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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-9250
CONSECO, INC.
INDIANA NO. 35-1468632
STATE OF INCORPORATION IRS EMPLOYER IDENTIFICATION NO.
11825 N. PENNSYLVANIA STREET
CARMEL, INDIANA 46032 (317) 817-6100
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES TELEPHONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, No Par Value New York Stock Exchange, Inc.
8 1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
10 1/2% Senior Notes due 2004 New York Stock Exchange, Inc.
9.16% Trust Originated Preferred Securities New York Stock Exchange, Inc.
7% FELINE PRIDES New York Stock Exchange, Inc.
8.70% Trust Originated Preferred Securities New York Stock Exchange, Inc.
9% Trust Originated Preferred Securities New York Stock Exchange, Inc.
9.44% Trust Originated Preferred Securities New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of common stock held by nonaffiliates (computed as
of April 11, 2000): $2,309,952,454
Shares of common stock outstanding as of April 11, 2000: 325,264,121
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's
definitive proxy statement for the 2000 annual meeting of shareholders are
incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS OF CONSECO.
Conseco, Inc. is a financial services holding company. We conduct and
manage our business through two operating segments, reflecting our major lines
of business: (i) insurance and fee-based operations; and (ii) finance
operations. Our insurance subsidiaries develop, market and administer
supplemental health insurance, annuity, individual life insurance, individual
and group major medical insurance and other insurance products. This segment
also includes other asset accumulation products such as mutual funds. Our
finance subsidiaries originate, purchase, sell and service consumer and
commercial finance loans throughout the United States. As used in this report,
the terms "we," "Conseco" or the "Company" refer to Conseco, Inc. and its
consolidated subsidiaries, unless the context requires otherwise. Since 1982,
Conseco has acquired 19 insurance groups. In 1998, we acquired Conseco Finance
Corp. ("Conseco Finance", formerly Green Tree Financial Corporation prior to its
name change in November 1999) which comprises our finance operations. Our
operating strategy is to grow our businesses by focusing our resources on the
development and expansion of profitable products and strong distribution
channels, to seek to achieve superior investment returns through active asset
management and to control expenses. On March 31, 2000, we announced that we plan
to explore the sale of Conseco Finance and are hiring Lehman Brothers Inc. to
assist in the planned sale. If the planned sale is completed, the Company will
no longer have finance operations. For a discussion concerning results of
operations by operating segment, see "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations."
In recent years, Conseco has been active in efforts to increase the
familiarity and overall preference for our brand. We believe that in a
competitive marketplace like financial services, companies that can
differentiate themselves through a familiar brand can obtain full value for
their products; sell more efficiently and command greater customer loyalty;
recruit and retain talent more easily; better withstand and weather inevitable
business crises; and have better access to the financial markets and the capital
they need in order to grow. Our advertising campaign is designed to introduce
consumers to the Conseco brand, to our product line and to the benefits of doing
business with Conseco.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Our executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and our telephone number is (317) 817-6100.
Data in Item 1 are provided as of December 31, 1999, or for the year then
ended (as the context implies), unless otherwise described.
MARKETING AND DISTRIBUTION
INSURANCE
Our insurance products are sold through three primary distribution
channels -- career agents, professional independent producers and direct
marketing.
Conseco seeks to retain the loyalty of its agency force by providing
marketing and sales support; electronic and automated access to account and
commission information; and marketing and training tools. We also have
introduced new products like equity-indexed annuities (1996) and multibucket
flexible premium annuities (which provide for various earnings strategies under
one product) (1999). We are also seeking to reduce our agents' administrative
burden, increase their productive sales time and get them the information they
need faster and more reliably. The Conseco Online Information System ("COINS")
enables agents to track policy and commission information and order materials at
their convenience. Many of our marketing companies and agents use COINS.
Our insurance subsidiaries collectively hold licenses to market our
insurance products in all fifty states, the District of Columbia, and certain
protectorates of the United States. Sales to residents of the following states
accounted for at least 5 percent of our 1999 collected premiums: California (9.8
percent), Florida (8.6 percent), Illinois (8.2 percent) and Texas (6.9 percent).
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We believe that people purchase most types of life insurance, accident and
health insurance and annuity products only after being contacted and solicited
by an insurance agent. Accordingly, the success of our distribution system is
largely dependent on our ability to attract and retain agents who are
experienced and highly motivated.
A description of the primary distribution channels follows:
Career Agents. This agency force of approximately 5,000 agents working
from 187 branch offices, permits one-on-one contacts with potential
policyholders and promotes strong personal relationships with existing
policyholders. The career agents sell primarily Medicare supplement and
long-term care insurance policies, senior life insurance and annuities. In 1999,
this distribution channel accounted for $1,522.0 million, or 23 percent, of our
total collected premiums. These agents sell only Conseco policies and typically
visit the prospective policyholder's home to conduct personalized
"kitchen-table" sales presentations. After the sale of an insurance policy, the
agent serves as a contact person for policyholder questions, claims assistance
and additional insurance needs.
Professional Independent Producers. This distribution channel consists of
a general agency and insurance brokerage distribution system comprised of
approximately 140,000 independent licensed agents doing business in all fifty
states. In 1999, this channel accounted for $4,808.0 million, or 74 percent, of
our total collected premiums.
Professional independent producers are a diverse network of independent
agents, insurance brokers and marketing organizations. Marketing companies
typically recruit agents for Conseco by advertising our products and commission
structure through direct mail advertising or through seminars for insurance
agents and brokers. These organizations bear most of the costs incurred in
marketing our products. We compensate the marketing organizations by paying them
a percentage of the commissions earned on new sales generated by the agents
recruited by such organizations. Certain of these marketing organizations are
specialty organizations that have a marketing expertise or a distribution system
relating to a particular product, such as flexible-premium annuities for
educators. During 1999, Conseco purchased three organizations that specialize in
marketing and distributing supplemental health products. In 1999, these three
organizations accounted for $213.8 million, or 3 percent, of our total collected
premiums.
Direct Marketing. This distribution channel is engaged primarily in the
sale of "graded benefit life" insurance policies. In 1999, this channel
accounted for $176.7 million, or 3 percent, of our total collected premiums.
FINANCE
Our finance group, with nationwide operations and managed finance
receivables of $45.8 billion at December 31, 1999, is one of America's largest
consumer finance companies, with leading market positions in retail home equity
mortgages, home improvement loans and consumer and dealer floorplan loans for
manufactured housing. Originations to customers in the following states
accounted for at least 5.0 percent of our 1999 originations: Texas (7.5
percent), California (7.1 percent), Florida (6.2 percent) and North Carolina
(5.9 percent). On March 31, 2000, we announced that we plan to explore the sale
of Conseco Finance. If the planned sale is completed, the Company will no longer
have finance operations.
During 1999, we sold our aircraft and franchise commercial finance
business. We also decided to discontinue the origination of commercial
asset-based loans. These actions are consistent with our intention to focus our
capital and resources on our core consumer businesses. The aircraft, franchise
and commercial asset-based loans represented 6.4 percent of our originations
during 1999.
During 1999, 70 percent of our finance products were marketed indirectly to
customers through intermediary channels such as dealers, vendors, contractors
and retailers; the remaining products were marketed directly to our customers
through our regional offices and service centers. A description of the primary
distribution channels follows:
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Dealers, Vendors, Contractors and Retailers. Manufactured housing, home
improvement, home equity, consumer finance and equipment finance receivables are
purchased from and originated by selected dealers and contractors after being
underwritten and analyzed via one of the Company's automated credit scoring
systems at one of our regional service centers. During 1999, these marketing
channels accounted for the following percentages of total loan originations: 88
percent of consumer loans for manufactured housing, 61 percent of home
improvement, 40 percent of home equity, 92 percent of consumer finance and 71
percent of equipment finance.
Regional Service Centers, Retail Satellite Offices and Telemarketing
Center. We market and originate manufactured housing loans through 45 regional
offices and 3 origination and processing centers. We originate home equity loans
through a system of 139 retail satellite offices and 6 regional centers. We also
market private label retail credit products through selected retailers and
process the contracts through Conseco Bank, Inc. ("Conseco Bank"), a Utah
industrial loan company, and through Green Tree Retail Services Bank, Inc.
("Retail Bank"), a South Dakota limited purpose credit card bank, both of which
are wholly owned subsidiaries of the Company. We utilize direct mail to
originate home improvement loans, home equity loans and credit cards. We provide
commercial finance loans to dealers, manufacturers and other distributors
through three regional lending centers. During 1999, these marketing channels
accounted for the following percentages of total loan originations: 12 percent
of manufactured housing, 39 percent of home improvement, 60 percent of home
equity, 8 percent of consumer finance, 29 percent of equipment finance and 100
percent of retail credit contracts.
INSURANCE PRODUCTS
SUPPLEMENTAL HEALTH
Supplemental health products include Medicare supplement, long-term care
and specified-disease insurance products distributed through our career agency
force and professional independent producers. During 1999, we collected Medicare
supplement premiums of $915.6 million, long-term care premiums of $793.5
million, specified-disease premiums of $376.3 million and other supplemental
health premiums of $121.2 million.
The following describes the major supplemental health products:
Medicare supplement. Medicare is a two-part federal health insurance
program for disabled persons and senior citizens (age 65 and older). Part A of
the program provides protection against the costs of hospitalization and related
hospital and skilled nursing home care, subject to an initial deductible,
related coinsurance amounts and specified maximum benefit levels. The deductible
and coinsurance amounts are subject to change each year by the federal
government. Part B of Medicare covers doctors bills and a number of other
medical costs not covered by Part A, subject to deductible and coinsurance
amounts for "approved" charges.
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as deductibles,
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. Our Medicare supplement plans automatically adjust coverage to reflect
changes in Medicare benefits. In marketing these products, we concentrate on
individuals who have recently become eligible for Medicare by reaching the age
of 65. We offer a higher first-year commission for sales to these policyholders
and competitive premium pricing. Approximately one-half of new sales of Medicare
supplement policies are to individuals who are 65 years old.
Long-term care. Long-term care products provide coverage, within
prescribed limits, for nursing home, home healthcare, or a combination of both
nursing home and home healthcare expenses. The long-term care plans are sold
primarily to retirees, and to a lesser degree, to older self-employed
individuals and others in middle-income levels.
Current nursing home care policies cover incurred and daily fixed-dollar
benefits available with an elimination period (which, similar to a deductible,
requires the insured to pay for a certain number of days of
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nursing home care before the insurance coverage begins), subject to a maximum
benefit. Home healthcare policies cover the usual and customary charges after a
deductible and are subject to a daily or weekly maximum dollar amount, and an
overall benefit maximum. We monitor the loss experience on our long-term care
products and, when necessary, apply for rate increases in the states in which we
sell such products.
