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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1993 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the transition period from to
Commission file number: 0-11164
CONSECO, INC.
Indiana No. 35-1468632
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State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 573-6100
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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
Common Stock, No Par Value New York Stock Exchange, Inc.
8-1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
$3.25 Series D Cumulative Convertible New York Stock Exchange, Inc.
Preferred Stock
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Aggregate market value of common stock held by nonaffiliates (computed as of
March 7, 1994): $1,320,947,980
Shares of common stock outstanding as of March 7, 1994: 26,171,939
DOCUMENTS INCORPORATED BY REFERENCE: The Registrant's definitive proxy
statement for the annual meeting of shareholders to be held June 7, 1994 is
incorporated by reference into Part III of this Report.
2 PART I
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ITEM 1. BUSINESS OF CONSECO.
Background
Conseco, Inc. ("Conseco" or the "Company") is a specialized financial
services holding company which primarily makes controlling strategic
investments in insurance companies and related businesses, manages the
operations of those businesses to increase their value, provides services to
acquired companies and other businesses, and seeks to realize the increase in
value that its management brings to such companies through sale or
restructuring. The insurance companies in which Conseco has made investments
develop, market, issue and administer primarily annuity, individual health
insurance and life insurance products. Conseco provides administrative, data
processing and investment management services to affiliated and nonaffiliated
companies. The Company's operating strategy is to consolidate and streamline
the administrative functions of the acquired companies, to improve their
investment yields through active asset management by a centralized investment
operation and to eliminate their unprofitable products and distribution
channels.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Its executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and its telephone number is (317) 573-6100.
Conseco's earnings result from three different activities: (i) the operations
of life insurance companies; (ii) services provided to affiliates and
nonaffiliates for fees; and (iii) the acquisition and restructuring of life
insurance companies, currently through Conseco Capital Partners II, L.P ("CCP
II"). Major ownership interests of insurance companies include: (i) Bankers
Life Holding Corporation ("BLH") and its subsidiaries; (ii) Western National
Corporation ("WNC") and its subsidiary, Western National Life Insurance Company
("Western National"), both of which were wholly owned until WNC's initial
public offering ("IPO") completed February 15, 1994; (iii) CCP Insurance, Inc.
and its subsidiaries ("CCP"), in which Conseco has a 40 percent ownership
interest and which is accounted for under the equity method and (iv) wholly
owned life insurance subsidiaries, Bankers National Life Insurance Company
("Bankers National"), National Fidelity Life Insurance Company ("National
Fidelity") and Lincoln American Life Insurance Company ("Lincoln American").
During 1990, Conseco formed Conseco Capital Partners, L.P. (the
"Partnership"), which raised and invested $99.5 million of capital. Of this
amount approximately half was provided by the Company and the balance by other
investors. A wholly owned subsidiary of Conseco was the sole general partner
of the Partnership. The Partnership was the Company's vehicle for effecting
acquisitions of the following insurance companies: Great American Reserve
Insurance Company ("Great American Reserve") in June 1990, Jefferson National
Life Insurance Company ("Jefferson National") in November 1990, Beneficial
Standard Life Insurance Company ("Beneficial Standard") in March 1991 and
Bankers Life and Casualty Company ("Bankers Life") in November 1992. In July
1992, CCP, a holding company organized for the Partnership's first three
acquisitions, completed an IPO of 8.0 million common shares, generating net
proceeds to CCP of $111.2 million. Great American Reserve, Jefferson National
and Beneficial Standard are collectively referred to herein as the "CCP
Companies." On March 25, 1993, BLH, a holding company organized for Bankers
Life, completed an IPO of 19.6 million common shares at $22 per share. BLH
and Bankers Life are collectively referred to herein as "Bankers."
On February 15, 1994, WNC completed an IPO of 37,202,500 shares, which
included 2,300,000 shares sold by WNC and 34,902,500 shares sold by Conseco.
After this IPO, Conseco continues to own 40 percent of the outstanding common
stock of WNC. In addition, Conseco sold 150,000 shares to the President of WNC
at the initial public offering price, less underwriting discounts and
commissions. Net pretax proceeds to Conseco from the sale of WNC shares and
related transactions totaled $537.9 million. WNC and Western National are
collectively referred to herein as "Western." Effective January 1, 1994,
Western is included in Conseco's financial statements on the equity method.
The IPO and related transactions are further described in Note 16 to the
consolidated financial statements.
On February 2, 1994, Conseco announced the closing of the formation of CCP
II, a partnership which will invest in acquisitions of specialized annuity,
life and accident and health insurance companies and related businesses. As
of January 31, 1994, 36 investors had committed a total of $624 million of
capital to the new partnership in a private placement (see "Acquisitions and
Restructuring").
As used herein the terms "Conseco" or the "Company" refer to Conseco, Inc.
and its consolidated subsidiaries, unless the context otherwise requires.
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INVESTMENTS IN LIFE INSURANCE COMPANIES
The following describes Conseco's major ownership interests in life
insurance companies and the business of these companies.
BANKERS
Bankers, which had total assets of approximately $4 billion at December 31,
1993, markets health and life insurance and annuity products primarily to
senior citizens through over 200 branch offices and approximately 3,300 career
agents. Most of Bankers' agents sell only Bankers' policies. Approximately
56 percent of the $1,464.7 million of direct premiums collected by Bankers in
1993 were from the sale of individual health insurance, principally Medicare
supplement and long-term care policies. Bankers believes that its success in
the individual health insurance market is attributable in large part to its
career agency force, which permits one-on-one contacts with potential
policyholders and builds loyalty to Bankers among existing policyholders. Its
efficient and highly automated claims processing system is designed to
complement its personalized marketing strategy by stressing prompt payment of
claims and rapid responses to policyholder inquiries.
Conseco owns 30.4 million common shares of BLH, or 56 percent of its
outstanding common shares. At December 31, 1993, the BLH shares owned by
Conseco had a net carrying value of $518.8 million, a fair value of
approximately $652.8 million and a cost of $313.1 million.
WESTERN
Western, which had total assets of $8.4 billion at December 31, 1993,
develops, markets and issues annuity products through niche distribution
channels. Approximately 98 percent of the $563.0 million of direct premiums
collected in 1993 were from the sale of annuity products. Western National
markets single premium deferred annuities ("SPDAs") to the savings and
retirement markets through financial institutions (principally banks and
thrifts), flexible premium deferred annuities ("FPDAs") to the tax-qualified
retirement market and single premium immediate annuities ("SPIAs") primarily
to the structured settlement market.
Western National was a wholly owned subsidiary of Conseco from its
acquisition in 1987 to the completion of the initial public offering of WNC,
Western National's parent, on February 15, 1994. After the offering Conseco
continues to own 40 percent of the common stock of WNC. The sale of common
stock of WNC and related transactions generated net pretax proceeds to Conseco
of $537.9 million, which were used to repay a $200 million senior unsecured
loan and for other general corporate purposes. Conseco will record, in the
first quarter of 1994, a one-time, after-tax gain of approximately
$43 million as a result of the IPO and related transactions.
CCP
CCP, which had $5.3 billion of assets at December 31, 1993, is a
specialized insurance holding company whose subsidiaries market, issue and
administer annuity, life and employee benefit-related insurance products
through diversified cost-effective distribution channels. These channels
consist of educator market specialists who sell tax-qualified annuities
and certain employee benefit-related insurance products primarily to school
teachers and administrators, professional independent producers who sell
various annuity and life insurance products aimed primarily at the retirement
market and financial institutions that sell SPDAs to their depositors through
employee agents. Approximately 74 percent of the $451.0 million of total
premiums collected in 1993 were from the sale of annuity products.
Conseco owns 11.6 million shares of CCP, or 40 percent of CCP's common
shares outstanding. At December 31, 1993, the CCP shares owned by Conseco had
a net carrying value of approximately $244.3 million, a fair value of
approximately $322.1 million and a cost of $102.8 million.
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CONSECO'S WHOLLY OWNED INSURANCE SUBSIDIARIES
Conseco's wholly owned insurance subsidiaries (excluding Western) had total
assets of approximately $1.0 billion at December 31, 1993. They have
profitable in-force blocks of many different annuity and life products, but do
not currently actively market their products.
Total premiums collected by these companies during 1993 were $148.2
million, including $61.8 million of premium from guaranteed investment
contracts and deposit funds maintained by subsidiaries of the Company.
SERVICES PROVIDED TO AFFILIATES AND NONAFFILIATES FOR FEES
Various combinations of services, including investment management, mortgage
origination and servicing, policy administration, data processing, product
marketing and executive management services, are provided to all affiliates and
to unaffiliated clients. In addition, subsidiaries of Conseco earn fees by:
(i) providing marketing services to financial institutions related to the
distribution of insurance and investment products and (ii) distributing
property and casualty insurance products through independent agencies. Total
fees from affiliates and nonaffiliates were $49.0 million, $30.2 million and
$22.4 million in 1993, 1992 and 1991, respectively. To the extent these
services are provided to entities that are included in the
financial statements on a consolidated basis, the intercompany fees are
eliminated in consolidation. Growth in this activity results from new clients
(both affiliated and others) and from increases in the fee-producing activities
conducted for such clients.
ACQUISITIONS AND RESTRUCTURING
Conseco believes that the consolidation of the U.S. life insurance industry
will continue, and Conseco intends to participate in this process. Conseco
believes that, under appropriate circumstances, it is more advantageous to
acquire companies with large books of in-force life and health insurance and
annuities than to produce new business because initial underwriting costs have
already been incurred and mature business is generally less likely to
terminate, making more predictable profit analysis possible.
