<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-11164
Conseco, Inc.
Indiana No. 35-1468632
---------------------- ------------------------------
State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 573-6100
-------------------------------------- --------------
Address of principal executive offices Telephone
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 [ ]
Shares of common stock outstanding as of May 2, 1994: 25,271,963
<PAGE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
March 31, December 31,
1994 1993
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Fixed maturities:
Actively managed at fair value (amortized cost: 1994 - $2,778.7;
1993 - $9,525.4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,684.2 $ 9,820.6
Held to maturity at amortized cost (fair value: 1994 - $ - ;
1993 - $1.6). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1.1
Equity securities at fair value (cost: 1994 - $14.9; 1993- $30.2) . . . . . . . . . 14.7 30.3
Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79.9 158.4
Credit-tenant loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.2 326.9
Policy loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117.3 190.0
Investment in Western National Corporation. . . . . . . . . . . . . . . . . . . . . 221.1 -
Investment in CCP Insurance, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . 228.8 244.3
Other invested assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.5 64.2
Trading account securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.1 105.8
Short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590.4 666.4
Assets held in separate accounts. . . . . . . . . . . . . . . . . . . . . . . . . . 77.1 81.1
-------- ---------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,113.3 11,689.1
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.8 168.3
Reinsurance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428.7 511.1
Cost of policies purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581.6 603.7
Cost of policies produced . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.7 258.6
Goodwill (net of accumulated amortization:
1994 - $16.4; 1993 - $14.3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318.1 320.6
Property and equipment at cost (net of accumulated depreciation:
1994 - $21.2; 1993 - $21.1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70.3 71.7
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135.8 126.2
-------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,901.3 $13,749.3
======== =========
(continued on next page)
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1994 1993
---- ----
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,481.9 $10,798.3
Income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.7 118.2
Investment borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312.3 427.7
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293.0 256.4
Liabilities related to separate accounts . . . . . . . . . . . . . . . . . . . . . 75.8 79.0
Notes payable of Conseco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195.8 413.0
Notes payable of Bankers Life Holding Corporation,
not direct obligations of Conseco . . . . . . . . . . . . . . . . . . . . . . . 279.5 290.3
-------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,694.0 12,382.9
-------- ---------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223.2 223.8
-------- ---------
Shareholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287.5 287.5
Common stock and additional paid-in capital, no par value,
500,000,000 shares authorized, shares outstanding:
1994 - 25,849,939; 1993 - 25,311,773. . . . . . . . . . . . . . . . . . . . . 174.6 102.8
Unrealized appreciation (depreciation) of securities
(net of applicable deferred income
taxes: 1994 - $(11.8); 1993 - $41.8) . . . . . . . . . . . . . . . . . . . . . (29.1) 97.5
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551.1 654.8
-------- ---------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 984.1 1,142.6
-------- ---------
Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . $5,901.3 $13,749.3
======== =========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 4
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
(unaudited)
Three months ended
March 31,
-------------------
1994 1993
---- ----
<S> <C> <C>
Revenues:
Insurance policy income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $321.1 $319.5
Investment activity:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68.5 206.1
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 37.1
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.6) 33.7
Fee revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9 7.1
Equity in earnings of Western National Corporation. . . . . . . . . . . . . . . . . . 21.9 -
Equity in earnings of CCP Insurance, Inc. . . . . . . . . . . . . . . . . . . . . . . 8.0 7.7
Merchant banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.3 138.1
Other income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 .2
------ ------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490.2 749.5
------ ------
Benefits and expenses:
Insurance policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232.3 252.7
Change in future policy benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 14.2
Interest expense on annuities and financial products. . . . . . . . . . . . . . . . . 14.6 101.7
Interest expense on long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 13.5 16.1
Interest expense on short-term investment borrowings. . . . . . . . . . . . . . . . . 2.2 1.3
Amortization related to operations. . . . . . . . . . . . . . . . . . . . . . . . . . 30.2 31.2
Amortization and change in future policy benefits
related to realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.9) 28.9
Other operating costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 53.0 52.3
------ ------
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 356.0 498.4
------ ------
Income before income taxes, minority
interest and extraordinary charge. . . . . . . . . . . . . . . . . . . . . . 134.2 251.1
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.8 93.9
------ ------
Income before minority interest and extraordinary charge . . . . . . . . . . . 94.4 157.2
Less minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9 14.8
------ ------
Income before extraordinary charge. . . . . . . . . . . . . . . . . . . . . . . 82.5 142.4
Extraordinary charge on extinguishment of debt,
net of taxes and minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 10.9
------ ------
(continued on next page)
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 5
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS, continued
(Dollars in millions, except per share data)
(unaudited)
Three months ended
March 31,
-------------------
1994 1993
---- ----
<S> <C> <C>
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80.1 131.5
Less preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 4.7
------ ------
Earnings applicable to common stock . . . . . . . . . . . . . . . . . . . . $ 75.4 $126.8
====== ======
Earnings per common share and common equivalent share:
Primary:
Weighted average shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,304,000 29,374,000
Earnings before extraordinary charge . . . . . . . . . . . . . . . . . . . . . $2.76 $4.69
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .09 .37
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.67 $4.32
===== =====
Fully diluted:
Weighted average shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,814,000 32,707,000
Earnings before extraordinary charge . . . . . . . . . . . . . . . . . . . . . $2.51 $4.31
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .07 .33
----- -----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.44 $3.98
===== =====
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 6
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Three months ended
March 31,
-------------------
1994 1993
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $287.5 $ 50.0
Series D preferred shares issued . . . . . . . . . . . . . . . . . . . . . . . . . - 287.5
------ --------
Balance, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $287.5 $ 337.5
====== ========
Common stock and additional paid-in capital:
Balance, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $102.8 $ 115.4
Amounts related to stock options and employee benefit plans. . . . . . . . . . . . 17.4 1.4
Tax benefit related to issuance of shares under employee benefit plans . . . . . . 67.5 4.4
Cost of shares acquired charged to common stock and additional
paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13.1) -
Cost of issuance of Series D preferred stock . . . . . . . . . . . . . . . . . . . - (9.0)
------ --------
Balance, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174.6 $ 112.2
====== ========
Unrealized appreciation (depreciation) of securities:
Balance, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97.5 $ 42.9
Change in unrealized appreciation (depreciation) . . . . . . . . . . . . . . . . . (126.6) 34.7
------ --------
Balance, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(29.1) $ 77.6
====== ========
Retained earnings:
Balance, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $654.8 $ 386.0
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80.1 131.5
Cost of shares acquired charged to retained earnings . . . . . . . . . . . . . . . (175.9) -
Dividends on common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.2) (.6)
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.7) (4.7)
------ --------
Balance, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $551.1 $ 512.2
====== ========
Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . $984.1 $1,039.5
====== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 7
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
-------------------
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80.1 $ 131.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization and depreciation . . . . . . . . . . . . . . . . . . . . . . . . . 31.1 62.2
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.2 71.3
Insurance liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29.2 4.9
Interest credited to insurance liabilities. . . . . . . . . . . . . . . . . . . 14.6 101.7
Fees charged to insurance liabilities . . . . . . . . . . . . . . . . . . . . . (8.9) (9.8)
Accrual and amortization of investment income . . . . . . . . . . . . . . . . . (11.1) (29.4)
Deferral of cost of policies produced . . . . . . . . . . . . . . . . . . . . . (31.6) (42.8)
Merchant banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65.3) (138.1)
Equity in earnings of Western National Corporation. . . . . . . . . . . . . . . (21.9) -
Equity in earnings of CCP Insurance, Inc. . . . . . . . . . . . . . . . . . . . (7.8) (7.7)
Trading account securities. . . . . . . . . . . . . . . . . . . . . . . . . . . 20.9 69.1
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 14.8
Extraordinary charge on extinguishment of debt. . . . . . . . . . . . . . . . . 2.4 10.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 50.6
------ --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . 91.2 289.2
------ --------
Cash flows from investing activities:
Proceeds from sale of shares of Western National Corporation and
related transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537.9 -
Sales of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562.2 1,615.5
Maturities and redemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.5 337.5
Purchases of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (705.6) (2,581.5)
Cash held by Western National Corporation before deconsolidation
and the settlement of intercompany balances. . . . . . . . . . . . . . . . . . . . (352.5) -
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.3) (74.6)
------ --------
Net cash provided (used) by investing activities . . . . . . . . . . . . 94.2 (703.1)
------ --------
Cash flows from financing activities:
Issuance of capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.0 279.4
Issuance of debt of Conseco, net. . . . . . . . . . . . . . . . . . . . . . . . . . . - 195.6
Payments on debt of Conseco . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220.3) (154.8)
Payments on debt of subsidiary - not direct obligations of Conseco. . . . . . . . . . (11.0) (10.0)
Payments to repurchase equity securities. . . . . . . . . . . . . . . . . . . . . . . (189.0) -
Deposits to insurance liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 76.2 271.6
Investment borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105.1 178.5
Withdrawals from insurance liabilities. . . . . . . . . . . . . . . . . . . . . . . . (30.5) (134.5)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.9) (2.0)
------ --------
Net cash provided (used) by financing activities. . . . . . . . . . . . . (261.4) 623.8
------ --------
Net increase (decrease) in short-term investments . . . . . . . . . . . . (76.0) 209.9
Short-term investments, beginning of period . . . . . . . . . . . . . . . . . . . . . . 666.4 666.6
------ --------
Short-term investments, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $590.4 $ 876.5
====== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 8
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes should be read in conjunction with the notes to
consolidated financial statements included in the 1993 Form 10-K of Conseco,
Inc. ("Conseco" or the "Company").
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of March 31, 1994, and
for the three months ended March 31, 1994 and 1993, reflect all adjustments,
consisting only of normal recurring items, which are necessary to present
fairly the Company's financial position and results of operations on a basis
consistent with that of the prior audited consolidated financial statements.
The consolidated financial statements include Conseco, Inc., its wholly owned
subsidiaries and Bankers Life Holding Corporation and its wholly owned
subsidiaries ("BLH"). Conseco's principal wholly owned insurance subsidiaries
are Bankers National Life Insurance Company, National Fidelity Life Insurance
Company and Lincoln American Life Insurance Company. In the first quarter of
1993 and as of December 31, 1993, the consolidated financial statements also
included the accounts of Western National Life Insurance Company ("Western").
As described under "Investment in Western National Corporation" in these notes,
Western National Corporation ("WNC"), a company formed to be the holding
company for Western, completed an initial public offering ("IPO") of its common
stock on February 15, 1994. The shares issued in the offering represented a
60 percent interest in WNC. The remaining common shares, which represent a 40
percent interest, are held by the Company. Accordingly, WNC is included in
Conseco's financial statements on the equity basis as of January 1, 1994.
Intercompany amounts and transactions among consolidated subsidiaries are
eliminated. Certain amounts from the prior period were reclassified to conform
to the 1994 presentation.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITIES
The Company classifies fixed maturity investments into two categories:
"actively managed" (which are carried at estimated fair value) and "held to
maturity" (which are carried at amortized cost). There were no fixed maturity
investments held to maturity at March 31, 1994. The adjustment to carry
actively managed fixed maturity investments at fair value (as described in note
1 to the consolidated financial statements included in the Company's 1993 Form
10-K) resulted in the following cumulative effects on balance sheet accounts
as of March 31, 1994:
<TABLE>
<CAPTION>
Adjustment to Carry
Balance Actively Managed
before Fixed Maturities Reported
Adjustment at Fair Value Amount
---------- ------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities. . . . . . . . . . . . . . $2,778.7 $(94.5) $2,684.2
Cost of policies purchased . . . . . . . . . . . . . . . . . 545.0 36.6 581.6
Cost of policies produced. . . . . . . . . . . . . . . . . . 185.4 16.3 201.7
Income tax liabilities . . . . . . . . . . . . . . . . . . . 72.6 (15.9) 56.7
Minority interest. . . . . . . . . . . . . . . . . . . . . . 229.9 (6.7) 223.2
Unrealized depreciation of securities. . . . . . . . . . . . (10.1) (19.0) (29.1)
</TABLE>
<PAGE>
<PAGE> 9
INVESTMENT IN WESTERN NATIONAL CORPORATION
On February 15, 1994, WNC completed the IPO of 37.2 million shares of
common stock, of which 2.3 million shares were sold by WNC and 34.9 million
shares were sold by Conseco. In addition, Conseco sold .2 million shares to
the President of WNC at the IPO price less underwriting discounts and
commissions. Prior to the IPO, Western and WNC were wholly owned subsidiaries
of Conseco. WNC was formed in October 1993 as a Delaware corporation to be the
holding company for Western. In connection with the organization of WNC and
the transfer of stock of Western to WNC by Conseco, WNC issued 60 million
shares of its common stock and a $150.0 million, 6.75 percent senior note due
March 31, 1996 (the "Conseco Note") to Conseco. On February 22, 1994, WNC
completed a public offering of $150.0 million aggregate principal amount of
7.125 percent senior notes due February 15, 2004. The net proceeds from the
offering of $147.5 million (after original issue discount, underwriting
discount and offering expenses) and certain proceeds from WNC's IPO of common
stock were used to repay the Conseco Note.
The shares issued in the IPO and the related transaction represent a 60
percent interest in WNC. The remaining common shares, which represent a 40
percent interest, are held by Conseco. Net pretax proceeds to Conseco from the
repayment of the Conseco Note and the sale of WNC shares totaling $537.9
million were used to repay a $200 million senior unsecured loan and for other
general corporate purposes. Effective January 1, 1994, WNC is included in
Conseco's financial statements on the equity method. In the first quarter of
1994, Conseco recorded a one-time gain of approximately $42.4 million (net of
taxes of $22.9 million) as a result of these transactions.
PRO FORMA DATA
The following pro forma data is presented as if the IPO of WNC had
occurred at the beginning of each of the periods presented. Additionally, the
pro forma data for the three months ended March 31, 1993, is presented as if
all financing transactions related to the IPO of BLH and Conseco's subsequent
purchases of additional shares of BLH and CCP Insurance, Inc. ("CCP") as
described in the notes to the consolidated financial statements included in
Conseco's 1993 Form 10-K had occurred at January 1, 1993. The net proceeds to
Conseco from these transactions were assumed to be invested to earn 3.5 percent
before income tax.
<TABLE>
<CAPTION>
Three months ended
March 31,
1994(a) 1993(b)
------- -------
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $414.2 $458.9
Income before extraordinary charge . . . . . . . . . . . . 29.5 37.4
Income before extraordinary charge per common share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . $ .88 $ 1.12
Fully diluted . . . . . . . . . . . . . . . . . . . . . .88 1.11
<FN>
(a) Excludes revenues, net income, net income per primary common share and net income per fully diluted
common share related to the gain on the sale which resulted from WNC's IPO and related transactions of
$65.3 million, $42.4 million, $1.50 and $1.29, respectively.
(b) Excludes revenues, net income, net income per primary common share and net income per fully diluted
common share related to the gain on the sale and incentive earnings allocation which resulted from BLH's
IPO and related transactions of $138.1 million, $84.7 million, $2.88 and $2.59, respectively.
</TABLE>
<PAGE>
<PAGE> 10
CHANGES IN LONG-TERM DEBT
Notes Payable of Conseco
In February 1994, the Company repaid in full a $200 million senior
unsecured loan executed in connection with the Company's acquisition of
additional BLH common shares in September 1993. The loan was repaid with the
proceeds from the sale of shares of WNC and resulted in an extraordinary charge
of $1.2 million (net of a $.6 million tax benefit).
In March 1994, the Company repaid two unsecured promissory notes, with
book values totaling $19.2 million resulting in an extraordinary charge of $.7
million (net of a $.4 million tax benefit).
Notes Payable of BLH (not direct obligations of Conseco)
In the first quarter of 1994, BLH made a scheduled principal payment on
its senior term loan of $11.0 million. The interest rate on BLH's senior term
loan was 6.38 percent at March 31, 1994.
Notes Payable of CCP
In the first quarter of 1994, CCP repaid an unsecured note, resulting in
an extraordinary charge to CCP of $1.3 million (net of a $.7 million tax
benefit). Conseco's share of this charge ($.5 million) was included as an
extraordinary charge in the consolidated statement of operations.
CHANGES IN CAPITAL STOCK
In February 1994, Conseco implemented an option exercise program under
which its chief executive officer and four executive vice presidents exercised
outstanding options to purchase approximately 3.6 million shares of the
Company's common stock. The options would otherwise have remained exercisable
until the years 1999 and 2000. As a result of the exercise, the Company
realized a tax deduction equal to the aggregate tax gain recognized by the
executives as a result of the exercise. The tax benefit of $67.5 million (net
of payroll taxes incurred of $2.9 million) and the proceeds from the exercise
of these and other employee options of $16.0 million were reflected as
increases in common stock and paid-in capital. The Company withheld sufficient
shares to cover federal and state taxes owed by the executives as a result of
the exercise transactions. Net of withheld shares, the Company issued
approximately 1.8 million common shares to the executives. The Company also
granted to the executive officers new options to purchase a total of 3,016,000
shares of the Company's common stock at $59.25 per share (the market price at
the date of such grant) under the 1994 Stock and Incentive Plan to replace the
shares surrendered for taxes and the exercise price on these and other recent
option exercises and as the 1994 incentive grant to six executives.
In addition to the 1.8 million shares repurchased as described above, the
Company repurchased approximately 1.4 million common shares for $83.1 million
during the first quarter of 1994, as part of its previously announced stock
repurchase program. The total cost of shares repurchased during the first
quarter of 1994 of $189.0 million was allocated to shareholders' equity
accounts as follows: (i) $13.1 million to common stock and paid-in capital
(such allocation was based on the average common stock and paid-in capital
balance per share) and (ii) $175.9 million to retained earnings.
During the first three months of 1994, 2,749 shares of common stock were
contributed to employee benefit plans. Additionally, $1.4 million was added
to common stock and additional paid-in capital related to employee benefit
plans.
<PAGE>
<PAGE> 11
REINSURANCE
The cost of reinsurance ceded for policies containing mortality or
morbidity risks totaled $8.1 million and $12.0 million in the first three
months of 1994 and 1993, respectively. This cost was deducted from insurance
policy income. Reinsurance premiums assumed on policies containing mortality
risks totaled $.1 million and $.3 million in the first three months of 1994 and
1993, respectively. Reinsurance recoveries netted against insurance policy
benefits totaled $5.2 million and $14.3 million in the first three months of
1994 and 1993, respectively.
CHANGES IN MINORITY INTEREST
The change in minority interest during the first quarter of 1994 was
attributable to the minority interests' share of the results of BLH's
operations for the period ended March 31, 1994, offset by the change in
unrealized appreciation (depreciation) of BLH's investments, consistent with
the requirements of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
<PAGE>
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting the
results of operations and the significant changes in balance sheet items. The
comparison of first quarter 1994 and 1993 balances in the consolidated inancial
statements is largely affected by the transactions described in the notes to
the consolidated financial statements included herein and the notes to the
consolidated financial statements included in the 1993 Form 10-K of Conseco.
This discussion should be read in conjunction with the aforementioned
consolidated financial statements and related notes.
RESULTS OF OPERATIONS
Conseco's earnings result from three different activities:
- Operations of life insurance companies;
- Services provided to affiliates and non-affiliates for fees; and
- Merchant banking activities, consisting of acquisition and
restructuring of life insurance companies currently
conducted through Conseco Capital Partners II, L.P. ("CCP II").
<PAGE>
<PAGE> 13
The following table shows the sources of Conseco's net income (after taxes
and minority interest) disaggregated for the above three earnings activities.
<TABLE>
<CAPTION>
Three months
ended March 31,
-----------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.5 $ 6.9
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2.7
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . (.3) 1.5
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1.9)
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 9.2
----- ------
WNC:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.7 20.5
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9.1
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6.6
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.7 36.2
----- ------
CCP:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 7.1
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.5) -
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 7.1
----- ------
Wholly owned insurance companies:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 5.6
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6.5
Net realized losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.0) (6.4)
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 5.7
----- ------
Total from operations of life insurance companies:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46.9 40.1
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18.3
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.3) 1.7
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.5) (1.9)
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.1 58.2
----- ------
Services provided for fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 4.3
----- ------
Merchant banking activities:
Incentive earnings allocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . - 22.3
Sale of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4 62.4
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4 84.7
----- ------
Corporate and other:
Operating expenses, net of revenues . . . . . . . . . . . . . . . . . . . . . . . . (3.5) (2.1)
Interest expense on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (5.1) (5.2)
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .6
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 -
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.9) (9.0)
----- ------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.5) (15.7)
----- ------
Consolidated earnings:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.4 37.1
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 18.9
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.3) 1.7
Merchant banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4 84.7
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.4) (10.9)
----- ------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80.1 $131.5
===== ======
</TABLE>
<PAGE>
<PAGE> 14
The disaggregated earnings summarized in the preceding schedule resulted
in fully diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three months
ended March 31,
-----------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .35 $ .22
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .08
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . (.01) .04
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (.06)
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 .28
----- -----
WNC:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66 .60
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .27
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .19
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66 1.06
----- -----
CCP:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 .22
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.02) -
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 .22
----- -----
Wholly owned insurance companies:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 .14
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .20
Net realized losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.15) (.18)
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .04 .16
----- -----
Total from operations of life insurance companies:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.43 1.18
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .55
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.16) .05
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.02) (.06)
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25 1.72
----- -----
Services provided for fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 .13
----- -----
Merchant banking activities:
Incentive earnings allocation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 1.91
Sale of stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.29 .68
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.29 2.59
----- -----
Corporate and other:
Operating expenses, net of revenues . . . . . . . . . . . . . . . . . . . . . . . . . (.11) (.05)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.16) (.16)
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .02
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .03 -
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.05) (.27)
----- -----
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.29) (.46)
----- -----
Consolidated earnings:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.35 1.10
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - .57
Net realized gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.13) .05
Merchant banking income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.29 2.59
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.07) (.33)
----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.44 $3.98
===== =====
</TABLE>
<PAGE>
<PAGE> 15
Additional Discussion of Consolidated Statement of Operations for the
First Quarter of 1994 Compared to the First Quarter of 1993:
The following tables and narratives summarize amounts reported in the
consolidated statement of operations for the first quarters of 1994 and 1993,
disaggregated as previously described for Conseco's three earnings activities.
Many of the changes which occurred in the consolidated statement of operations
resulted from: (i) restructurings that changed Conseco's percentage ownership
in BLH, WNC and CCP and (ii) changes in control of WNC that affected the
determination of whether the affiliate was to be included in Conseco's
statement of operations under the consolidation or the equity method of
accounting.
BLH:
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Revenues:
Insurance policy income . . . . . . . . . . . . . . . . . . . . . . . . . $303.6 $295.9
Investment activity:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 47.9 34.3
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . - 12.4
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . (1.9) 11.1
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349.6 354.7
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224.9 216.1
Interest expense on annuities and financial products. . . . . . . . . . . 10.3 8.4
Interest expense on long-term debt. . . . . . . . . . . . . . . . . . . . 7.6 10.8
Amortization related to operations. . . . . . . . . . . . . . . . . . . . 28.4 26.5
Amortization related to realized gains (losses) . . . . . . . . . . . . . (.9) 7.1
Other operating costs and expenses . . . . . . . . . . . . . . . . . . . 38.8 38.4
Income before taxes, minority interest and extraordinary charge. . . . . . . 38.3 46.8
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 17.9
Income before minority interest and extraordinary charge . . . . . . . . . . 23.1 28.9
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9 14.8
Extraordinary charge (net of minority interest of $2.9 million in 1993) . . - (1.9)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 12.2
Less preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . - 3.0
Earnings applicable to common stock. . . . . . . . . . . . . . . . . . . . . 11.2 9.2
Summarized by component, all net of applicable expenses, taxes
and minority interest:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 6.9
Net trading income. . . . . . . . . . . . . . . . . . . . . . . . . . . - 2.7
Net realized gains (losses) . . . . . . . . . . . . . . . . . . . . . . (.3) 1.5
Extraordinary charge on extinguishment of debt. . . . . . . . . . . . . - (1.9)
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 9.2
</TABLE>
<PAGE>
<PAGE> 16
General. Conseco's first quarter 1993 earnings reflected a 44 percent
ownership interest in BLH. In March 1993, BLH completed an IPO of its common
stock, thus reducing Conseco's ownership to 31 percent. On September 30, 1993,
Conseco acquired 13.3 million additional common shares of BLH, increasing its
ownership interest to 56 percent. While activities of BLH were included in
Conseco's financial statements on a consolidated basis for all periods
presented herein, the minority interest adjustment removes from Conseco's net
income the portion applicable to other owners so that net income reflects only
Conseco's applicable ownership interest (i.e., 44 percent during the first
quarter of 1993 and 56 percent during the first quarter of 1994).
At March 31, 1994, the BLH shares owned by Conseco had a net carrying
value of approximately $496.8 million, a market value of approximately $645.2
million and a cost of $313.1 million.
Insurance policy income. Insurance policy income increased $8.0 million,
or 2.7 percent, in the first quarter of 1994 over the same period in 1993.
BLH's insurance policy income was comprised primarily of individual health
premiums, which increased as a result of new business, improved persistency and
rate increases.
Net investment income. Net investment income increased $13.6 million,
or 40 percent, in the first quarter of 1994 over the same period in 1993. The
increase was due to the growth of invested assets as a result of (i) the
recurring operations, (ii) the recapture on March 31, 1993, of a reinsurance
treaty with related assets totaling $182 million, and (iii) the capital
transactions in connection with BLH's IPO, as discussed in the notes to the
consolidated financial statements included in Conseco's 1993 Form 10-K,
partially offset by lower yields on the investment portfolio.
Net trading income. BLH had no trading income in the first quarter of
1994 compared to $2.7 million (after applicable expenses, taxes and minority
interest) in the first quarter of 1993. Trading income often fluctuates from
quarter to quarter as market conditions change for trading activities.
Net realized gains. BLH sold $435.2 million and $467.3 million of
actively managed securities during the first quarter of 1994 and 1993,
respectively. Such securities were sold in response to changes in the
investment environment which created opportunities to enhance the risk profile
of the investment portfolio by replacing existing securities with alternative
securities without adversely affecting the matching of expected maturities of
assets and liabilities.
The realization of investment gains and losses affects the timing of the
amortization of the cost of policies purchased and the cost of policies
produced. As a result of net realized losses from the sales of fixed maturity
investments in the first quarter of 1994, amortization of cost of policies
purchased was decreased by $.9 million. As a result of net realized gains from
the sales of fixed maturity investments in the first quarter of 1993,
amortization of cost of policies purchased and cost of policies produced was
increased by $5.2 million and $1.9 million, respectively.
<PAGE>
<PAGE> 17
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) increased $8.8 million, or 4.1 percent, in
the first quarter of 1994 over the same period in 1993. The increase related
primarily to an increase in premiums with mortality and morbidity features
written by BLH.
Interest expense on long-term debt. Interest expense on long-term debt
decreased $3.2 million, or 30 percent, in the first quarter of 1994 compared
to the same period in 1993. The reduction in interest expense was attributed
to (i) scheduled and unscheduled principal payments totaling $65.0 million on
the senior term loan of BLH in March and April, 1993, (ii) the repurchase of
$20.0 million senior subordinated notes of BLH in December 1993 and (iii) the
repayment of $36.7 million junior subordinated notes in March 1993.
Extraordinary charge. In the first quarter of 1993, BLH retired all of
its junior subordinated notes and prepaid $55.0 million of its senior term loan
resulting in a net extraordinary charge of $4.8 million, of which Conseco's
share was $1.9 million.
WNC:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------
1994
-------------------
Included in
Total Conseco's
WNC Accounts 1993
--- -------- ----
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Insurance policy income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.0 $ - $ 7.5
Investment activity:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 153.9 - 130.6
Net trading income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 - 13.9
Net realized gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 - 24.2
Equity in earnings of WNC. . . . . . . . . . . . . . . . . . . . . . . . . . . - 21.9 -
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169.6 21.9 176.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits . . . . . . . . . . . . . . . . . . . . . . . . . 27.4 - 32.7
Interest expense on annuities and
financial products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.2 - 67.7
Amortization related to operations . . . . . . . . . . . . . . . . . . . . . . 4.5 - 3.6
Amortization and change in future policy
benefits related to realized gains. . . . . . . . . . . . . . . . . . . . . 5.8 - 14.4
Other operating costs and expenses . . . . . . . . . . . . . . . . . . . . . . 3.4 - 1.3
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.1 21.9 55.9
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 .2 19.7
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.7 21.7 36.2
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.2 21.7 20.5
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 - 9.1
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 6.6
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.7 21.7 36.2
</TABLE>
<PAGE>
<PAGE> 18
General. Prior to the completion of the IPO of WNC, Western and WNC were
wholly owned subsidiaries of Conseco. After the IPO Conseco owns 40 percent
of WNC. Accordingly, WNC is included in Conseco's financial statements on the
equity method effective January 1, 1994. Amounts included in Conseco's
accounts for the first quarter of 1994 reflected (i) all of WNC's earnings for
the period through February 15, 1994, the date the IPO was completed, and (ii)
40 percent of WNC's earnings for the remainder of the quarter. The closing
price of WNC shares on the New York Stock Exchange on March 31, 1994, was
$13.25 per share. This indicated a total fair value of Conseco's investment
in WNC of $318.1 million, compared to the carrying value of $221.1 million and
the initial cost to Conseco of $44.7 million.
Insurance policy income. Insurance policy income relates primarily to
premiums from products with mortality and morbidity features. The decline
during the periods presented resulted from decreased emphasis on generating new
premiums from such products.
Net investment income. Net investment income increased during the
periods presented because of the growth of invested assets resulting from (i)
operations, (ii) the recapture of reinsurance from subsidiaries of Conseco on
March 31, 1993, resulting in an increase of $1.3 billion in insurance
liabilities and invested assets, and (iii) the recapture of reinsurance from
a nonaffiliated company on June 30, 1993, resulting in an increase of $156.5
million in insurance liabilities and invested assets, partially offset by lower
yields on the investment portfolio. In addition, during the first quarter of
1994 and 1993 fixed maturity investments were redeemed prior to their scheduled
maturity dates, resulting in additional investment income of approximately $1.7
million and $6.3 million, respectively.
Net trading income. Net trading income (after applicable expenses and
taxes) decreased during the periods presented as a result of changes in market
conditions for trading activities.
Net realized gains. Net realized gains (after applicable expenses,
amortization, change in future policy benefits and taxes) often fluctuate from
period to period. Western sold fixed maturity investments of $786.5 million,
and $791.5 million in the first quarter of 1994 and 1993, respectively.
The realization of investment gains in the first quarter of 1994 resulted
in an increase in insurance liabilities and change in future policy benefits
of $5.8 million. In addition, as a result of investment gains realized in the
first quarter of 1993, amortization of the cost of policies purchased and the
cost of policies produced was increased by $4.8 million and $9.6 million,
respectively.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits), which relate solely to policies with
mortality and morbidity features, decreased $5.3 million, or 16 percent, in the
first quarter of 1994 compared to the same period in 1993, due to improved
mortality and morbidity experience.
Interest expense on annuities and financial products. Interest expense
on annuities and financial products increased $14.5 million, or 21 percent, in
the first quarter of 1994 compared to the same period in 1993 as a result of
increased annuity liabilities coming from both (i) operations and (ii) the
reinsurance recaptures described under "Net investment income" above,
partially offset by reduced interest rates credited on these products. The
average rate credited on all insurance liabilities was 6.2 percent and 7.2
percent at March 31, 1994 and 1993, respectively. The decline in credited
rates over this period resulted from the lower interest rate environment.
Other operating costs and expenses. Other operating expenses increased
$2.1 million, or 162 percent, in the first quarter of 1994 compared to the same
period in 1993, primarily as a result of the additional costs incurred from
establishing WNC as a separate holding company. Additionally, approximately
$.2 million of non-recurring expenses were incurred in the first quarter of
1994 as a result of the start-up of WNC's operations after the IPO.
<PAGE>
<PAGE> 19
CCP:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------
1994 1993
-------------------- ---------------------
Included in Included in
Total Conseco's Total Conseco's
CCP Accounts CCP Accounts
--- -------- --- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income. . . . . . . . . . . . . . . . . . . . . . . . $30.1 $ - $32.3 $ -
Investment activity:
Net investment income . . . . . . . . . . . . . . . . . . . . . . . 95.2 - 101.1 -
Net trading income. . . . . . . . . . . . . . . . . . . . . . . . . - - 6.5 -
Net realized gains. . . . . . . . . . . . . . . . . . . . . . . . . 1.5 - 5.7 -
Equity in earnings of CCP . . . . . . . . . . . . . . . . . . . . . . - 8.0 - 7.7
Equity in earnings of BLH. . . . . . . . . . . . . . . . . . . . . . . - - 1.2 -
Merchant banking income. . . . . . . . . . . . . . . . . . . . . . . . - - 10.5 -
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126.8 8.0 157.3 7.7
Benefits and expenses:
Insurance policy benefits and change in future policy benefits . . . . 16.9 - 22.1 -
Interest expense on annuities and financial products . . . . . . . . . 53.8 - 62.5 -
Interest expense on long-term debt . . . . . . . . . . . . . . . . . . 2.8 - 4.4 -
Interest expense on short-term investment borrowings . . . . . . . . . 1.6 - .2 -
Amortization related to operations . . . . . . . . . . . . . . . . . . 6.8 - 7.4 -
Amortization and change in future policy
benefits related to realized gains. . . . . . . . . . . . . . . . . .9 - 5.2 -
Other operating costs and expenses . . . . . . . . . . . . . . . . . . 12.3 - 11.2 -
Income before taxes and extraordinary charge. . . . . . . . . . . . . . . 31.7 8.0 44.3 7.7
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 .6 16.0 .6
Income before extraordinary charge. . . . . . . . . . . . . . . . . . . . 20.4 7.4 28.3 7.1
Extraordinary charge. . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) (.5) - -
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.1 6.9 28.3 7.1
Summarized by component, all net of applicable expenses,
taxes and minority interest:
Operating earnings. . . . . . . . . . . . . . . . . . . . . . . . . 20.0 7.4 23.9 7.1
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . - - 4.2 -
Net realized gains . . . . . . . . . . . . . . . . . . . . . . . . .4 - .2 -
Extraordinary charge. . . . . . . . . . . . . . . . . . . . . . . . (1.3) (.5) - -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.1 6.9 28.3 7.1
</TABLE>
CCP's earnings during the periods presented were affected by: (i) reduced
interest expense resulting from the reduction in CCP's long-term debt through
scheduled and unscheduled principal payments and lower interest rates; (ii)
reduced trading income resulting from less favorable market conditions and
(iii) the merchant banking income earned in the first quarter of 1994.
Conseco's equity in the earnings of CCP during this period was affected by
these factors and changes in Conseco's ownership interest in CCP resulting from
(i) Conseco's acquisition of 2.3 million additional shares of CCP after the
first quarter of 1993 and (ii) CCP's repurchase of .5 million common shares in
open market transactions in the first quarter of 1994. Conseco's equity in the
earnings of CCP in the first quarter of 1994 included a $.5 million
extraordinary charge related to CCP's prepayment of debt. At March 31, 1994,
Conseco owned 40 percent of the common stock of CCP. Such shares owned by
Conseco had a net carrying value of $228.8 million, a fair value of
approximately $251.3 million and a total cost to Conseco of $102.8 million.
<PAGE>
<PAGE> 20
CCP was a partner in Conseco Capital Partners, L.P.'s (the "Partnership")
investment in BLH. In conjunction with BLH's IPO, CCP's investment in the
Partnership was exchanged for approximately 2.8 percent of the common stock of
BLH. Through the date of the IPO, CCP had recognized equity in earnings of BLH
of $1.2 million in the first quarter of 1993. A gain on the sale of stock by
BLH of $10.5 million was recognized in the first quarter of 1993. After the
IPO, CCP's investment in BLH is carried at fair value, with any unrealized gain
or loss, net of tax, included directly in shareholders' equity.
Because Conseco's investment in BLH is accounted for using the
consolidation method, Conseco's ownership interest in BLH through CCP was
included in the "BLH" segment. Conseco's ownership interest in the gain
recognized by CCP in conjunction with BLH's IPO was included in the "Merchant
Banking" segment.
WHOLLY OWNED INSURANCE SUBSIDIARIES OF CONSECO:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Revenues:
Insurance policy income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17.5 $17.1
Investment activity:
Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.6 40.3
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 9.6
Net realized losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7.6) (1.7)
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.5 65.3
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.5 18.1
Interest expense on annuities and
financial products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 25.5
Amortization related to operations . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 2.0
Amortization related to realized gains. . . . . . . . . . . . . . . . . . . . . . . . - 7.4
Other operating costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 3.5
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 8.8
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 3.1
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 5.7
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 5.6
Net trading income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6.5
Net realized losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.0) (6.4)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 5.7
</TABLE>
<PAGE>
<PAGE> 21
Net investment income. Net investment income decreased during the
periods presented because of the recapture of reinsurance by Western from
Conseco's wholly owned insurance subsidiaries on March 31, 1993, which resulted
in a decrease of $1.3 billion in insurance liabilities and invested assets.
In addition, during the first quarter of 1993 fixed maturity investments were
redeemed prior to their scheduled maturity dates, resulting in additional
investment income of approximately $1.7 million. Such additional investment
income was not significant during the first quarter of 1994.
Net trading income. The wholly owned insurance subsidiaries had no
trading income in the first quarter of 1994, compared to $6.5 million (after
applicable expenses and taxes) in the first quarter of 1993. Trading income
often fluctuates from quarter to quarter as market conditions change for
trading activities.
Net realized gains. Net realized gains (after applicable expenses,
amortization and taxes) often fluctuate from period to period. Fixed maturity
investments of $100.4 million and $328.6 million were sold in the first
quarters of 1994 and 1993, respectively.
The realization of investment gains and losses affects the timing of the
amortization of the cost of policies produced and the cost of policies
purchased. As a result of the net realized gains from the sales of fixed
maturities in the first quarter of 1993, amortization of the cost of policies
purchased and the cost of policies produced was increased by $7.2 million and
$.2 million, respectively.
Interest expense on annuities and financial products. Interest expense
on annuities and financial products decreased during the periods presented as
a result of the aforementioned reinsurance recapture by Western. The average
rate credited on all insurance liabilities was approximately 7.0 percent at
March 31, 1994 and approximately 7.1 percent at March 31, 1994 and 1993,
respectively.
Amortization related to operations. Amortization related to operations
decreased in the first quarter of 1994 from the same period in 1993 as a result
of the aforementioned reinsurance recapture.
<PAGE>
<PAGE> 22
SERVICES PROVIDED FOR FEES:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Revenue:
Investment management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9.6 $7.8
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 1.9
Administrative services, net of
directly related expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.1
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 10.8
Less intercompany eliminations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.5) (3.7)
Revenues reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.9 7.1
Net income attributable to:
Investment management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 3.7
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 (.1)
Administrative services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 .7
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 4.3
</TABLE>
Conseco's fee revenues include: (i) fees for investment management and
mortgage origination and servicing; (ii) commissions earned for insurance and
investment product marketing and distribution and (iii) administrative fees for
policy administration, data processing, product marketing and executive
management services. To the extent these services are provided to entities
that are included in the financial statements on a consolidated basis, the
intercompany fees are eliminated in consolidation.
Growth in total fees during the first quarter of 1994 compared to the
first quarter of 1993 was the result of an increase in fee-producing activities
provided to both affiliated clients and others. Commission revenues of
Marketing Distribution Systems Consulting Group, Inc. ("Bankmark") were $2.6
million in the first quarter of 1994 compared to $1.4 million in the first
quarter 1993 period subsequent to Bankmark's acquisition on March 8, 1993.
Also, during the first quarter of 1994, the Company earned $1.5 million in fees
related to mortgage banking activities compared to $.9 million in the same
period in 1993.
MERCHANT BANKING ACTIVITIES:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Incentive earnings allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 36.6
Gain on sale of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.3 101.5
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.3 138.1
Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.9 53.4
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.4 84.7
</TABLE>
<PAGE>
<PAGE> 23
The first quarter 1994 gain related to the sale of a majority interest
in WNC. The first quarter 1993 incentive earnings allocation was earned when
total returns realized by the other partners in the first partnership exceeded
prescribed targets. The first quarter 1993 gain related to the public sale of
shares by BLH.
CORPORATE AND OTHER:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.7 $6.3
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 7.7
Interest expense on long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 8.1
Other operating costs and expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0 9.2
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 2.9
Loss before extraordinary charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 6.7
Extraordinary charge on extinguishment of debt . . . . . . . . . . . . . . . . . . . . 1.9 9.0
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.5 15.7
</TABLE>
These operations include financing costs for debt on which Conseco is
directly liable and the costs associated with the holding company operations.
Net investment income decreased in the first quarter of 1994 from the same
period in 1993 as a result of (i) lower average invested assets and (ii)
decreased yields on such invested assets.
During the first quarter of 1994, the Company repaid certain debt as
described in the notes to the consolidated financial statements included
herein, resulting in an extraordinary charge of $1.9 million (net of a $1.0
million tax benefit). During the first quarter of 1993, the Company also
repaid certain debt resulting in an extraordinary charge of $9.0 million (net
of a $4.6 million tax benefit).
PREMIUMS COLLECTED
Insurance policy income shown on the Company's financial statements in
accordance with generally accepted accounting principles consists of premiums
received for policies which have life contingencies or morbidity features. For
annuity and universal life contracts without such features, premiums collected
are not reported as revenues, but rather are reported as deposits to insurance
liabilities. Revenues for products recognized as deposits to insurance
liabilities are recognized over time in the form of investment income and
surrender or other charges.
<PAGE>
<PAGE> 24
Premiums collected by BLH. Premiums collected by BLH for the first
quarter of 1994 were $385.2 million, of which $63.1 million were recorded as
deposits to policy liability accounts. This compared to $366.1 million
collected and $52.4 million recorded as deposits to policy liability accounts
in the first quarter of 1993. Collected premiums by business segment were as
follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Individual health:
Medicare supplement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $157.9 $148.4
Long-term care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.1 28.0
Comprehensive. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.4 28.7
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 9.6
------ ------
Total individual health . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222.4 214.7
Annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.7 48.5
Individual life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.3 23.1
Group and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77.6 79.8
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $385.0 $366.1
====== ======
</TABLE>
Medicare supplement premiums collected increased $9.5 million, or 6.4
percent, in the quarter ended March 31, 1994, compared to the same period of
1993. New business, improved persistency, rate increases and payment mode
changes contributed to this increase. Annualized new business premiums were
approximately $19.9 million in both 1994 and 1993.
Long-term care plans accounted for 8.3 percent of total collected
premiums in the first quarter of 1994 and 7.6 percent in the same period in
1993. Long-term care collected premiums increased in 1994 compared to 1993 due
to growth in new business and a larger base of renewal premiums. Annualized
new business premiums were $6.2 million and $4.3 million in the first quarters
of 1994 and 1993, respectively.
Annuity premiums collected increased 27 percent in the first quarter of
1994 compared to the same period in 1993. Virtually all of this increase
related to sales of single premium deferred annuities. The increase occurred,
despite reduced interest rates being credited to annuities, because of an
increased marketing emphasis placed on annuity sales and because of the low
rates available on alternative investments, such as certificates of deposit.
Collected premiums for comprehensive major medical decreased 18 percent
for the quarter ended March 31, 1994, compared to the same period in 1993, as
anticipated due to prior steps taken to improve the profitability of this
product.
Premiums collected by Conseco's wholly owned insurance subsidiaries.
Premiums collected by Conseco's wholly owned insurance subsidiaries were $26.0
million and $73.7 million in the three months ended March 31, 1994, and 1993,
respectively. During the first quarter of 1993, the Company collected $55.5
million of premiums from guaranteed investment contracts and deposit funds for
qualified retirement plans maintained by a subsidiary of the Company. The
principal emphasis of Conseco's wholly owned subsidiaries is on generating
profits through adequate pricing of their insurance products and maintaining
appropriate investment spreads throughout the lives of the policies sold.
Conseco's wholly owned subsidiaries are not actively marketing new products.
<PAGE>
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
The comparison of March 31, 1994 balances to December 31, 1993 balances
in the consolidated balance sheet is largely affected by the deconsolidation
of Western, effective January 1, 1994. Additional changes in the consolidated
balance sheet reflected growth through Conseco's three earnings activities
previously discussed and the long-term debt and capital stock transactions
described in the accompanying notes to consolidated financial statements.
The following unaudited pro forma balance sheet data at December 31,
1993, are presented as if the IPO of WNC and related transactions had occurred
on such date (dollars in millions):
<TABLE>
<S> <C>
Investment in WNC . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254.6
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,317.7
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,020.1
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,628.9
Shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,167.4
</TABLE>
The decrease in shareholders' equity in the first quarter of 1994
resulted from the capital transactions described in "Changes in Capital Stock"
in the notes to the consolidated financial statements and a decline in
unrealized appreciation (depreciation) of $126.6 million to reflect the
decrease in the market value of the Company's investments, partially offset by
the increase in shareholders' equity from earnings. The decline in unrealized
appreciation (depreciation) is recorded consistent with the requirements of
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This decrease resulted from the
higher interest rate environment, which generally caused the market value of
fixed maturities to decrease.
The ratio of debt for which the Company is directly liable to
shareholders' equity decreased to .20-to-1 at March 31, 1994, from .36-to-1 at
December 31, 1993, as a result of the repayment of debt as described in
"Changes in Long-Term Debt" in the notes to the consolidated financial
statements. Book value per common share was $26.95 at March 31, 1994, compared
to $33.78 at December 31, 1993. The decline was due to an increase in the
shares outstanding as well as decreased common equity described in the
preceding paragraph. The return on average common equity was 39 percent
(annualized) for the three months ended March 31, 1994, compared to 37 percent
for the year ended December 31, 1993. This increase occurred because of the
effect of merchant banking income earned in the first quarter of 1994 and the
decrease in average common shareholders' equity in the first quarter of 1994
compared to the year ended December 31, 1993.
Dividends declared on common stock for the quarter ended March 31, 1994,
were $.125 per share.
The amortized cost, estimated fair value and carrying value of fixed
maturities (all of which were actively managed) were as follows at March 31,
1994:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and
obligations of United States government
corporations and agencies . . . . . . . . . . . . . . . . . . . $ 68.4 $ 1.1 $ 2.1 $ 67.4
Obligations of states and political subdivisions. . . . . . . . . 10.7 .1 .9 9.9
Debt securities issued by foreign governments . . . . . . . . . . 2.8 .8 - 3.6
Public utility securities . . . . . . . . . . . . . . . . . . . . 530.0 6.1 30.4 505.7
Other corporate securities. . . . . . . . . . . . . . . . . . . . 1,163.5 14.1 41.6 1,136.0
Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . 1,003.3 1.7 43.4 961.6
-------- ----- ------ --------
Total fixed maturities . . . . . . . . . . . . . . . . . . $2,778.7 $23.9 $118.4 $2,684.2
======== ===== ====== ========
</TABLE>
<PAGE>
<PAGE> 26
The following table sets forth the quality of fixed maturity investments
as of March 31, 1994, classified in accordance with the highest rating by a
nationally recognized statistical rating organization, or, if not rated by such
firms, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") as follows: for purposes of the table, NAIC Class 1 is
included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-" and Classes 4 to
6, "B+ and below".
<TABLE>
<CAPTION>
Investment Percent of Percent of
Rating Fixed Maturities Total Investments
------ ---------------- -----------------
<S> <C> <C>
AAA . . . . . . . . . . . . . . . . . . 39% 25%
AA. . . . . . . . . . . . . . . . . . . 7 5
A . . . . . . . . . . . . . . . . . . . 18 12
BBB+. . . . . . . . . . . . . . . . . . 7 4
BBB . . . . . . . . . . . . . . . . . . 10 6
BBB-. . . . . . . . . . . . . . . . . . 13 9
--- --
Investment grade . . . . . . . . 94 61
--- --
BB+ . . . . . . . . . . . . . . . . . . 2 1
BB. . . . . . . . . . . . . . . . . . . - -
BB- . . . . . . . . . . . . . . . . . . 1 1
B+ and below. . . . . . . . . . . . . . 3 2
--- --
Below investment grade . . . . . 6 4
--- --
Total fixed maturities . . . . . 100% 65%
=== ==
</TABLE>
Fixed maturities which were below investment grade had a total estimated
fair value and carrying value of $169.5 million, which approximately equalled
the amortized cost as of March 31, 1994.
During the first three months of 1994, the Company wrote down investments
and accrued investment income totaling $.2 million as a result of changes in
conditions which caused the Company to conclude that the issuers may be unable
to comply with the terms of the securities. These writedowns were recorded as
realized losses. The Company recorded writedowns of $3.4 million in the
comparable period of 1993. The amortized cost, carrying value and fair value
of fixed maturity investments in default as to the payment of principal or
interest were $9.9 million, $10.8 million and $10.8 million, respectively, at
March 31, 1994.
Mortgage-backed securities at March 31, 1994, included collateralized
mortgage obligations of $513.7 million and mortgage-backed pass-through
securities of $447.9 million. Although mortgage-backed securities are subject
to risks involving the timing of cash flows due to prepayments, the Company
seeks to limit its risk by (i) purchasing securities which are backed by
collateral with lower prepayment sensitivity (such as mortgages purchased at
a discount from par value and mortgages that are extremely seasoned), (ii)
avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities) and (iii)
concentrating on securities with prepayment protected structures (such as
planned amortization class ("PAC") collateralized mortgage obligations). PAC
instruments represented approximately 83 percent of the Company's
collateralized mortgage obligations at March 31, 1994.
<PAGE>
<PAGE> 27
At March 31, 1994, the par value, amortized cost and estimated fair value
of investments in mortgage-backed securities summarized by interest rates on
the underlying collateral were comprised of the following:
<TABLE>
<CAPTION>
Par Amortized Estimated
Value Cost Fair Value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-through securities:
Below 7%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 310.7 $ 311.5 $295.4
7% - 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136.2 139.4 134.4
8% - 9% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 5.9 6.0
Above 9%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9 11.8 12.1
Planned amortization class CMO instruments:
Below 7%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145.6 137.1 127.0
7% - 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249.7 245.0 235.9
8% - 9% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.2 37.7 36.5
Above 9%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2 25.0 24.8
Other CMO instruments:
Below 7%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.0 30.0 29.0
Above 9%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.6 59.9 60.5
-------- -------- ------
Total mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . $1,010.8 $1,003.3 $961.6
======== ======== ======
</TABLE>
Mortgage loans at March 31, 1994, totaled $79.9 million, or 1.9 percent
of total invested assets. At March 31, 1994, the balance of mortgage loans was
comprised of 85 percent commercial loans, 2 percent residential loans and 13
percent residual interests in collateralized mortgage obligations. Less than
1 percent of mortgage loans were noncurrent at March 31, 1994. There were no
realized losses on mortgage loans during the three months ended March 31, 1994
and 1993. At March 31, 1994, the Company had a loan loss reserve of $.9
million.
Credit-tenant loans are loans for commercial properties which require (i)
the lease of the principal tenant to be assigned to the Company and to produce
adequate cash flow to fund substantially all the requirements of the loan and
(ii) the principal tenant or the guarantor of such tenant's obligations to have
a credit rating at the time of origination of the loan of at least BBB or its
equivalent. These loans are also secured by the value of the related property.
The underwriting guidelines take into account such factors as the lease terms
of the property; the borrower's management ability, including business
experience, property management capabilities and financial soundness; and such
economic, demographic or other factors that may affect the income generated by
the property or its value. The underwriting guidelines also require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans are carried at
amortized cost.
The Company enters into reverse repurchase agreements and dollar roll
transactions in order to increase its return on investments and increase its
liquidity. These transactions are accounted for as short-term collateralized
borrowings. Such borrowings were $312.3 million at March 31, 1994, and were
collateralized by pledged securities with fair values approximately equal to
the borrowings. Such borrowings averaged approximately $266 million during the
first quarter of 1994 compared to approximately $192 million during the first
quarter of 1993.
<PAGE>
<PAGE> 28
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from generally accepted
accounting principles. The Company's life insurance subsidiaries that are
included on a consolidated basis in these financial statements reported the
following amounts to regulatory agencies at March 31, 1994, after appropriate
eliminations of intercompany accounts among such subsidiaries (dollars in
millions):
<TABLE>
<S> <C>
Statutory capital and surplus . . . . . . . . . . . . . . . . . $411.3
Asset valuation reserve. . . . . . . . . . . . . . . . . . . . . 25.8
Interest maintenance reserve . . . . . . . . . . . . . . . . . . 72.7
------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $509.8
======
</TABLE>
In connection with the acquisition of BLH, the capital of one of the life
insurance subsidiaries (Bankers Life Insurance Company of Illinois) was
increased by providing cash in exchange for a surplus debenture. The unpaid
balance of the surplus debenture of $485.0 million at March 31, 1994, is
considered a part of statutory capital and surplus of the life insurance
subsidiary. Payments to BLH of principal and interest on the surplus debenture
may be made from available funds only with the approval of the Illinois
Department of Insurance when its Director is satisfied that the financial
condition of the subsidiary warrants that action. Such approval may not be
withheld provided the surplus of the subsidiary exceeds, after such payment,
approximately $128 million. Such subsidiary's surplus at March 31, 1994, was
$344.1 million. During April 1994, such subsidiary made a scheduled principal
payment on the surplus debenture of $25.0 million plus accrued interest.
Statutory accounting practices require that portions of surplus, called
the asset valuation reserve ("AVR") and the interest maintenance reserve
("IMR") be appropriated and reported as liabilities. The purpose of these
reserves is to stabilize statutory net income and surplus against fluctuations
in the market value of investments. The IMR captures all investment gains and
losses on debt instruments resulting from changes in interest rates and
provides for subsequent amortization of such amounts into statutory net income
on a basis reflecting the remaining life of the assets sold. The AVR captures
investment gains and losses related to changes in creditworthiness and is also
adjusted each year based on a formula related to the quality and loss
experience of the Company's investment portfolio.
At March 31, 1994, the ratio of such consolidated statutory account
balances to consolidated statutory liabilities (excluding AVR, IMR, liabilities
from separate account business and short-term collateralized borrowings) was
17.0 percent, compared to a ratio of 11.4 percent (17.1 percent excluding the
accounts of Western) at December 31, 1993.
During the three months ended March 31, 1994, the Company's wholly owned
life insurance subsidiaries paid no dividends to the parent company.
Approximately $18.7 million is available for distribution in 1994 without the
permission of state regulatory authorities.
<PAGE>
<PAGE> 29
The following table compares the consolidated pretax income determined
on a statutory accounting basis with such income reported herein in accordance
with generally accepted accounting principles:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Life insurance subsidiaries:
Pretax income as reported on a statutory accounting basis
before deduction of expenses paid to affiliates and transfers
to and from and amortization of the IMR . . . . . . . . . . . . . . . . . . . . $ 63.1 $115.6
Net effect of adjustments for generally
accepted accounting principles. . . . . . . . . . . . . . . . . . . . . . . . . (.5) 4.2
------ ------
Pretax income, generally accepted accounting principles. . . . . . . . . . . 62.6 119.8
Non-life companies:
Interest expense on long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . (13.5) (16.1)
Equity in earnings of CCP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 7.7
Equity in earnings of WNC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.9 -
Merchant banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65.3 138.1
All other income and expense, net
(excluding amounts received from affiliates). . . . . . . . . . . . . . . . . . (10.1) 1.6
------ ------
Consolidated pretax income, generally accepted
accounting principles. . . . . . . . . . . . . . . . . . . . . . . . . . . $134.2 $251.1
====== ======
</TABLE>
SUBSEQUENT EVENTS
In April 1994, Conseco and Zenith National Insurance Corporation
("Zenith") executed a letter of intent providing for the acquisition by a
Conseco affiliate of CalFarm Life Insurance Company ("CalFarm") from Zenith for
approximately $120 million in cash. The transaction excludes group business
and is subject to the negotiation of a definitive agreement and the receipt of
all necessary regulatory approvals. Conseco has agreed to give CCP the right
of first refusal of any acquisition with a purchase price under $150 million.
If CCP does not exercise such right, the acquisition of CalFarm will be made
by CCP II. CalFarm is a life insurance company with assets of approximately
$.8 billion. In 1993, CalFarm collected premiums of approximately $100 million
(excluding group business) and recorded statutory net income of $5.0 million.
In May 1994, Conseco signed a definitive agreement to purchase The
Statesman Group, Inc. ("Statesman") through CCP II for $350 million. Under the
agreement, Statesman's shareholders would receive $15.25 per share, plus the
right to receive up to another $2.00 in cash per share, based on the outcome
of Statesman's pending litigation against the U.S. government concerning
Statesman's former savings bank subsidiary. The transaction, which is subject
to the approval of Statesman's shareholders and the receipt of all necessary
regulatory approvals, is expected to close in the third quarter of 1994.
Statesman is a financial services holding company with assets of $4.6 billion.
In 1993, Statesman collected $1.0 billion of annuity premiums and recorded net
income of $37.2 million.
<PAGE>
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
11.1 Computation of Earnings Per Share - Primary.
11.2 Computation of Earnings Per Share - Fully Diluted.
b) Reports on Form 8-K.
A report on Form 8-K dated February 15, 1994, was filed with the
Commission to report under Item 2 the disposition of a majority
interest in Western National Corporation and to report under Item 7b
pro forma financial information of Conseco and its subsidiaries.
<PAGE>
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO, INC.
Dated: May 13, 1994 By: /s/ ROLLIN M. DICK
--------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
<PAGE> 1
<TABLE>
EXHIBIT 11.1
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(unaudited)
<CAPTION>
Three months ended
March 31,
--------------------
1994 1993
---- ----
<S> <C> <C>
Shares outstanding, beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 25,311,773 24,911,148
Weighted average shares issued
for the exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . 2,977,213 95,014
Treasury stock acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,396,021) -
Common equivalent shares, at average market price, related to:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995,079 3,983,592
Employee stock plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416,312 384,580
----------- ------------
Weighted average primary shares outstanding. . . . . . . . . . . . . . . . . . . . 28,304,356 29,374,334
=========== ============
Net income for primary earnings per share:
Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,144,000 $131,518,000
Less preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,672,000) (4,749,000)
----------- ------------
Net income for primary earnings per share. . . . . . . . . . . . . . . . . . . . . $75,472,000 $126,769,000
=========== ============
Net income per primary common share. . . . . . . . . . . . . . . . . . . . . . . . $2.67 $4.32
===== =====
</TABLE>
<PAGE> 1
<TABLE>
EXHIBIT 11.2
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(unaudited)
<CAPTION>
Three months ended
March 31,
---------------------
1994 1993
---- ----
<S> <C> <C>
Weighted average primary shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,304,356 29,374,334
Incremental common equivalent shares for
convertible preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . 4,509,509 3,257,024
Incremental common equivalent shares for
options and employee stock plans based
on market price at the end of the period. . . . . . . . . . . . . . . . . . . . 13 75,398
----------- ------------
Weighted average fully diluted
shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,813,878 32,706,756
=========== ============
Net income for fully diluted
earnings per share:
Net income as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,144,000 $131,518,000
Less preferred stock dividends (excluding
dividends on convertible preferred stock) . . . . . . . . . . . . . . . . . . . - (1,375,000)
----------- ------------
Net income for fully diluted
earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,144,000 $130,143,000
=========== ============
Net income per fully diluted
common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.44 $3.98
===== =====
</TABLE>