Specified-disease products. These policies generally provide fixed or
limited benefits. Cancer insurance and heart/stroke products are guaranteed
renewable individual accident and health insurance policies. Payments under
cancer insurance policies are generally made directly to, or at the direction
of, the policyholder following diagnosis of, or treatment for, a covered type of
cancer. Heart/stroke policies provide for payments directly to the policyholder
for treatment of a covered heart disease, heart attack or stroke. The benefits
provided under the specified-disease policies do not necessarily reflect the
actual cost incurred by the insured as a result of the illness; benefits are not
reduced by any other medical insurance payments made to or on behalf of the
insured.
Approximately 73 percent of our specified-disease policies in force (based
on a count of policies) are sold with return of premium or cash value riders.
The return of premium rider generally provides that after a policy has been in
force for a specified number of years or upon the policyholder reaching a
specified age, the Company will pay to the policyholder, or a beneficiary under
the policy, the aggregate amount of all premiums paid under the policy, without
interest, less the aggregate amount of all claims incurred under the policy.
ANNUITIES
Annuity products include equity-indexed annuity, variable annuity,
traditional fixed rate annuity and market value-adjusted annuity products sold
through both career agents and professional independent producers. During 1999,
we collected annuity premiums of $2,473.7 million.
The following describes the major annuity products:
Equity-indexed annuity products. These products accounted for $911.8
million, or 14 percent, of our total premiums collected in 1999. The
accumulation value of these annuities is credited with interest at an annual
minimum guaranteed average rate over the term of the contract of 3 percent (or,
including the effect of applicable sales loads, a 1.7 percent compound average
interest rate over the term of the contracts), but the annuities provide for
potentially higher returns based on a percentage (the "participation rate") of
the change in the Standard & Poor's Corporation ("S&P") 500 Index during each
year of their term. The Company has the discretionary ability to annually change
the participation rate which currently ranges from 50 percent to 70 percent plus
a first-year "bonus", similar to the bonus interest described below for
traditional fixed rate annuity products, which generally ranges from 20 percent
to 30 percent. The minimum guaranteed values are equal to: (i) 90 percent of
premiums collected for annuities for which premiums are received in a single
payment (single premium deferred annuities "SPDAs"), or 75 percent of first year
and 87.5 percent of renewal premiums collected for annuities which allow for
more than one payment (flexible premium deferred annuities "FPDAs"); plus (ii)
interest credited on such percentage of the premiums collected at an annual rate
of 3 percent. The annuity provides for penalty-free withdrawals of up to 10
percent of premium in each year after the first year of the annuity's term.
Other withdrawals from SPDA products are generally subject to a surrender charge
of 9 percent over the eight year contract term at which time the contract must
be renewed or withdrawn. Other withdrawals from FPDA products are subject to a
surrender charge of 12 percent to 20 percent in the first year, declining 1.2
percent to 1.3 percent each year, to zero over a 10 to 15 year period, depending
on issue age. We purchase S&P 500 Index Call Options ("S&P 500 Call Options") in
an effort to hedge potential increases to policyholder benefits resulting from
increases in the S&P 500 Index to which the product's return is linked.
Other fixed rate annuity products. These products include SPDAs, FPDAs
(excluding the equity-indexed products) and single-premium immediate annuities
("SPIAs"). These products accounted for $958.5 million, or 15 percent, of our
total collected premiums in 1999. Our SPDAs and FPDAs typically have an interest
rate (the "crediting rate") that is guaranteed by the Company for the first
policy year, after which, we have the discretionary ability to change the
crediting rate to any rate not below a guaranteed minimum rate. The guaranteed
rate on annuities written recently ranges from 3.0 percent to 4.5 percent, and
the rate on
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all policies in force ranges from 3.0 percent to 6.0 percent. The initial
crediting rate is largely a function of: (i) the interest rate we can earn on
invested assets acquired with the new annuity fund deposits; (ii) the costs
related to marketing and maintaining the annuity products; and (iii) the rates
offered on similar products by our competitors. For subsequent adjustments to
crediting rates, we take into account the yield on our investment portfolio,
annuity surrender assumptions, competitive industry pricing and the crediting
rate history for particular groups of annuity policies with similar
characteristics.
Approximately 55 percent of our new annuity sales have been "bonus"
products. The initial crediting rate on these products specifies a bonus
crediting rate ranging from 1 percent to 6 percent of the annuity deposit for
the first policy year only. After the first year, the bonus interest portion of
the initial crediting rate is automatically discontinued, and the renewal
crediting rate is established. As of December 31, 1999, crediting rates on our
outstanding traditional annuities were at an average rate, excluding bonuses, of
4.3 percent.
The policyholder is typically permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to his or her account (the
"accumulation value"), subject in virtually all cases to the assessment of a
surrender charge for withdrawals in excess of specified limits. Most of our
traditional annuities provide for penalty-free withdrawals of up to 10 percent
of the accumulation value each year, subject to limitations. Withdrawals in
excess of allowable penalty-free amounts are assessed a surrender charge during
a penalty period which generally ranges from five to 12 years after the date a
policy is issued. The initial surrender charge is generally 6 percent to 12
percent of the accumulation value and generally decreases by approximately 1 to
2 percentage points per year during the penalty period. Surrender charges are
set at levels to protect the Company from loss on early terminations and to
reduce the likelihood of policyholders terminating their policies during periods
of increasing interest rates. This practice lengthens the effective duration of
policy liabilities and enables the Company to maintain profitability on such
policies.
SPIAs accounted for $41.8 million, or .6 percent, of our total collected
premiums in 1999. SPIAs are designed to provide a series of periodic payments
for a fixed period of time or for life, according to the policyholder's choice
at the time of issue. Once the payments begin, the amount, frequency and length
of time for which they are payable are fixed. SPIAs often are purchased by
persons at or near retirement age who desire a steady stream of payments over a
future period of years. The single premium is often the payout from a terminated
annuity contract. The implicit interest rate on SPIAs is based on market
conditions when the policy is issued. The implicit interest rate on the
Company's outstanding SPIAs averaged 6.9 percent at December 31, 1999.
Recently, the Company introduced its multibucket annuity product which
provides for different rates of cash value growth based on the experience of a
particular market strategy. Earnings are credited to this product based on the
market activity of a given strategy, less management fees, and funds may be
moved between cash value strategies. Portfolios available include high-yield
bond, investment-grade bond, convertible bond and guaranteed-rate portfolios.
During 1999, this product accounted for $76.9 million, or 1.2 percent, of our
total collected premiums.
Variable annuity products. Variable annuities accounted for $603.4
million, or 9.3 percent, of our total premiums collected in 1999. Variable
annuities, sold on a single-premium or flexible-premium basis, differ from fixed
annuities in that the principal value may fluctuate, depending on the
performance of assets allocated pursuant to various investment options chosen by
the contract owner. Variable annuities offer contract owners a fixed or variable
rate of return based upon the specific investment portfolios into which premiums
may be directed.
LIFE
Life products include traditional, universal life and other life insurance
products. These products are currently sold through career agents, professional
independent producers and direct response marketing. During 1999, we collected
$970.7 million, or 15 percent, of our total collected premiums from life
products.
Interest-sensitive life products. These products include universal life
products that provide whole life insurance with adjustable rates of return
related to current interest rates. They accounted for $511.3 million, or
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7.9 percent, of our total collected premiums in 1999 and are marketed through
professional independent producers and to a lesser extent, career agents. The
principal differences between universal life products and other
interest-sensitive life insurance products are policy provisions affecting the
amount and timing of premium payments. Universal life policyholders may vary the
frequency and size of their premium payments, and policy benefits may also
fluctuate according to such payments. Premium payments under other interest-
sensitive policies may not be varied by the policyholders, and as a result, are
designed to reduce the administrative costs typically associated with monitoring
universal life premium payments and policy benefits.
Traditional life. These products accounted for $459.4 million, or 7.1
percent, of our total collected premiums in 1999. Traditional life policies,
including whole life, graded benefit life and term life products, are marketed
through professional independent producers, career agents and direct response
marketing. Under whole life policies, the policyholder generally pays a level
premium over an agreed period or the policyholder's lifetime. The annual premium
in a whole life policy is generally higher than the premium for comparable term
insurance coverage in the early years of the policy's life, but is generally
lower than the premium for comparable term insurance coverage in the later years
of the policy's life. These policies, which continue to be marketed by the
Company on a limited basis, combine insurance protection with a savings
component that increases in amount gradually over the life of the policy. The
policyholder may borrow against the savings generally at a rate of interest
lower than that available from other lending sources. The policyholder may also
choose to surrender the policy and receive the accumulated cash value rather
than continuing the insurance protection. Term life products offer pure
insurance protection for a specified period of time -typically 5, 10 or 20
years.
Traditional life products also include graded benefit life insurance
products. Graded benefit life products accounted for $176.7 million, or 2.7
percent, of our total collected premiums in 1999. Graded benefit life insurance
products are offered on an individual basis primarily to persons age 50 to 80,
principally in face amounts of $350 to $10,000, without medical examination or
evidence of insurability. Premiums are paid as frequently as monthly. Benefits
paid are less than the face amount of the policy during the first two years,
except in cases of accidental death. Graded benefit life policies are marketed
using direct response marketing techniques. New policyholder leads are generated
primarily from television and print advertisements.
INDIVIDUAL AND GROUP MAJOR MEDICAL
Current sales of our individual and group major medical health insurance
products are targeted to self-employed individuals, small business owners, large
employers and early retirees. Various deductible and coinsurance options are
available, and most policies require certain utilization review procedures. The
profitability of this business depends largely on the overall persistency of the
business in force, claim experience and expense management. During 1999, we
collected $855.7 million, or 13 percent, of our total collected premiums from
these products.
FINANCE PRODUCTS
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance. If the planned sale is completed, the Company will no longer have
finance operations.
CONSUMER FINANCING
Manufactured Housing. Our finance subsidiaries provide financing for
consumer purchases of manufactured housing. During 1999, we originated $6.6
billion of contracts for manufactured housing purchases, or 26 percent of our
total originations. At December 31, 1999, our managed receivables include $24.7
billion of contracts for manufactured housing purchases, or 54 percent of total
managed receivables. Manufactured housing or a manufactured home is a structure,
transportable in one or more sections, which is designed to be a dwelling with
or without a permanent foundation. Manufactured housing does not include either
modular housing (which typically involves more sections, greater assembly and a
separate means of transporting the sections) or recreational vehicles.