Since Conseco commenced operations in 1982, it has acquired 11 life
insurance companies, the first seven as wholly owned subsidiaries and the last
four through the first partnership. Recent acquisition activity is described
in Notes 1 and 2 to the consolidated financial statements. All acquisitions
have been accounted for as purchases. Therefore, activities of acquired
companies have been included in the results of operations commencing with the
date of purchase. Of the first seven companies acquired by Conseco, three were
subsequently sold and four remained as wholly owned subsidiaries at December
31, 1993. One of the four (Western National) was partially disposed of in
February 1994 when Conseco sold 60 percent of its interest in a public offering
as described in Note 16 to the consolidated financial statements. The first
three companies acquired in the first partnership are now wholly owned
subsidiaries of CCP, in which Conseco holds a 40 percent interest. The final
acquisition of the first partnership is now a wholly owned subsidiary of BLH,
in which Conseco holds a 56 percent interest.
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Following is a summary of the major acquisitions by Conseco and the
Partnership since 1982:
Purchase Price
Including Fees
Year Company Acquired and Costs Acquired By
---- ---------------- --------- -----------
(Dollars in millions)
1982 Security National Life Insurance Company $ 1.3 Conseco
1983 Consolidated National Life Insurance Company 4.2 Conseco
1985 Lincoln American 25.0 Conseco
1986 Lincoln Income Life Insurance Company 32.3 Conseco
1986 Bankers National 117.6 Conseco
1987 Western National 261.7 Conseco
1989 National Fidelity 68.4 Conseco
1990 Great American Reserve 135.0 Partnership
1990 Jefferson National 171.0 Partnership
1991 Beneficial Standard 141.1 Partnership
1992 Bankers Life 600.0 Partnership
On February 2, 1994, Conseco announced the closing of the formation of CCP
II, a partnership which will invest in acquisitions of specialized annuity,
life and accident and health insurance companies and related businesses. As
of January 31, 1994, 36 investors had committed a total of $624 million of
capital to the new partnership in a private placement. Commitments to the new
partnership include $100 million from Conseco, $25 million from Bankers, $25
million from CCP, $50 million from Western and $36 million from the executive
officers and directors of Conseco and its affiliates. A subsidiary of Conseco
is the sole managing general partner of CCP II.
OPERATIONS
Conseco reduces operating expenses by centralizing, standardizing and more
efficiently performing many functions common to most life insurance companies,
such as underwriting and policy administration, accounting and financial
reporting, marketing, regulatory compliance, actuarial services and asset
management.
Conseco's centralized management techniques resulted in significant
employee reductions and expense savings in the nine insurance companies
acquired between 1985 and 1992. The ratio of aggregate operating expenses
(excluding commissions) to premiums collected for these nine companies was
reduced from 11 percent for the last year prior to acquisition to 7.4 percent
for the second full year (or in Bankers' case, the first full year) following
acquisition. The ratio of such expenses to total assets of these companies
decreased from 3.4 percent to 1.9 percent in the same periods.
The administration of Bankers' individual health insurance, unlike that
of life insurance or annuities, involves a high volume of claims processing,
multiple contacts with policyholders and generally higher operational costs.
In 1993, Bankers processed more than four million policyholder claims. Bankers
has developed an efficient and highly automated policyholder administration
operation to minimize the costs of such large volume processing and deliver a
high level of service to its policyholders. Bankers' state-of-the-art
processing techniques stress prompt payment of claims. In most cases, Bankers
mails its policyholders' checks within a week of receiving a claim. Bankers
believes that its efficiency and promptness in processing policyholder claims
have been a major reason for its strong reputation for service and the above
average persistency of its Medicare supplement products. Conseco (through
certain of its wholly owned subsidiaries) provides Bankers certain investment
advisory, executive consulting, data processing, accounting, legal, mortgage
loan servicing and origination, and other services.
During 1993, Bankers implemented several measures to enhance efficiency
and reduce operating costs, including relocating its office space, which
previously was scattered in 27 separate buildings totaling approximately
750,000 square feet in three separate locations in the Chicago area. The
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scattering of Bankers' employees resulted in logistical complexities,
difficult communications and control and additional operating costs. In the
fourth quarter of 1993, Bankers relocated to approximately 300,000 square feet
of office space on two floors of a single facility in downtown Chicago pursuant
to a 15-year lease agreement. Bankers entered into a 10-year lease for
approximately 100,000 square feet of warehouse space in a facility also located
in Chicago.
Prior to WNC's IPO, Western had no full-time employees, and all of
Western's daily operations were handled by Conseco pursuant to agreements
between Western and Conseco. After the completion of the IPO, Western employs
approximately 150 people, including certain former Conseco employees who work
at the Western Annuity Center in Amarillo, Texas. To maintain operational
efficiencies, Western will continue to contract with Conseco and its
subsidiaries for investment advisory, data processing, mortgage loan servicing
and origination and other services.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolios of Conseco's wholly
owned subsidiaries, Western, CCP, Bankers and other nonaffiliated clients.
CCM had approximately $19 billion of assets at fair value under management at
December 31, 1993, of which $15.9 billion were assets of affiliated companies
and $3.1 billion were assets of nonaffiliated companies. CCM's investment
philosophy is to maintain a largely investment grade fixed-income portfolio,
provide adequate liquidity for expected liability durations and other
requirements and maximize total return through active investment management.
Investment activities are an integral part of the Company's business;
investment income is a significant component of the Company's total revenues.
Profitability is significantly affected by spreads between interest yields on
investments and rates credited on insurance liabilities. Substantially all
credited rates on single premium deferred annuities and flexible premium
deferred annuities may be changed annually. As of December 31, 1993, the
average yield on the Company's investment portfolio was 8.2 percent and the
average interest rate credited on the Company's total liability portfolio was
6.5 percent.
The Company balances the duration of its invested assets with the expected
duration of benefit payments arising from insurance liabilities. At December
31, 1993, the adjusted modified duration of fixed maturities, trading
securities and short-term investments was 5.7 years.
For information regarding the composition and diversification of the
investment portfolio of Conseco's subsidiaries, see Management's Discussion and
Analysis - "Investments" and Note 3 to the consolidated financial statements.
COMPETITION
The life insurance industry is highly competitive and consists of a large
number of insurance companies, some of which have substantially greater
financial resources, broader and more diversified product lines and larger
staffs than those of Conseco and its investees. Competition also is
encountered from the expanding number of banks, securities brokerage firms
and other financial intermediaries which market insurance products and offer
competing products, such as savings accounts and securities. Additionally,
when Conseco's acquisition partnerships bid on companies they wish to acquire,
they typically are in competition with other entities.
A significant portion of Western National's annuity sales currently is made
through banks and thrifts, which are presently precluded by state and federal
regulation from issuing insurance directly. Some federal regulatory agencies,
members of Congress and representatives of the banking industry have advocated
legislative and regulatory changes to broaden the ability of banks to
participate in the direct sale and underwriting of insurance products. If such
changes were to occur, Western National could be faced with increased
competition in its markets or the loss of certain marketing relationships.
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Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the ratings of an insurer as
one factor in determining which insurer's annuity to market or purchase.
Bankers Life, Western National and the principal insurance subsidiaries of CCP
are rated "A (Excellent)" by A.M. Best. Ratings for the industry currently
range from "A++ (Superior)" to "C- (Fair)". Publications of A.M. Best indicate
that the "A" rating is assigned to those companies that, in A.M. Best's
opinion, have achieved excellent overall performance when compared to the norms
of the insurance industry and that generally have demonstrated a strong ability
to meet their respective policyholder and other contractual obligations. In
evaluating a company's financial and operating performance, A.M. Best reviews
the company's profitability, leverage and liquidity as well as the company's
book of business, the adequacy and soundness of its reinsurance, the quality
and estimated market value of its assets, the adequacy of its reserves and the
experience and competency of its management. A.M. Best's ratings are based
upon factors relevant to policyholders, agents, insurance brokers and
intermediaries. In addition, Western National and Bankers Life have claims
paying ability ratings of AA- from Duff & Phelps Credit Rating Company ("Duff
& Phelps") and the three CCP Companies have claims paying ability ratings
of A+ from Duff & Phelps. Duff & Phelps' claims paying ability ratings range
from "AAA (Highest claims paying ability)" to "DD (Company is under an order
of liquidation)." The AA- rating represents "Very high claims paying ability"
and the A+ rating represents "High claims paying ability." At present, Western
National also has a claims paying rating of A+ from Standard & Poor's
Corporation and a financial strength rating of Baa2 from Moody's Investor
Service, Inc. Generally, rating agencies base their ratings on information
furnished to them by the issuer and on investigations, studies and
assumptions by the rating agencies. There is no assurance that any particular
rating will continue for any given period of time or that it will not be
changed or withdrawn entirely if, in the judgement of the rating agency,
circumstances so warrant.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The standardized
policy features for Medicare supplement products mandated by the Omnibus Budget
Reconciliation Act of 1984 and the National Association of Insurance
Commissioners increase the comparability of such policies and may intensify
competition based on factors other than product features. See "Investments in
Life Insurance Companies - Bankers" and "Regulation."
The Company believes that the insurance companies it invests in are able
to compete effectively because they: (i) emphasize specialized distribution
channels where the ability to respond rapidly to changing customer needs yields
a competitive edge; (ii) are experienced in establishing and cultivating
relationships with the unique distribution networks and the independent
marketing companies operating in these specialized markets; (iii) can offer
competitive premium rates as a result of their lower-than-average operating
costs and increased investment yields achieved by applying active investment
portfolio management techniques; and (iv) have reliable policyholder
administrative services supported by customized data processing systems.
UNDERWRITING
Under current regulations, insurance companies are prohibited from
underwriting Medicare supplement policies for certain first time purchasers.
Under these rules, if a person applies for insurance within six months of
becoming eligible for Medicare by reason of age, the person may not be rejected
due to medical conditions. For other prospective policyholders, such as senior
citizens who are transferring to Bankers' products, the underwriting procedures
are relatively limited.
Long-term care and comprehensive major medical products generally require
detailed underwriting procedures designed to assess and quantify the insurance
risks before such policies are issued to individuals and groups. Certain
health and life insurance products require medical examinations of applicants
(including blood and urine tests, where permitted). These requirements are
graduated according to the applicant's age and may vary by policy type. The
Company also relies on medical records and each potential policyholder's
written application for insurance products, which is generally prepared
under the supervision of a trained agent. The Company uses information from
the application and, in some cases, inspection reports, physician statements
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or medical examinations to determine whether a policy should be issued as
applied for, issued with reduced coverage under a health rider or rejected.
Group accident and health policies are underwritten based on the
characteristics of the group and its past claim experience.
Underwriting with respect to SPDAs and FPDAs is minimal. The Company
carefully examines specific information on structured settlement annuitants to
develop specific schedules of payments to injured persons, frequently pursuant
to legal judgements or insurance settlements. Agents obtain detailed medical
information about an annuitant, including test results and medical history.
Such information is evaluated by the medical director who provides a life
expectancy which is equated to an age higher than the current age of the
annuitant. The price of the annuity is developed using the "higher" age and
a mortality table, taking into consideration the Company's expectations about
current and future investment performance.
Substantially all the life insurance policies issued by the Company's
subsidiaries are underwritten individually, although standardized underwriting
procedures have been adopted for certain coverages. After initial processing,
each file is reviewed and the information needed to make an underwriting
decision (such as medical examinations, doctors' statements and special
medical tests) is obtained. After the information is collected and reviewed,
the Company either issues the policy as applied for, issues the policy with an
extra premium charge because of unfavorable factors, or rejects the
application.
REINSURANCE
Consistent with the general practice of the life insurance industry, the
Company's subsidiaries reinsure portions of the coverage provided by their
insurance products with other insurance companies under agreements of indemnity
reinsurance. The Company's subsidiaries also assume reinsurance from other
insurers. Reinsurance assumed is accounted for in the same manner as direct
business.
Indemnity reinsurance agreements are intended to limit a life insurer's
maximum loss on a large or unusually hazardous risk or to obtain a greater
diversification of risk. Indemnity reinsurance does not discharge the original
insurer's primary liability to the insured, but it is the practice of insurers
(subject to certain limitations of state insurance statutes) to account
for risks which have been reinsured with other approved companies, to the
extent of the reinsurance, as though they are not risks for which the original
insurer is liable. The Company's reinsured business is ceded to numerous
reinsurers; the amount of business ceded to any one reinsurer is not material.
The policy risk retention limit of Conseco's subsidiaries on the life of
one individual does not exceed $.8 million as of December 31, 1993.
Reinsurance ceded by Conseco's subsidiaries represented 8 percent of gross
combined life insurance in force at December 31, 1993. Reinsurance assumed by
Conseco's subsidiaries represented .5 percent of net combined life insurance
in force at December 31, 1993.
The Company also has ceded policy liabilities under assumption reinsurance
agreements where all obligations under the insurance contracts have been ceded
to another company. Accordingly, the insurance liabilities related to such
policies are not reported in the balance sheet. The Company believes the
assuming companies are able to honor all contractual commitments under the
assumption reinsurance agreements, based on the Company's periodic reviews of
their financial statements, insurance industry reports and reports filed with
state insurance departments.
At December 31, 1993 and 1992, reinsurance receivables with carrying values
of $398.5 million and $420.0 million, respectively, were associated with
annuity business ceded to an unaffiliated company and retroceded on
substantially identical terms to an ICH affiliate. Bankers provides
administrative, data processing and general management services related to the
reinsured business in exchange for annual fees based on a percentage of
reinsured reserves. Additionally, Bankers is entitled to experience refunds
based on the investment performance of assets supporting the annuity reserves.
9
During the first quarter of 1993, Bankers recaptured certain participating
life insurance policies (having assets approximately equal to insurance
liabilities of $182.0 million) that had previously been ceded to an affiliate
of ICH, from whom Bankers was acquired in 1992. Recapture fees of $15.5
million were capitalized as a component of cost of policies purchased.
In a few instances, Bankers has reinsured blocks of insurance to an
unrelated insurer to provide funds for enhancing surplus and for other
purposes. Under these surplus relief arrangements, statutorily determined
profits on the reinsured business are accelerated through the reinsurer's
payment of ceding commissions representing the present value of profits on
the business over the reinsurance period. At December 31, 1993, Bankers Life's
statutory capital and surplus included approximately $2.9 million of benefits
from this financial reinsurance. No benefit was recognized under generally
accepted accounting principles ("GAAP").
EMPLOYEES
As of March 7, 1994, Conseco had approximately 3,140 employees, including
approximately 1,600 home office employees and 450 branch office employees of
Bankers. None of the Company's employees are covered by a collective
bargaining agreement. Conseco believes that it has excellent relations with
its employees. Approximately 150 employees formerly employed by Conseco became
employees of WNC after the initial public offering of WNC's common stock on
February 15, 1994.
GOVERNMENTAL REGULATION
General
Life insurance companies are subject to regulation and supervision by the
states in which they transact business. The laws of the various states
establish supervisory agencies with broad administrative and supervisory powers
related to granting and revoking licenses to transact business, regulating
trade practices, establishing guaranty associations, licensing agents,
approving policy forms, filing premium rates on certain business, setting
reserve requirements, determining the form and content of required financial
statements, determining the reasonableness and adequacy of capital and surplus
and prescribing the maximum concentrations of certain classes of investments.
Most states also have enacted legislation which regulates insurance holding
company systems, including acquisitions, extraordinary dividends, the terms of
surplus debentures, the terms of affiliated transactions, and other related
matters. Currently, the Company and its insurance subsidiaries are registered
as a holding company system pursuant to such legislation in Texas, Missouri,
Tennessee, California and Illinois and routinely report to other jurisdictions.
Although the federal government does not directly regulate the business of
insurance, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, can significantly affect the insurance
business. Recently, increased scrutiny has been placed upon the insurance
regulatory framework and a number of state legislatures have considered or
enacted legislative proposals that alter, and in many cases increase, state
authority to regulate insurance companies and holding company systems. In
addition, legislation has been introduced in Congress which could result in the
federal government assuming some role in the regulation of the insurance
industry.
The National Association of Insurance Commissioners ("NAIC"), an
association of state regulators and their staffs, attempts to coordinate the
state regulatory process and continually re-examines existing laws and
regulations and their application to insurance companies. Recently, this
re-examination has focused on insurance company investment and solvency issues
and has resulted in new interpretations of certain existing laws, the
development of certain new laws and the implementation of certain non-statutory
guidelines. The NAIC has formed committees and appointed advisory groups to
study and formulate regulatory proposals on such diverse issues as the use of
surplus debentures, accounting for reinsurance transactions and the adoption
of risk-based capital ("RBC") rules. In addition, in connection with its
accreditation of states to conduct periodic company examinations, the NAIC has
encouraged states to adopt model NAIC laws on specific topics, such as holding
company regulations and the definition of extraordinary dividends. It is not
possible to predict the future impact of changing state and federal regulation
on the operations of the Company.
The NAIC adopted RBC requirements, effective December 31, 1993, to evaluate
the adequacy of statutory capital and surplus in relation to investment and
insurance risks associated with: (i) asset quality; (ii) mortality and
morbidity; (iii) asset and liability matching; and (iv) other business factors.
The RBC formula is designed as an early warning tool to help state regulators
identify possible weakly capitalized companies for the purpose of initiating
regulatory action. In addition, the formula defines a new minimum capital
standard which supplements the prevailing system of low, fixed minimum capital
and surplus requirements on a state-by-state basis.
10
The new RBC requirements provide for four different levels of regulatory
attention depending on the ratio of the company's total adjusted capital
(defined as the total of its statutory capital, surplus and asset valuation
reserve and 50 percent of apportioned dividends) to its RBC. The "Company
Action Level" is triggered if a company's total adjusted capital is less
than 100 percent but greater than or equal to 75 percent of its RBC, or if
total adjusted capital is less than 125 percent of RBC and a negative trend has
occurred. The trend test calculates the greater of any decrease in the margin
(i.e., the amount in dollars by which a company's total adjusted capital
exceeds its RBC) between the current year and the prior year and
between the current year and the average of the past three years, and assumes
that the decrease could occur again in the coming year. If a similar decrease
in the margin in the coming year would result in an RBC of less than 95
percent, then the Company Action Level would be triggered. At the Company
Action Level, a company must submit a comprehensive plan to the regulatory
authority which discusses proposed corrective actions to improve its capital
position. The "Regulatory Action Level" is triggered if a company's total
adjusted capital is less than 75 percent but greater than or equal to 50
percent of its RBC. At the Regulatory Action Level, the regulatory authority
will perform a special examination of the company and issue an order specifying
corrective actions that must be followed. The "Authorized Control Level" is
triggered if a company's total adjusted capital is less than 50 percent but
greater than or equal to 35 percent of its RBC, and the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control. The "Mandatory Control Level" is triggered if a company's
total adjusted capital is less than 35 percent of its RBC, and the regulatory
authority is mandated to place the company under its control. Calculations
using the NAIC formula at December 31, 1993, indicated that the ratios of the
total adjusted capital to RBC for all of Conseco's primary subsidiaries and
investees were greater than twice the Company Action Level.
Texas recently adopted its own RBC requirements, the stated purpose of
which is to require a minimum level of capital and surplus to absorb the
financial, underwriting, and investment risks assumed by an insurer. Under
Texas' RBC regulations, Western National and Bankers National, as
Texas-domiciled companies, must maintain a minimum level of capital and surplus
determined by a calculation formula contained in the Texas Regulations.
Additionally, two insurance subsidiaries of CCP are domiciled in Texas. Texas'
RBC requirements differ from those adopted by the NAIC in two principal
respects: (i) the elements used to determine minimum RBC levels in the
respective calculation formulas differ and (ii) the Texas Regulations do not
contain "Action Levels" (like those adopted by the NAIC) prescribing certain
corrective actions if RBC threshold levels are not met. However, the
Commissioner of the Texas Insurance Department does have the power to take
similar corrective actions if a company does not maintain the required minimum
level of capital and surplus. Under the Texas Regulations, an insurer has met
RBC requirements if its admitted assets exceed its liabilities by at least 3
percent. At December 31, 1993, the admitted assets of each of the Conseco
subsidiaries and CCP subsidiaries domiciled in Texas exceeded liabilities by
more than twice the required 3 percent level.
Most states have enacted legislation or adopted administrative regulations
affecting the acquisition of control of insurance companies as well as
transactions between insurance companies and persons controlling them. The
nature and extent of such legislation and regulations vary from state to state.
Most states, however, require administrative approval of the acquisition of 10
percent or more of the outstanding shares of an insurance company incorporated
in the state or the acquisition of 10 percent or more of the outstanding stock
of an insurance holding company whose insurance subsidiary is incorporated in
the state. The acquisition of 10 percent of such shares is generally deemed
to be the acquisition of "control" for the purpose of the holding company
statutes and requires not only the filing of detailed information concerning
the acquiring parties and the plan of acquisition, but also administrative
approval prior to the acquisition. In many states, an insurance authority may
find that "control" in fact does not exist in circumstances in which a person
owns or controls either a lesser or a greater amount of securities.
As part of their routine regulatory oversight process, insurance
departments approximately once every three years conduct periodic detailed
examinations ("Triennial Examinations") of the books, records and accounts of
insurance companies-domiciled in their states. Such Triennial Examinations are
11
generally conducted in cooperation with the departments of two or three other
states under guidelines promulgated by the NAIC. The Company expects Western
National and Bankers to each receive a Triennial Examination in 1994.
Health Care
Federal and state regulations have had, and are expected to continue to
have, the effect of increasing the regulation of Medicare supplement plans in
all states. Recent NAIC rules: (i) require minimum loss ratios of at least 75
percent for group policies and 65 percent for individual policies; (ii) create
10 standardized benefit plans to promote comparability; (iii) guarantee
renewability of policies; (iv) prohibit insurers from underwriting for health
conditions or claims experience policy applications from persons who first
become eligible for Medicare by reason of age; and (v) impose restrictions on
commissions payable to agents. The NAIC rules also require insurance companies
to file annual requests for premium increases, rather than relying on automatic
escalation provisions. As of November 1, 1993, all states have adopted the
NAIC rules.
Numerous proposals have been introduced in Congress and the state
legislatures aimed at reforming the current health care system. Proposals have
included, among other things: (i) modifications to the existing employer-based
insurance system; (ii) a quasi-regulated system of "managed competition" among
health plans; and (iii) a single payer, public program. Changes in health care
policy could significantly affect Bankers' business. For example, federal
comprehensive major medical or long-term care programs, if proposed and
implemented, could partially or fully replace some of Bankers' current
products. However, the institution of such programs also could create new
marketplace opportunities for supplemental insurance similar to Bankers'
Medicare supplement policies. Some reform proposals also could: (i)
standardize major medical or long-term care coverages; (ii) impose mandated or
targeted loss ratios or rate regulation; (iii) require the use of community
rating or other means that limit the ability of insurers to differentiate among
risks; or (iv) mandate utilization review or other managed care concepts to
determine what benefits would be paid by insurers. If adopted, these or other
proposals could increase the level of competition among health insurers. In
addition, changes could be made in Medicare that could necessitate revisions
in Bankers' Medicare supplement products. Other potential initiatives,
designed to tax insurance premiums or shift medical care costs from government
to private insurers, could have an adverse effect on Bankers' business,
although such taxes and costs might be offset in whole or in part by increasing
premiums. Depending on their form, proposals designed to reduce health care
costs could reduce benefits payable by Bankers. Bankers is unable to predict
what changes to the country's health care system will be enacted, and if
enacted, their scope and effect on Bankers' business. However, Bankers
continues to believe that the opportunity for its products will grow under any
realistic and affordable health care reform scenario.
FEDERAL INCOME TAXATION
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted on
August 10, 1993. The most significant provision of the Act affecting the
Company was the increase in the corporate income tax rate to 35 percent from
34 percent, effective for taxable income reported for the year 1993. As a
result of the increase in the tax rate, the Company recognized additional tax
expense of $8.9 million, consisting of: (i) $5.6 million related to income in
1993; (ii) $1.9 million related to a one-time adjustment to accumulated
deferred taxes relating to prior years' income; and (iii) $1.4 million related
to unrealized appreciation of securities at the date the new law was enacted.
In addition, the equity in earnings of CCP was reduced by approximately $1.6
million as a result of the Company's share of the additional tax expense
recorded by CCP related to the increase in the tax rate. The impact of other
provisions of the Act was not material.
The annuity and life insurance products marketed and issued by Conseco's
subsidiaries generally provide the policyholder with an income tax advantage,
as compared to other saving investments such as certificates of deposit and
bonds, in that income taxation on the increase in value of the product is
deferred until receipt by the policyholder. With other savings investments,
the increase in value is taxed as earned. Life insurance benefits which accrue
12
prior to the death of the policyholder and annuity benefits are generally not
taxable until paid, and life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably as
opposed to the economic accrual methods, which tend to accelerate taxable
income into earlier years and which are required for other investments. The
tax advantage for annuities and life insurance is provided in the Internal
Revenue Code ("IRC"), and is generally followed in all states and other United
States taxing jurisdictions. Accordingly, it is subject to change by Congress
and the legislatures of the respective taxing jurisdictions.
Conseco's insurance company subsidiaries are taxed as life insurance
companies under the IRC. During 1990, the taxation of life insurance companies
was changed to require a portion of the expenses incurred in selling insurance
products to be deducted over a period of years, as opposed to immediate
deduction in the year incurred. This change, although not affecting tax
expense on the Company's financial statements because it affects only the
timing of the deductions, does have the effect of increasing the Company's tax
for statutory accounting purposes. This, in turn, reduces statutory surplus
and, accordingly, decreases the amount of cash dividends that may be paid by
the life insurance subsidiaries. For 1993, the increase in the Company's
current tax due to this change was $25.5 million.
The Company had regular tax loss carryforwards at December 31, 1993, of
approximately $94.9 million, portions of which begin expiring in 1999.
ITEM 2. PROPERTIES.
The Company's principal operations are located on a 150-acre corporate
campus in Carmel, Indiana, immediately north of Indianapolis. These facilities
contain approximately 416,000 square feet of space in seven buildings which
contain Conseco's executive offices and certain administrative operations of
its subsidiaries. These facilities include significant capacity for future
growth.
Bankers currently leases 300,000 square feet of executive office and
administration space in a single facility in downtown Chicago under a 15-year
lease agreement. Bankers also leases approximately 100,000 square feet of
warehouse space in a second Chicago facility under a 10-year lease agreement.
Bankers leases approximately 208 sales offices totaling approximately 340,000
square feet. All of the sales office leases are short-term in length, with
remaining lease terms ranging from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, Conseco and its subsidiaries are involved in lawsuits
which are primarily related to their operations. Most of these lawsuits
involve claims under insurance policies or other contracts of the Company.
Even though Conseco may be contesting the validity or extent of its liability
in response to such lawsuits, the Company has established reserves in its
consolidated financial statements which approximate its estimated potential
liability or cost of defense. Accordingly, none of the lawsuits currently
pending, either individually or in the aggregate, is expected to have a
material adverse effect on the Company's consolidated financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
OPTIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
Officer Positions with Conseco, Principal
Name and Age(a) Since Occupation and Business Experience (b)
- - ---------------- ----- --------------------------------------
Stephen C. Hilbert, 48 1979 Since 1979, Chairman of the Board and Chief Executive Officer, since 1988,
President, and from 1979 to 1986, Secretary of Conseco.
Ngaire E. Cuneo, 43 1992 Since 1992, Executive Vice President of Corporate Development; from 1986
to 1992, Senior Vice President and Corporate Officer of General Electric
Capital Corporation.
Rollin M. Dick, 62 1986 Since 1986, Executive Vice President, Chief Financial Officer and Director,
and from 1988 to 1989, Treasurer, of Conseco.
Donald F. Gongaware, 58 1985 Since 1985, Executive Vice President and Director and, since 1989, Chief
Operations Officer of Conseco.
Lawrence W. Inlow, 43 1986 Since 1986, Executive or Senior Vice President, Secretary and General
Counsel of Conseco.
Walter T. Kirkbride, 47 1987 Since 1987, Executive Vice President and Chief Investment Officer of
Conseco.
___________________
(a) The executive officers serve as such at the discretion of the Board of Directors and are elected at the annual meeting of the
Board.
(b) Business experience is given for at least the last five years.
14
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The common stock of Conseco (trading symbol "CNC") has been listed for
trading on the New York Stock Exchange (the "NYSE") since 1986. The following
table sets forth the quarterly dividends paid per share and the ranges of high
and low sales prices per share on the NYSE for the last two fiscal years, based
upon information supplied by the NYSE. All applicable share and per share data
in this Form 10-K have been adjusted for the two-for-one stock splits
distributed on July 1, 1991 and April 1, 1992.
Period Market Price Dividend
------ ------------
High Low Paid
---- --- ----
1992:
First Quarter $41-1/2 $30-5/8 $0.020
Second Quarter 36-1/4 20-5/8 0.020
Third Quarter 32-1/2 24-1/4 0.020
Fourth Quarter 47-3/8 29-1/4 0.020
1993:
First Quarter 73-5/8 45-3/8 0.025
Second Quarter 67-3/8 44-5/8 0.025
Third Quarter 75-1/4 57-3/4 0.025
Fourth Quarter 75-3/4 53-1/2 0.125
As of March 7, 1994, there were approximately 14,700 holders of record of
the outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
In October 1988, the Company's Board of Directors adopted a policy of
paying regular quarterly cash dividends on its common stock. The first such
dividend was $.0125 per share. Subsequent dividends, which were increased to
$.015 per share effective with the dividend paid October 1, 1990, to $.02 per
share effective with the dividend paid October 1, 1991, to $.025 per share
effective with the dividend paid January 4, 1993, and to $.125 per share
effective with the dividend paid October 1, 1993, have been paid on the first
business day of each calendar quarter, after review by the Board of
Directors of the Company's interim operating results. The Company's general
policy continues to be to retain most of its earnings. Retained earnings have
been used to finance the growth and development of the Company's business
through acquisitions or otherwise and to finance the repurchase of its common
stock on those occasions when the Company has believed that the use of funds
for stock repurchases would not interfere with other cash needs and that its
shares were undervalued in the market.
In February 1993 the Company issued $287.5 million liquidation value Series
D Cumulative Convertible Preferred Stock ("Preferred Stock"), on which
dividends ($3.25 per share) are cumulative from the date of original issue and
are payable quarterly, commencing April 15, 1993. The terms of the Preferred
Stock prohibit the payment of cash dividends on capital stock ranking junior
to the Preferred Stock if the Company is not current in its dividend payments
on the Preferred Stock. During 1993, the Company paid dividends of $13.5
million on the Preferred Stock and is current on its payments.
The principal operating subsidiaries of Conseco are life insurance
companies organized under state laws and subject to regulation by state
insurance departments. These laws and regulations limit the ability of
insurance subsidiaries to make cash dividends, loans or advances to a holding
company such as Conseco. However, these laws generally permit the payment,
without prior approval, of annual dividends which in the aggregate do not
exceed the greater of (or in some states the lesser of): (i) the subsidiary's
prior year net gain from operations; or (ii) 10 percent of surplus at the prior
year-end, both computed on the statutory basis of accounting prescribed for
insurance companies.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
Years Ended December 31,
-----------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(Amounts in millions, except per share amounts)
OPERATING DATA
Premiums collected $2,140.1 $1,464.9 $1,648.7 $1,361.4 $937.9
Insurance policy income 1,293.8 378.7 280.8 152.8 198.9
Investment activity:
Net investment income 896.2 888.6 921.4 581.7 417.7
Net trading income 93.1 35.9 50.7 6.0 14.3
Net realized gains 149.5 124.3 123.3 4.5 22.9
Total revenues 2,636.0 1,523.9 1,391.8 753.3 662.7
Income before income taxes,
minority interest and
extraordinary charge 610.2 330.0 223.2 65.3 70.2
Earnings excluding realized
investment gains
and extraordinary charge(b) 301.9 162.7 84.0 39.0 32.1
Extraordinary charge on
extinguishment
of debt, net of tax 11.9 5.3 5.0 - -
Net income 297.0 169.5 116.0 41.7 47.2
Preferred dividends 20.6 5.5 6.8 5.6 8.3
Earnings applicable to
common stock 276.4 164.0 109.2 36.1 38.9
PER SHARE DATA
Net income, primary $ 9.45 $ 5.43 $ 4.10 $1.37 $1.75
Net income, fully diluted 8.77 5.40 4.02 1.36 1.26
Earnings excluding realized
investment gains
and extraordinary charge(b) 8.92 5.18 2.89 1.25 .81
Dividends declared per common
share .30 .085 .070 .055 .05
Book value per common
share outstanding 33.78 21.86 15.44 5.83 4.30
Shares outstanding at year-end 25.3 24.9 24.7 20.6 25.2
Average fully diluted
shares outstanding 33.5 29.6 25.4 25.4 33.1
BALANCE SHEET DATA
Total assets $13,749.3 $11,772.7 $11,832.4 $8,371.1 $5,267.1
Long-term debt for which
Conseco is
directly liable 413.0 163.2 177.6 268.9 300.3
Notes payable of BLH, not direct
obligations of Conseco(c) 290.3 392.0 - - -
Notes payable related to
CCP Companies,
not direct obligations
of Conseco - - 319.3 258.1 -
Shareholders' equity 1,142.6 594.3 431.6 180.2 158.3
(a) For periods beginning with their acquisitions and ending June 30, 1992,
the financial statements of the CCP Companies were consolidated with the
financial statements of Conseco. With the completion of the initial public
offering by CCP, the Company no longer had unilateral control to direct all of
CCP's activities and therefore, no longer consolidates the financial statements
of the CCP Companies with the financial statements of Conseco. As of November
1, 1992, the Company began to include in its financial statements the newly
acquired Partnership subsidiary, Bankers. Comparison of consolidated financial
information in the above table is significantly affected by the various
Partnership acquisitions and the deconsolidation of the CCP Companies effective
July 1, 1992. Refer to the notes to consolidated financial statements included
elsewhere herein for a description of business combinations.
(b) Represents net income excluding net realized gains and extraordinary
charge, less applicable expenses, amortization, changes in future policy
benefits, taxes and minority interest.
(c) Represents notes issued by BLH in connection with the acquisition of
Bankers Life.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion highlights the material factors affecting the
results of operations and the significant changes in balance sheet items. This
discussion should be read in conjunction with the accompanying consolidated
financial statements, the notes thereto and the financial statistics appearing
elsewhere herein.
The comparison of 1993, 1992 and 1991 balances in the consolidated
financial statements is largely affected by the transactions described in Note
1 "Significant Accounting Policies - Basis of Presentation" and Note 2
"Acquisitions" to the consolidated financial statements.
RESULTS OF OPERATIONS
Conseco's earnings result from three different activities:
- The operations of life insurance companies;
- Services provided to affiliates and nonaffiliates for fees; and
- The acquisition and restructuring of life insurance companies, currently
conducted through CCP II.
Operations of Life Insurance Companies
Life insurance companies are included in Conseco's financial statements on
a consolidated basis if they are unilaterally controlled by Conseco (i.e.,
companies that are wholly owned by Conseco, companies that are over 50 percent
but less than 100 percent owned by Conseco, and companies that are over 50
percent owned by a partnership in which Conseco is the sole general partner).
Life insurance companies are included in Conseco's financial statements on an
equity basis if not so controlled (i.e., companies in which Conseco has a
significant interest but does not have unilateral control). Refer to Notes 1
and 2 of the consolidated financial statements for a description of changes
during the last three years in the composition of the companies included in
Conseco's consolidated financial statements.
Growth in this activity results from: (i) the acquisition of new companies;
(ii) changes in Conseco's ownership interest in the companies; and (iii)
changes in the profitability of such companies related to premiums received,
investment results, product profitability, expense levels and other factors.
Services Provided for Fees
Various combinations of services, including investment management, mortgage
origination and servicing, policy administration, data processing, product
marketing and executive management services, are provided to all affiliates and
other unaffiliated clients. In addition, subsidiaries of Conseco earn fees by:
(i) providing marketing services to financial institutions related to the
distribution of insurance and investment products and (ii) distributing
property and casualty insurance products through independent agencies.
Growth in this activity results from new clients (both affiliated and
others) and from increases in the fee-producing activities conducted for such
clients.
Acquisition and Restructuring of Life Insurance Companies
Since Conseco commenced operations in 1982, it has acquired 11 life
insurance companies, the first seven as wholly owned subsidiaries and the last
four through the first partnership. Recent acquisition activity is described
in Notes 1 and 2 to the consolidated financial statements. All acquisitions
have been accounted for as purchases. Therefore, activities of acquired
companies have been included in the results of operations commencing with the
date of purchase.
17
Of the first seven companies acquired as wholly owned subsidiaries by
Conseco, three were subsequently sold and four remained as wholly owned
subsidiaries at December 31, 1993. One of the four (Western National) was
partially disposed of in February 1994 when Conseco sold 60 percent of its
interest in a public offering as described in Note 16 to the consolidated
financial statements. The first three companies acquired in the first
partnership are now wholly owned subsidiaries of CCP, in which Conseco holds
a 40 percent interest. The final acquisition of the first partnership is now
a wholly owned subsidiary of BLH, in which Conseco holds a 56 percent interest.
Future acquisitions will be accomplished through CCP II, in which a
subsidiary of Conseco is the sole managing general partner. CCP II was formed
in early 1994 with commitments from 36 partners for $624 million of capital for
the purpose of completing acquisitions of insurance companies, building value
within such acquired companies and realizing such increased value for the
investing partners. Commitments to the new partnership include $100 million
from Conseco, $25 million from Bankers, $25 million from CCP, $50 million from
Western and $36 million from executive officers and directors of Conseco and
its affiliates.
Activities of companies acquired through the first partnership are recorded
in the segment related to operations of life insurance companies. Conseco also
provides services to those companies resulting in increased income in the fee
for service segment. Earnings are reflected in the acquisition and
restructuring segment when Conseco, as general partner, earns incentive
compensation related to the level of total returns to the partners in excess
of prescribed targets, and when restructuring gains are realized from the sale
of portions of the acquired entities.
