Mr. Lubbers sounds a bit... ticked off. Doesn't Wendt usually write these kinds of letters himself?
biz.yahoo.com
January 7, 2002
Dear Conseco Investor:
When Gary Wendt recruited me to the Conseco turnaround 17 months ago, he didn't sugar-coat the task ahead. At the time, this company had $2 billion in bank debt coming due and no apparent way to pay it. And if it could negotiate that ``boulder,'' as he called it, there were half a dozen other boulders waiting to be moved. Beyond the immediate boulders was the tough job of changing Conseco from an acquisition engine into a company producing shareholder value through operations. He knew there would be bumps in the road, and that an open channel to investors and our other outside audiences would be important to our success. Like the others Gary recruited to this adventure, I enjoy a challenge. But I never imagined having to write a letter like this.
On Saturday morning, I was quoted in the New York Times calling SalomonSmithBarney's January 3 ``research'' report absurd. I called it that because the report contains misleading information and bad analysis.
The core of the January 3rd SSB report takes the loan losses projected by Greenpoint on its exit from the MH business and projects them onto Conseco. The report states:
* ``Tied to its exit from MH loan financing, GPT essentially doubled
* loan loss assumptions, and we anticipate, based on its own loan
* pool performance, that CNC may face similar action.``
The report proceeds to justify this statement NOT by an analysis of loan pool performance, as promised. Rather, in an official-looking table on page 3 of the report, the report takes Conseco public data, ASSUMES the projected cumulative loss rate projected by Greenpoint to calculate its write-off, and PLUGS the difference as something called ``projected additional future losses based on GPT''. Then, the assumed cumulative loss, borrowed from the GPT announcement, is draped in a new title: ``SalomonSmithBarney Revised Projection of Lifetime MH Losses.''
This so-called analysis is used to assert that it ``would imply'' future charges or loan losses of between $2.2 and $3.5 billion for Conseco.
What is wrong with this ``analysis''? It is 100% based on the Greenpoint data and assumptions. Two data points drive the cumulative loan loss projection announced by Greenpoint: (1) default rates and (2) severity rates. For the SSB analysis to hold water, Conseco's experience would have to mirror the Greenpoint experience and projections.
Does it? NO
Will it? NO.
Is there any basis for an analyst's claiming that it does or it will? No, none whatsoever. In fact, there is basis for an opposite conclusion.
In one of its several demonstrably misleading statements the report says:
``Greenpoint is considered to have been a much more disciplined and prudent lender than Conseco Finance.``
Based on what? I should think that people reading SalomonSmithBarney research would prefer data. Not to pick on Greenpoint, a well-run and successful company, but the loan performance data clearly shows that Conseco Finance is the better performing MH lender. In data compiled by Lehman Bros. and available on its website, you can see that for securitization pools since 1999, Conseco has lower average monthly losses and lower cumulative losses. See attached.
Worse, SSB's analysis is based on Greenpoint's projected severity rate of 80.2% -- which means that GPT plans on getting less than 20 cents on the dollar for its repossessed MH units.
Is that or will that be Conseco's severity rate? NO.
Should an objective analyst know why this is an inappropriate basis for making projections about Conseco? Absolutely.
We have talked many times in the last year about how critical it is to our operations to avoid wholesale disposition of repo units. Throughout this bad cycle in the MH business, our severity rates for on-balance-sheet receivables have remained at approximately 48%.(1) In a business that plans on between 1 in 4 and 1 in 5 loans defaulting, the recovery rates on repossessed collateral is a crucial financial metric. And this is where being No. 1 in the industry really matters - as we've said many times before.
At September 30, Greenpoint's severity rate was 65%, 35% higher than our on-balance-sheet severity rate and 20% higher than our average of all MH repo disposition. And as Greenpoint noted in its announcement last week, its 80% severity rate is predicated on its exiting the market.
Conseco is not exiting this business segment. There is no disgrace in Greenpoint's exiting. Its presentation last week shows pretty conclusively that it generates higher returns for shareholders by getting out. As Gary Wendt has told you before, he made the same decision at GE Capital, where, as we all know, market leadership was prized above all things as a critical element of financial success - just as it is in the MH lending business, where Conseco Finance is No. 1.
The positive variance between Greenpoint and Conseco Finance on loan performance is almost exclusively owing to Conseco Finance's strategic advantage in the market. Yet, the SSB report gives it not a pause. It passes completely over the data and extrapolates an unsupportable opposite conclusion, namely, that whatever befell Greenpoint will befall Conseco.