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The majority of sales contracts for manufactured home purchases are
financed on a conventional basis. Federal Housing Administration and Veterans'
Administration contracts represent less than 1 percent of our manufactured
housing originations and 2 percent of our total servicing portfolio.
Manufactured housing contracts are generally subject to minimum down payments of
at least 5 percent of the amount financed and have terms of up to 30 years.
Through our regional service centers, we purchase manufactured housing
contracts from dealers located throughout the United States. Our regional
service center personnel solicit dealers in their region. If the dealer wishes
to utilize our financing, the dealer completes an application. Upon approval, a
dealer agreement is executed. We also originate manufactured housing installment
loan agreements directly with customers. For the year ended December 31, 1999,
88 percent of our manufactured housing loan originations were purchased from
dealers and 12 percent were originated directly by us.
Customers' credit applications for new manufactured homes are reviewed in
our service centers. If the application meets our guidelines, we generally
purchase the contract after the customer has moved into the manufactured home.
We use a proprietary automated credit scoring system to evaluate manufactured
housing contracts. The scoring system is statistically based, quantifying
information using variables obtained from customer credit applications and
credit reports.
Mortgage Services. Products within this category include home equity and
home improvement loans. During 1999, we originated $6.7 billion of contracts for
these products, or 27 percent of our total originations. At December 31, 1999,
our managed receivables include $12.2 billion of contracts for home equity and
home improvement loans, or 27 percent of total managed receivables.
We originate home equity loans through 139 retail satellite offices and 6
regional centers and through a network of correspondent lenders throughout the
United States. The satellite offices are responsible for originating,
processing, underwriting and funding the loan transaction. Subsequently, loans
are re-underwritten on a test basis by a third party to ensure compliance with
our credit policy. After the loan has closed, the loan documents are forwarded
to our loan servicing center. The servicing center is responsible for handling
customer service and performing document handling, custodial and quality control
functions.
During 1999, approximately 60 percent of our home equity finance loans were
originated directly with the borrower. The remaining finance volume was
originated through approximately 220 correspondent lenders.
Typically, home equity loans are secured by first or second liens. Homes
used for collateral in securing home equity loans may be either residential or
investor owned, one-to-four-family properties having a minimum appraised value
of $25,000. During 1999, approximately 57 percent of the loans originated were
secured by first liens. The average loan to value for loans originated in 1999
was approximately 91 percent. The majority of our home equity loans are fixed
rate closed-end loans. We periodically purchase adjustable rate loans from our
correspondent network. Adjustable rate loans accounted for 22 percent of our
home equity finance volume during 1999.
We originate the majority of our home improvement loan contracts indirectly
through a network of home improvement contractors located throughout the United
States. We review the financial condition, business experience and
qualifications of all contractors through which we obtain loans.
We finance both conventional home improvement contracts and contracts
insured through the Federal Housing Administration Title I program. Such
contracts are generally secured by first, second or, to a lesser extent, third
liens on the improved real estate. We also implemented an unsecured conventional
home improvement lending program for certain customers which generally allows
for loans of $2,500 to $15,000. Unsecured loans account for less than 3 percent
of our home improvement servicing portfolio.
Typically, an approved contractor submits the customer's credit application
and construction contract to our centralized service center where an analysis of
the creditworthiness of the customer is made using a proprietary credit scoring
system. If it is determined that the application meets our underwriting
guidelines, we typically purchase the contract from the contractor when the
customer verifies satisfactory completion of the work.
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We also originate home improvement loans directly with borrowers. After
receiving a mail solicitation, the customer calls our telemarketing center and
our sales representative explains the available financing plans, terms and rates
depending on the customer's needs. The majority of the loans are secured by a
second or third lien on the real estate of the customer. Direct distribution
accounted for approximately 39 percent of the home improvement finance
originations during 1999.
The types of home improvements we finance include exterior renovations
(such as windows, siding and roofing); pools and spas; kitchen and bath
remodeling; and room additions and garages. We may also extend additional credit
beyond the purchase price of the home improvement for the purpose of debt
consolidation.
Consumer/Credit Card. These products include financing for consumer
products and our private label credit card programs. During 1999, we originated
$3.2 billion of contracts for these products, or 13 percent of our total
originations. At December 31, 1999, our managed receivables include $3.8 billion
of contracts for consumer product and credit card loans, or 8 percent of total
managed receivables.
We also provide financing for the purchase of certain consumer products
such as marine products (boats, boat trailers and outboard motors); motorcycles;
recreational vehicles; sport vehicles (snowmobiles, personal watercraft and
all-terrain vehicles); pianos and organs; and horse and utility trailers. These
financing contracts are typically originated by dealers throughout the United
States. Approved dealers submit the customer's credit application and purchase
order to our central service center where an analysis of the creditworthiness of
the proposed buyer is made. If the application is approved, we purchase the
contract when the customer completes the purchase transaction.
We also offer private label retail credit card programs with select
retailers. We review the credit of individual customers seeking credit cards
utilizing a credit scoring system.
COMMERCIAL FINANCING
Commercial. Commercial financing primarily includes: (i) floorplan
lending; (ii) truck lending and leasing; and (iii) small-ticket equipment
lending and leasing. During 1999, we originated $8.5 billion of contracts for
commercial financing, or 34 percent of our total originations. At December 31,
1999, our managed receivables include $5.1 billion of contracts for commercial
financing, or 11 percent of total managed receivables.
During 1999, we sold our aircraft and franchise commercial finance
divisions. We also decided to discontinue the origination of commercial
asset-backed loans. These actions are consistent with our intention to focus our
capital and resources on our core consumer businesses. During 1999, we
originated $1.6 billion of these loans, or 6.4 percent of our total
originations.
"Floorplan receivables" represent the financing of product inventory for
retail dealers of a variety of consumer products. The products securing the
floorplan receivables include manufactured housing, recreational vehicles and
marine products. During 1999, we originated $5.6 billion of these loans, or 22
percent of our total originations. We generally provide floorplan financing for
products only if we have also entered into an agreement with the manufacturer,
distributor or other vendor of such product to allow us to provide the consumer
financing in connection with the sale of products that are the subject of the
floorplan financing. Advances made for the purchase of inventory are most
commonly arranged in the following manner: the dealer will contact the
manufacturer and place a purchase order for a shipment of inventory. The
manufacturer will then contact us to obtain approval for the loan. Upon such
request, we will analyze whether: (i) the manufacturer is in compliance with its
floorplan agreement; (ii) the dealer is in compliance with our program; and
(iii) such purchase order is within the dealer's credit limit. If these
requirements are met, we will approve the loan. The manufacturer will then ship
the inventory and directly submit the invoice for such purchase order to us for
payment. Interest or finance charges normally begin as of the invoice date. The
proceeds of the loan being made are paid directly to the manufacturer and are
often funded a number of days subsequent to the invoice date depending upon
specific arrangements with the manufacturer. Inventory inspections are
frequently performed to physically verify the collateral securing the dealer's
loan, check the condition of the
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inventory, account for any missing inventory and collect any funds due.
Approximately two-thirds of our manufactured housing dealers are participants in
this program.
We also provide financing and leasing programs to commercial borrowers for
the purchase of trucks and trailers and small-equipment (such as computer,
office and telecommunications equipment). During 1999, we originated $1.3
billion of these loans, or 5.2 percent of total originations. In early 2000, we
significantly reduced our originations of loans and leases relating to trucks
and trailers.
ACQUISITIONS
Since 1982, Conseco has acquired 19 insurance groups and related businesses
and two finance companies. We continue to regularly investigate acquisition
opportunities in the industries in which we operate. We evaluate potential
acquisitions based on a variety of factors, including the operating results and
financial condition of the business to be acquired, its growth potential,
management and personnel and the potential return on such acquisition in
relation to other acquisition opportunities and the internal development of our
existing business operations. No assurances can be given as to when, if at all,
or upon what terms Conseco will make any such acquisition.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered investment adviser
wholly owned by Conseco, manages the investment portfolios of Conseco's
subsidiaries. CCM had approximately $41.8 billion of assets (at fair value)
under management at December 31, 1999, of which $30.4 billion were assets of
Conseco's subsidiaries and $11.4 billion were assets of unaffiliated parties.
Our investment philosophy is to maintain a largely investment-grade fixed-income
portfolio, provide adequate liquidity for expected liability durations and other
requirements and maximize total return through active investment management.
Investment activities are an integral part of our business; investment
income is a significant component of our total revenues. Profitability of many
of our insurance products is significantly affected by spreads between interest
yields on investments and rates credited on insurance liabilities. Although
substantially all credited rates on SPDAs and FPDAs may be changed annually,
changes in crediting rates may not be sufficient to maintain targeted investment
spreads in all economic and market environments. In addition, competition and
other factors, including the impact of the level of surrenders and withdrawals,
may limit our ability to adjust or to maintain crediting rates at levels
necessary to avoid narrowing of spreads under certain market conditions. As of
December 31, 1999, the average yield, computed on the cost basis of our
investment portfolio, was 7.2 percent, and the average interest rate credited or
accruing to our total insurance liabilities (excluding interest rate bonuses for
the first policy year only and excluding the effect of credited rates
attributable to variable or equity-indexed products) was 5.0 percent.
We manage the equity-based risk component of our equity-indexed annuity
products by: (i) purchasing S&P 500 Index Call Options in an effort to hedge
such risk; and (ii) adjusting the participation rate to reflect the change in
the cost of such options (such cost varies based on market conditions).
Accordingly, we are able to focus on managing the interest rate spread component
of these products.
We seek to balance the duration of our invested assets with the expected
duration of benefit payments arising from our insurance liabilities. At December
31, 1999, the adjusted modified duration of fixed maturities and short-term
investments was approximately 6.6 years and the duration of our insurance
liabilities was approximately 6.6 years.
For information regarding the composition and diversification of the
investment portfolio of our subsidiaries, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of
Operations -- Investments" and the notes to our consolidated financial
statements.
COMPETITION
Our businesses operate in a highly competitive environment. The financial
services industry consists of a large number of companies, some of which are
larger and have greater financial resources, broader and more
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diversified product lines and larger staffs than those of Conseco. An expanding
number of banks, securities brokerage firms and other financial intermediaries
also market insurance products or offer competing products, such as mutual fund
products, traditional bank investments and other investment and retirement
funding alternatives. We also compete with many of these companies and others in
providing services for fees. In most areas, competition is based on a number of
factors, including pricing, service provided to distributors and policyholders
and ratings. Conseco's subsidiaries must also compete with their competitors to
attract and retain the allegiance of dealers, vendors, contractors,
manufacturers, retailers and agents.
