<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 September 30, 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 1-9250
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 November 1, 1994: 24,470,614
<PAGE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
September 30, December 31,
1994 1993
(unaudited) (audited)
----------- ---------
<S> <C> <C>
Investments:
Fixed maturities:
Actively managed at fair value (amortized
cost: 1994 - $7,152.9; 1993 - $9,525.4) $ 6,865.3 $ 9,820.6
Held to maturity at amortized cost (fair value:
1994 - $ - ; 1993 - $1.6) - 1.1
Equity securities at fair value (cost:
1994 - $40.9; 1993- $30.2) 37.1 30.3
Mortgage loans 144.9 158.4
Credit-tenant loans 49.0 326.9
Policy loans 176.4 190.0
Investment in Western National Corporation 157.3 -
Investment in CCP Insurance, Inc. 206.2 244.3
Other invested assets 71.1 64.2
Trading account securities 26.1 105.8
Short-term investments 425.2 666.4
Assets held in separate accounts 85.5 81.1
--------- ---------
Total investments 8,244.1 11,689.1
Cash segregated for the conversion of subordinated
convertible debentures of a subsidiary 66.5 -
Accrued investment income 118.3 168.3
Reinsurance receivables 41.2 511.1
Deferred income taxes 153.5 -
Cost of policies purchased 1,113.5 603.7
Cost of policies produced 242.4 258.6
Goodwill (net of accumulated amortization:
1994 - $20.6; 1993 - $14.3) 615.3 320.6
Property and equipment at cost (net of accumulated
depreciation: 1994 - $25.0; 1993 - $21.1) 88.0 71.7
Securities segregated for future redemption
of preferred stock of a subsidiary 35.5 -
Other assets 168.8 126.2
--------- ---------
Total assets $10,887.1 $13,749.3
========= =========
<FN>
(continued on next page)
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1994 1993
(unaudited) (audited)
----------- ---------
<S> <C> <C>
Liabilities:
Insurance liabilities $ 8,249.0 $10,798.3
Income tax liabilities - 118.2
Investment borrowings 151.7 427.7
Other liabilities 360.7 256.4
Liabilities related to separate accounts 85.1 79.0
Notes payable of Conseco 258.6 413.0
Notes payable of CCP II entities, not direct
obligations of Conseco 374.4 -
Notes payable of Bankers Life Holding Corporation,
not direct obligations of Conseco 279.8 290.3
--------- ---------
Total liabilities 9,759.3 12,382.9
--------- ---------
Minority interest 341.0 223.8
--------- ---------
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 - 24,433,834;
1993 - 25,311,773 172.1 102.8
Unrealized appreciation (depreciation) of
securities (net of applicable deferred
income taxes: 1994 - $(53.6); 1993 - $41.8) (203.6) 97.5
Retained earnings 530.8 654.8
--------- ---------
Total shareholders' equity 786.8 1,142.6
--------- ---------
Total liabilities and shareholders' equity $10,887.1 $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)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $320.2 $324.7 $ 954.2 $ 967.0
Investment activity:
Net investment income 71.1 229.3 213.0 664.1
Net trading income (loss) (1.2) 25.2 (3.6) 77.8
Net realized gain (loss) (5.8) 34.2 (17.4) 104.3
Fee revenue 14.4 6.4 42.5 21.3
Equity in earnings of Western
National Corporation 7.5 - 38.9 -
Equity in earnings of CCP Insurance, Inc. 5.0 8.6 22.2 25.9
Restructuring income - - 65.3 138.1
Other income 12.7 .3 12.9 .8
----- ----- ------- -------
Total revenues 423.9 628.7 1,328.0 1,999.3
----- ----- ------- -------
Benefits and expenses:
Insurance policy benefits 223.8 248.9 680.1 752.5
Change in future policy benefits 11.7 22.1 31.5 52.2
Interest expense on annuities and
financial products 19.1 100.5 51.9 308.3
Interest expense on long-term debt 12.2 12.9 37.4 42.5
Interest expense on short-term
investment borrowings 1.3 4.1 6.2 7.6
Amortization related to operations 32.8 35.4 95.3 100.8
Amortization and change in future
policy benefits related to realized
gains and losses (1.7) 29.0 (2.6) 84.5
Other operating costs and expenses 46.5 52.8 152.4 164.0
----- ----- ------- -------
Total benefits and expenses 345.7 505.7 1,052.2 1,512.4
----- ----- ------- -------
Income before income taxes, minority
interest and extraordinary charge 78.2 123.0 275.8 486.9
Income tax expense 26.8 48.5 85.1 180.5
----- ----- ------- -------
Income before minority interest and
extraordinary charge 51.4 74.5 190.7 306.4
Less minority interest 15.6 22.3 38.2 60.4
----- ----- ------- -------
Income before extraordinary charge 35.8 52.2 152.5 246.0
Extraordinary charge on extinguishment
of debt, net of taxes and minority
interest - - 2.4 10.9
----- ----- ------- -------
<FN>
(continued on next page)
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 Nine months ended
September 30, September 30,
------------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income 35.8 52.2 150.1 235.1
Less preferred stock dividends 4.7 5.1 14.0 15.9
------ ------ ------- ------
Earnings applicable to common stock $ 31.1 $ 47.1 $ 136.1 $219.2
====== ====== ======= ======
Earnings per common share and common
equivalent share:
Primary:
Weighted average shares 25,740,000 29,220,000 26,850,000 29,269,000
Earnings before extraordinary charge $1.21 $1.61 $5.16 $7.86
Extraordinary charge - - (.09) (.37)
----- ----- ----- -----
Net income $1.21 $1.61 $5.07 $7.49
===== ===== ===== =====
Fully diluted:
Weighted average shares 30,249,000 33,868,000 31,360,000 33,448,000
Earnings before extraordinary charge $1.18 $1.53 $4.87 $7.26
Extraordinary charge - - (.08) (.32)
----- ----- ----- -----
Net income $1.18 $1.53 $4.79 $6.94
===== ===== ===== =====
<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)
Nine months ended
September 30,
--------------------
1994 1993
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning of period $ 287.5 $ 50.0
Series D preferred shares issued - 287.5
Series B preferred shares redeemed - (50.0)
------- --------
Balance, end of period $ 287.5 $ 287.5
======= ========
Common stock and additional paid-in capital:
Balance, beginning of period $ 102.8 $ 115.4
Amounts related to stock options and employee
benefit plans 18.6 4.0
Tax benefit related to issuance of shares under
employee benefit plans 67.8 15.2
Cost of shares acquired charged to common stock and
additional paid-in capital (17.1) (25.3)
Cost of issuance of Series D preferred shares - (9.0)
------- --------
Balance, end of period $ 172.1 $ 100.3
======= ========
Unrealized appreciation (depreciation) of securities:
Balance, beginning of period $ 97.5 $ 42.9
Change in unrealized appreciation (depreciation) (301.1) 93.3
------- --------
Balance, end of period $(203.6) $ 136.2
======= ========
Retained earnings:
Balance, beginning of period $ 654.8 $ 386.0
Net income 150.1 235.1
Cost of shares acquired charged to retained earnings (250.7) -
Dividends on common stock (9.4) (4.4)
Dividends on preferred stock (14.0) (15.9)
------- --------
Balance, end of period $ 530.8 $ 600.8
======= ========
Total shareholders' equity $ 786.8 $1,124.8
======= ========
<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)
Nine months ended
September 30,
--------------------
1994 1993
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 150.1 $ 235.1
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 98.5 166.9
Income taxes (11.5) 10.3
Insurance liabilities 41.1 86.7
Interest credited to insurance liabilities 51.9 308.3
Fees charged to insurance liabilities (26.6) (29.4)
Accrual and amortization of investment income (15.1) (57.4)
Deferral of cost of policies produced (101.6) (120.1)
Restructuring income (65.3) (138.1)
Equity in undistributed earnings of Western
National Corporation (36.9) -
Equity in undistributed earnings of CCP Insurance, Inc. (21.5) (25.4)
Trading account securities 18.9 80.5
Minority interest 30.6 59.9
Extraordinary charge on extinguishment of debt 2.4 10.9
Other (36.5) (1.8)
-------- --------
Net cash provided by operating activities 78.5 586.4
-------- --------
Cash flows from investing activities:
Proceeds from sale of shares of Western National
Corporation and related transactions 537.9 -
Sales of investments 1,110.6 4,353.7
Maturities and redemptions 96.5 1,098.2
Purchases of investments (1,569.2) (7,603.7)
Cash received from reinsurance recapture 158.8 -
Purchase of additional shares of Bankers Life
Holding Corporation - (237.6)
Purchase of additional shares of CCP Insurance, Inc. - (59.5)
Purchase of The Statesman Group, Inc. (215.3) -
Cash held by Western National Corporation before
deconsolidation and the settlement of
intercompany balances (352.5) -
Other (6.9) (66.9)
-------- --------
Net cash used by investing activities (240.1) (2,515.8)
-------- --------
Cash flows from financing activities:
Issuance of capital stock 16.4 281.5
Issuance of equity interests in subsidiaries 67.6 405.3
Issuance of debt of Conseco, net 62.6 393.4
Issuance of debt of subsidiaries, net - not direct
obligations of Conseco 306.3 -
Payments on debt of Conseco (220.3) (157.2)
Payments on debt of subsidiaries - not direct
obligations of Conseco (66.5) (103.3)
Payments to repurchase equity securities of Conseco. (267.8) (75.3)
Payments to repurchase equity securities of subsidiary (33.2) (52.2)
Deposits to insurance liabilities 268.2 864.3
Investment borrowings (55.5) 527.4
Withdrawals from insurance liabilities (134.0) (414.0)
Dividends paid (23.4) (15.3)
-------- --------
Net cash provided (used) by financing activities (79.6) 1,654.6
-------- --------
Net decrease in short-term investments (241.2) (274.8)
Short-term investments, beginning of period 666.4 666.6
-------- --------
Short-term investments, end of period $ 425.2 $ 391.8
======== ========
<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 September 30, 1994,
and for the three and nine months ended September 30, 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, its wholly
owned subsidiaries, Bankers Life Holding Corporation and its wholly owned
subsidiaries ("BLH") and Conseco Capital Partners II, L.P. ("CCP II") and its
majority-owned subsidiaries. As sole general partner, Conseco exercises
significant control over CCP II; therefore, the accounts of CCP II and its
majority-owned subsidiaries are included in the consolidated financial
statements. As described under "Acquisition of Statesman" in these notes, CCP
II completed the acquisition of The Statesman Group, Inc. ("Statesman"), on
September 29, 1994. The acquisition has been accounted for as a purchase. The
purchase price of Statesman was allocated to the assets and liabilities
acquired based on a preliminary determination of the values of the net assets
acquired; accordingly, this allocation may be adjusted upon final determination
of such values. The operations of Statesman will be included in the
consolidated statement of operations of Conseco in periods beginning October
1, 1994.