Extrapolating a conclusion about Conseco's ongoing business from the economics of Greenpoint's exit is inappropriate. And for an analyst to ignore completely the several reasons why a Greenpoint exit is beneficial to Conseco Finance is inexplicable.
In short, the ``analysis'' that is the core of the SSB report is the fabrication of a circumstance that does not and will not exist.
I am obliged to note a few other errors in the SSB report.
Perhaps the most egregious is the comment that: ``on a liquidation basis ... policyholders should be reasonably well protected by various state guaranty funds.``
The misinformation that this sentence implies is simply irresponsible. The analyst knows well that Conseco's insurance policyholders are backed by $25 billion of assets that are held on the books of our insurance subsidiaries, and that our risk-based-capital (RBC) ratios are well in excess of prescribed levels. We have worked diligently to maintain the confidence of insurance regulators around the country, and the claims paying ability of this company is not in doubt.
The SSB report makes several references to the performance of our MH securitization pools. We went into great detail on this subject at the November 15th investor briefing in New York (which Mr. Devine chose not to attend). I won't repeat those arguments explaining why the SSB views on recent portfolio performance are wrong.
By the way, none of this note should be construed to say that performance in the MH sector is by any means rosy. It is not. We are in a very difficult economy that will continue to put pressure on earnings in the Finance company. Obviously, the accounting for the 4th quarter is not complete, but due in large part to increasing provision for losses, we expect to fall short of our previous guidance of 72 cents per share for 2001. This will come as no surprise given the similar recent announcements by many in the banking and lending business. The weight of the unemployment and business slowdown hit hard in November and December.
On two other 4th quarter issues raised in the SSB report, we can report that there will be no I/O impairment charge in the 4th quarter - in other words, performance was within the more conservative model put in place last quarter for the old gain-on-sale pools. Second, the SSB report erroneously reports that guarantees on securitizations are funded by and backed by an LOC. That is not correct.
Also incorrect, the report twice compares Conseco Finance's home equity lending to Providian, in one instance as follows:
``Our rating and estimate changes reflect ... continuing problems in the home equity segment that have plagued rival Providian Financial.``
Not only is Providian not ``a rival,'' they don't even do home equity lending! Providian exited this market and sold its home equity portfolio in early 2000.
The other comparison that the report makes with our home equity lending business is with ``Bank of America's now-discontinued Money Store operations.'' First, it must be noted that The Money Store was never owned by Bank of America -- yet another error. It was owned by First Union. Although in this case it is at least true that The Money Store did home equity lending, the comparability stops there. The Money Store served a much riskier credit profile. Its distribution channel was direct response to television ads. Conseco Finance's home equity business is done through branch offices around the country.
If Mr. Devine truly wants to present comparable home equity lending data, we suggest that he take a look at our competitor CitiFinancial - SSB's sister company at CitiGroup. The CitiFinancial website description practically mirrors Conseco Finance's:
CitiFinancial provides community-based lending services through a strong branch network system. Decisions are made locally by CitiFinancial team members who live and work in the locations they serve. This on-the-ground, face-to-face customer interaction gives us a unique competitive advantage, allowing us to best determine each client's needs. Our consumer loan services include real estate-secured loans, unsecured and partially secured personal loans, and loans to finance consumer goods.
Our team at Conseco Finance says that CitiFinancial may generate better earnings than we do based on its lower cost of capital, but that we may have the better loan performance in a head-to-head comparison. Since SSB has unique access to the data, they perhaps could make a comparison.
Is this report just sloppy work? Or is it an intentional effort to color the public perception of Conseco. I will leave that for you to judge.
The purpose of this note is to communicate to all investors and potential investors in our company that Mr. Devine's work contains errors. There are several other reputable analysts who cover our company. If you read their work in combination, you will get a more accurate view of Conseco.
We are a company now in the 19th month of a difficult turnaround, made even more difficult by the current economy. Our original turnaround objectives hit rough sailing in the 2nd quarter of 2001 when, as we now know, but didn't know then, the economy entered a mild recession. Compounded by 9-11, this economic backdrop has hindered our plan. Despite the setback, we continue to execute. We said we would make all our debt payments in 2001, and we did - six months early. We said we would reduce the company's debt by more than $3 billion by the end of 2003, and $2.2 billion has already been eliminated.
We plan to survive. And we plan to thrive. We will do so with the support of investors, regulators, and customers who have the good sense - the common sense - to pay attention to the facts.
Sincerely,
R. Mark Lubbers
EVP, Corporate Affairs |