In the finance industry, operations are affected by consumer demand which
is influenced by regional trends, economic conditions and personal preferences.
Competition in the finance industry is primarily among banks, finance companies
(or finance divisions of manufacturers), savings and loan associations and
credit unions. Competition is based on a number of factors, including service,
the credit review process, the integration of financing programs and the ability
to manage the servicing portfolio in changing economic environments.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The provisions of the
Omnibus Budget Reconciliation Act of 1984 and the work of the National
Association of Insurance Commissioners ("NAIC") (an association of state
regulators and their staffs) have resulted in standardized policy features for
Medicare supplement products. This increases the comparability of such policies
and may intensify competition based on factors other than product features. See
"Underwriting" and "Governmental Regulation." In addition to the products of
other insurance companies, our health insurance products compete with health
maintenance organizations, preferred provider organizations and other health
care-related institutions which provide medical benefits based on contractual
agreements.
Marketing companies, agents who market insurance products, school
districts, financial institutions and policyholders use the financial strength
ratings assigned to an insurer by independent rating agencies as one factor in
determining which insurer's products to market or purchase. All of our primary
life insurance companies have received: (i) an "A" (Excellent) rating by A.M.
Best Company ("A.M. Best"); (ii) an "AA-" claims-paying ability rating from Duff
& Phelps' Credit Rating Company ("Duff & Phelps"); (iii) an "A-" claims-paying
ability rating from S&P; and (iv) a "Baa1" insurance financial strength rating
from Moody's Investor Services ("Moody's"). A.M. Best ratings for the industry
currently range from "A++ (Superior)" to "F (In Liquidation)." Publications of
A.M. Best indicate that the "A" and "A-" ratings are assigned to those companies
that, in A.M. Best's opinion, have demonstrated excellent overall performance
when compared to the standards established by A.M. Best and have demonstrated a
strong ability to meet their obligations to policyholders over a long period of
time. Duff & Phelps' claims-paying ability ratings range from "AAA (Highest
claims-paying ability)" to "DD (Company is under an order of liquidation)." An
"AA-" rating represents "Very high claims-paying ability." S&P claims-paying
ability ratings range from "AAA (Superior)" to "R (Regulatory Action)." An "A"
rating is assigned by S&P to those companies which, in its opinion, have a
secure claims-paying ability and whose financial capacity to meet policyholder
obligations is viewed on balance as sound, but their capacity to meet such
policyholder obligations is somewhat more susceptible to adverse changes in
economic or underwriting conditions than more highly rated insurers. A plus or
minus sign attached to a S&P or Duff & Phelps claims-paying rating shows
relative standing within a ratings category. A "Baa" is assigned by Moody's to
those companies which, in its opinion, "offer adequate financial security,
however, certain protective elements may be lacking or may be characteristically
unreliable over any great period of time." A numeric modifier attached to a
Moody's insurance financial strength rating refers to ranking within the group,
with one being the highest. These A.M. Best, Duff & Phelps, S&P and Moody's
ratings consider the claims paying ability of the rated company and are not a
rating of the investment worthiness of the rated company. Following our
announcement on March 31, 2000, that we plan to explore the sale of Conseco
Finance, the ratings in the previous paragraph were placed under review as the
agencies analyze the developing transaction. In addition, S&P changed its
outlook to negative.
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We believe that we are able to compete effectively because: (i) we
emphasize a number of specialized distribution channels, where the ability to
respond rapidly to changing customer needs yields a competitive edge; (ii) we
are experienced in establishing and cultivating relationships with the unique
distribution networks and the independent marketing companies operating in these
specialized markets; (iii) we can offer competitive rates as a result of our
operating efficiencies and higher-than-average investment yields achieved by
applying active investment portfolio management techniques; and (iv) we have
reliable policyholder administrative services, supported by customized
information technology systems.
INSURANCE UNDERWRITING
Under regulations promulgated by the NAIC and adopted as a result of the
Omnibus Budget Reconciliation Act of 1990, we are prohibited from underwriting
our Medicare supplement policies for certain first-time purchasers. If a person
applies for insurance within six months after becoming eligible by reason of
age, or disability in certain limited circumstances, the application may not be
rejected due to medical conditions. Some states prohibit underwriting of all
Medicare supplement policies. For other prospective Medicare supplement
policyholders, such as senior citizens who are transferring to Conseco's
products, the underwriting procedures are relatively limited, except for
policies providing prescription drug coverage.
Before issuing long-term care or comprehensive major medical products to
individuals and groups, we generally apply detailed underwriting procedures
designed to assess and quantify the insurance risks. We require medical
examinations of applicants (including blood and urine tests, where permitted)
for certain health insurance products and for life insurance products which
exceed prescribed policy amounts. These requirements are graduated according to
the applicant's age and may vary by type of policy or product. We also rely on
medical records and the potential policyholder's written application. In recent
years, there have been significant regulatory changes with respect to
underwriting individual and group major medical plans. An increasing number of
states prohibit underwriting and/or charging higher premiums for substandard
risks. We monitor changes in state regulation that affect our products, and
consider these regulatory developments in determining where we market our
products.
Most of our life insurance policies are underwritten individually, although
standardized underwriting procedures have been adopted for certain low
face-amount life insurance coverages. After initial processing, insurance
underwriters review each file and obtain the information needed to make an
underwriting decision (such as medical examinations, doctors' statements and
special medical tests). After collecting and reviewing the information, the
underwriter either: (i) approves the policy as applied for, or with an extra
premium charge because of unfavorable factors; or (ii) rejects the application.
We underwrite group insurance policies based on the characteristics of the group
and its past claim experience. Graded benefit life insurance policies are issued
without medical examination or evidence of insurability. There is minimal
underwriting on annuities.
REINSURANCE
Consistent with the general practice of the life insurance industry, our
subsidiaries enter into both facultative and treaty agreements of indemnity
reinsurance with other insurance companies in order to reinsure portions of the
coverage provided by our insurance products. Indemnity reinsurance agreements
are intended to limit a life insurer's maximum loss on a large or unusually
hazardous risk or to diversify its risk. Indemnity reinsurance does not
discharge the original insurer's primary liability to the insured. The Company's
reinsured business is ceded to numerous reinsurers. We believe the assuming
companies are able to honor all contractual commitments, based on our periodic
review of their financial statements, insurance industry reports and reports
filed with state insurance departments.
As of December 31, 1999, the policy risk retention limit was generally $.8
million or less on the policies of our subsidiaries. Reinsurance ceded by
Conseco represented 21 percent of gross combined life insurance in force and
reinsurance assumed represented 5.2 percent of net combined life insurance in
force. At December 31, 1999, the total ceded business in force of $27.7 billion
was primarily ceded to insurance companies rated "A- (Excellent)" or better by
A.M. Best. Our principal reinsurers at December 31, 1999
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were American Equity Investment Life Insurance Company, General & Cologne Life
Insurance Company, Connecticut General Life Insurance Company, Employers
Reassurance Corporation, Life Reassurance Corporation of America, Lincoln
National Life Insurance Company, RGA Reinsurance Company, Security Life of
Denver and Swiss Re Life and Health America. No other single reinsurer assumes
greater than 3 percent of the total ceded business in force.
EMPLOYEES
At December 31, 1999, Conseco, Inc. and its subsidiaries had approximately
17,000 employees, including: (i) 3,700 home office employees; (ii) 1,400
employees in our Chicago office (primarily involved with our career agent
operations); (iii) 1,800 employees in various locations serving as
administrative centers for our insurance operations; (iv) 500 employees in
branch offices (primarily supporting our career agency force); and (v) 9,600
employees supporting our finance operations. None of our employees is covered by
a collective bargaining agreement. We believe that we have excellent relations
with our employees.
GOVERNMENTAL REGULATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Financial Modernization Act"), which significantly
modifies the regulation of financial services companies. The Financial
Modernization Act allows full affiliations among banks, insurance companies,
securities firms and other financial services companies, that could result in
increased consolidation of, and competition among, these firms. In addition, the
Financial Modernization Act contains privacy provisions relating to the
protection, transfer and use of the nonpublic personal information of consumers.
Consumer privacy laws containing expanded provisions also have been adopted, or
are under consideration, in a number of states.
INSURANCE
Our insurance subsidiaries are subject to regulation and supervision by the
insurance regulatory agencies of the states in which they transact business.
State laws generally establish supervisory agencies with broad regulatory
authority, including the power to: (i) grant and revoke business licenses; (ii)
regulate and supervise trade practices and market conduct; (iii) establish
guaranty associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish reserve
requirements; (viii) prescribe the form and content of required financial
statements and reports; (ix) determine the reasonableness and adequacy of
statutory capital and surplus; (x) perform financial, market conduct and other
examinations; (xi) define acceptable accounting principles; (xii) regulate the
type and amount of permitted investments; and (xiii) limit the amount of
dividends and surplus debenture payments that can be paid without obtaining
regulatory approval. Our insurance subsidiaries are subject to periodic
examinations by state regulatory authorities. We do not expect the results of
any ongoing examinations to have a material effect on the Company's financial
condition.
Most states have also enacted regulations on the activities of insurance
holding company systems, including acquisitions, extraordinary dividends, the
terms of surplus debentures, the terms of affiliate transactions and other
related matters. Currently, the Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in the
domiciliary states of the insurance subsidiaries (Arizona, Illinois, Indiana,
Missouri, New York, Ohio, Pennsylvania and Texas), and they routinely report to
other jurisdictions.
Most states have either enacted legislation or adopted administrative
regulations which affect the acquisition of control of insurance companies as
well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations vary from state to
state. Most states, however, require administrative approval of: (i) the
acquisition of 10 percent or more of the outstanding shares of an insurance
company domiciled in the state; or (ii) the acquisition of 10 percent or more of
the outstanding stock of an insurance holding company whose insurance subsidiary
is domiciled in the state. The acquisition of 10 percent of such shares is
generally deemed to be the acquisition of control for the purpose of the holding
company statutes. These regulations require the acquirer to file detailed
information concerning
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the acquiring parties and the plan of acquisition, and to obtain administrative
approval prior to the acquisition. In many states, however, an insurance
authority may determine that control does not exist, even in circumstances in
which a person owns or controls 10 percent or a greater amount of securities.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, securities regulation and federal taxation, do affect the insurance
business. Legislation has been introduced from time to time in Congress that
could result in the federal government assuming some role in regulating the
companies or allowing combinations between insurance companies, banks and other
entities.
On the basis of statutory statements filed with state regulators annually,
the NAIC calculates certain financial ratios to assist state regulators in
monitoring the financial condition of insurance companies. A "usual range" of
results for each ratio is used as a benchmark. In the past, variances in certain
ratios of our insurance subsidiaries have resulted in inquiries from insurance
departments to which we have responded. Such inquiries did not lead to any
restrictions affecting our operations.
In recent years, the NAIC has developed several model laws and regulations
including: (i) investment reserve requirements; (ii) risk-based capital ("RBC")
standards; (iii) codification of insurance accounting principles; (iv)
additional investment restrictions; (v) restrictions on an insurance company's
ability to pay dividends; and (vi) product illustrations. The NAIC is currently
developing new model laws or regulations, including product design standards and
reserve requirements.
The RBC standards establish capital requirements for insurance companies
based on the ratio of the company's total adjusted capital (defined as the total
of its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its RBC (such ratio is referred to herein as the "RBC ratio").
The standards are designed to help identify companies which are under
capitalized and require specific regulatory actions in the event an insurer's
RBC ratio falls below specified levels. Each of our life insurance subsidiaries
has more than enough statutory capital to meet the standards as of December 31,
1999.
The NAIC has adopted model long-term care policy language providing
nonforfeiture benefits and has proposed a rate stabilization standard for
long-term care policies. Various bills are proposed from time to time in the
U.S. Congress which would provide for the implementation of certain minimum
consumer protection standards for inclusion in all long-term care policies,
including guaranteed renewability, protection against inflation and limitations
on waiting periods for pre-existing conditions. Federal legislation permits
premiums paid for qualified long-term care insurance to be treated as
tax-deductible medical expenses and for benefits received on such policies to be
excluded from taxable income.
In addition, our insurance subsidiaries are required under guaranty fund
laws of most states in which we transact business, to pay assessments up to
prescribed limits to fund policyholder losses or liabilities of insolvent
insurance companies. Assessments can be partially recovered through a reduction
in future premium taxes in some states.
Most states mandate minimum benefit standards and loss ratios for accident
and health insurance policies. We are generally required to maintain, with
respect to our individual long-term care policies, minimum anticipated loss
ratios over the entire period of coverage of not less than 60 percent. With
respect to our Medicare supplement policies, we are generally required to attain
and maintain an actual loss ratio, after three years, of not less than 65
percent. We provide, to the insurance departments of all states in which we
conduct business, annual calculations that demonstrate compliance with required
minimum loss ratios for both long-term care and Medicare supplement insurance.
These calculations are prepared utilizing statutory lapse and interest rate
assumptions. In the event we have failed to maintain minimum mandated loss
ratios, our insurance subsidiaries could be required to provide retrospective
refunds and/or prospective rate reductions. We believe that our insurance
subsidiaries currently comply with all applicable mandated minimum loss ratios.
NAIC model regulations, adopted in substantially all states, created 10
standard Medicare supplement plans (Plans A through J). Plan A provides the
least extensive coverage, while Plan J provides the most extensive coverage.
Under NAIC regulations, Medicare insurers must offer Plan A, but may offer any
of the
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other plans at their option. Our insurance subsidiaries currently offer nine of
the model plans. We have declined to offer Plan J, due in part to its high
benefit levels and, consequently, high costs to the consumer.
Numerous proposals to reform the current health care system (including
Medicare) have been introduced in Congress and in various state legislatures.
Proposals have included, among other things, modifications to the existing
employer-based insurance system, a quasi-regulated system of "managed
competition" among health plans, and a single-payer, public program. Changes in
health care policy could significantly affect our business. For example, Federal
comprehensive major medical or long-term care programs, if proposed and
implemented, could partially or fully replace some of Conseco's current
products.
A number of states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge for health care
coverages between new business and renewal business for similar demographic
groups. State legislation has also been adopted or is being considered that
would make health insurance available to all small groups by requiring coverage
of all employees and their dependents, by limiting the applicability of
pre-existing conditions exclusions, by requiring insurers to offer a basic plan
exempt from certain benefits as well as a standard plan, or by establishing a
mechanism to spread the risk of high risk employees to all small group insurers.
Congress and various state legislators have from time to time proposed changes
to the health care system that could affect the relationship between health
insurers and their customers, including external review.
We cannot predict with certainty the effect that any proposals, if adopted,
or legislative developments could have on our insurance businesses and
operations.
FINANCE
The Company's finance operations are subject to regulation by certain
federal and state regulatory authorities. A substantial portion of the Company's
consumer loans and assigned sales contracts are originated or purchased by
finance subsidiaries licensed under applicable state law. The licensed entities
are subject to examination by and reporting requirements of the state
administrative agencies issuing such licenses. The finance subsidiaries are
subject to state laws and regulations which in certain states: limit the amount,
duration and charges for such loans and contracts; require disclosure of certain
loan terms and regulate the content of documentation; place limitations on
collection practices; and govern creditor remedies. The licenses granted are
renewable and may be subject to revocation by the respective issuing authority
for violation of such state's laws and regulations. Some states have adopted or
are considering the adoption of consumer protection laws or regulations that
impose requirements or restrictions on lenders who make certain types of loans
secured by real estate.
In addition to the finance companies licensed under state law, both Conseco
Bank and Retail Bank, both of which are wholly owned subsidiaries of Conseco,
are under the supervision of, and subject to examination by, the Federal Deposit
Insurance Corporation. Conseco Bank is also supervised and examined by the Utah
Department of Financial Institutions. Retail Bank is supervised and examined by
the South Dakota Department of Banking. The ownership of these entities does not
subject the Company to regulation by the Federal Reserve Board as a bank holding
company. Conseco Bank has the authority to engage generally in the banking
business and may accept all types of deposits, other than demand deposits.
Retail Bank is limited by its charter to engage in the credit card business and
may issue only certificates of deposit in denominations of $100,000 or greater.
Conseco Bank and Retail Bank are subject to regulation relating to capital
adequacy, leverage, loans, deposits, consumer protection, community
reinvestment, payment of dividends and transactions with affiliates.
A number of states have usury and other consumer protection laws which may
place limitations on the amount of interest charged on loans originated in such
state. Generally, state law has been preempted by federal law under the
Depositary Institutions Deregulation and Monetary Control Act of 1980 ("DIDA")
which deregulates the rate of interest, discount points and finance charges with
respect to first lien residential loans, including manufactured home loans and
real estate secured mortgage loans. As permitted under DIDA, a number of states
enacted legislation timely opting out of coverage of either or both of the
interest rate and/or finance charge provisions of the Act. States may no longer
opt out of the interest rate provisions of the Act, but
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could in the future opt out of the finance charge provisions. To be eligible for
federal preemption for manufactured home loans, the Company's licensed finance
companies must comply with certain restrictions providing protection to
consumers. In addition, another provision of DIDA applicable to state-chartered
insured depository institutions permits both Conseco Bank and Retail Bank to
export interest rates, finance charges and certain fees from the states where
they are located to all other states, with the exception of Iowa which opted out
of the Act during the permitted time period. Interest rates, finance charges and
fees in Utah and South Dakota are, for the most part, deregulated.
The Company's operations are subject to federal regulation under other
applicable federal laws and regulations, the more significant of which include:
the Truth in Lending Act ("TILA"); the Equal Credit Opportunity Act ("ECOA");
the Fair Credit Reporting Act ("FCRA"); the Real Estate Settlement and
Procedures Act ("RESPA"); the Home Mortgage Disclosure Act ("HMDA"); the Home
Owner Equity Protection Act ("HOEPA"); and certain rules and regulations of the
Federal Trade Commission ("FTC Rules").
TILA and Regulation Z promulgated thereunder contain certain disclosure
requirements designed to provide consumers with uniform, understandable
information with respect to the terms and conditions of extensions of credit and
the ability to compare credit terms. TILA also provides consumers with a three
day right to cancel certain credit transactions, including certain of the loans
originated by the Company.
ECOA requires certain disclosures to applicants for credit concerning
information that is used as a basis for denial of credit and prohibits
discrimination against applicants with respect to any aspect of a credit
transaction on the basis of sex, race, color, religion, national origin, age,
marital status, derivation of income from a public assistance program or the
good faith exercise of a right under TILA. ECOA also requires that adverse
action notices be given to applicants who are denied credit.
FCRA regulates the process of obtaining, using and reporting of credit
information on consumers. This Act also regulates the use of credit information
among affiliates.
RESPA regulates the disclosure of information for consumers in loans
involving a mortgage on real estate. The Act and related regulations also govern
payment for and disclosure of payments for settlement services in connection
with mortgage loans and prohibits the payment of referral fees for the referral
of a loan or related services.
HMDA requires reporting of certain information to the Department of Housing
and Urban Development, including the race and sex of applicants in connection
with mortgage loan applications. A lender is required to obtain and report such
information if the application is made in person, but is not required to obtain
such information if the application is taken over the telephone.
HOEPA provides for additional disclosure and regulation of certain consumer
mortgage loans which are defined by the Act as "Covered Loans." A Covered Loan
is a mortgage loan (other than a mortgage loan to finance the initial purchase
of a dwelling) which (1) has total origination fees in excess of the greater of
eight percent of the loan amount, or $441, or (2) has an annual percentage rate
of more than ten percent higher than comparably maturing United States treasury
obligations. A number of the Company's home equity and home improvement loans
are Covered Loans under the Act.
The FTC Rules provide, among other things, that in connection with the
purchase of consumer sales finance contracts from dealers, the holder of the
contract is subject to all claims and defenses which the consumer could assert
against the dealer, but the consumer's recovery under such provisions cannot
exceed the amount paid under the sales contract.
In the judgment of the Company, existing federal and state law and
regulations have not had a material adverse effect on the finance operations of
the Company. There can, however, be no assurance that future law and regulatory
changes will not occur and will not place additional burdens on the Company's
finance operations.
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The Company's commercial lending operations are not subject to material
regulation in most states, although certain states do require licensing. In
addition, certain provisions of ECOA apply to commercial loans to small
businesses.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by our
insurance subsidiaries generally provide the policyholder with an income tax
advantage, as compared to other savings investments such as certificates of
deposit and bonds, in that income taxation on the increase in value of the
product is deferred until it is received by the policyholder. With other savings
investments, the increase in value is taxed as earned. Annuity benefits and life
insurance benefits, which accrue prior to the death of the policyholder, are
generally not taxable until paid. Life insurance death benefits are generally
exempt from income tax. Also, benefits received on immediate annuities (other
than structured settlements) are recognized as taxable income ratably, as
opposed to the methods used for some other investments which tend to accelerate
taxable income into earlier years. The tax advantage for annuities and life
insurance is provided in the Internal Revenue Code (the "Code"), and is
generally followed in all states and other United States taxing jurisdictions.
From time to time, various tax law changes have been proposed that could
have an adverse effect on our business, including elimination of all or a
portion of the income tax advantage of certain insurance products and changes in
how life insurance companies are taxed; such changes could affect the
marketability of our products and increase the Company's current tax liability.
Various such changes were proposed in the Revenue Proposal of the Clinton
Administration released in February 2000. In addition, from time to time,
various tax law changes have been proposed that could increase the
attractiveness of our products to certain consumers. For example, Congress is
currently considering a proposal which would allow more consumers to be eligible
to deduct long-term care policy premiums from taxable income.
Our insurance company subsidiaries are taxed under the life insurance
company provisions of the Code. Provisions in the Code require a portion of the
expenses incurred in selling insurance products to be deducted over a period of
years, as opposed to immediate deduction in the year incurred. This provision
increases the tax for statutory accounting purposes, which reduces statutory
earnings and surplus and, accordingly, decreases the amount of cash dividends
that may be paid by the life insurance subsidiaries. As of December 31, 1999,
the cumulative taxes paid by our insurance subsidiaries as a result of this
provision were approximately $370 million.
The Company had tax loss carryforwards at December 31, 1999, of
approximately $.8 billion, portions of which begin expiring in 2003. However,
the amount of such loss that may be offset against current taxable income is
subject to the following limitations: (i) losses may be offset against income of
other corporate entities only if such entities are included in the same
consolidated tax return (insurance companies are currently not eligible for
inclusion in Conseco's consolidated tax return until five years after they are
acquired); (ii) losses incurred in non-life companies (which comprise most of
the loss carryforwards) may offset only a portion of income from life companies
in the same consolidated tax return; and (iii) some loss carryforwards may not
be used to offset taxable income of entities acquired after the loss was
incurred. We, however, believe we will be able to utilize substantially all
current loss carryforwards before they expire.
ITEM 2. PROPERTIES.
Headquarters. Our headquarters is located on a 180-acre corporate campus
in Carmel, Indiana, immediately north of Indianapolis. The 12 buildings on the
campus (all but one of which are owned) contain approximately 956,000 square
feet of space and house Conseco's executive offices and certain administrative
operations of its subsidiaries. The campus has ample room for additional
buildings to support future growth.
Insurance operations. Our career agent operations are primarily
administered from a single facility of 300,000 square feet in downtown Chicago,
Illinois, leased under an agreement having a remaining life of eight years. We
also lease approximately 130,000 square feet of warehouse space in a second
Chicago facility; this lease has a remaining life of three years. Conseco owns
an office building in Kokomo, Indiana (100,000 square
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feet), and two office buildings in Rockford, Illinois (total of 169,000 square
feet), which serve as administrative centers for portions of our insurance
operations. Conseco owns one office building in Philadelphia, Pennsylvania
(127,000 square feet), which serves as the administrative center for our direct
response life insurance operations; approximately 60 percent of this space is
occupied by the Company, with the remainder leased to tenants. Conseco also
leases 223 sales offices and 4 other administrative offices in various states
totaling approximately 463,700 square feet; these leases are short-term in
length, with remaining lease terms ranging from one to five years.
Finance operations. Certain corporate servicing operations are housed in
Saint Paul, Minnesota, in 120,000 square feet of a building owned by the
Company. The finance segment operates 45 manufactured housing regional service
centers and three commercial finance business centers. Such offices are leased,
typically for a term of three to five years, and range in size from 1,700 to
22,000 square feet. We also operate a central servicing center in Rapid City,
South Dakota. The lease on this facility has a remaining term of four years,
with an option to purchase, and consists of 137,000 square feet. In Rapid City,
South Dakota, we have agreed to lease one additional building under construction
which will contain approximately 76,000 square feet. The home improvement and
consumer product divisions lease their main office in Saint Paul, Minnesota. The
lease has a remaining term of four years and consists of 125,000 square feet.
The home equity business has operations in six regional locations and 139
regional satellite offices, plus a service center in Tempe, Arizona, which
opened in February 1997 (which consists of three buildings totaling
approximately 200,000 square feet). The finance operations also lease 4 other
administrative offices in Minnesota, New Jersey and Georgia totaling
approximately 197,000 square feet; these leases are short-term in length with
remaining lease terms ranging from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
Conseco Finance was served with various related lawsuits filed in the
United States District Court for the District of Minnesota. These lawsuits were
generally filed as purported class actions on behalf of persons or entities who
purchased common stock or options of Conseco Finance during alleged class
periods that generally run from February 1995 to January 1998. One action
(Florida State Board of Admin. v. Green Tree Financial Corp., Case No. 98-1162)
did not include class action claims. In addition to Conseco Finance, certain
current and former officers and directors of Conseco Finance are named as
defendants in one or more of the lawsuits. Conseco Finance and other defendants
obtained an order consolidating the lawsuits seeking class action status into
two actions, one of which pertains to a purported class of common stockholders
(In re Green Tree Financial Corp. Stock Litig., Case No. 97-2666) and the other
which pertains to a purported class action of stock option traders (In re Green
Tree Financial Corp. Options Litig., Case No. 97-2679). Plaintiffs in the
lawsuits assert claims under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. In each case, plaintiffs allege that Conseco Finance and the other
defendants violated federal securities laws by, among other things, making false
and misleading statements about the current state and future prospects of
Conseco Finance (particularly with respect to prepayment assumptions and
performance of certain loan portfolios of Conseco Finance) which allegedly
rendered Conseco Finance's financial statements false and misleading. On August
24, 1999, the United States District Court for the District of Minnesota issued
an order to dismiss with prejudice all claims alleged in the lawsuits. The
plaintiffs subsequently appealed the decision to the U.S. Court of Appeals for
the 8th Circuit, and the appeal is currently pending. The Company believes that
the lawsuits are without merit and intends to continue to defend them
vigorously. The ultimate outcome of these lawsuits cannot be predicted with
certainty.
Four lawsuits have been filed against Conseco in the United States District
Court for the Southern District of Indiana. The cases, captioned Luisi v.
Conseco, Inc., et al., Case No. IP00-C-0593-B/S and Sechrist v. Conseco, Inc.,
et al., Case No. IP00-C-0585-M/S, Klein v. Conseco, Inc., et al., Case No.
IP00-0602 C-M/S, and Brody v. Conseco, Inc., et al., Case No. IP00-0609 C-M/S,
were filed as purported class actions on behalf of persons or entities that
purchased Conseco common stock during the alleged class periods that generally
run from April of 1999 through April of 2000. Two officers/directors of Conseco
are named as defendants in the lawsuits. In each case, the plaintiffs assert
claims under Section 10(b) and 20(a) of the Securities and Exchange Act of 1934.
In each case, plaintiffs allege that
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Conseco and the individual defendants violated federal securities laws by, among
other things, making false and misleading statements about the current state and
future prospects of Conseco Finance (particularly with respect to performance of
certain loan portfolios of Conseco Finance) which allegedly rendered Conseco's
financial statements false and misleading. The Company believes that the
lawsuits are without merit and intends to defend them vigorously. The ultimate
outcome of these lawsuits cannot be predicted with certainty.
Conseco, Inc. and its subsidiaries, Conseco Life Insurance Company and
Wabash Life Insurance Company, are currently named as defendants in a certified
nationwide class action lawsuit in the Superior Court for Santa Clara County
(California, cause number CV768991) and captioned "John P. Dupell and the John
P. Dupell 1992 Insurance Trust vs. Massachusetts General Life Insurance Company:
Life Partners Group, Inc., Wabash Life Insurance Company, Conseco, Inc., Donovan
R. Bolton, et al." The class, approximately 345,000 in number, consists of all
persons who purchased universal life insurance policies from Conseco Life
Insurance Company, formerly named Massachusetts General Life Insurance Company,
between January 1, 1984 and July 23, 1999 (excluding policies where death
benefits were paid). The claims involve the changing interest rate climate
between the 1980's and the comparatively lower rates in the 1990's, and the
resulting lower rates credited to universal life products. The plaintiffs
asserted claims of fraud, breach of the covenant of good faith and fair dealing,
negligence, negligent misrepresentation, unjust enrichment and related matters.
Conseco believes this lawsuit is without merit and is defending it vigorously.
The ultimate outcome of this lawsuit cannot be predicted with certainty.
In addition, the Company and its subsidiaries are involved on an ongoing
basis in lawsuits related to its operations. Although the ultimate outcome of
certain of such matters cannot be predicted, such lawsuits currently pending
against the Company or its subsidiaries are not expected, individually or in the
aggregate, to have a material adverse effect on the Company's consolidated
financial condition, cash flows or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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Optional Item. Executive Officers of the Registrant.
POSITIONS WITH CONSECO, PRINCIPAL
OFFICER NAME AND AGE(A) SINCE OCCUPATION AND BUSINESS EXPERIENCE(B)
- ----------------------- ----- -------------------------------------
Stephen C. Hilbert, 54............... 1979 Since 1979, Chairman of the Board and Chief Executive
Officer of Conseco; from 1988 to February 2000,
President of Conseco.
Thomas J. Kilian, 49................. 1998 Since February 2000, President of Conseco; from 1998
to February 2000, Executive Vice President and Chief
Operations Officer of Conseco; since 1996, President
of Conseco Services, LLC (responsible for insurance
operations, data processing, human resources and
administrative services for various Conseco
subsidiaries); from 1989 to 1996, Senior Vice
President of data processing for various Conseco
subsidiaries.
Ngaire E. Cuneo, 49.................. 1992 Since 1992, Executive Vice President, Corporate
Development and, since 1994, Director of Conseco.
Rollin M. Dick, 68................... 1986 Since 1986, Executive Vice President, Chief Financial
Officer and Director of Conseco.
John J. Sabl, 48..................... 1997 Since 1997, Executive Vice President, General Counsel
and Secretary of Conseco; from 1983 to 1997, Partner
in the law firm of Sidley & Austin.
James S. Adams, 40................... 1997 Since 1997, Senior Vice President, Chief Accounting
Officer and Treasurer of Conseco; from 1989 to
present, Senior Vice President and Treasurer of
various Conseco subsidiaries.
Edward M. Berube, 52................. 1999 Since 1999, Senior Vice President and
President-Insurance Group of Conseco; from 1997 to
1999, President and Chief Operating Officer of
American Life Insurance Company; from 1992 to 1997,
President of CIGNA Financial Advisors and Life
Brokerage.
Maxwell E. Bublitz, 44............... 1998 Since 1998, Senior Vice President, Investments of
Conseco; from 1994 to present, President and Chief
Executive Officer of Conseco Capital Management, Inc.,
a subsidiary of Conseco.