18
Analysis of Net Income and Fully Diluted Earnings Per Share
The following table shows the sources of Conseco's net income (after tax
and minority interest) for the three years ended December 31, 1993,
disaggregated into the three earnings activities described in the preceding
section:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Operations of life insurance companies:
Bankers:
Operating earnings before
trading income $ 36.9 $ 4.8 $ -
Net trading income 6.9 .7 -
Net realized gains (losses) 2.9 (.1) -
Extraordinary charge (3.1) - -
------ ------ ------
Net income 43.6 5.4 -
------ ------ ------
Western:
Operating earnings before
trading income 93.4 80.6 56.8
Net trading income 32.1 16.5 15.7
Net realized gains 4.5 5.1 25.0
------ ------ ------
Net income 130.0 102.2 97.5
------ ------ ------
CCP:
Operating earnings before
trading income 34.6 23.2 10.9
Net trading income - 1.6 5.3
Net realized gains - 3.0 8.6
Extraordinary charge - (3.9) -
------ ------ ------
Net income 34.6 23.9 24.8
------ ------ ------
Wholly owned life companies excluding Western:
Operating earnings before
trading income 27.5 18.6 14.0
Net trading income 8.6 1.6 1.5
Net realized gains (losses) (1.3) 4.1 3.4
------ ------ ------
Net income 34.8 24.3 18.9
------ ------ ------
Life Re net income - 10.6 8.6
------ ------ ------
Total from operations of life insurance companies:
Operating earnings before
trading income 192.4 137.8 90.3
Net trading income 47.6 20.4 22.5
Net realized gains 6.1 12.1 37.0
Extraordinary charge (3.1) (3.9) -
------ ------ ------
Net income 243.0 166.4 149.8
------ ------ ------
Services provided for fees - net income 14.3 14.5 11.2
------ ------ ------
Acquisition and restructuring of life insurance
companies:
Incentive earnings allocation 22.3 3.6 -
Sale of stock 61.0 19.7 -
------ ------ ------
Net income 83.3 23.3 -
------ ------ ------
(continued on next page)
19
(continued from previous page)
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Corporate and other:
Operating expenses, net of revenues (15.1) (11.1) (7.3)
Interest expense (19.9) (22.2) (32.7)
Net trading loss (.7) - -
Net realized gains .9 - -
Extraordinary charge (8.8) (1.4) (5.0)
------ ------ ------
Net loss (43.6) (34.7) (45.0)
------ ------ ------
Consolidated earnings:
Operating earnings before
trading income 255.0 142.3 61.5
Net trading income 46.9 20.4 22.5
Net realized gains 7.0 12.1 37.0
Extraordinary charge (11.9) (5.3) (5.0)
------ ------ ------
Net income $297.0 $169.5 $116.0
====== ====== ======
20
The disaggregated earnings summarized in the preceding schedule resulted
in fully diluted earnings per share as follows:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Operations of life insurance companies:
Bankers:
Operating earnings before
trading income $1.10 $ .16 $ -
Net trading income .21 .02 -
Net realized gains .08 - -
Extraordinary charge (.09) - -
------ ------ ------
Net income 1.30 .18 -
------ ------ ------
Western:
Operating earnings before
trading income 2.74 2.59 2.07
Net trading income .93 .53 .56
Net realized gains .13 .16 .91
------ ------ ------
Net income 3.80 3.28 3.54
------ ------ ------
CCP:
Operating earnings before
trading income 1.03 .75 .36
Net trading income - .05 .18
Net realized gains - .09 .29
Extraordinary charge - (.11) -
------ ------ ------
Net income 1.03 .78 .83
------ ------ ------
Wholly owned life companies
excluding Western:
Operating earnings before
trading income .81 .59 .50
Net trading income .25 .06 .06
Net realized gains (.04) .13 .13
------ ------ ------
Net income 1.02 .78 .69
------ ------ ------
Life Re net income - .26 .21
------ ------ ------
Total from operations of life
insurance companies:
Operating earnings before
trading income 5.68 4.35 3.14
Net trading income 1.39 .66 .80
Net realized gains .17 .38 1.33
Extraordinary charge (.09) (.11) -
------ ------ ------
Net income 7.15 5.28 5.27
------ ------ ------
Services provided for fees - net income .42 .47 .41
------ ------ ------
Acquisition and restructuring of
life insurance companies:
Incentive earnings allocation .66 .12 -
Sale of stock 1.83 .66 -
------ ------ ------
Net income 2.49 .78 -
------ ------ ------
(continued on next page)
21
(continued from previous page)
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Corporate and other:
Operating expenses (.45) (.33) (.17)
Interest expense (.59) (.75) (1.29)
Net trading loss (.02) - -
Net realized gains .03 - -
Extraordinary charge (.26) (.05) (.20)
----- ----- -----
Net loss (1.29) (1.13) (1.66)
----- ----- -----
Consolidated earnings:
Operating earnings before trading income 7.55 4.52 2.09
Net trading income 1.37 .66 .80
Net realized gains .20 .38 1.33
Extraordinary charge (.35) (.16) (.20)
----- ----- -----
Net income $8.77 $5.40 $4.02
===== ===== =====
22
The following table further analyzes the changes in fully diluted earnings
per share in 1993 compared to 1992 and in 1992 compared to 1991 to identify the
increases (decreases) related to changes in income and the decreases related
to changes in the number of shares outstanding.
1993 1992
Compared to Compared to
1992 1991
---- ----
Fully diluted earnings per share:
Current year $8.77 $5.40
Prior year 5.40 4.02
----- -----
Net increase $3.37 $1.38
----- -----
----- -----
Increase (decrease) related to changes in income:
Operations of life insurance companies
Bankers $1.32 $ .21
Western 1.09 .28
CCP .41 .08
Wholly owned life insurance companies,
excluding Western .44 .22
Life Re (.26) .09
----- -----
Increase from operations of life
insurance companies 3.00 .88
Services provided for fees .02 .14
Acquisition and restructuring of life
insurance companies 2.07 .91
Corporate and other (.34) .34
Less effect of increase in federal income
tax rate (.23) -
----- -----
Total related to changes in income 4.52 2.27
Decrease related to issuances and repurchases
of common or common equivalent shares (1.15) (.89)
----- -----
Net increase $3.37 $1.38
===== =====
23
Additional Discussion of Consolidated Statement of Operations for the Three
Years Ended December 31, 1993:
The following tables and narratives summarize amounts reported in the
consolidated statement of operations for the three years ended December 31,
1993, disaggregated as previously described for Conseco's three earnings
activities. Many of the changes which occurred in the consolidated statement
of operations resulted from: (i) acquisitions of new affiliates; (ii)
restructurings that changed Conseco's percentage ownership in the affiliate;
and (iii) changes in control of the affiliates that affected the determination
of whether the affiliate was to be included in Conseco's statement of
operations under the consolidation or the equity method of accounting.
Operations of life insurance companies:
Bankers:
As Included in Prior to
Conseco's Consolidated Conseco's
Financial Statements Acquisition
-------------------- -----------
For the period
For the from acquisition Ten months
year ended through ended
December 31, December 31, October 31,
1993 1992 1992
---- ---- ----
(Dollars in millions)
Revenues:
Insurance policy income $1,200.7 $191.5 $ 944.1
Investment activity:
Net investment income 174.7 21.1 105.2
Net trading income 31.5 2.4 -
Net realized gains (losses) 43.6 7.0 (33.6)
Total revenues 1,450.5 222.5 1,013.8
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 864.3 120.1 720.3
Interest expense on annuities and
financial products 36.5 5.3 23.8
Interest expense on long-term debt 36.0 7.4 -
Amortization related to operations 116.9 25.6 79.4
Amortization related to realized gains 30.5 - -
Other operating costs and expenses 154.3 26.9 138.5
Income from continuing operations before
taxes, minority interest and
extraordinary charge 208.1 37.2 51.8
Income tax expense 80.2 14.9 5.9
Income from continuing operations
before minority interest 127.9 22.3 45.9
Minority interest 78.2 14.4 -
Extraordinary charge (net of minority
interest of $4.8 million) (3.1) - -
Income from continuing operations 46.6 7.9 45.9
Earnings from discontinued operations - - 16.6
Net income 46.6 7.9 62.5
Less preferred stock dividends 3.0 2.5 -
Earnings applicable to common stock 43.6 5.4 62.5
Summarized by component, all net of
applicable expenses, taxes and minority interest:
Operating earnings, excluding trading
income 36.9 4.8 73.7
Net trading income 6.9 .7 -
Net realized gain (loss) 2.9 (.1) (22.2)
Extraordinary charge on extinguishment
of debt (3.1) - -
Earnings from discontinued operations - - 11.0
Net income 43.6 5.4 62.5
24
General. Conseco's 1992 earnings reflected a 44 percent ownership interest
in BLH from November 1, 1992, the date Bankers was acquired by the Partnership.
In March 1993, BLH completed an IPO of its common stock, thus reducing
Conseco's ownership to 31 percent. On September 30, 1993, Conseco acquired
13.3 million additional common shares of BLH, increasing its ownership interest
to 56 percent. While all activities of Bankers are included in Conseco's
financial statements on a consolidated basis for all periods after November 1,
1992, the minority interest adjustment removes from Conseco's net income the
portion applicable to other owners so that net income reflects only Conseco's
applicable ownership interest (i.e., 44 percent during 1992 and the first
quarter of 1993, 31 percent during the second and third quarters of 1993
and 56 percent during the fourth quarter of 1993). To enhance comparability,
the amounts for the ten months ended October 31, 1992, (which was prior to the
Partnership's acquisition of Bankers) are separately presented.
At December 31, 1993, the BLH shares owned by Conseco had a net carrying
value of approximately $518.8 million, a market value of approximately $652.8
million and a cost of $313.1 million.
Insurance policy income. Insurance policy income increased $65.1 million,
or 5.7 percent, in 1993 over total insurance policy income in 1992. Bankers'
insurance policy income was comprised primarily of individual health premiums,
which increased as a result of new business, improved persistency and rate
increases.
Net investment income. Net investment income increased $48.4 million, or
38 percent, in 1993 over total net investment income in 1992. The increase was
due to the growth of invested assets as a result of (i) the recurring
operations, (ii) the recapture in 1993 of a reinsurance treaty with related
assets totaling $182 million and (iii) the capital transactions in connection
with BLH's IPO, as discussed in the accompanying notes to the consolidated
financial statements, partially offset by lower yields on the investment
portfolio. In addition, during 1993 fixed maturity investments were redeemed
prior to their scheduled maturity dates, resulting in additional investment
income of approximately $.8 million.
Net trading income. Net trading income (after applicable expenses,
minority interest and taxes) increased $6.2 million in 1993 compared to total
1992. Bankers' trading activities commenced in November 1992, after its
acquisition by the Partnership.
Net realized gains. Bankers sold approximately $2.2 billion of fixed
maturity investments in 1993, realizing gains (after applicable expenses,
amortization, minority interest and taxes) of $2.9 million. For the ten month
period ended October 31, 1992, realized investment losses included writedowns
primarily related to Bankers' mortgage-backed security portfolio of derivative
collateralized mortgage obligations, which portfolio was transferred to a trust
later acquired by ICH or sold to ICH prior to the acquisition of Bankers by the
Partnership.
Net realized gains relate to securities sold in response to changes in the
investment environment which created opportunities to enhance the risk profile
of the investment portfolio by replacing existing securities with alternative
securities without adversely affecting the quality of the portfolio or the
matching of expected maturities of assets and liabilities. The sales of these
securities at a gain followed by reinvestment of the proceeds at lower yields
may, absent other management action, tend to decrease future investment yields.
The Company believes, however, that the decreases in future investment yields
that may result from these sales will not have a significant effect on future
net income because: (i) additional amortization of the cost of policies
purchased and the cost of policies produced was recognized to reflect reduced
future yields (see the following paragraph); (ii) interest rates credited to
some products were reduced, diminishing the effect of the yield decrease on the
investment earnings spread; and (iii) the investment portfolio increased as a
result of reinvesting the realized gains.
The realization of investment gains affects the timing of the amortization
of cost of policies purchased and cost of policies produced. As a result of
net realized gains from the sales of fixed maturity investments in 1993,
amortization of cost of policies purchased and cost of policies produced was
increased by $21.0 million and $9.5 million, respectively.
25
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) increased $23.9 million, or 2.8 percent, in
1993 over the total amount in 1992. The increase related primarily to an
increase in premiums with mortality and morbidity features written by Bankers.
Purchase accounting adjustments were made to insurance liabilities
in conjunction with the acquisitions of Bankers made by the Partnership in
November 1992 and Conseco in September 1993 (as described in Note 2 to the
consolidated financial statements). The impact of these adjustments was that
insurance policy benefits (and change in future policy benefits) in 1993 were
lower than the amounts which would have been recorded had the accounting basis
of insurance liabilities been the same as in 1992. Such decline somewhat
offsets the increases described above. Loss ratios did not change
significantly.
Interest expense on long-term debt. Interest expense on long-term debt
increased $28.6 million in 1993 compared to the total amount in 1992. This
interest relates to debt incurred to finance the acquisition of Bankers by the
Partnership effective October 31, 1992. Therefore, interest expense was
incurred for a full year in 1993 compared to two months in 1992.
Other operating costs and expenses. Other operating costs and expenses
decreased $11.1 million, or 6.7 percent, in 1993 compared to the total amount
in 1992 as a result of cost reductions realized subsequent to the acquisition
of Bankers.
Extraordinary charge. In 1993 Bankers retired all of its junior notes,
prepaid a portion of its senior term loan and repurchased $20 million of its
Series B Senior Subordinated Notes, resulting in a net extraordinary charge of
$7.9 million, of which Conseco's share was $3.1 million.
Western:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Revenues:
Insurance policy income $ 21.8 $ 48.0 $ 43.9
Investment activity:
Net investment income 610.1 507.8 450.7
Net trading income 49.6 25.0 23.8
Net realized gains 92.7 72.4 62.2
Total revenues 774.2 653.2 580.6
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 121.2 130.2 125.9
Interest expense on annuities and
financial products 333.1 267.1 249.5
Amortization related to operations 16.5 16.3 11.3
Amortization and change in future policy
benefits related to realized gains 84.3 64.6 24.3
Other operating costs and expenses 8.4 12.1 14.2
Income before taxes 204.5 156.8 149.0
Income tax expense 74.5 54.6 51.5
Net income 130.0 102.2 97.5
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings, excluding
trading income 93.4 80.6 56.8
Net trading income 32.1 16.5 15.7
Net realized gains 4.5 5.1 25.0
Net income 130.0 102.2 97.5
26
General. Western's increased operating earnings principally reflected the
slightly widened spread between investment yields and policy crediting rates
on an increasing base of invested assets during the periods presented. The
increase in invested assets in 1993 was affected by: (i) the recapture of
reinsurance from subsidiaries of Conseco on March 31, 1993, resulting in an
increase of $1.3 billion in insurance liabilities and invested assets; and (ii)
the recapture of reinsurance from a nonaffiliated company on June 30, 1993,
resulting in an increase of $156.5 million in insurance liabilities and
invested assets.
Insurance policy income. Insurance policy income related primarily to
premiums from products with mortality and morbidity features. Declines from
1992 to 1993 have resulted from decreased emphasis on generating new premiums
from such products.
Net investment income. Net investment income has increased over the last
three years because of the overall growth of invested assets resulting from
operations and the reinsurance recaptures described above, partially offset by
lower yields on the investment portfolio. In addition, during 1993, 1992 and
1991, fixed maturity investments were redeemed prior to their scheduled
maturity dates, resulting in additional investment income of approximately
$18.0 million, $12.8 million and $3.5 million, respectively.
Net trading income. The increases in net trading income (after applicable
expenses and taxes) in 1993 over the prior two years were primarily due to more
favorable market conditions for trading activities.
Net realized gains. Net realized gains (after applicable expenses,
amortization, change in future policy benefits and taxes) often fluctuate from
year to year. Western sold fixed maturity investments of $3.6 billion, $2.4
billion and $2.9 billion in 1993, 1992 and 1991, respectively.
The effect of sales of fixed maturities on the amortization of cost of
policies purchased and cost of policies produced is discussed above under
"Bankers." As a result of the net realized gains from the sales of fixed
maturity investments in 1993, 1992, and 1991, amortization of the cost of
polices purchased was increased by $14.0 million, $42.1 million and $13.1
million, respectively and amortization of the cost of policies produced was
increased by $33.2 million, $22.5 million and $11.2 million, respectively. In
addition, the realization of investment gains affected the timing of additions
to insurance liabilities, resulting in an increase of $37.1 million in 1993.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits), which relate solely to policies with
mortality and morbidity features, fluctuated very little over the last three
years, due to decreased emphasis on generating new premiums from such products.
Interest expense on annuities and financial products. Interest expense on
annuities and financial products has increased over the last three years as a
result of increased annuity deposits, offset by reduced interest rates credited
on these products. The average rate credited on all insurance liabilities was
6.4 percent, 7.6 percent and 8.1 percent at December 31, 1993, 1992 and 1991,
respectively. The decline in credited rates over this period resulted from the
lower interest rate environment. The 1993 increase in this expense was largely
affected by the reinsurance recapture by Western as discussed under "General"
above.
Other operating costs and expenses. The decreases in other operating costs
and expenses in 1993 from 1992 and in 1992 from 1991 were primarily due to
reduced guaranty fund assessments. The decrease in 1993 also reflected
decreased commissions on renewal premiums.
27
CCP:
Prior to July 1, 1992, Conseco exercised unilateral control over CCP;
therefore, the accounts of CCP were included in the consolidated financial
statements of Conseco. After CCP's IPO, Conseco no longer had unilateral
control over CCP and included CCP's results in its financial statements on the
equity, rather than the consolidation, method. The financial information below
summarizes the amounts included in Conseco's consolidated financial statements
and the total accounts of CCP for the three-year period.
For the years ended December 31,
---------------------------------------------------------------------
1993 1992 1991
---------------------------------------------------------------------
(Dollars in millions)
Included in Included in Included in
Total Conseco's Total Conseco's Total Conseco's
CCP Accounts CCP Accounts CCP Accounts
--- --------- --- -------- --- --------
Revenues:
Insurance policy income $127.8 $ - $139.5 $ 67.1 $161.9 $161.9
Investment activity:
Net investment income 412.9 - 380.4 187.0 318.1 318.1
Net trading income 24.3 - 15.6 5.0 17.4 17.4
Net realized gains 55.8 - 63.5 22.7 41.7 41.7
Equity in earnings of CCP - 37.4 - 15.8 - -
Equity in earnings of Bankers 1.2 - .7 - - -
Gain on sale of stock by Bankers 10.5 - - - - -
Total revenues 632.5 37.4 599.7 297.6 539.1 539.1
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 77.0 - 77.1 34.6 94.7 94.7
Interest expense on annuities
and financial products 243.5 - 251.1 124.5 217.1 217.1
Interest expense on long-term debt 16.1 - 26.1 17.9 39.0 39.0
Interest expense on short-term
investment borrowings 4.4 - 2.3 1.6 5.9 5.9
Amortization related to operations 29.4 - 23.2 13.4 24.5 24.5
Amortization and change in future
policy benefits related to
realized gains 36.4 - 45.9 13.7 18.0 18.0
Other operating costs and expenses 52.2 - 55.1 27.2 54.0 54.0
Income before taxes, minority
interest and extraordinary charge 173.5 37.4 118.9 64.7 85.9 85.9
Income tax expense 65.9 2.8 42.0 18.6 30.1 33.5
Income before minority interest
and extraordinary charge 107.6 34.6 76.9 46.1 55.8 52.4
Minority interest - - - 16.2 - 24.0
Extraordinary charge - - (8.8) (3.9) - -
Net income 107.6 34.6 68.1 26.0 55.8 28.4
Less preferred stock dividends - - 3.8 2.1 5.0 3.6
Earnings applicable to common stock 107.6 34.6 64.3 23.9 50.8 24.8
Summarized by component, all net
of applicable expenses, taxes and minority interest:
Operating earnings, excluding
trading income 81.1 34.6 55.4 23.2 28.6 10.9
Net trading income 15.8 - 10.1 1.6 11.5 5.3
Net realized gains 10.7 - 11.4 3.0 15.7 8.6
Extraordinary charge - - (8.8) (3.9) - -
Net income 107.6 34.6 68.1 23.9 55.8 24.8
CCP's earnings during the three years ended December 31, 1993, were
affected by: (i) a widened spread between investment yields and policy
crediting rates on an increasing base of invested assets; (ii) the reduced
interest expense resulting from the reduction in CCP's long-term debt through
scheduled and unscheduled principal payments and lower interest rates;
(iii) the purchase of Beneficial Standard in March 1991; and (iv) the
investment of the net proceeds (after prepayment of certain debt) from CCP's
IPO in July 1992 and its second public offering in September 1993. Conseco's
equity in the earnings of CCP during the three years ended December 31, 1993,
was affected by these factors and changes in Conseco's ownership interest in
CCP resulting from CCP's IPO and other transactions described in Note 4 to the
consolidated financial statements. In addition, in 1992, Conseco's equity in
the earnings of CCP included a $3.9 million extraordinary charge related to
CCP's prepayment of debt. At December 31, 1993, Conseco owned 40 percent of
the common stock of CCP. Such shares owned by Conseco had a net carrying value
of $244.3 million, a fair value of approximately $322.1 million and a total
cost to Conseco of $102.8 million.
28
CCP was a partner in the Partnership's investment in Bankers. In
conjunction with BLH's IPO, CCP's investment in the Partnership was exchanged
for approximately 2.8 percent of the common stock of BLH. Through the date of
the IPO, CCP had recognized equity in earnings of Bankers of $1.2 million and
$.7 million in 1993 and 1992, respectively. A gain on the sale of stock by BLH
of $10.5 million was recognized at the time of the exchange. After the IPO,
CCP's investment in BLH is carried at fair value, with any unrealized gain or
loss, net of income tax, included directly in shareholders' equity.
Conseco's direct ownership in BLH and its indirect ownership through CCP
represent a controlling interest. Accordingly, Conseco's investment in BLH is
accounted for using the consolidation method. Conseco's ownership interest
in Bankers through CCP is included in the "Bankers" segment. Conseco's
ownership interest in the gain recognized by CCP in conjunction with the IPO
is included in the "Acquisitions and Restructuring" segment.
Wholly owned insurance subsidiaries of Conseco, excluding Western:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Revenues:
Insurance policy income $ 72.3 $ 81.4 $ 79.6
Investment activity:
Net investment income 110.2 181.3 162.5
Net trading income 13.4 3.2 12.7
Net realized gains 11.5 22.2 21.4
Total revenues 207.4 288.1 276.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 82.3 90.0 92.9
Interest expense on annuities and
financial products 38.9 109.9 110.1
Amortization related to operations 7.6 16.2 15.4
Amortization related to realized gains 11.5 15.1 8.1
Other operating costs and expenses 12.0 18.2 15.9
Income before taxes 55.0 38.1 29.5
Income tax expense 20.2 13.8 10.6
Net income 34.8 24.3 18.9
Summarized by component, all net
of applicable expenses and taxes:
Operating earnings, excluding
trading income 27.5 18.6 14.0
Net trading income 8.6 1.6 1.5
Net realized gains (losses) (1.3) 4.1 3.4
Net income 34.8 24.3 18.9
Insurance policy income. Insurance policy income related primarily to
premiums from products with mortality and morbidity features and the recent
declines have resulted from decreased emphasis on generating new premiums from
such products.
29
Net investment income. Net investment income decreased from 1992 to 1993
because of the recapture of reinsurance by Western from Conseco's other wholly
owned life insurance subsidiaries on March 31, 1993, which resulted in a
decrease of $1.3 billion in insurance liabilities and invested assets. Net
investment income increased from 1991 to 1992 as a result of the overall growth
of invested assets resulting from operations. In addition, during 1993, 1992
and 1991 fixed maturity investments were redeemed prior to their scheduled
maturity dates, resulting in additional investment income of approximately $3.7
million, $7.5 million and $.4 million, respectively.
Net trading income. The increase in net trading income (after applicable
expenses and taxes) in 1993 over the prior two years was primarily due to more
favorable market conditions for trading activities.
Net realized gains. Net realized gains (after applicable expense,
amortization and taxes) often fluctuate from year to year. Fixed maturity
investments of $.6 billion, $.9 billion and $.6 billion were sold in 1993, 1992
and 1991, respectively.
The effect of sales of fixed maturities on the amortization of cost of
policies purchased and cost of policies produced is discussed above under
"Bankers." As a result of the net realized gains from the sales of fixed
maturity investments by Conseco's other wholly owned life insurance
subsidiaries in 1993, 1992 and 1991, amortization of the cost of policies
purchased was increased by $11.0 million, $7.9 million and $2.4 millon,
respectively, and amortization of the cost of policies produced was increased
by $.5 million and $7.2 million and $5.7 million, respectively.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) which relate solely to policies with
mortality and morbidity features have fluctuated over the last three years due
to the decreased emphasis on generating new premiums from such products.
Interest expense on annuities and financial products. Interest expense on
annuities and financial products decreased from 1992 to 1993 as a result of the
reinsurance recapture by Western National. Such expense increased from 1991
to 1992 as a result of increased annuity deposits, offset by reduced rates
credited on these products. The average rate credited on all insurance
liabilities was approximately 7.0 percent at December 31, 1993 and 1992, and
approximately 7.9 percent at December 31, 1991.
Amortization related to operations. Amortization related to operations
decreased in 1993 from 1992 as a result of the recapture of reinsurance, which
was previously discussed.
Other operating costs and expenses. The decrease in other operating costs
and expenses in 1993 from 1992 was primarily due to the reinsurance recapture
by Western National, which was previously discussed. The increase in other
operating costs and expenses in 1992 from 1991 was due to several factors
including increased guaranty fund assessments and compensation costs.
Life Re:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Equity in earnings of Life Re $ - $11.3 $9.3
Income tax expense - .7 .7
Net income attributable to
investment in Life Re - 10.6 8.6
Conseco's ownership interest in Life Re was sold in November 1992, thereby
terminating this source of income.
30
Services Provided for Fees:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Revenue:
Investment management $34.1 $25.0 $19.1
Commissions 9.4 1.7 1.4
Administrative services, net of
directly related expenses 5.5 3.5 1.9
Total revenue 49.0 30.2 22.4
Less intercompany eliminations (22.5) (17.3) (17.0)
Revenues reported 26.5 12.9 5.4
Net income attributable to:
Investment management 14.7 12.3 10.2
Commissions (4.0) (.1) (.3)
Administrative services 3.6 2.3 1.3
Net income 14.3 14.5 11.2
Conseco's fee revenues include: (i) fees for investment management and
mortgage origination and servicing; (ii) commissions earned for insurance and
investment product marketing and distribution; and (iii) administrative fees
for policy administration, data processing, product marketing and executive
management services. To the extent these services are provided to entities
that are included in the financial statements on a consolidated basis, the
intercompany fees are eliminated in consolidation.
In March 1993, Conseco acquired Marketing Distribution Systems Consulting
Group, Inc. and Subsidiaries ("Bankmark"), an insurance marketing company which
develops relationships with financial institutions to provide insurance
and investment products to their customers. Through Bankmark, financial
institutions can offer products from several insurance companies, including
Western National. After its acquisition by Conseco, Bankmark began a formal
program to actively expand its business by developing relationships with a few
large money-center banks to assist them in distributing retail insurance
products to their customers. As a result of the costs incurred in conjunction
with Bankmark's expansion efforts, Bankmark incurred a net loss of
approximately $3.7 million during the period from its acquisition through
December 31, 1993.
Growth in total fees during the last three years was the result of new
clients (both affiliated and others) and from growth in fee-producing
activities provided to such clients. Commission revenues of Bankmark,
subsequent to its acquisition in March 1993, totaled $7.4 million.
Acquisitions and Restructuring of Life Insurance Companies:
For the years ended December 31,
--------------------------------
1993 1992
---- ----
(Dollars in millions)
Incentive earnings allocation $ 36.6 $ 9.3
Gain on sale of stock 101.5 45.6
Total revenues 138.1 54.9
Income tax expense 54.8 31.6
Net income 83.3 23.3
31
The incentive earnings allocations were earned when total returns realized
by the other partners in the first partnership exceeded prescribed targets.
Such amounts were recorded: (i) in 1992 based on the returns resulting from the
value of the CCP shares distributed to the partners; and (ii) in 1993, based
on the value of BLH shares so distributed. Income from the sale of stock in
1992 resulted from Conseco's sale of its ownership in Life Re and from
Conseco's share of the gain realized from the public sale of shares by CCP.
The 1993 gain related to the public sale of shares by BLH.
Corporate and other:
For the years ended December 31,
--------------------------------
1993 1992 1991
---- ---- ----
(Dollars in millions)
Net investment income $12.4 $ 8.4 $10.0
Total revenues 14.1 9.3 10.9
Interest expense on long-term debt 30.6 33.7 49.5
Other operating costs and expenses 35.9 26.2 22.5
Income tax benefit 17.6 17.3 21.1
Expenses before extraordinary charge 34.8 33.3 40.0
Extraordinary charge on extinguishment
of debt 8.8 1.4 5.0
Net loss 43.6 34.7 45.0
These operations include financing costs for debt on which Conseco is
directly liable and the costs associated with the holding company operations.
The 32 percent decline in interest expense on long term debt from 1991 to
1992 was attributable to declines in long-term debt through scheduled and
unscheduled principal payments. Interest expense for 1993 reflected: (i) the
decline in long-term debt through scheduled and unscheduled principal payments;
(ii) the refinancing of 12.75 percent senior subordinated notes through the
issuance of 8.125 percent senior notes; and (iii) the $200 million senior
secured loan used to acquire additional shares of Bankers in September 1993
(such debt was repaid in February 1994 with a portion of the proceeds from the
IPO of WNC).
Other operating costs and expenses increased over the last three years
principally as the result of compensation expense based on the Company's
increased earnings.
SALES
Insurance policy income shown in the Company's consolidated statement of
operations in accordance with generally accepted accounting principles consists
of premiums received for policies which have life contingencies or morbidity
features. For annuity and universal life contracts without such features,
premiums collected are not reported as revenues, but rather are reported as
deposits to insurance liabilities. Revenues for products recognized as
deposits to insurance liabilities are recognized over time in the form of
investment income and surrender or other charges.
32
Premiums collected by Bankers. Total premiums collected in 1993 were
$1,464.7 million, of which $264.0 million were recorded as deposits to policy
liability accounts. This compares to $1,368.9 million collected and $233.3
million recorded as deposits to policy liability accounts in 1992. Bankers
amounts in 1992, which are used as a basis of comparison in this discussion,
include periods prior to Conseco's acquisition of Bankers in November 1992.
Collected premiums by type are provided in the following table for 1993 and
1992:
For the years ended
December 31,
--------------
1993 1992
---- ----
(Dollars in millions)
Individual health:
Medicare supplement $ 565.5 $ 524.9
Long-term care 114.9 103.5
Other 142.4 160.5
-------- --------
Total individual health