<font color=red> Business Wire: Profit From Insurance & Finance Businesses Up
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Profit From Insurance & Finance Businesses Up
``We are determined to start 2001 with a strong balance sheet.'' Gary C. Wendt
Thursday October 26, 4:21 pm Eastern Time
Press Release
Profit From Insurance & Finance Businesses Up
Additional Restructuring and Other Special Charges Taken
``We are determined to start 2001 with a strong balance sheet.'' Gary C. Wendt
INDIANAPOLIS--(BUSINESS WIRE)--Oct. 26, 2000-- In its 3rd Quarter earnings release today, Conseco, Inc. (NYSE:CNC - news) announced improved earnings from operations and a series of one-time charges as new management continues to execute the turnaround of the Indianapolis-based company.
The company continued to show improvement in its two core business segments -- insurance and finance. It reported pre-tax operating earnings from its continuing insurance operations of $192.3 million -- the highest in the last four quarters and up 18% over the 2nd quarter. Similarly, pre-tax operating earnings from Conseco Finance were the highest of the previous four quarters at $40.0 million. Net income from continuing operations before the charges outlined below was $49.2 million, or $0.15 per share of common stock.
The company also reported a series of charges that management termed as ``required and pragmatic.'' Total charges in the 3rd quarter were $488.5 million after tax. The charges fell into three general categories:
charges resulting from restructuring the company's bank debt ($9.6 million);
charges resulting from the restructuring of Conseco Finance ($156.2 million); and
charges resulting from ``legacy practices'' ($322.7 million).
After special charges, taxes, and interest the company reported a net loss in the 3rd quarter of $489 million.
Management noted that even after the loss, the company is comfortably within its loan covenant ratios and that the book value of the company, excluding unrealized gains and losses, at September 30, 2000 was $5.4 billion, or more than $15 per share of common stock. Additionally, management noted that a conversion of trust preferred debt to common stock is expected next February that would add $500 million to the value of the company's equity.
Conseco CEO Gary Wendt also disclosed that prior to undertaking the company's debt restructuring, management sought an objective third-party evaluation of the company's intangible assets. That actuarial study, conducted by Milliman & Robertson, examined the adequacy of the company's reserves, the recoverability of its intangibles, and its GAAP and Statutory profitability. The results of that examination were shared with the 25 banks participating in the company's bank consortium prior to their approval of the debt restructuring agreement. Additionally M&R's analysis was made available to rating agencies, including A.M. Best prior to their announced change in rating outlook from ``developing'' to ``positive.''
The company also noted that the combined risk-based capital (RBC) ratio of Conseco's insurance subsidiaries is over 250% of required capital. This industry measure of capital adequacy is higher than many highly regarded A- rated carriers.
Wendt, who joined Conseco as Chairman & CEO as the third quarter began, was encouraged by the insurance and finance operating profits and neither discouraged nor surprised by the large special charges. ``Given the healthy signs we are seeing in the core businesses, I am optimistic about the future. Investors should not be confused; this is a turnaround year for Conseco, not one meant for earnings per share analysis.
``We are on course with our turnaround plan - in fact ahead of schedule on some items. We are doing the things we said we would do. We are determined to start 2001 with a strong balance sheet.''
1. Core operations trend positive
Insurance & fee based operations:
Pre-tax continuing insurance operating earnings were $192.3 million, up $29.5 million or 18% over 2Q00. Insurance policy income was $1,074 million, stable with the previous quarter and up 2% over 1Q00, reflecting our ability to retain customers despite our current rating. The overall earnings increase was due primarily to improved loss ratios in our health businesses, with improvement across all product lines -- including long-term care.
Year-to-date total insurance, collections net of one-time reinsurance, were up 4% compared to 1999. In 3Q00, collections were $1.48 billion vs. $1.53 billion in 3Q99, a decrease of 3%. As expected, virtually all of the decrease in 3Q collections occurred in fixed annuity products, which are more sensitive to ratings, while all other core insurance product lines were generally flat or experienced increases in collected premium during the quarter.
Conseco Fund Group surpassed annual sales targets by end of 3Q, and Conseco Capital Management successfully engaged Frank Russell Company to transition its equity portfolio management.
Finance operations:
Conseco's consumer and commercial finance operations had pre-tax operating earnings of $40.0 million in 3Q00, an increase of 43% over 2Q00 and 12% over 1Q00. As expected, increasing on-balance-sheet receivables under the portfolio method of accounting are resulting in increasing net interest margin income. Also, general and administrative expenses decreased by approximately $22 million, or 15%, in 3Q00 compared to 2Q00 as we began to realize the cost savings from the previously announced restructuring of Conseco Finance.