Bruce A. Crittenden, 48.............. 1999 Since 1999, Senior Vice President and
President-Finance Group of Conseco; from 1996 to
present, Executive Vice President, from 1997 to
present, President, Retail/Mortgage Services and Home
Improvement Divisions, from 1995 to 1996, Senior Vice
President of Conseco Finance Corp., a subsidiary of
Conseco; from 1972 to 1995, various officer positions
with Household International, Inc., including Managing
Director of Household Finance Corporation (1993-
1995), Senior Vice President (1991-1993) and Chief
Operating Officer of Household Retail Services, Inc.
(1988-1991).
- -------------------------
(a) The executive officers serve as such at the discretion of the Board of
Directors and are elected annually.
(b) Business experience is given for at least the last five years.
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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.
MARKET PRICE
------------------ DIVIDEND
PERIOD HIGH LOW PAID
- ------ ---- --- --------
1998:
First Quarter............................................. $57 7/8 $38 1/2 $.1250
Second Quarter............................................ 58 1/8 43 3/8 .1250
Third Quarter............................................. 51 3/4 26 5/8 .1250
Fourth Quarter............................................ 38 1/4 22 .1400
1999:
First Quarter............................................. $37 13/16 $26 13/16 $.1400
Second Quarter............................................ 35 5/16 28 .1400
Third Quarter............................................. 31 15/16 19 .1400
Fourth Quarter............................................ 24 3/4 16 9/16 .1500
As of March 10, 2000, there were approximately 140,000 holders of the
outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
Cash dividends are paid quarterly at an amount determined by our Board of
Directors. As part of our plans to strengthen our capital structure, Conseco
reduced the cash dividend on its common stock to a quarterly rate of 5 cents per
share, beginning with the dividend paid in April of 2000.
Our general policy is to retain most of our earnings. Retained earnings
have been used: (i) to finance the growth and development of the Company's
business through acquisitions or otherwise; (ii) to pay preferred stock
dividends; (iii) to pay distributions on the Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts; (iv) to repurchase common
stock on those occasions when we have determined that our shares were
undervalued in the market and that the use of funds for stock repurchases would
not interfere with other cash needs; and (v) to pay dividends on common stock.
We have paid all cumulative dividends on our preferred stock and
distributions on our Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts when due. We are prohibited from paying common
stock dividends if such payments are not current. Certain Conseco financing
agreements require the Company to maintain financial ratios which could also
limit our ability to pay dividends.
Our ability to pay dividends depends primarily on the receipt of cash
dividends and other cash payments from our finance and life insurance company
subsidiaries. Our life insurance companies are organized under state laws and
subject to regulation by state insurance departments. These laws and regulations
limit the ability of insurance subsidiaries to make cash dividends, loans or
advances to a holding company such as Conseco. However, these laws generally
permit the payment out of the subsidiary's earned surplus, without prior
approval, of annual dividends which in the aggregate do not exceed the greater
of (or in a few states, the lesser of): (i) the subsidiary's prior year net gain
from operations; or (ii) 10 percent of surplus attributable to policyholders at
the prior year-end, both computed on the statutory basis of accounting
prescribed for insurance companies. On March 31, 2000, we announced that we plan
to explore the sale of our finance subsidiary. Cash receipts available to pay
dividends will change if the planned sale is completed. See "Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations -- Liquidity of Conseco (parent company)."
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (A).
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA
Insurance policy income......................... $ 4,040.5 $ 3,948.8 $ 3,410.8 $ 1,654.2 $ 1,465.0
Gain on sale of finance receivables(b).......... 550.6 745.0 779.0 400.6 443.3
Net investment income........................... 3,411.4 2,506.5 2,171.5 1,505.3 1,318.6
Net investment gains (losses) from the sale of
investments................................... (156.2) 208.2 266.5 60.8 204.1
Total revenues.................................. 8,335.7 7,760.2 6,872.2 3,789.8 3,561.2
Interest expense:
Corporate..................................... 169.6 165.4 109.4 108.1 119.4
Finance and investment borrowings............. 392.1 275.1 202.9 92.1 79.5
Total benefits and expenses..................... 7,184.8 6,714.5 5,386.5 2,974.0 2,738.5
Income before income taxes, minority interest
and extraordinary charge...................... 1,150.9 1,045.7 1,485.7 815.8 822.7
Extraordinary charge on extinguishment of debt,
net of tax.................................... -- 42.6 6.9 26.5 2.1
Net income(c)................................... 595.0 467.1 866.4 452.2 470.9
Preferred stock dividends....................... 1.5 7.8 21.9 27.4 18.4
Net income applicable to common stock........... 593.5 459.3 844.5 424.8 452.5
PER SHARE DATA(D)
Net income, basic............................... $ 1.83 $ 1.47 $ 2.72 $ 1.85 $ 2.19
Net income, diluted(c).......................... 1.79 1.40 2.52 1.69 2.03
Dividends declared per common share............. .580 .530 .313 .083 .046
Book value per common share outstanding......... 15.50 16.37 16.45 13.47 8.52
Shares outstanding at year-end.................. 327.7 315.8 310.0 293.4 205.2
Weighted average shares outstanding for diluted
earnings...................................... 332.9 332.7 338.7 267.7 232.3
BALANCE SHEET DATA -- PERIOD END
Total assets.................................... $52,185.9 $43,599.9 $40,679.8 $28,724.0 $19,517.7
Notes payable and commercial paper:
Corporate..................................... 2,481.8 2,932.2 2,354.9 1,094.9 1,456.1
Finance....................................... 4,682.5 2,389.3 1,863.0 762.5 383.6
Related to securitized finance receivables
structured as collateralized borrowings..... 4,641.8 -- -- -- --
Total liabilities............................... 43.990.6 36,229.4 34,082.0 23,810.2 17,082.7
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts... 2,639.1 2,096.9 1,383.9 600.0 --
Other equity interests in subsidiaries........ -- -- -- 97.0 403.3
Shareholders' equity............................ 5,556.2 5,273.6 5,213.9 4,216.8 2,031.7
OTHER FINANCIAL DATA(D)(E)
Premium and asset accumulation product
collections(f)................................ $ 6,986.0 $ 6,051.3 $ 5,075.6 $ 3,280.2 $ 3,106.5
Operating earnings(g)........................... 1,068.0 1,046.3 991.8 467.5 381.8
Managed finance receivables..................... 45,791.4 37,199.8 27,957.1 20,072.7 13,887.6
Total managed assets (at fair value)(h)......... 98,561.8 87,247.4 70,259.8 59,084.8 42,711.4
Shareholders' equity, excluding accumulated
other comprehensive income (loss)............. 6,327.8 5,302.0 5,013.3 4,180.2 1,919.0
Book value per common share outstanding,
excluding accumulated other comprehensive
income (loss)................................. 17.85 16.46 15.80 13.34 7.97
Delinquencies greater than 60 days as a
percentage of managed finance receivables..... 1.42% 1.19% 1.08% 1.08% .93%
Net credit losses as a percentage of average
managed finance receivables................... 1.31% 1.03% 1.05% .74% .56%
- -------------------------
(a) Comparison of selected supplemental consolidated financial data in the table
above is significantly affected by the following business combinations
accounted for as purchases: Washington National Corporation (effective
December 1, 1997); Colonial Penn Life Insurance Company and Providential
Life Insurance Company (September 30, 1997); Pioneer Financial Services,
Inc. (April 1, 1997); Capitol
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American Financial Corporation (January 1, 1997); Transport Holdings Inc.
(December 31, 1996); American Travellers Corporation (December 31, 1996); FINOVA
Acquisition I, Inc. (December 1, 1996); and Life Partners Group, Inc. (July 1,
1996). All financial data have been restated to give retroactive effect to
the merger with Conseco Finance accounted for as a pooling of interests.
(b) On September 8, 1999, we announced that we would no longer structure the
securitizations of the loans we originate in a manner that results in
gain-on-sale revenues. For more information on this change, see
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations -- Finance Segment -- General."
(c) Net income of $595.0 million for the year ended December 31, 1999, or $1.79
per diluted share, included an impairment charge of $349.2 million (net of
taxes), or $1.05 per share, to write down the carrying value of Conseco
Finance's interest-only securities and servicing rights. Net income of
$467.1 million for the year ended December 31, 1998, or $1.40 per diluted
share, included merger-related and impairment charges totaling $503.8
million (net of income taxes), or $1.52 per share. Such amounts were
comprised of (i) $148.0 million of merger-related costs; (ii) $549.4 million
to write down the carrying value of Conseco Finance's interest-only
securities and servicing rights; and (iii) income taxes of $193.6 million.
(d) All share and per-share amounts have been restated to reflect the
two-for-one stock splits paid on February 11, 1997 and April 1, 1996.
(e) Amounts under this heading are included to assist the reader in analyzing
the Company's financial position and results of operations. Such amounts are
not intended to, and do not, represent insurance policy income, net income,
shareholders' equity or book value per share prepared in accordance with
generally accepted accounting principles ("GAAP").
(f) Includes premiums received from universal life products and products without
mortality or morbidity risk. Such premiums are not reported as revenues
under GAAP and were $3,023.3 million in 1999; $2,585.7 million in 1998;
$2,099.4 million in 1997; $1,881.3 million in 1996; and $1,757.5 million in
1995. Also includes deposits in mutual funds totaling $479.3 million in
1999; $87.1 million in 1998; and $19.9 million in 1997.
(g) Represents income before extraordinary charge and net investment gains
(losses) of our insurance segment (less that portion of amortization of cost
of policies purchased and cost of policies produced and income taxes
relating to such gains (losses)). In 1995, operating earnings also excluded
income of $87.1 million (net of income taxes) primarily arising from the
release of deferred income taxes previously accrued on income related to two
affiliates (such deferred tax was no longer required when Conseco reached 80
percent ownership of these companies) and the sale of Conseco's investment
in Eagle Credit (a finance subsidiary of Harley Davidson). In 1996,
operating earnings also excluded income of $17.4 million (net of income
taxes) primarily arising from the sale of Conseco's investment in Noble
Broadcast Group, Inc. Operating earnings in 1997 also excluded: (i) an
impairment loss in the finance segment of $117.8 million (net of income
taxes); (ii) a charge of $40.5 million (net of income taxes) related to
premium deficiencies on our Medicare supplement business in the State of
Massachusetts; and (iii) a charge of $4.3 million (net of income taxes)
related to the death of an executive officer. Operating earnings in 1998
exclude the merger-related and impairment charges of $503.8 million (net of
income taxes) described in note (c) above. Operating earnings in 1999
exclude: (i) the impairment charge of $349.2 million (net of income taxes)
described in note (c) above; and (ii) the provision for losses on loan
guarantees of $11.9 million (net of taxes).
(h) Represents: (i) our assets excluding finance receivables, interest-only
securities and servicing assets, of $41.4 billion, $38.9 billion, $37.2
billion, $26.4 billion and $17.9 billion at December 31, 1999, 1998, 1997,
1996 and 1995, respectively; (ii) the total fixed and revolving credit
receivables that Conseco Finance manages, including receivables on its
balance sheet and receivables applicable to the holders of asset-backed
securities sold by Conseco Finance of $45.8 billion, $37.2 billion, $28.0
billion, $20.1 billion and $13.9 billion at December 31, 1999, 1998, 1997,
1996 and 1995, respectively; and (iii) the total market value of the
investment portfolios managed by CCM, excluding assets of Conseco's
subsidiaries, of $11.4 billion, $11.2 billion, $5.1 billion, $12.6 billion
and $10.9 billion at December 31, 1999, 1998, 1997, 1996 and 1995,
respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
In this section, we review the consolidated financial condition of Conseco
at December 31, 1999 and 1998, the consolidated results of operations for the
three years ended December 31, 1999, and where appropriate, factors that may
affect future financial performance. We have prepared all financial information
to give retroactive effect to the merger with Conseco Finance (the "Conseco
Finance Merger") accounted for as a pooling of interests. Please read this
discussion in conjunction with the accompanying consolidated financial
statements, notes and selected consolidated financial data.
On March 31, 2000, we announced that we plan to explore the sale of Conseco
Finance and are hiring Lehman Brothers Inc. to assist in the planned sale. If
the planned sale is completed, the Company will no longer have finance
operations.
All statements, trend analyses and other information contained in this
report and elsewhere (such as in filings by Conseco with the Securities and
Exchange Commission, press releases, presentations by Conseco or its management
or oral statements) relative to markets for Conseco's products and trends in
Conseco's operations or financial results, as well as other statements including
words such as "anticipate," "believe," "plan," "estimate," "expect," "intend,"
"should," "could," "goal," "target," "on track," "comfortable with," and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which may
cause actual results to be materially different from those contemplated by the
forward-looking statements. Such factors include, among other things: (i)
general economic conditions and other factors, including prevailing interest
rate levels, stock and credit market performance and health care inflation,
which may affect (among other things) Conseco's ability to sell its products,
its ability to make loans and access capital resources and the costs associated
therewith, the market value of Conseco's investments, the lapse rate and
profitability of policies, and the level of defaults and prepayments of loans
made by Conseco; (ii) Conseco's ability to achieve anticipated synergies and
levels of operational efficiencies; (iii) customer response to new products,
distribution channels and marketing initiatives; (iv) mortality, morbidity,
usage of health care services and other factors which may affect the
profitability of Conseco's insurance products; (v) performance of our
investments; (vi) changes in the Federal income tax laws and regulations which
may affect the relative tax advantages of some of Conseco's products; (vii)
increasing competition in the sale of insurance and annuities and in the finance
business; (viii) regulatory changes or actions, including those relating to
regulation of financial services affecting (among other things) bank sales and
underwriting of insurance products, regulation of the sale, underwriting and
pricing of products, and health care regulation affecting health insurance
products; (ix) the outcome of the contemplated sale process relating to Conseco
Finance Corp.; and (x) the risk factors or uncertainties listed from time to
time in Conseco's filings with the Securities and Exchange Commission.
CONSOLIDATED RESULTS AND ANALYSIS
Net income of $595.0 million in 1999, or $1.79 per diluted share, included:
(i) the impairment charge (net of taxes) of $349.2 million, or $1.05 per share,
to reduce the value of interest-only securities and servicing rights; and (ii)
net investment losses (net of related costs, amortization and taxes) of $111.9
million, or 34 cents per share.
Net income of $467.1 million in 1998, or $1.40 per diluted share, included:
(i) net investment losses (net of related costs, amortization and taxes) of
$32.8 million, or 10 cents per share; (ii) an extraordinary charge (net of
taxes) of $42.6 million, or 13 cents per share, related to early retirement of
debt; (iii) the impairment charge (net of taxes) of $355.8 million, or $1.08 per
share, to reduce the value of interest-only securities and servicing rights; and
(iv) a merger-related charge (net of taxes) of $148.0 million, or $.44 per
share, related primarily to costs incurred in conjunction with the Conseco
Finance Merger.
Net income of $866.4 million in 1997, or $2.52 per diluted share, included:
(i) net investment gains (net of related costs, amortization and taxes) of $44.1
million, or 13 cents per share; (ii) an extraordinary charge of $6.9 million, or
2 cents per share, related to early retirement of debt; (iii) a charge of 4
cents per
24
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share related to the induced conversion of preferred stock (treated as a
preferred stock dividend); (iv) an impairment loss totaling $117.8 million or 35
cents per share; (v) charges of $40.5 million, or 12 cents per share, related to
premium deficiencies on our Medicare supplement business in the state of
Massachusetts; and (vi) charges of $4.3 million, or 1 cent per share, related to
the death of an executive officer. The impairment loss represents a charge to
reduce the value of interest-only securities and servicing rights generally due
to adverse prepayments.
Total revenues included net investment losses of $156.2 million in 1999,
and net investment gains of $208.2 million and $266.5 million in 1998 and 1997,
respectively. Excluding net investment gains (losses), total revenues were $8.5
billion in 1999, up 12 percent over 1998. Total revenues, excluding net
investment gains, were up 14 percent in 1998 over 1997. Increases in total
revenues in all three years reflect the impact and timing of acquisitions, as
well as growth in both segments.
We evaluate performance and base management's incentives on operating
earnings which is defined as income before extraordinary charge, net investment
gains (losses) of our life insurance and corporate segments (less that portion
of amortization of cost of policies purchased and cost of policies produced and
income taxes relating to such gains (losses)), and unusual or infrequent items
(net of income taxes). Operating earnings are determined by adjusting GAAP net
income for the above mentioned items. While these items may be significant
components in understanding and assessing our consolidated financial
performance, we believe that the presentation of operating earnings enhances the
understanding of our results of operations by highlighting net income
attributable to the normal, recurring operations of the business and by
excluding events that materially distort trends in net income. However,
operating earnings are not a substitute for net income determined in accordance
with GAAP.
RESULTS OF OPERATIONS BY SEGMENT FOR THE THREE YEARS ENDED DECEMBER 31,
1999:
The following tables and narratives summarize our operating results by
business segment.
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
Operating earnings:
Operating income of segments before income taxes and
minority interest:
Insurance and fee-based operations (see page 26)..... $1,513.6 $1,367.8 $1,116.3
Finance operations (see page 30)..................... 588.3 584.0 672.6
Corporate interest and other expenses (see page
35)............................................... (205.7) (180.4) (126.8)
-------- -------- --------
Operating income before income taxes and minority
interest........................................ 1,896.2 1,771.4 1,662.1
Income tax related to operating income.................... 695.4 634.7 618.0
-------- -------- --------
Operating income before minority interest......... 1,200.8 1,136.7 1,044.1
Minority interest in consolidated subsidiaries............ 132.8 90.4 52.3
-------- -------- --------
Operating earnings................................ 1,068.0 1,046.3 991.8
Nonoperating items:
Net investment gains (losses), net of tax and other
items.................................................. (111.9) (32.8) 44.1
Impairment charge, net of tax............................. (349.2) (355.8) (117.8)
Provision for loss........................................ (11.9) -- --
Merger-related charge, net of tax......................... -- (148.0) --
Charge related to premium deficiencies on Medicare
supplement business in the State of Massachusetts...... -- -- (40.5)
Charge related to the death of an executive officer....... -- -- (4.3)
-------- -------- --------
Income before extraordinary charge................ 595.0 509.7 873.3
Extraordinary charge, net of tax............................ -- 42.6 6.9
-------- -------- --------
Net income........................................ $ 595.0 $ 467.1 $ 866.4
======== ======== ========
25
26
INSURANCE AND FEE-BASED OPERATIONS:
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN MILLIONS)
Premiums and asset accumulation product collections:
Annuities........................................... $ 2,473.7 $ 1,999.1 $ 1,689.7
Supplemental health................................. 2,206.6 2,158.1 1,912.8
Life................................................ 970.7 928.8 709.2
Individual and group major medical.................. 855.7 878.2 744.0
Mutual funds........................................ 479.3 87.1 19.9
---------- ---------- ----------
Total premiums and asset accumulation
product collections....................... $ 6,986.0 $ 6,051.3 $ 5,075.6
========== ========== ==========
Average liabilities for insurance and asset
accumulation products:
Annuities:
Mortality based.................................. $ 600.3 $ 689.5 $ 617.4
Equity-linked.................................... 1,710.1 902.5 254.0
Deposit based.................................... 10,864.7 11,649.6 11,336.4
Separate accounts and investment trust
liabilities...................................... 1,717.4 913.7 461.1
Health.............................................. 4,761.2 4,452.0 3,626.5
Life:
Interest sensitive............................... 4,121.6 4,131.4 3,256.2
Non-interest sensitive........................... 2,799.9 2,762.9 2,284.7
---------- ---------- ----------
Total average liabilities for insurance and
asset accumulation products, net of
reinsurance ceded......................... $ 26,575.2 $ 25,501.6 $ 21,836.3
========== ========== ==========
Revenues:
Insurance policy income............................. $ 4,040.5 $ 3,948.8 $ 3,410.8
Net investment income:
General account invested assets.................. 2,012.6 1,972.1 1,729.4
Venture capital investments...................... 368.2 6.9 .8
Equity-indexed products based on S&P 500 Index... 142.3 103.9 39.4
Amortization of cost of S&P 500 Call Options..... (96.3) (52.0) (14.6)
Separate account assets.......................... 172.7 51.0 70.3
Fee revenue and other income........................ 117.9 91.3 65.8
---------- ---------- ----------
Total revenues(a)........................... 6,757.9 6,122.0 5,301.9
---------- ---------- ----------
Expenses:
Insurance policy benefits........................... 2,835.4 2,704.8 2,368.3
Amounts added to policyholder account balances:
Annuity products other than those listed below... 666.5 728.6 697.1
Equity-indexed products based on S&P 500 Index... 141.3 96.1 39.3
Separate account liabilities..................... 172.7 51.0 70.3
Amortization related to operations.................. 733.1 493.6 408.8
Interest expense on investment borrowings........... 57.9 65.3 42.0
Other operating costs and expenses.................. 637.4 614.8 559.8
---------- ---------- ----------
Total benefits and expenses (a)............. 5,244.3 4,754.2 4,185.6<