Conseco's principal wholly owned insurance subsidiaries are Bankers
National Life Insurance Company, National Fidelity Life Insurance Company and
Lincoln American Life Insurance Company (collectively referred to as "Wholly
Owned Insurance Subsidiaries"). In the first nine months 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). No fixed maturity investments
were classified in the "held to maturity" category at September 30, 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 September 30, 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 . . . . . . . . . . . $7,152.9 $(287.6) $6,865.3
Cost of policies purchased. . . . . . . . . . . . . . . 1,036.3 77.2 1,113.5
Cost of policies produced . . . . . . . . . . . . . . . 230.6 11.8 242.4
Deferred income taxes . . . . . . . . . . . . . . . . . 84.0 69.5 153.5
Minority interest . . . . . . . . . . . . . . . . . . . 386.2 (45.2) 341.0
Unrealized depreciation of securities . . . . . . . . . (119.7) (83.9) (203.6)
</TABLE>
<PAGE> 9
ACQUISITION OF STATESMAN
On September 29, 1994, CCP II completed the acquisition of Statesman
(the "Acquisition"). After the Acquisition and related financing transactions,
CCP II owns approximately 80 percent of the outstanding shares of Statesman's
common stock. Conseco formed CCP II in February 1994 with several other
investors for the purpose of investing in acquisitions of annuity, life and
accident and health insurance companies and related businesses. Conseco,
through its direct investment and through its equity interest in the
investments made by BLH, CCP Insurance, Inc. ("CCP") and WNC, has approximately
a 27 percent ownership interest in Statesman.
The Acquisition was consummated pursuant to an Agreement and Plan of
Merger dated May 1, 1994, providing for the merger of Statesman with a
subsidiary of CCP II. Statesman's former stockholders received $15.25 in cash
per common equivalent share plus a contingent payment right to receive up to
another $2.00 in cash per common equivalent share (the "Contingent
Consideration") based on the outcome of Statesman's pending litigation against
the U.S. Government concerning Statesman's former savings bank subsidiary (the
"Government Litigation").
The Acquisition and related transactions were funded with: (i) $45.0
million of cash contributions made to CCP II by its partners (including $7.2
million provided by wholly owned subsidiaries of Conseco, $1.8 million by BLH,
$1.8 million by CCP and $3.6 million by WNC), (ii) $57.0 million in cash from
the sale in a private placement of the payment-in-kind preferred stock of
Statesman (the "Statesman PIK Preferred Stock") (including $25.9 million
purchased by BLH and $24.0 million purchased by CCP), (iii) $150.0 million in
cash from the sale in a public offering by ALHC Merger Corporation, a
subsidiary of CCP II which was merged into American Life Holding Company
("ALHC"), a wholly owned subsidiary of Statesman, of its 11-1/4% Senior
Subordinated Notes due 2004 (the "ALHC Senior Subordinated Notes") and (iv)
$200.0 million in cash from a senior secured loan (the "ALHC Senior Term Loan")
obtained by ALHC Merger Corporation. The sources and uses of this financing
are summarized below (dollars in millions):
<TABLE>
<S> <C>
Sources of Funds:
ALHC Senior Term Loan:
Borrowed upon closing of the Acquisition $170.0
Borrowed upon determination of Government Litigation 30.0 (i)
ALHC Senior Subordinated Notes 150.0
Statesman PIK Preferred Stock 57.0
Common equity contribution from CCP II 45.0
------
Total sources $452.0
======
Uses of Funds:
Payment of cash consideration to acquire Statesman $314.1 (ii)
Payment upon determination of Government Litigation 30.1 (i)
Repayment of bank indebtedness of a subsidiary of Statesman 55.5 (iii)
Transaction fees and expenses 14.8
Purchase of surplus note from American Life and
Casualty Insurance Company ("American Life"),
Statesman's principal operating subsidiary 24.0
Cash retained 13.5
------
Total uses $452.0
======
<FN>
(i) In the event of an unfavorable determination of the Government
Litigation against the U.S. Government, $30.1 million would be paid to
the holders of Statesman's 1988 Series I and II Preferred Stock $1 Par
(the "Statesman 1988 Series Preferred Stock"), which is currently held
by the U.S. Government. In the event of a favorable determination of
this litigation, the same amount, representing a portion of the
Contingent Consideration, would be paid to the other former
stockholders of Statesman.
<PAGE>
<PAGE> 10
(ii) This amount assumes conversion of all outstanding 6-1/4% Convertible
Subordinated Debentures due 2003 of Statesman (the "Convertible
Debentures"), which were convertible into an aggregate of 4,528,125
shares of Statesman common stock. To the extent that any holders of
the Convertible Debentures do not convert such securities, the proceeds
which would have been used to pay such holders will be held in escrow
until the Convertible Debentures are converted by the holders thereof,
are redeemed by Statesman, or mature.
(iii) A subsidiary of Statesman was the borrower under a credit facility with
an outstanding balance including accrued interest and fees of $55.5
million at the Acquisition date, which was repaid with a portion of the
proceeds from the financing.
</TABLE>
In accordance with the CCP II partnership agreement, Conseco earned fees
of $2.5 million (net of taxes of $1.3 million) for services related to the
financing of the Acquisition.
The ALHC Senior Term Loan was provided by a syndicate of lenders with Bank
of America Illinois (formerly Continental Bank, N.A.) (the "Bank") as the
agent. The loan has two tranches. One tranche has an aggregate principal
amount of $160.0 million ("Tranche A") and the other tranche has an aggregate
principal amount of $40.0 million ("Tranche B"). On the Acquisition date,
$130.0 million and $40.0 million were borrowed under Tranche A and Tranche B,
respectively, with the remaining $30.0 million to be borrowed at a later date
when needed to redeem the Statesman 1988 Series Preferred Stock, which is
currently held by the U.S. Government, or pay the Contingent Consideration,
depending on the outcome of the Government Litigation.
Tranche A and Tranche B bear interest at a rate of either: (i) the Bank's
Alternate Reference Rate plus an applicable margin payable monthly; or (ii) the
Interbank Offered Rate ("IBOR") plus an applicable margin for periods of one,
two, three or six months as selected by ALHC from time to time (such rate
selected for the first three month period was 7.5 percent and 8.0 percent for
Tranche A and Tranche B, respectively.) The applicable margin for the rate
based on the Bank's Alternate Reference Rate will vary from .25 percent to 1.0
percent for Tranche A and from .75 percent to 1.5 percent for Tranche B,
depending on the principal amount plus unused commitments. The applicable
margin for the rate based on IBOR will vary from 1.5 percent to 2.25 percent
for Tranche A and from 2.0 percent to 2.75 percent for Tranche B, depending
on the principal amount plus unused commitments.
The principal amounts of Tranche A and Tranche B are payable in annual
installments on April 1 of each year according to the following amortization
schedule (dollars in millions):
<TABLE>
<CAPTION>
Payment Principal Installment
Date Tranche A Tranche B
---- --------- ---------
<S> <C> <C>
1995 $ 15.0 $ -
1996 16.5 .5
1997 23.5 .5
1998 26.0 .5
1999 26.0 .5
2000 26.0 .5
2001 27.0 .5
2002 - 37.0
------ -----
$160.0 $40.0
====== =====
</TABLE>
<PAGE>
<PAGE> 11
Mandatory prepayments will be required (i) from 50 percent of Excess Cash
Flow (as defined in the loan agreement); (ii) upon the sale or disposition of
any significant assets other than in the ordinary course of business; and (iii)
upon the sale or issuance of debt or equity securities of Statesman or any of
its subsidiaries. The ALHC Senior Term Loan is secured by, among other things,
pledges of the capital stock of ALHC's subsidiaries (American Life and American
Life and Casualty Marketing Division Co. ("AMCO")) and the surplus notes of
American Life held by ALHC. The ALHC Senior Term Loan is unconditionally
guaranteed by Statesman and AMCO. In addition, CCP II has pledged to the
lenders the Statesman common stock owned by CCP II.
The ALHC Senior Subordinated Notes bear interest at 11.25 percent, payable
semiannually on March 15 and September 15, and will mature on September 15,
2004. The ALHC Senior Subordinated Notes are redeemable at the option of ALHC,
in whole or in part, at any time on and after September 15, 1999, initially at
105.625 percent of their principal amount, plus accrued interest, declining to
100 percent of their principal amount, plus accrued interest, on and after
September 15, 2001.
Dividends on the Statesman PIK Preferred Stock accrue annually at 13
percent in additional shares of Statesman PIK Preferred Stock through 2005.
Thereafter, dividends are payable quarterly at 15 percent per annum in cash.
The Statesman PIK Preferred Stock ranks senior to the Statesman common stock
with respect to dividends, and upon liquidation, the Statesman PIK Preferred
Stock will carry a liquidation preference equal to $1,000 per share, plus
accrued unpaid dividends. The Statesman PIK Preferred Stock is redeemable at
the option of Statesman, in whole or from time to time in part. The optional
redemption price of the Statesman PIK Preferred Stock will be $1,000 per share,
plus any accrued and unpaid dividends, and the Statesman PIK Preferred Stock
generally will not have any voting rights. As partial consideration for the
purchase of the Statesman PIK Preferred Stock, the purchasers received common
stock representing 20 percent of the common shares of Statesman outstanding
immediately after the Acquisition.
The acquisition of Statesman described above was recorded in the
consolidated statement of cash flows as follows (dollars in millions):
<TABLE>
<S> <C>
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . $(3,913.9)
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . (68.2)
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (59.1)
Cash segregated for future conversion of convertible
subordinated debentures of a subsidiary. . . . . . . . . . . . (66.5)
Securities segregated for future redemption
of preferred stock of a subsidiary . . . . . . . . . . . . . . (35.5)
Other investments. . . . . . . . . . . . . . . . . . . . . . . . . (51.9)
Cost of policies purchased . . . . . . . . . . . . . . . . . . . . (515.6)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (302.4)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . (101.3)
Reinsurance receivables. . . . . . . . . . . . . . . . . . . . . . (5.6)
Insurance liabilities. . . . . . . . . . . . . . . . . . . . . . . 4,658.4
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 123.6
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . 99.0
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.7
---------
Cash used . . . . . . . . . . . . . . . . . . . . . . . . . $ (215.3)
=========
</TABLE>
<PAGE>
<PAGE> 12
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 to be the holding company for
Western. In connection with the organization of WNC and the transfer of the
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 sold in the IPO and the related sale to the president of WNC
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 gain of approximately $42.4 million (net
of taxes of $22.9 million) as a result of these transactions.
PRO FORMA DATA
The pro forma data are presented as if the following transactions had
all occurred on January 1, 1993: (i) the acquisition of Statesman; (ii) the
IPO of WNC; and (iii) the IPO of BLH and Conseco's subsequent purchases of
additional shares of BLH and CCP (as described in the notes to the consolidated
financial statements included in Conseco's 1993 Form 10-K).
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------
1994(a) 1993(b)
---- ----
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $ 1,548.2 $1,614.7
Income before extraordinary charge . . . . . . . . . . 101.7 115.5
Income before extraordinary charge per common share:
Primary . . . . . . . . . . . . . . . . . . . . . . 3.27 3.40
Fully diluted . . . . . . . . . . . . . . . . . . . 3.25 3.36
<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, $1.58 and $1.35,
respectively. Also excludes net income, net income per primary
common share and net income per fully diluted common share
related to fees for services provided relating to the financing
of the Acquisition of $2.5 million, $.09 and $.08, 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, $83.3 million, $2.85 and $2.49, respectively.
</TABLE>
<PAGE>
<PAGE> 13
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 from the
proceeds of 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 having
a total book value of $19.2 million, resulting in an extraordinary charge of
$.7 million (net of a $.4 million tax benefit).
In April 1994, the Company entered into a revolving credit agreement
which provides a $140.0 million credit facility through May 1, 1997; $63.0
million was borrowed at September 30, 1994 under the facility. Borrowings of
$8.0 million were repaid on October 3, 1994. The agreement permits borrowings
based on defined rates plus an applicable margin based on the rating of the
Company's unsecured senior notes. The interest rate under the revolving credit
agreement at September 30, 1994, was 5.69 percent. The Company pays a
commitment fee equal to .25 percent per annum on the average daily unused
commitments. The Company must prepay the loan if certain ratios are not
maintained. Conseco expects to repay the loan in connection with the
acquisition described under "Pending Acquisition."
Notes Payable of CCP II Entities (not direct obligations of Conseco)
Notes payable issued to finance the Statesman acquisition are described
under "Acquisition of Statesman" in these notes. In addition, Statesman's
notes payable at September 30, 1994 included: (i) 6.25 percent Convertible
Subordinated Debentures due 2003 (the "Debentures") with a par value and
carrying value of $66.5 million; and (ii) $1.6 million due under capital lease
obligations. Unless previously redeemed, the Debentures are convertible at any
time prior to maturity into shares of the Statesman's common stock at a
conversion ratio of 65.625 shares of common stock for each 1,000 principal
amount of debentures ($15.24 per share of common stock). As a result of the
Acquisition, holders of the Debentures are entitled to receive, at their
option, the same consideration given to the holders of Statesman common stock
for each share of Statesman common stock into which such securities were
convertible prior to the Acquisition. Such amount aggregates $66.5 million at
September 30, 1994, and will be held in escrow until the debentures are
converted, redeemed or mature.
Notes Payable of BLH (not direct obligations of Conseco)
During March 1994, BLH made a scheduled $11.0 million principal payment
on the senior term loan. The interest rate on BLH's senior term loan was 7.75
percent at September 30, 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) is included as an
extraordinary charge in the consolidated statement of operations.
<PAGE>
<PAGE> 14
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. The tax benefit of $67.8 million (net of payroll taxes incurred
of $2.9 million) and the proceeds from the exercise of these and other employee
options of $16.4 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 2.9 million common shares during the first
nine months of 1994, as part of its previously announced stock repurchase
program. The total cost of shares repurchased during the first three quarters
of 1994 of $267.8 million was allocated to shareholders' equity accounts as
follows: (i) $17.1 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) $250.7 million to retained earnings.
During the first nine months of 1994, 3,885 shares of common stock were
contributed to employee benefit plans. Additionally, $2.2 million was added
to common stock and additional paid-in capital related to employee benefit
plans.
REINSURANCE
The cost of reinsurance ceded for policies containing mortality or
morbidity risks totaled $17.9 million and $20.4 million in the first nine
months of 1994 and 1993, respectively. This cost was deducted from insurance
policy income. Reinsurance premiums assumed on policies containing mortality
risks totaled $3.1 million and $3.9 million in the first nine months of 1994
and 1993, respectively. Reinsurance recoveries netted against insurance policy
benefits totaled $15.0 million and $25.8 million in the first nine months of
1994 and 1993, respectively.
Effective April 1, 1994, BLH recaptured certain annuity business
previously ceded to an unaffiliated company and retroceded to an affiliate of
Southwestern Life Corporation (formerly ICH Corporation). The excess of
assumed liabilities of $390.2 million over acquired assets of $371.0 million
was capitalized as a component of cost of policies purchased.
<PAGE>
<PAGE> 15
CHANGES IN MINORITY INTEREST
Changes in minority interest during the first nine months of 1994 and
1993 are summarized below (dollars in millions):
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Minority interest, beginning of period $223.8 $ 24.0
Changes in investments made by minority shareholders:
Preferred stock of a subsidiary of Statesman
outstanding at the Acquisition date 99.0 (i) -
Investment in Statesman PIK Preferred Stock 31.1 (ii) -
Investment in CCP II 36.0 (ii) -
Change in investment in BLH - 174.4 (iii)
Repurchase of equity securities by BLH (33.2) (52.2)
Minority interests' equity in the change in
financial position of the Company's subsidiaries:
Net income before extraordinary charge 38.2 60.4
Extraordinary charge - (3.3)
Unrealized appreciation (depreciation) of securities (43.4) 12.4
Dividends (10.5) (1.5)
------ ------
Minority interest, end of period $341.0 $214.2
====== ======
<FN>
(i) Consists of 2,760,000 shares of $2.16 Redeemable Cumulative
Preferred Stock (the "$2.16 Preferred Shares") and 1,200,000
shares of $2.32 Redeemable Cumulative Preferred Stock (the "$2.32
Preferred Shares").
The $2.16 Preferred Shares are entitled to cash dividends of
$2.16 per share payable quarterly and may be redeemed in whole
or in part, at any time after August 25, 1997, at $26.25 per
share declining to $25.00 per share on or after September 30,
2000, plus cumulative unpaid dividends. The $2.16 Preferred
Shares are mandatorily redeemable on September 30, 2007.
The $2.32 Preferred Shares are entitled to cash dividends of
$2.32 per share payable quarterly and may be redeemed in whole
or in part, at any time after February 2, 1998, at $26.25 per
share declining to $25.00 per share on or after February 1, 2001,
plus unpaid cumulative dividends. The $2.32 Preferred Shares are
mandatorily redeemable on February 15, 2008.
Zero coupon bonds have been placed in an escrow account to be
used for the future redemption of the preferred stock on or
before their mandatory redemption dates. The aggregate
redemption values and the maturity dates of such zero coupon
bonds correspond to the redemption values (excluding cumulative
unpaid dividends) and the mandatory redemption dates of the $2.16
Preferred Shares and the $2.32 Preferred Shares.
(ii) See "Acquisition of Statesman" in these notes.
(iii) Represents the change in minority interest attributable to the
minority interests' share of the net increase in BLH's
shareholders' equity resulting from the initial public offering
of BLH, partially offset by Conseco's purchase of the common
stock of BLH from a minority shareholder in September 1993.
</TABLE>
<PAGE>
<PAGE> 16
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 1994 and 1993 balances in the consolidated financial 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
- Restructuring activities, consisting of acquisition and
restructuring of life insurance companies currently conducted
through CCP II.
<PAGE>
<PAGE> 17
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 Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . . . . . . . . . . . $ 20.8 $ 7.3 $ 51.4 $ 21.2
Net trading income (loss) . . . . . . . . . . . . . . - .6 (.4) 5.3
Net realized gain (loss). . . . . . . . . . . . . . . (.5) (.1) (2.4) 2.5
Extraordinary charge . . . . . . . . . . . . . . . . - - - (2.1)
------ ----- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . 20.3 7.8 48.6 26.9
------ ----- ------ ------
WNC:
Operating earnings . . . . . . . . . . . . . . . . . 8.7 24.0 35.0 67.8
Net trading income. . . . . . . . . . . . . . . . . . - 12.6 2.6 25.7
Net realized gain (loss). . . . . . . . . . . . . . . (1.7) (3.7) (.1) 3.5
------ ----- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . 7.0 32.9 37.5 97.0
------ ----- ------ ------
CCP:
Operating earnings . . . . . . . . . . . . . . . . . 5.0 5.1 20.1 16.6
Net trading income. . . . . . . . . . . . . . . . . . - 2.2 - 4.3
Net realized gain (loss). . . . . . . . . . . . . . . (.4) .6 .5 3.0
Extraordinary charge. . . . . . . . . . . . . . . . . - - (.5) -
------ ----- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . 4.6 7.9 20.1 23.9
------ ----- ------ ------
Wholly Owned Insurance Subsidiaries:
Operating earnings . . . . . . . . . . . . . . . . . 5.1 6.5 15.8 19.5
Net trading income (loss) . . . . . . . . . . . . . . (.5) .6 (.4) 7.1
Net realized gain (loss). . . . . . . . . . . . . . . (1.3) 4.1 (7.0) (.2)
------ ----- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . 3.3 11.2 8.4 26.4
------ ----- ------ ------
Total from operations of life insurance companies:
Operating earnings . . . . . . . . . . . . . . . . . . . 39.6 42.9 122.3 125.1
Net trading income (loss) . . . . . . . . . . . . . . . . (.5) 16.0 1.8 42.4
Net realized gain (loss). . . . . . . . . . . . . . . . . (3.9) .9 (9.0) 8.8
Extraordinary charge. . . . . . . . . . . . . . . . . . . - - (.5) (2.1)
------ ----- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . 35.2 59.8 114.6 174.2
------ ----- ------ ------
Services provided for fees:
Services provided for fees. . . . . . . . . . . . . . . . 5.7 4.2 17.5 13.1
Statesman fees. . . . . . . . . . . . . . . . . . . . . . 2.5 - 2.5 -
------ ----- ------ ------
Services provided for fees . . . . . . . . . . . . 8.2 4.2 20.0 13.1
------ ----- ------ ------
Restructuring activities:
Incentive earnings allocation . . . . . . . . . . . . . . - - - 22.3
Sale of stock . . . . . . . . . . . . . . . . . . . . . . - (1.4) 42.4 61.0
------ ----- ------ ------
Net income (loss). . . . . . . . . . . . . . . . . - (1.4) 42.4 83.3
------ ----- ------ ------
Corporate and other:
Operating expenses, net of revenues . . . . . . . . . . . (2.5) (6.5) (10.7) (14.0)
Interest expense on long-term debt. . . . . . . . . . . . (4.4) (4.3) (13.4) (14.1)
Net trading income (loss) . . . . . . . . . . . . . . . . (.3) .1 (1.2) .7
Net realized gain (loss). . . . . . . . . . . . . . . . . (.4) .3 .3 .7
Extraordinary charge. . . . . . . . . . . . . . . . . . . - - (1.9) (8.8)
------ ----- ------ ------
Net loss . . . . . . . . . . . . . . . . . . . . . (7.6) (10.4) (26.9) (35.5)
------ ----- ------ ------
Consolidated earnings:
Operating earnings . . . . . . . . . . . . . . . . . . . 40.9 36.3 118.2 110.1
Net trading income (loss) . . . . . . . . . . . . . . . . (.8) 16.1 .6 43.1
Net realized gain (loss). . . . . . . . . . . . . . . . . (4.3) 1.2 (8.7) 9.5
Restructuring income (loss) . . . . . . . . . . . . . . . - (1.4) 42.4 83.3
Extraordinary charge. . . . . . . . . . . . . . . . . . . - - (2.4) (10.9)
------ ----- ------ ------
Net income . . . . . . . . . . . . . . . . . . . . $ 35.8 $52.2 $150.1 $235.1
====== ===== ====== ======
</TABLE>
<PAGE>
<PAGE> 18
The disaggregated earnings summarized in the preceding schedule resulted
in fully diluted earnings per share as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . . . . . . . . . . . $ .69 $ .21 $ 1.63 $ .64
Net trading income (loss) . . . . . . . . . . . . . . - .02 (.01) .15
Net realized gain (loss). . . . . . . . . . . . . . (.02) - (.07) .08
Extraordinary charge . . . . . . . . . . . . . . . . - - - (.06)
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . .67 .23 1.55 .81
----- ----- ------ -----
WNC:
Operating earnings . . . . . . . . . . . . . . . . . .29 .70 1.13 1.97
Net trading income. . . . . . . . . . . . . . . . . . - .37 .07 .75
Net realized gain (loss). . . . . . . . . . . . . . . (.06) (.11) - .10
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . .23 .96 1.20 2.82
----- ----- ------ -----
CCP:
Operating earnings . . . . . . . . . . . . . . . . . .16 .15 .64 .50
Net trading income. . . . . . . . . . . . . . . . . . - .06 - .13
Net realized gain (loss). . . . . . . . . . . . . . . (.01) .02 .02 .09
Extraordinary charge. . . . . . . . . . . . . . . . . - - (.02) -
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . .15 .23 .64 .72
----- ----- ------ -----
Wholly Owned Insurance Subsidiaries:
Operating earnings . . . . . . . . . . . . . . . . . .17 .21 .50 .56
Net trading income (loss) . . . . . . . . . . . . . . (.01) .01 - .21
Net realized gain (loss). . . . . . . . . . . . . . . (.05) .12 (.23) (.01)
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . .11 .34 .27 .76
----- ----- ------ -----
Total from operations of life insurance companies:
Operating earnings . . . . . . . . . . . . . . . . . . . 1.31 1.27 3.90 3.67
Net trading income (loss) . . . . . . . . . . . . . . . . (.01) .46 .06 1.24
Net realized gain (loss). . . . . . . . . . . . . . . . . (.14) .03 (.28) .26
Extraordinary charge. . . . . . . . . . . . . . . . . . . - - (.02) (.06)
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . 1.16 1.76 3.66 5.11
----- ----- ------ -----
Services provided for fees:
Services provided for fees. . . . . . . . . . . . . . . . .19 .12 .56 .38
Statesman fees. . . . . . . . . . . . . . . . . . . . . . .08 - .08 -
----- ----- ------ -----
Services provided for fees . . . . . . . . . . . . .27 .12 .64 .38
----- ----- ------ -----
Restructuring activities:
Incentive earnings allocation . . . . . . . . . . . . . . - - - .67
Sale of stock . . . . . . . . . . . . . . . . . . . . . . - (.04) 1.35 1.82
----- ----- ------ -----
Net income (loss). . . . . . . . . . . . . . . . . - (.04) 1.35 2.49
----- ----- ------ -----
Corporate and other:
Operating expenses, net of revenues . . . . . . . . . . . (.08) (.19) (.34) (.41)
Interest expense. . . . . . . . . . . . . . . . . . . . . (.15) (.13) (.43) (.41)
Net trading income (loss) . . . . . . . . . . . . . . . . (.01) - (.04) .02
Net realized gain (loss). . . . . . . . . . . . . . . . . (.01) .01 .01 .02
Extraordinary charge. . . . . . . . . . . . . . . . . . . - - (.06) (.26)
----- ----- ------ -----
Net loss . . . . . . . . . . . . . . . . . . . . . (.25) (.31) (.86) (1.04)
----- ----- ------ -----
Consolidated earnings:
Operating earnings . . . . . . . . . . . . . . . . . . . 1.35 1.07 3.77 3.23
Net trading income (loss) . . . . . . . . . . . . . . . . (.02) .46 .02 1.26
Net realized gain (loss). . . . . . . . . . . . . . . . . (.15) .04 (.27) .28
Restructuring income (loss) . . . . . . . . . . . . . . . - (.04) 1.35 2.49
Extraordinary charge. . . . . . . . . . . . . . . . . . . - - (.08) (.32)
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . $1.18 $1.53 $ 4.79 $6.94
===== ===== ====== =====
</TABLE>
<PAGE>
<PAGE> 19
Additional Discussion of Consolidated Statement of Operations for the
First Nine Months of 1994 Compared to the First Nine Months of 1993 and for the
Third Quarter of 1994 Compared to the Third Quarter of 1993:
The following tables and narratives summarize amounts reported in the
consolidated statement of operations for the first nine months of 1994 and 1993
and the third 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) changes in
Conseco's percentage ownership in BLH, WNC and CCP; and (ii) changes in control
of WNC that affected the determination of whether such affiliate was to be
included in Conseco's statement of operations under the consolidation or the
equity method of accounting.
<TABLE>
BLH:
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . . . . . . . . . . . $306.4 $300.8 $ 909.9 $ 896.1
Investment activity:
Net investment income . . . . . . . . . . . . . . . 56.3 45.5 159.3 123.4
Net trading income (loss). . . . . . . . . . . . . . (.1) 4.3 (1.2) 25.8
Net realized gain (loss) . . . . . . . . . . . . . . (2.9) 13.1 (5.8) 35.8
Other income. . . . . . . . . . . . . . . . . . . . . . 12.7 - 12.7 1.1
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 372.4 363.7 1,074.9 1,082.2
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits . . . . . . . . . . . . . . . . . . 219.3 217.5 660.9 650.7
Interest expense on annuities and financial products. . 16.3 9.3 42.0 26.7
Interest expense on long-term debt. . . . . . . . . . . 7.7 8.2 22.9 27.9
Amortization related to operations. . . . . . . . . . . 31.3 28.7 90.9 83.3
Amortization related to realized gains . . . . . . . . (1.5) 11.3 (1.3) 25.0
Other operating costs and expenses . . . . . . . . . . 35.7 37.2 108.8 115.8
Income before taxes, minority interest
and extraordinary charge. . . . . . . . . . . . . . . . 62.6 50.4 145.4 150.3
Income tax expense. . . . . . . . . . . . . . . . . . . . . 24.3 20.3 56.2 57.9
Income before minority interest and extraordinary charge. . 38.3 30.1 89.2 92.4
Minority interest . . . . . . . . . . . . . . . . . . . . . 18.0 22.3 40.6 60.4
Extraordinary charge . . . . . . . . . . . . . . . . . . . - - - 2.1
Net income. . . . . . . . . . . . . . . . . . . . . . . . . 20.3 7.8 48.6 29.9
Less preferred stock dividends. . . . . . . . . . . . . . . - - - 3.0
Earnings applicable to common stock . . . . . . . . . . . . 20.3 7.8 48.6 26.9
Summarized by component, all net of applicable
expenses, taxes and minority interest:
Operating earnings . . . . . . . . . . . . . . . . . $20.8 $ 7.3 $ 51.4 $ 21.2
Net trading income (loss). . . . . . . . . . . . . . - .6 (.4) 5.3
Net realized gain (loss) . . . . . . . . . . . . . . (.5) (.1) (2.4) 2.5
Extraordinary charge . . . . . . . . . . . . . . . . - - - (2.1)
Net income . . . . . . . . . . . . . . . . . . . . . 20.3 7.8 48.6 26.9
</TABLE>
<PAGE>
<PAGE> 20
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 for the second quarter
of 1993. On September 30, 1993, Conseco acquired 13.3 million additional
common shares of BLH, increasing its ownership interest to 56 percent. During
the first nine months of 1994, BLH acquired 1.6 million shares of its common
stock at a cost of $33.2 million, which increased Conseco's ownership interest
in BLH to 57 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. Such ownership interest was 44 percent during
the first quarter of 1993, 32 percent during the second and third quarters of
1993, 56 percent during the fourth quarter of 1993, and 57 percent during the
first nine months of 1994.
At September 30, 1994, the BLH shares owned by Conseco had a net
carrying value of approximately $438.5 million and a cost of $313.1 million.
The market value of these shares, based on the November 1, 1994, closing price
of $18.875 per share, was approximately $573 million.
Insurance policy income. Insurance policy income increased in the third
quarter and first nine months of 1994 compared to the 1993 periods primarily
as a result of increases in Medicare supplement and long-term care premiums,
offset by decreases in other individual health premiums (as anticipated) due
to prior steps taken to improve the profitability of these products (see
"Premiums Collected" which follows).
Net investment income. Net investment income increased 24 percent to
$56.3 million in the third quarter of 1994 from $45.5 million in the third
quarter of 1993, and increased 29 percent to $159.3 million in the first nine
months of 1994 from $123.4 million in the first nine months of 1993. The
increases were due to the growth of invested assets as a result of: (i)
recurring operations; (ii) the recapture, effective April 1, 1994, of a
reinsurance treaty with assets totaling $371.0 million; (iii) the recapture on
March 31, 1993, of a reinsurance treaty with related assets totaling $182.0
million; and (iv) 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 (loss). BLH had no net trading income (after
applicable expenses, taxes and minority interest) in the third quarter of 1994,
compared to $.6 million of net trading income in the third quarter of 1993.
The net trading loss was $.4 million in the first nine months of 1994, compared
to net trading income of $5.3 million in the same period of 1993. Net trading
income often fluctuates from period to period as market conditions change for
trading activities.
Net realized gain (loss). Net realized gain (loss) (after applicable
expenses, amortization, change in future policy benefits and taxes) often
fluctuates from period to period. BLH sold $180.5 million and $471.5 million
of actively managed securities during the third quarters of 1994 and 1993,
respectively, and $898.8 million and $1,601.7 million in the first nine months
of 1994 and 1993, respectively. Such securities were sold in response to
changes in the investment environment which created opportunities to enhance
the total return of the investment portfolio without adversely affecting the
quality of the portfolio or 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 realized gains and losses from the sales of fixed
maturity investments in the third quarters of 1994 and 1993, amortization of
the cost of policies purchased and the cost of policies produced were decreased
by $1.5 million and increased $11.3 million, respectively. As a result of
realized gains and losses from the sales of fixed maturity investments in the
first nine months of 1994 and 1993, amortization of the cost of policies
purchased and the cost of policies produced were decreased by $1.3 million and
increased by $25.0 million, respectively.
Other income. Other income of $12.7 million in the three and nine month
periods ended September 30, 1994, includes amounts related to the resolution
of several contingencies and a curtailment gain relating to the elimination of
certain postretirement benefits.
Insurance policy benefits. The change in total insurance policy
benefits (including change in future policy benefits) between the corresponding
1993 and 1994 periods is consistent with the change in insurance policy income.
<PAGE>
<PAGE> 21
Interest expense on annuities and financial products. Interest expense
on annuities and financial products increased 75 percent to $16.3 million in
the third quarter of 1994 from $9.3 million in the third quarter of 1993, and
increased 57 percent to $42.0 million in the first nine months of 1994 from
$26.7 million in the first nine months of 1993. Such increases reflect
increased annuity liabilities from (i) the reinsurance recapture described
under "Reinsurance" in the notes to the consolidated financial statements and
(ii) increased annuity sales described under "Premiums Collected", partially
offset by reduced interest rates credited on these products.
Interest expense on long-term debt. Interest expense on long-term debt
decreased 6 percent to $7.7 million in the third quarter of 1994 from $8.2
million in the third quarter of 1993, and decreased 18 percent to $22.9 million
in the first nine months of 1994 from $27.9 million in first nine months of
1993. The reduction in interest expense was attributable to: (i) scheduled and
unscheduled principal payments totaling $65.0 million on the senior term loan
in March and April, 1993; (ii) the repurchase of $20.0 million senior
subordinated notes of BLH in December 1993; (iii) the repayment of $36.7
million junior subordinated notes in March 1993; and (iv) the scheduled
principal payment on the senior term loan of $11.0 million in March 1994.
Extraordinary charge. In the first nine months 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 $5.6 million, of which
Conseco's share was $2.1 million.
<PAGE>
<PAGE> 22
<TABLE>
WNC:
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1994 1994
------------------- ------------------
Included in Included in
Total Conseco's Total Conseco's
WNC Accounts 1993 WNC Accounts 1993
--- -------- ---- --- -------- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 10.3 $ - $ 3.6 $ 23.1 $ - $ 17.3
Investment activity:
Net investment income 161.3 - 160.7 472.2 - 448.4
Net trading income - - 19.9 3.7 - 40.0
Net realized gain (loss) (11.8) - 8.4 (8.3) - 54.5
Equity in earnings of WNC - 7.5 - - 38.9 -
Total revenues 159.8 7.5 192.6 490.7 38.9 560.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 35.2 - 27.3 91.9 - 91.4
Interest expense on annuities and
financial products 87.8 - 89.1 254.8 - 245.9
Interest expense on long-term debt 2.7 - - 6.9 - -
Amortization related to operations 4.4 - 4.9 13.2 - 12.5
Amortization and change in future policy
benefits related to realized gains and losses (4.6) - 13.9 (1.1) - 49.3
Other operating costs and expenses 3.9 - 1.4 10.2 - 4.7
Income before taxes 29.2 7.5 53.3 109.2 38.9 151.7
Income tax expense 10.4 .5 20.4 39.0 1.4 54.7
Net income 18.8 7.0 32.9 70.2 37.5 97.0
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings $23.5 $8.7 $24.0 $ 72.5 $ 35.0 $ 67.8
Net trading income - - 12.6 2.4 2.6 25.7
Net realized gain (loss) (4.7) (1.7) (3.7) (4.7) (.1) 3.5
Net income 18.8 7.0 32.9 70.2 37.5 97.0
</TABLE>
General. Prior to the completion of the IPO of WNC, Western and WNC
were wholly owned subsidiaries of Conseco. As a result of 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 nine months 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
period. At September 30, 1994, the shares of WNC owned by Conseco had a net
carrying value of $157.3 million and an initial cost of $44.7 million. The
market value of these shares, based on the November 1, 1994, closing price of
$11.875 per share, was approximately $296 million.
Insurance policy income. Insurance policy income relates primarily to
premiums from products with mortality and morbidity features. The increase in
insurance policy income during the third quarter of 1994 compared to the third
quarter of 1993 as well as the first nine months of 1994 compared to the first
nine months of 1993 was the result of increased sales of single premium
immediate annuities with life contingencies ("SPIAs"). Western does not
emphasize generating new premiums from products with mortality or morbidity
features. <PAGE>
<PAGE> 23
Net investment income. Total net investment income of WNC increased
slightly to $161.3 million in the third quarter of 1994 from $160.7 million in
the third quarter of 1993, and increased 5.3 percent to $472.2 million in the
first nine months of 1994 from $448.4 million in the first nine months of 1993.
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 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 assets,
partially offset by lower yields on the investment portfolio. In addition,
during the third quarter of 1993, fixed maturity investments were redeemed
prior to their scheduled maturity dates, resulting in additional investment
income of approximately $3.4 million. During the nine months ended September
30, 1994 and 1993, such additional investment income was approximately $2.7
million and $14.4 million, respectively.
Net trading income. WNC had no net trading income (after applicable
expenses and taxes) in the third quarter of 1994, compared to $12.6 million of
net trading income in the third quarter of 1993. Net trading income was $2.4
million in the first nine months of 1994 compared to net trading income of
$25.7 million in the same period of 1993. Net trading income often fluctuates
from period to period as market conditions change for trading activities.
Furthermore, WNC's management's decision to de-emphasize trading activity
contributed to the decline.
Net realized gain (loss). Net realized gain (loss) (after applicable
expenses, amortization, change in future policy benefits and taxes) often
fluctuate from period to period. Western sold fixed maturity investments of
$835.6 million and $647.0 million in the third quarters of 1994 and 1993,
respectively, and $2,534.9 million and $2,270.5 million in the first nine
months of 1994 and 1993, respectively. Such securities were sold in response
to changes in the investment environment which created opportunities to enhance
the total return of the investment portfolio without adversely affecting the
quality of the portfolio or the matching of expected maturities of the assets
and liabilities. Additionally, during the third quarter of 1994, WNC elected
to sell securities in order to shorten the maturity structure of its investment
portfolio and to provide a better match with its liability structure which
tends to shorten in rising interest rate environments. WNC's management
expects further net realized losses will be recognized in the fourth quarter
of 1994 as a result of continuing efforts to shorten the average portfolio
maturity.
The realization of investment gains and losses affects: (i) the timing
of the amortization of the cost of policies purchased and the cost of policies
produced; and (ii) the change in future policy benefits. As a result of
realized gains and losses from the sales of fixed maturity investments in the
third quarters of 1994 and 1993, amortization and change in future policy
reserves related to realized gains and losses were $(4.6) million and $13.9
million, respectively. The negative amortization in the third quarter of the
1994 reflects the effect of the realization of investment losses and subsequent
reinvestment of the proceeds at comparably higher rates on the cost of policies
purchased and the cost of policies produced for investment-type contracts
(principally annuities). Amortization and change in future policy reserves
related to realized gains and losses in the first nine months of 1994 and 1993
were $(1.1) million and $49.3 million, respectively.
Insurance policy benefits. Total insurance policy benefits (including
change in future policy benefits) increased 29 percent to $35.2 million in the
third quarter of 1994 from $27.3 million in the third quarter of 1993, as a
result of increased sales of SPIAs. Such benefits increased slightly to $91.9
million in the first nine months of 1994 from $91.4 million in the first nine
months of 1993, as a result of the increase in sales of SPIAs, offset by
changes in mortality experience.
Interest expense on annuities and financial products. Interest expense
on annuities and financial products decreased slightly to $87.8 million in the
third quarter of 1994 from $89.1 million in the third quarter of 1993. Such
decrease reflects the reduced interest rates credited on these products, net
of increased annuity liabilities. This account increased 4 percent to $254.8
million in the first nine months of 1994 from $245.9 million in the first nine
months of 1993. Such increase reflects the increased annuity liabilities 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
6.3 percent and 6.6 percent at September 30, 1994 and 1993, respectively.
Interest expense on long-term debt. WNC completed its public offering
of $150.0 million aggregate principal amount 7.125 percent senior notes on
February 22, 1994. Interest expense in the 1994 periods relates principally
to such notes. <PAGE>
<PAGE> 24
Other operating costs and expenses. Other operating expenses increased
179 percent to $3.9 million in the third quarter of 1994 from $1.4 million in
the third quarter of 1993, and increased 117 percent to $10.2 million in the
first nine months of 1994 from $4.7 million in the first nine months of 1993,
primarily as a result of the additional costs incurred in establishing WNC as
a separate holding company.
<TABLE>
CCP:
<CAPTION> Three months ended September 30,
-------------------------------------------
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 . . . . . . . . . . . . . . . . . . . . . $ 30.0 $ - $ 34.3 $ -
Investment activity:
Net investment income. . . . . . . . . . . . . . . . . . . . . 88.8 - 100.8 -
Net trading income . . . . . . . . . . . . . . . . . . . . . . - - 9.6 -
Net realized gain. . . . . . . . . . . . . . . . . . . . . . . (2.3) - 12.2 -
Equity in earnings of CCP . . . . . . . . . . . . . . . . . . . . - 5.0 - 8.6
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 116.5 5.0 156.9 8.6
Benefits and expenses:
Insurance policy benefits and change in future policy benefits. . 21.7 - 19.9 -
Interest expense on annuities and financial products. . . . . . . 51.4 - 58.0 -
Interest expense on long-term debt. . . . . . . . . . . . . . . . 2.6 - 4.0 -
Interest expense on short-term investment borrowing . . . . . . . .9 - 1.4 -
Amortization related to operations . . . . . . . . . . . . . . . 7.1 - 7.9 -
Amortization and change in future policy
benefits related to realized gains . . . . . . . . . . . . . . (.9) - 8.9 -
Other operating costs and expenses. . . . . . . . . . . . . . . . 14.3 - 14.9 -
Income before taxes and extraordinary charge . . . . . . . . . . . . 19.4 5.0 41.9 8.6
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 .4 18.6 .7
Income before extraordinary charge . . . . . . . . . . . . . . . . . 12.6 4.6 23.3 7.9
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . - - - -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.6 4.6 23.3 7.9
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . $ 13.5 $5.0 $ 16.8 $ 5.1
Net trading income . . . . . . . . . . . . . . . . . . . . . . - - 6.1 2.2
Net realized gain (loss) . . . . . . . . . . . . . . . . . . . (.9) (.4) .4 .6
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . - - - -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 12.6 4.6 23.3 7.9
</TABLE>
<PAGE>
<PAGE> 25
<TABLE>
<CAPTION> Nine months ended September 30,
-------------------------------------------
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 . . . . . . . . . . . . . . . . . . . . . $ 88.2 $ - $ 97.5 $ -
Investment activity:
Net investment income. . . . . . . . . . . . . . . . . . . . . 276.8 - 309.2 -
Net trading income . . . . . . . . . . . . . . . . . . . . . . - - 19.3 -
Net realized gain. . . . . . . . . . . . . . . . . . . . . . . 8.6 - 32.1 -
Equity in earnings of CCP . . . . . . . . . . . . . . . . . . . . - 22.2 - 25.9
Equity in earnings of BLH . . . . . . . . . . . . . . . . . . . . - - 1.2 -
Restructuring income. . . . . . . . . . . . . . . . . . . . . . . - - 10.5 -
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 373.6 22.2 469.8 25.9
Benefits and expenses:
Insurance policy benefits and change in future policy benefits. . 54.9 - 62.2 -
Interest expense on annuities and financial products. . . . . . . 156.8 - 186.5 -
Interest expense on long-term debt. . . . . . . . . . . . . . . . 7.7 - 12.4 -
Interest expense on short-term investment borrowings. . . . . . . 4.8 - 2.3 -
Amortization related to operations . . . . . . . . . . . . . . . 20.2 - 23.0 -
Amortization and change in future policy
benefits related to realized gains . . . . . . . . . . . . . . 5.5 - 17.7 -
Other operating costs and expenses. . . . . . . . . . . . . . . . 36.5 - 39.2 -
Income before taxes and extraordinary charge . . . . . . . . . . . . 87.2 22.2 126.5 25.9
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 31.7 1.6 48.1 2.0
Income before extraordinary charge . . . . . . . . . . . . . . . . . 55.5 20.6 78.4 23.9
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . . . . 1.3 .5 - -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.2 20.1 78.4 23.9
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . . . . . . . . . . . . . . . $ 54.1 $20.1 $ 58.5 $ 16.6
Net trading income . . . . . . . . . . . . . . . . . . . . . . - - 12.5 4.3
Net realized gain . . . . . . . . . . . . . . . . . . . . . . 1.4 .5 7.4 3.0
Extraordinary charge . . . . . . . . . . . . . . . . . . . . . (1.3) (.5) - -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 54.2 20.1 78.4 23.9
</TABLE>
CCP's earnings during the third quarters of 1994 and 1993 and the first
nine months of 1994 and 1993 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; (iii) restructuring
income earned in the first quarter of 1993; (iv) unfavorable mortality and
morbidity experience; (v) lower investment income due to lower average invested
assets, prepayment income and investment yields; and (vi) reduced operating
costs resulting from lower policy maintenance expenses and other factors.
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 in the
first nine months of 1993; and (ii) CCP's repurchase of 2.0 million common
shares in open market transactions in the first nine months of 1994. Conseco's
equity in the earnings of CCP in the first nine months of 1994 included a $.5
million extraordinary charge related to CCP's prepayment of debt. At September
30, 1994, Conseco owned 43 percent of the common stock of CCP. Such shares
owned by Conseco had a net carrying value of $206.2 million and a total cost
to Conseco of $102.8 million. The market value of these shares, based on the
November 1, 1994, closing price of $15.50 per share, was approximately $179
million.
<PAGE>
<PAGE> 26
CCP was a partner in the investment of Conseco Capital Partners, L.P.
(the "Partnership") 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 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 is
included in the "BLH" segment. Conseco's ownership interest in the gain
recognized by CCP in conjunction with BLH's IPO is included in the
"Restructuring Activities" segment.
WHOLLY OWNED INSURANCE SUBSIDIARIES:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . . . . . . . . . . . . $13.8 $20.3 $ 44.3 $ 54.6
Investment activity:
Net investment income . . . . . . . . . . . . . . . . 18.5 24.7 57.4 90.3
Net trading income (loss) . . . . . . . . . . . . . . (.6) .8 (.5) 10.7
Net realized gain (loss). . . . . . . . . . . . . . . (2.4) 12.0 (12.1) 12.6
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 29.3 57.8 89.1 168.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits . . . . . . . . . . . . . . 16.2 26.9 50.7 63.3
Interest expense on annuities and
financial products. . . . . . . . . . . . . . . . . . 2.7 2.1 9.9 35.7
Amortization related to operations . . . . . . . . . . . 1.4 1.8 4.2 5.9
Amortization related to realized gains and losses . . . . (.2) 3.8 (1.3) 10.2
Other operating costs and expenses. . . . . . . . . . . . 2.0 3.1 10.7 10.3
Income before taxes . . . . . . . . . . . . . . . . . . . . 7.3 20.1 14.7 43.0
Income tax expense . . . . . . . . . . . . . . . . . . . . . 4.0 8.9 6.3 16.6
Net income . . . . . . . . . . . . . . . . . . . . . . . . 3.3 11.2 8.4 26.4
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . . . . . . . . . . $ 5.1 $ 6.5 $ 15.8 $ 19.5
Net trading income (loss) . . . . . . . . . . . . . . (.5) .6 (.4) 7.1
Net realized gain (loss). . . . . . . . . . . . . . . (1.3) 4.1 (7.0) (.2)
Net income . . . . . . . . . . . . . . . . . . . . . 3.3 11.2 8.4 26.4
</TABLE>
Insurance policy income. Insurance policy income relates primarily to
premiums from products with mortality and morbidity features. The amount of
insurance policy income in 1994 reflects the decreased emphasis on generating
new premiums from such products.
<PAGE>
<PAGE> 27
Net investment income. Net investment income of the wholly owned
insurance subsidiaries decreased 25 percent to $18.5 million in the third
quarter of 1994 from $24.7 million in the third quarter of 1993, and decreased
36 percent to $57.4 million in the first nine months of 1994 from $90.3 million
in the first nine months of 1993. Such decrease is the result of several
factors including: (i) a reduction in investment income related to the separate
account activities (see interest expense on annuities and financial products);
(ii) the purchase of additional shares of BLH; (iii) lower yields on the
investment portfolios; and (iv) for the nine month periods 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 assets. In addition, during the third quarters of 1994 and
1993, fixed maturity investments were redeemed prior to their scheduled
maturity dates, resulting in additional investment income of approximately $.2
million and $.7 million, respectively. Such additional investment income was
$.4 million and $3.0 million in the first nine months of 1994 and 1993,
respectively.
Net trading income (loss). The wholly owned insurance subsidiaries had
$.5 million of net trading losses (after applicable expenses and taxes) in the
third quarter of 1994, compared to $.6 million of trading income in the third
quarter of 1993. Net trading income (loss) was $(.4) million and $7.1 million
in the first nine months of 1994 and 1993, respectively. Net trading income
often fluctuates from period to period as market conditions change for trading
activities.
Net realized gains (losses). Net realized gains (after applicable
expenses, amortization and taxes) often fluctuate from period to period. Fixed
maturity investments of $32.2 million and $58.7 million were sold in the third
quarters of 1994 and 1993, respectively, and $183.8 million and $457.9 million
were sold in the first nine months of 1994 and 1993, respectively. Such
securities were sold in response to changes in the investment environment which
created opportunities to enhance the total return of the investment portfolio
without adversely affecting the quality of the portfolio or 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 produced and the cost of policies
purchased. As a result of realized gains and losses from the sales of fixed
maturities in the third quarters of 1994 and 1993, amortization related to
realized gains and losses were $(.2) million and $3.8 million, respectively.
As a result of realized gains and losses of fixed maturities in the first nine
months of 1994 and 1993, amortization related to realized gains and losses were
$(1.3) million and $10.2 million, respectively.
Insurance policy benefits and change in future policy benefits. These
accounts decreased 40 percent to $16.2 million in the third quarter of 1994
from $26.9 million in the third quarter of 1993 primarily as a result of a
decrease in sales of products with mortality and morbidity features.
Interest expense on annuities and financial products. Interest expense
on annuities and financial products increased 29 percent to $2.7 million in the
third quarter of 1994 from $2.1 million in the third quarter of 1993 as a
result of higher rates credited on insurance liabilities. Such expense
decreased 72 percent to $9.9 million in the first nine months of 1994 from
$35.7 million in the first nine months of 1993 as a result of: (i) a reduction
in amounts credited to the separate accounts as a result of the aforementioned
reduction in investment income related to these accounts; and (ii) the
aforementioned reinsurance recapture by Western. The average rate credited on
all insurance liabilities was approximately 7.0 percent at September 30, 1994,
and approximately 6.9 percent at September 30, 1993.
Amortization related to operations. Amortization related to operations
decreased in the first nine months of 1994 from the same period in 1993 as a
result of the aforementioned reinsurance recapture.
<PAGE>
<PAGE> 28
SERVICES PROVIDED FOR FEES:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenue:
Investment management $ 9.0 $ 8.8 $ 27.6 $ 24.9
Commissions 5.2 2.8 14.4 7.7
Fees for services provided related
to CCP II financing 3.8 - 3.8 -
Administrative services, net of
directly related expenses 2.5 1.9 6.9 4.7
Total revenue 20.5 13.5 52.7 37.3
Less intercompany eliminations (6.1) (7.1) (10.2) (16.0)
Revenues reported 14.4 6.4 42.5 21.3
Net income attributable to:
Investment management 3.8 3.6 12.5 11.3
Commissions .2 (.6) .5 (1.2)
Fees for services provided
related to CCP II financing 2.5 - 2.5 -
Administrative services 1.7 1.2 4.5 3.0
Net income 8.2 4.2 20.0 13.1
</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; (iii) administrative fees for
policy administration, data processing, product marketing and executive
management services; and (iv) fees for services related to CCP II financing.
To the extent that 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 third quarter of 1994 over the third
quarter of 1993, as well as in the first nine months of 1994 over the first
nine months of 1993, was the result of an increase in fee-producing activities
provided to both affiliated clients and others. Commission revenues in the
third quarter and nine months of 1994 include $1.8 million and $4.0 million,
respectively, related to the buyout of a marketing agreement by a bank.
<PAGE>
<PAGE> 29
RESTRUCTURING ACTIVITIES:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <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 - 1.4 22.9 54.8
Net income - (1.4) 42.4 83.3
</TABLE>
The 1994 gain related to the sale of a majority interest in WNC. The
1993 incentive earnings allocation was earned when total returns realized by
the other partners in the first partnership exceeded prescribed targets. The
1993 gain related to the public sale of shares by BLH.
CORPORATE AND OTHER:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net investment income $ .2 $ 2.3 $ 3.4 $11.3
Total revenues (.8) 3.5 2.2 14.7
Interest expense on long-term debt 6.7 6.6 20.6 21.5
Other operating costs and expenses 5.7 13.1 20.0 32.8
Income tax benefit 5.6 5.8 13.4 12.9
Loss before extraordinary charge 7.6 10.4 25.0 26.7
Extraordinary charge on extinguishment of debt - - 1.9 8.8
Net loss 7.6 10.4 26.9 35.5
</TABLE>
These operations include financing costs for debt which Conseco is
directly liable and the costs associated with the holding company operations.
Net investment income decreased in the third quarter of 1994 and in the
nine months of 1994 from the same periods in 1993 primarily as a result of
lower average invested assets. The lower average invested assets resulted
principally from: (i) repurchases of Conseco shares in the nine months ended
September 30, 1994; (ii) purchases of .3 million shares of common stock of
Kemper Corporation in the third quarter of 1994; and (iii) repayment of certain
debt described in the accompanying notes to the consolidated financial
statements, offset by: (i) the proceeds from the sale of WNC shares in the
first quarter of 1994; (ii) borrowings under the revolving credit facility, and
(iii) the net cash flow activity during 1993 described in Management's
Discussion and Analysis - Liquidity of the Parent Company, in the Company's
Form 10-K for the year ended December 31, 1993.
Other operating costs and expenses decreased 56 percent to $5.7 million
in the third quarter of 1994 from $13.1 million in the third quarter of 1993,
and decreased 39 percent to $20.0 million in the first nine months of 1994 from
$32.8 million in the first nine months of 1993 as a result of compensation
costs based on the Company's earnings and the elimination of accruals of
nonvested compensation of an executive no longer employed by the Company.
<PAGE>
<PAGE> 30
During the first nine months 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 nine months of 1993, the Company also
repaid certain debt, resulting in an extraordinary charge of $8.8 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 and
of certain policy charges and fees. 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.
Premiums collected by BLH. Premiums collected by BLH for the third
quarter of 1994 were $387.4 million, of which $87.6 million were recorded as
deposits to policy liability accounts. This compared to $367.5 million
collected and $74.1 million recorded as deposits to policy liability accounts
in the third quarter of 1993. Premiums collected by BLH for the first nine
months of 1994 were $1,147.5 million, of which $234.8 million were recorded as
deposits to policy liability accounts. This compared to $1,088.3 million
collected and $189.6 million recorded as deposits to policy liability accounts
in the first nine months of 1993. Collected premiums by business segment are
as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------ ------------------
1994 1993 1994 1993
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Individual health:
Medicare supplement $141.6 $135.8 $ 437.9 $ 415.6
Long-term care 33.9 29.5 97.9 85.6
Other 28.0 34.7 90.1 109.5
------ ------ -------- --------
Total individual health 203.5 200.0 625.9 610.7
Annuities 81.4 68.2 218.2 174.4
Individual life 24.0 23.5 70.4 70.3
Group and other 78.5 75.8 233.0 232.9
------ ------ -------- --------
Total $387.4 $367.5 $1,147.5 $1,088.3
====== ====== ======== ========
</TABLE>
Medicare supplement premiums collected increased 4 percent to $141.6
million in the third quarter of 1994 from $135.8 million in the third quarter
of 1993, and increased 5 percent to $437.9 million in the first nine months of
1994 from $415.6 million in the first nine months of 1993. These increases are
primarily due to improved persistency, rate increases on renewal policies and
policy payment mode changes. Annualized new business premiums were $57.5
million and $59.5 million in the first nine months of 1994 and 1993,
respectively.
Long-term care collected premiums increased 15 percent to $33.9 million
in the third quarter of 1994 from $29.5 million in the third quarter of 1993,
and increased 14 percent to $97.9 million in the first nine months of 1994 from
$85.6 million in the first nine months of 1993. Growth in new business as a
result of cross-selling activities and a larger base of renewal premiums
contributed to this increase. Annualized new business premiums increased 28
percent to $20.5 million in the first nine months of 1994 from $16.0 million
in the first nine months of 1993.
<PAGE>
<PAGE> 31
Collected annuity premiums increased 19 percent to $81.4 million in the
third quarter of 1994 from $68.2 million in the third quarter of 1993, and
increased 25 percent to $218.2 million in the first nine months of 1994 from
$174.4 million in the first nine months of 1993. Virtually all of this
increase related to sales of single premium deferred annuities. The increase
occurred because of an increased marketing emphasis placed on annuity sales,
and because alternative investments, such as certificates of deposit, were
offering comparatively lower rates.
Collected premiums for other individual health products decreased 19
percent to $28.0 million in the third quarter of 1994 from $34.7 million in the
third quarter of 1993, and decreased 18 percent to $90.1 million in the first
nine months of 1994 from $109.5 million in the first nine months of 1993.