In line with the new business model designed to make Conseco Finance a cash producer, loan originations for 3Q00 were at $3.9 billion vs. $5.0 billion and $5.4 billion in 1Q00 and 2Q00, respectively. The significant slowing of originations allowed Conseco Finance to enhance net interest margins and to upstream cash to the holding company.
Spreads achieved in 3Q00 securitizations were excellent. In the manufactured housing business (MH), the net spread retained on the 3Q00 $750 million securitization (with points spread over the life of the loans) was 4.70% vs. a 3.49% average spread during all of 1999. In the fixed rate home equity loan (HEL) business, the net spread retained on the 3Q00 $700 million securitization was 7.02% vs. 5.10% average spread during all of 1999.
60 day + delinquencies at 9/30/00 increased to 1.71% from 1.47% at 6/30/00 driven by increases in MH delinquencies. We continue to believe that the rise in MH delinquencies is attributable to the disruption of our collection centralization efforts during the attempted sale and subsequent restructuring of Conseco Finance. Our goal for the 4th quarter is to reduce MH 60+ delinquencies by 20 basis points. Delinquencies in our other continuing finance lines are stable and on plan. Across our continuing lines of business, our loan loss reserve as a % of 60+ delinquencies at 9/30/00 was 95% vs. 88% at 6/30/00.
2. Third quarter charges
Charges during the third quarter, reported on an after tax basis, totaled $488.5 million, as follows:
After-tax charge
----------------
Resulting from debt restructuring:
One time advisory & professional fees $4.7 million
Leucadia prepayment charge 4.9
---
9.6
Resulting from restructuring of Conseco Finance:
Finance businesses sold, closed or marked-
to-market for run-off 115.2
Cancellation/write-off of servicing system 23.3
One time related to cost cutting 17.7
-----
156.2
Resulting from "legacy practices":
Tritel mark-to-market 107.6
Interest only impairment 133.3
FASB EITF 99-20 change in accounting
for interest only securities 55.3
Provision for D&O loan program losses 12.7
Other 13.8
-----
322.7
Total $488.5 million
Notes to the chart of special charges:
(1) Charges resulting from the restructuring of Conseco Finance
include losses from the sale and/or mark-to-market of four
discontinued Conseco Finance businesses. The company expects the
sale of the fifth business, vendor finance, to result in a gain.
(2) "Legacy Practices" created certain transactions which introduced a
significant degree of volatility in the financial statements.
The investment in Tritel fluctuates considerably from quarter to
quarter, often in the hundreds of millions of dollars.
The charge for the "Interest Only Impairment" is a remnant of the
prior use of Gain on Sale Accounting. Only $640 million in IO
securities remains on the company's balance sheet after this 3Q00
charge. The interest-only securities can also materially vary in
value from quarter to quarter as the market for these fluctuate;
the early adoption of FASB EITF 99-20 on July 1, 2000 now means
this fluctuation will flow through the statement of operations
instead of shareholders' equity.
Finally, the program instituted by prior management to guarantee
loans by banks to directors and officers to purchase Conseco stock
requires the company as the need arises to provide additional
allowances for potential loss on these guarantees.
3. Looking Forward
The many accomplishments of the third quarter we call Part I of "The
Conseco Restoration Plan." This part, Restructuring, was designed to
completely re-engineer Conseco's capital structure. While never fully
complete, several major elements of this plan were executed in the
third quarter:
1. Restructuring the operations of Conseco Finance: Done
2. Third party evaluation of intangible assets: Done
3. Restructuring of $2.8 billion in bank debt; and Done
4. The completion of the sale or monetization of more In process
than $1 billion of a planned $2 billion of
non-strategic assets.
With respect to the company's remaining asset disposition, management noted that concerns regarding the importance of the value of the Tritel investment in meeting the $2 billion target are misplaced. Current estimates of expected proceeds (completed transactions plus future transactions) indicate that, even at Tritel's current market value, total proceeds would exceed the $2 billion goal by more than $150 million. Commenting on the sale of assets, Wendt said, ``The company has significant flexibility to meet or exceed the goal of reducing debt by more than $2 billion before 12/31/01 as called for in the agreement with our banks.''
``Restructure'' will be a necessary constant process to assure that capital is employed in businesses which provide adequate returns, responsible growth and, hence, increases in shareholder values.
But other changes are already underway to improve performance. Conseco was a highly successful company during the 80s and 90s by being, in essence, a ``merchant banker.'' It acquired a significant number of companies which now provide three basic strengths for restoring shareholder value: a brand; multiple product lines; and broad distribution capabilities in the rapidly expanding, demographically maturing middle market.
Now it must employ modern management techniques to maximize these positions. Two weeks ago we took the first step in the process by ``de-layering'' the organization so that all business operations report directly to the CEO. This process will now continue by shifting staff responsibilities from the corporate level to the business operating level. Only by so doing will managers have the information available to make the quick and well calculated decisions necessary in the 2000 business environment.
As this process takes place we will place greater accountability in both our operating areas: Finance and Insurance. We will focus on establishing responsible, but challenging budget goals, which focus both on revenue growth and system productivity. We are experienced in these processes and now must make it our priority to bring Conseco's bruised reputation up to world-class standards.
It is here -- in the operating Businesses -- where shareholder value must be built and why in this and future communications we ask you to perceive Conseco in three parts:
A Insurance Companies B Finance Company
Building
Sales Shareholder Portfolio Management
Productivity Value Productivity
Customer Satisfaction Maximize Origination
C Holding Company
Manage:
- Debt Reduction
- Asset Sales
- Legacy Practices
Provide proper guidance.
We will be providing projected income guidance later this quarter and,
going forward, information and our discussion of Conseco will
emphasize this vision of our company.
Conseco, Inc. (NYSE:CNC - news)
Financial Highlights
Quarter Ended Nine Months Ended
Sept. 30: Sept. 30:
2000 1999 2000 1999
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In millions:
Insurance, finance and
fee-based operations
income:
Insurance operations $ 192.3 $ 331.8 $ 518.6 $ 926.0
Fee-based operations 0.0 4.0 (6.1) 11.3
Consumer and commercial
finance 40.0 173.0 103.8 552.9
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Insurance, finance
and fee-based
operating income 232.3 508.8 616.3 1,490.2
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Corporate operations:
Tritel venture capital
investment losses (165.5) 0.0 (164.9) 0.0
Interest expense (79.3) (41.9) (207.0) (135.1)
Discontinued lines (13.2) 25.2 (43.9) 75.8
Other, net (2.3) (7.0) 47.6 42.3
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Corporate operations
- operating losses (260.3) (23.7) (368.2) (17.0)
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Operating income
before taxes and
minority interest (28.0) 485.1 248.1 1,473.2
Taxes (0.4) (184.9) (123.4) (533.9)
Minority interest (35.3) (33.4) (110.0) (93.9)
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Net operating income (63.7) 266.8 (14.7) 845.4
Investment losses (42.8) (48.1) (127.4) (72.8)
Special and impairment
charges (320.6) (63.1) (641.6) (115.9)
Extraordinary charge and
cumulative effect of
accounting change (60.2) 0.0 (60.3) 0.0
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Net income (loss) (487.3) 155.6 (814.6) 656.7
Preferred stock dividends (2.2) 0.0 (8.9) (0.6)
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Net income (loss)
available to common
shareholders ($489.5) $ 155.6 ($823.5) $ 656.1
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Earnings per common
diluted share:
Weighted average
shares (in millions) 325.3 332.8 326.2 332.8
Insurance and fee-based $ .35 $ .62 $ .92 $ 1.73
Consumer and commercial
finance .08 .32 .20 1.03
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Insurance, finance
and fee-based
operating income .43 .94 1.12 2.76
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Corporate operations:
Tritel venture capital
investment losses (.33) 0.00 (.33) 0.00
Interest expense (.25) (.24) (.78) (1.67)
Discontinued lines (.04) .14 (.17) .94
Other, net (.01) (.04) .18 .52
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Corporate operations
- operating losses (.63) (.14) (1.10) (.21)
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Operating EPS (.20) 0.80 .02 2.55
Investment losses (.13) (0.14) (.39) (0.22)
Restructuring, nonrecurring
loss and impairment charge (.99) (0.19) (1.97) (0.35)
Cumulative effect of
accounting change (.18) 0.00 (.18) 0.00
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Total EPS ($ 1.50) $ 0.47 ($ 2.52) $ 1.98
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Shareholders' equity and
minority interest
(in billions)(1) $ 7.8 $ 8.6
Book value per common
share(1) $ 15.11 $ 18.21
Book value per common share,
assuming purchase of shares
under stock purchase
contracts and conversion of
convertible securities(1) $ 16.25 $ 19.09
Total managed assets
(in billions)(2) $ 101.7 $ 96.8
(1) Excludes accumulated other comprehensive income (loss).
(2) The total of balance sheet assets and finance receivables and
investments managed for nonaffiliates.
Conseco, Inc.
Consolidated Balance Sheet (in millions) At At
Sept. 30, 2000 Dec. 31, 1999
----------------------------------------------------------------------
Assets
Investments:
Actively managed fixed
maturities at fair value $ 21,552.3 $ 22,203.8
Interest-only securities
at fair value 640.1 905.0
Equity securities at fair
value 298.5 312.7
Mortgage loans 1,460.0 1,274.5
Policy loans 648.8 664.1
Venture capital
investments 349.2 527.5
Other invested assets 351.5 544.0
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Total investments 25,300.4 26,431.6
Cash and cash equivalents 1,351.6 1,686.9
Accrued investment income 486.5 436.0
Finance receivables 5,098.9 5,104.1
Finance receivables
- securitized 11,625.6 4,730.5
Cost of policies purchased 1,988.4 2,258.5
Cost of policies produced 2,523.6 2,087.4
Reinsurance receivables 680.8 728.6
Goodwill, net of accumulated
amortization 3,847.1 3,927.8
Income tax assets 554.4 209.8
Assets held in separate
accounts and investment
trust 2,878.9 2,231.4
Cash held in segregated
accounts for investors in
securitizations 637.8 853.0
Cash held in segregated
accounts related to
servicing agreements and
securitization transactions 547.0 274.0
Other assets 1,372.9 1,226.3
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Total assets 58,893.9 52,185.9
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Liabilities and
shareholders' equity
Liabilities:
Liabilities for insurance
and asset accumulation
products:
Interest-sensitive
products 16,329.3 17,322.4
Traditional products 7,801.9 7,537.3
Claims payable and other
policyholder funds 1,040.0 1,042.3
Liabilities related to
separate accounts and
investment trust 2,878.9 2,231.4
Liabilities related to
deposit products 1,574.4 870.5
Investor payables 637.8 853.0
Other liabilities 1,530.4 1,498.7
Investment borrowings 354.5 828.9
Notes payable and commercial
paper:
Corporate 4,273.5 2,481.8
Finance 4,577.1 4,682.5
Related to securitized
finance receivables 10,944.6 4,641.8
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Total liabilities 51,942.4 43,990.6
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Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 2,401.5 2,639.1
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Shareholders' equity:
Preferred stock 484.7 478.4
Common stock and additional
paid-in capital 2,908.8 2,987.1
Accumulated other
comprehensive loss (849.0) (771.6)
Retained earnings 2,005.5 2,862.3
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Total shareholders' equity 4,550.0 5,556.2
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Total liabilities and
shareholders' equity $ 58,893.9 $ 52,185.9
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Conseco, Inc.
Consolidated Statement of Operations (millions)
Quarter Ended Nine Months Ended
Sept. 30: Sept. 30:
2000 1999 2000 1999
----------------------------------------------------------------------
Revenues
Insurance policy income $1,074.1 $1,017.5 $3,195.2 $3,044.9
Net investment income 830.6 667.9 2,773.9 2,071.5
Gain on sale of finance
receivables 1.9 156.7 4.5 525.3
Net investment losses (74.4) (74.0) (227.9) (95.9)
Fee revenue and other income 123.1 121.6 380.7 354.2
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Total revenues 1,955.3 1,889.7 6,126.4 5,900.0
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Benefits and expenses
Insurance policy benefits 1,000.0 814.7 3,086.7 2,624.9
Provision for losses 110.8 28.3 345.5 76.8
Interest expense 410.2 135.2 1,006.5 371.3
Amortization 128.7 168.1 512.2 472.7
Other operating costs
and expenses 418.9 332.2 1,234.9 993.0
Special charges 253.3 0.0 580.5 0.0
Impairment charge 205.0 100.1 217.1 183.9
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Total benefits and expenses 2,526.9 1,578.6 6,983.4 4,722.6
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Income (loss) before income
taxes, minority interest,
extraordinary charge and
cumulative effect of
accounting change (571.6) 311.1 (857.0) 1,177.4
Income tax expense (benefit) (179.8) 122.1 (212.7) 426.8
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Income (loss) before
minority interest,
extraordinary charge
and cumulative effect of
accounting change (391.8) 189.0 (644.3) 750.6
Minority interest
- distributions on
company-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 35.3 33.4 110.0 93.9
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Income (loss) before
extraordinary charge and
cumulative effect of
accounting change (427.1) 155.6 (754.3) 656.7
Extraordinary charge on
extinguishment of debt, net
of income taxes 4.9 0.0 5.0 0.0
Cumulative effect of
accounting change, net
of taxes 55.3 0.0 55.3 0.0
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Net income (loss) (487.3) 155.6 (814.6) 656.7
Less preferred stock
dividends 2.2 0.0 8.9 0.6
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Net income (loss) applicable
to common stock ($ 489.5) $ 155.6 ($ 823.5) $ 656.1
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