,948.8 $3,410.8
Gain on sale of finance receivables (b)..................... 26.9 7.5 550.6 745.0 779.0
Net investment income....................................... 3,794.9 3,920.4 3,411.4 2,506.5 2,171.5
Net realized investment gains (losses) ..................... (413.7) (358.3) (156.2) 208.2 266.5
Total revenues.............................................. 8,108.1 8,296.4 8,335.7 7,760.2 6,872.2
Interest expense:
Corporate................................................. 369.6 438.4 249.1 182.2 109.4
Finance and investment borrowings......................... 1,239.6 1,014.7 312.6 258.3 202.9
Total benefits and expenses................................. 8,527.5 9,658.2 7,184.8 6,714.5 5,386.5
Income (loss) before income taxes, minority interest,
extraordinary gain (loss) and cumulative effect of
accounting change......................................... (419.4) (1,361.8) 1,150.9 1,045.7 1,485.7
Extraordinary gain (loss) on extinguishment of debt,
net of income tax......................................... 17.2 (5.0) - (42.6) (6.9)
Cumulative effect of accounting change, net of income tax... - 55.3 - - -
Net income (loss) (c)....................................... (405.9) (1,191.2) 595.0 467.1 866.4
Preferred stock dividends .................................. 12.8 11.0 1.5 7.8 21.9
Net income (loss) applicable to common stock................ (418.7) (1,202.2) 593.5 459.3 844.5
PER SHARE DATA (d)
Net income (loss), basic.................................... $(1.24) $(3.69) $1.83 $1.47 $2.72
Net income (loss), diluted.................................. (1.24) (3.69) 1.79 1.40 2.52
Dividends declared per common share......................... - .100 .580 .530 .313
Book value per common share outstanding..................... 12.34 11.95 15.50 16.37 16.45
Shares outstanding at year-end.............................. 344.7 325.3 327.7 315.8 310.0
Weighted average shares outstanding for diluted earnings.... 338.1 326.0 332.9 332.7 338.7
BALANCE SHEET DATA - PERIOD END
Total investments........................................... $25,027.2 $25,017.6 $26,431.6 $26,073.0 $26,699.2
Goodwill.................................................... 3,695.4 3,800.8 3,927.8 3,960.2 3,693.4
Total assets................................................ 61,392.3 58,589.2 52,185.9 43,599.9 40,679.8
Notes payable and commercial paper:
Corporate................................................. 4,087.6 5,055.0 4,624.2 3,809.9 2,354.9
Finance................................................... 2,527.9 2,810.9 2,540.1 1,511.6 1,863.0
Related to securitized finance receivables structured
as collateralized borrowings........................... 14,484.5 12,100.6 4,641.8 - -
Total liabilities........................................... 54,724.8 51,810.9 43,990.6 36,229.4 34,082.0
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.............. 1,914.5 2,403.9 2,639.1 2,096.9 1,383.9
Shareholders' equity ....................................... 4,753.0 4,374.4 5,556.2 5,273.6 5,213.9
OTHER FINANCIAL DATA (d) (e)
Premium and asset accumulation product collections (f)...... $6,247.1 $ 7,158.6 $6,986.0 $6,051.3 $5,075.6
Operating earnings (g)...................................... 218.0 151.8 749.2 841.1 991.8
Managed finance receivables................................. 43,002.3 46,585.9 45,791.4 37,199.8 27,957.1
Total managed assets (at fair value) (h).................... 94,567.7 95,471.7 98,561.8 87,247.4 70,259.8
Shareholders' equity, excluding accumulated other
comprehensive income (loss)............................... 5,192.0 5,025.4 6,327.8 5,302.0 5,013.3
Book value per common share outstanding, excluding
accumulated other comprehensive income (loss)............. 13.61 13.95 17.85 16.46 15.80
Delinquencies greater than 60 days as a percentage of
managed finance receivables............................... 2.10% 1.76% 1.42% 1.19% 1.08%
Net credit losses as a percentage of average managed
finance receivables....................................... 2.41% 1.79% 1.31% 1.03% 1.05%
25
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(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); and Capitol American Financial Corporation
(January 1, 1997). 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. After that date, the gains we recognize are generally related to
the sale of the entire loan (with no interests retained by the Company).
For more information on this change, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations