Looks like CNC may be a little shaky as an investment right now. I got the following from a post over at the fool:
It is verified. CNC booked appreciation of venture capital investments in income, not equity. I do not know of any other company that does this. I am amazed that the auditors signed off on such a thing. This is was a very important move for CNC, because they had net investment income from venture capital investments of $368 million in 1999. Income before income taxes but after preferred dividends in 1999 was $1,016 million, meaning a full 36% of CNC income before tax that is available to common shareholders came from investment income from venture capital investments that WAS NOT EVEN RECOGNIZED. How much of that "income" was given back in 2000 already? This is incredibly aggressive accounting. I didn't even know companies could do it, I have never seen appreciation run through the income statement. To me this is just one more beautiful example of why the earnings of CNC, and the management of CNC, cannot be trusted. In 1998, net investment income from venture capital investments was $7 million. Total earnings for 1998 before tax but after preferred dividends was $947 million. So if you remove the income from venture capital investments for both years, you would have pre tax income available for common shareholders of $648 in 1999 and $940 in 1998. This dear friends, is why CNC is taking the unusual position that appreciation in highly speculative investments runs through income and not equity like every other company in the US. In other words, after you cut through all the attempts by CNC to confuse the issue, earnings for 1999 suck.
So if we are going to record in income the appreciation in venture capital investments, why don't we record in income the depreciation in the other investments of CNC? There was $1,177 million of depreciation in the investment portfolio, you know, the safe one, not the risky venture capital one, the one that includes investment grade bonds. This depreciation of high quality assets goes to equity, the appreciation of risky venture capital investments goes to income. It should be the other way around! Why don't we look at it this way. There was $1,016 million of pretax income available for common shareholders in 1999. If CNC had been consistent on the inclusion of unrealized gains and losses in the income statement, and included the $1,177 in depreciation of its bonds in income instead of equity, it would have actually had a pre tax loss of $161 million.
How bad is the balance sheet? Well, the liabilities are real. We know that. We know that CNC will pay out a real life cash dollar for all of its recorded liabilities. I wish we could say the same for the assets. For we will not receive a real life cash dollar for every recorded asset. There is goodwill of $3,928 million. That is a sunk cost. We have $2,258 million in cost of policies purchased, something similar to goodwill. Both of these are intangibles which do not represent a future cash claim on anyone. They total $6,186 million. So again, how bad is the balance sheet? Well, the equity of CNC is only $5,556. So these non claims represent more than the total of shareholders' equity, meaning that CNC has a negative tangible equity. But it gets worse. There is another intangible asset, cost of policies produced of $2,087 million. This is nothing more than a big prepaid expense. The cash has been paid out, but the expense has not yet been recognized on the income statement. So this is another of those "assets" that does not represent a future cash claim on someone else. If we use this in our computation of tangible equity it becomes a huge number, a whooping negative $2,717 million. That is how bad the balance sheet is.
The deferred asset, cost of policies produced went from $1,454 million in 1998 to $2,087 million in 1999, an increase of $633 million. Let me tell you why I think that this is a problem. The total pre tax income from insurance was $1,341 million in 1999. Of this, $368 million was net investment income from venture capital investments. So if you reduce the $1,341 by this amount to get a more normalized ( and rational ) annual earnings, you end up with $973 million of income from insurance operations. So of that $973 million of income, a full $633 million had to be reinvested just to pay the costs of producing the income. Or another way of looking at it. CNC had net income for common shareholders of $594 million in 1999. Now was the cash from that income used to pay dividends, repurchase stock, pay down debt, investment in technology, finance new loan business? No, no, no, no and no. $633 million of that $594 million in income was needed to simply fund the production of insurance business, creating this large prepaid. DON'T BE MISLEAD WHEN CNC TOUTS IS CASH FLOW FOR THE YEAR. This is yet another CNC attempt to confuse investors and hide its true nature. The operating cash flow of an insurance company includes the increase in liabilities that record future payment obligations to policyholders. So the number given for cash flow from operations is very misleading. What an investor must do is look at the parts, not what CNC tells you.
CNC is to clever by half in their reporting. Operating income ( income before taxes, minority interest and extraordinary charges ) for the insurance business was $1,342 million in 1999, compared to $1,340 million in 1998. Now take out the $368 million for 1999 and $7 million in 1998 for investment income from venture capital investments, and you get $974 million in 1999 and $1,333 million in 1998. Meaning, operating income for insurance went DOWN by $359 million in 1999, or 27%. CNC could NOT allow lower insurance operating earnings in 1999 to be reported since their finance operations were under the gun, they needed something to hang their hat on. Thus the very unusual, and unjustifiable and 100% wrong in my opinion, recording of $368 million in appreciation in venture capital investments as income. Why this sort of outrage is not blowing the lid off this reporting scam is beyond me. To me, this is inexcusable!
But why must CNC resort to the inexcusable practice of reporting the appreciation of highly speculative venture capital investments in the income of the insurance business? This should go into equity. Because outside of investment income, the insurance business of CNC took it on the chin in 1999. In 1999, it had insurance policy income of $4,040 million and fee revenue and other income of $118 million for a total of $4,158 million. In 1999 there was total benefits and expenses of $5,244, for a deficit of $1,086 million. In 1998, it had insurance policy income of $3,949 million and fee revenue and other income of $91 million for a total of $4,040 million. In 1998 there was total benefits and expenses of $4,754, for a deficit of $714 million. So the loss from the collection of premiums and payment of benefits and expenses increased by $372 ( $714 less $1,086 ) million in 1999. So the management of CNC panicked. They have a year to year decrease in income of $372 million. Where will we get that amount of money? Where or where could it come from; from appreciation of venture capital investments maybe? What was the amount booked as income from the appreciation of venture capital investments? What was it? Was it almost $371 million. Well, actually it was only $368 million, but what is $3 million among honest folks like CNC?
So why is the price of CNC stock so low? We have a terrible balance sheet; liars in management; deteriorating operating profits in insurance; liars in management; a failed business plan for finance; liars in management; "one" time write-offs every year; liars in management; self-serving, underwater, unrecorded, unrecognized, uncollectible loan guarantees to offices; liars in management; self-serving option plans for insiders; liars in management; self-serving compensation plans for Hilbert; liars in management; self-serving, incredibly aggressive, inexcusably aggressive accounting; liars in management; big losses in the bond portfolio; liars in management; a cut in the dividend; liars in management; constantly decreasing income projections; liars in management; field houses, riverboats and magic shows; liars in management; and of course, liars in management. |
