Two Thumbs up to CNC Management:
biz.yahoo.com
Conseco Answers Analyst
May 8, 2001
Mr. Colin Devine
Mr. William H. Ryan
SalomonSmithBarney
Via Fax
Gentlemen:
The attached explains the difference between 1Q00 and 1Q01 in the ``Corporate Expense'' line on page 3 of our 1Q01 Investor Guide. Since your ``research'' yesterday was both inflammatory and inaccurate, this response is being made available to our investors and the general public.
As you noted, the line item for ``Corporate Expenses'' was a credit of $8.5 million. This amount is correct. Your attempt to ``normalize'' our earnings by averaging the 2000 quarterly amounts for this line item is irresponsible for people in your position.
Why? Because it is generally well known that: Conseco is under new management; the structure of the company has been dramatically reorganized; and we are engaged in a significant cost cutting program. Therefore, any comparison to 2000 or any prior years, must take into account both cost reductions and business reorganization.
Cost Reductions: As reflected in the detail of the attached
1Q00 and 1Q01 comparisons, $19 million of the $24.3 million
difference stems from reduced compensation expense and reduced
marketing expense, chiefly advertising.
Business reorganization: The old Conseco did not fully
allocate its corporate expense. Why? First, because the
holding company was doing other things besides running the
businesses - e.g. investing in a riverboat casino. And,
second, because it had a different philosophy about allocating
corporate expenses. As you can see on the chart, net
allocations to the business units are greater in 1Q01,
reflecting our view that maximum allocation of recurring
corporate expenses gives the most accurate view of operating
earnings. In fact, we have actually slightly over-allocated to
the businesses ($3.2 million). That occurred because expenses
were allocated based on plan, but actual expenses were lower.
This small over-allocation plus the riverboat profits resulted
in the net credit in the corporate expense line.
In short, we are doing what we said we'd do. We are building a company that creates value by running our two businesses. We are doing that in Wendt style, which places a premium on productivity and accountability - thus cost cuts, small corporate staff, and maximum allocation of corporate expenses.
Finally, your criticism of Conseco Finance's whole loan sale as a component of operating earnings is completely off base. As you would know if you had bothered to attend the December 19, 2000 investor briefing or to read the accompanying 200 page slide presentation, whole loan sales are a planned source of income for the Finance business. The ``New Business Opportunities'' page in Bruce Crittenden's presentation clearly depicted excess capacity to originate loans, and an accompanying chart indicates that this excess capacity would be used to generate whole loan sales and additional fee income.
Your attempt to recast our 1Q earnings as ``50% of their reported level'' is a gross distortion - hardly the product of dispassionate analysis. Your attempt to deduct gains from whole loan sales ignores our articulated business strategy. We continue to wonder what motivates such behavior. |