These decreases were anticipated because of prior steps taken to improve the
profitability of these products.
Premiums collected by Conseco's wholly owned insurance subsidiaries.
Premiums collected by Conseco's wholly owned insurance subsidiaries decreased
12 percent to $20.0 million in the third quarter of 1994 from $22.8 million in
the third quarter of 1993, and decreased 45 percent to $64.4 million in the
first nine months of 1994 from $117.9 million in the first nine months of 1993.
During the first nine months 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. Conseco's wholly
owned subsidiaries are not actively marketing new products.
LIQUIDITY AND CAPITAL RESOURCES
The comparison of September 30, 1994 balances to December 31, 1993
balances in the consolidated balance sheet is largely affected by the
deconsolidation of Western, effective January 1, 1994, and the acquisition of
Statesman by CCP II effective September 30, 1994. Additional changes in the
consolidated balance sheet reflect growth through Conseco's three earnings
activities previously discussed and the long-term debt and capital stock
transactions described in the accompanying notes to the consolidated financial
statements.
The decrease in shareholders' equity in the first nine months of 1994
resulted from: (i) the capital transactions described in "Changes in Capital
Stock" in the notes to the consolidated financial statements; and (ii) a change
in unrealized appreciation (depreciation) of $(301.1) 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) of securities is recorded consistent with the
requirements of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). 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 total
capital decreased to .25 to 1 at September 30, 1994, from .27 to 1 at December
31, 1993, as a result of the repayment of debt, partially offset by borrowings
under a new revolving credit agreement described in "Changes in Long-Term Debt"
in the notes to the consolidated financial statements. The ratio of debt (for
which the Company is directly liable) to total capital excluding unrealized
appreciation (depreciation) of securities recorded consistent with the
requirements of SFAS 115 decreased to .21 to 1 at September 30, 1994, from .28
to 1 at December 31, 1993. Book value per common share was $20.43 at September
30, 1994, compared to $33.78 at December 31, 1993. The decline was due to the
decrease in common equity described in the preceding paragraph, offset by the
decrease in shares outstanding described in "Changes in Capital Stock" in the
notes to the consolidated financial statements. Excluding unrealized
appreciation (depreciation) of securities recorded consistent with the
requirements of SFAS 115, the book value per common share was $28.77 at
September 30, 1994, compared to $29.93 at December 31, 1993. The return on
average common equity was 28 percent (annualized) for the nine months ended
September 30, 1994, compared to 37 percent for the year ended December 31,
1993. This decrease occurred because of fluctuations in net trading gain
(loss), net realized gain (loss) and restructuring income during these periods.
Dividends declared on common stock for the nine months ended September
30, 1994, were $.375 per share. <PAGE>
<PAGE> 32
INVESTMENTS
The amortized cost, estimated fair value and carrying value of fixed
maturities (all of which were actively managed) were as follows at September
30, 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. . . . . . . . . . . . . . . . . $ 360.8 $ .3 $ 7.5 $ 353.6
Obligations of states and political subdivisions. . . . . . . 27.8 - .5 27.3
Debt securities issued by foreign governments . . . . . . . . 22.8 - 1.1 21.7
Public utility securities . . . . . . . . . . . . . . . . . . 1,117.8 3.8 73.3 1,048.3
Other corporate securities. . . . . . . . . . . . . . . . . . 2,580.2 2.1 111.3 2,471.0
Mortgage-backed securities. . . . . . . . . . . . . . . . . . 3,043.5 .6 100.7 2,943.4
-------- ----- ------ --------
Total fixed maturities . . . . . . . . . . . . . . . . $7,152.9 $ 6.8 $294.4 $6,865.3
======== ===== ====== ========
</TABLE>
The following table sets forth the quality of fixed maturity investments
as of September 30, 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. . . . . . . . . . . . . . . . . 48% 40 %
AA . . . . . . . . . . . . . . . . . 8 6
A. . . . . . . . . . . . . . . . . . 23 20
BBB+ . . . . . . . . . . . . . . . . 5 4
BBB. . . . . . . . . . . . . . . . . 6 5
BBB- . . . . . . . . . . . . . . . . 6 5
--- --
Investment grade. . . . . . . 96 80
--- --
BB+. . . . . . . . . . . . . . . . . 1 1
BB . . . . . . . . . . . . . . . . . 1 -
BB-. . . . . . . . . . . . . . . . . 1 1
B+ and below . . . . . . . . . . . . 1 1
--- --
Below investment grade. . . . 4 3
--- --
Total fixed maturities. . . . 100% 83%
=== ==
</TABLE>
Fixed maturities which were below investment grade had a total estimated
fair value and carrying value of $271.7 million and an amortized cost of $287.4
million at September 30, 1994.
<PAGE>
<PAGE> 33
During the first nine months of 1993, the Company wrote down investments
and accrued investment income totaling $7.5 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 no such writedowns in the comparable
period of 1994. 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, $10.2 million and $10.2 million, respectively, at September 30,
1994.
Mortgage-backed securities at September 30, 1994, included collateralized
mortgage obligations of $2,421.2 million and mortgage-backed pass-through
securities of $522.2 million. Although mortgage-backed securities are subject
to risks involving the timing of cash flows due to prepayments, the Company
seeks to limit its risk by: (i) purchasing securities which are backed by
collateral with lower prepayment sensitivity (such as mortgages purchased at
a discount from par value and mortgages that are extremely seasoned); (ii)
limiting securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities); and (iii)
investing in securities structured to reduce prepayment risk (such as planned
amortization class ("PAC") and targeted amortization class ("TAC")
collateralized mortgage obligations). PAC and TAC instruments represented
approximately 39 percent of the Company's mortgage-backed securities at
September 30, 1994. At September 30, 1994, the par value, amortized cost and
estimated fair value of investments in mortgage-backed securities summarized
by interest rates on the underlying collateral were comprised of the following:
<TABLE>
<CAPTION>
Par Amortized Estimated
Value Cost Fair Value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-through securities:
Below 7%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 318.6 $ 317.8 $ 287.2
7% - 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171.7 172.0 160.3
8% - 9% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.4 65.9 65.7
9% and above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 9.4 9.0
Planned amortization class CMO instruments:
Below 7%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427.2 388.6 361.3
7% - 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394.4 366.6 343.5
8% - 9% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80.4 79.6 76.0
9% and above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.1 41.8 41.0
Targeted amortization class CMO instruments:
Below 7% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.1 49.7 49.7
7% - 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242.2 199.6 199.6
8% - 9% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.7 48.7 48.7
9% and above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.1 43.9 42.5
Other CMO instruments:
Below 7%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82.0 66.7 65.5
7% - 8% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635.8 508.3 508.3
8% - 9% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516.4 476.1 476.1
9% and above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225.0 208.8 209.0
-------- -------- --------
Total mortgage-backed securities. . . . . . . . . . . . . . . . . . .$3,367.1 $3,043.5 $2,943.4
======== ======== ========
</TABLE>
<PAGE>
<PAGE> 34
At September 30, 1994, the balance of mortgage loans was comprised of 92
percent commercial loans, 2 percent residential loans and 6 percent residual
interests in collateralized mortgage obligations. Less than 1 percent of
mortgage loans were noncurrent at September 30, 1994. There were no material
realized losses on mortgage loans during the nine months ended September 30,
1994 and 1993, respectively. At September 30, 1994, the Company had a loan loss
reserve of $.9 million.
Borrowings under reverse repurchase agreements and dollar-roll
transactions were $151.7 million at September 30, 1994, and were collateralized
by pledged securities with fair values approximately equal to the borrowings.
Such borrowings averaged approximately $218.6 million during the first nine
months of 1994, compared to approximately $368.4 million during the same period
of 1993.
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 September 30, 1994, after
appropriate eliminations of intercompany accounts among such subsidiaries
(dollars in millions):
<TABLE>
<S> <C>
Statutory capital and surplus . . . . . . . . . . . . . . . $649.5
Asset valuation reserve ("AVR"). . . . . . . . . . . . . . . 57.6
Interest maintenance reserve ("IMR") . . . . . . . . . . . . 94.2
------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $801.3
======
</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 $460.0 million at September 30, 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 September 30, 1994,
was $316.2 million. During April 1994, such subsidiary made a scheduled
principal payment on the surplus debenture of $25.0 million plus accrued
interest.
At September 30, 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
9.0 percent, compared to a ratio of 11.4 percent (17.1 percent excluding the
accounts of Western) at December 31, 1993.
During the nine months ended September 30, 1994, the Company's wholly
owned life insurance subsidiaries paid no dividends to the parent company.
Approximately $18.7 million is available for distribution from wholly owned
insurance subsidiaries in 1994 without the permission of state regulatory
authorities.
<PAGE>
<PAGE> 35
PENDING ACQUISITION
On June 26, 1994, Conseco and Kemper Corporation ("Kemper") signed a
definitive merger agreement under which a wholly owned subsidiary of Conseco
will be merged into Kemper. It is contemplated the combined entity would
operate under the Kemper name. Under the agreement, each of the issued and
outstanding shares of Kemper common stock would be converted into the right to
receive $56.00 in cash and a fraction of a share of Conseco common stock
determined by dividing $11.00 by the average closing price of Conseco common
stock prior to the merger (such fraction to be not more than .2418 nor less
than .1982). On November 2, 1994, Conseco proposed a consensual change in the
merger agreement. Under this proposal, each share of Kemper common stock would
be converted into the right to receive $56 in cash and .1087 shares of Conseco
common stock. Accordingly, the total consideration would be $60 per Kemper
share and the total value of the transaction would be approximately $2.96
billion based on the value of Conseco shares on November 2, 1994. This
compares to $67 per share and a total value of $3.25 billion, based on
Conseco's share value on June 26, 1994, in the existing merger agreement which
remains in effect. The merger agreement with Kemper contemplates that CCP II
will purchase Kemper's life insurance and real estate subsidiaries.
Consummation of the merger is subject to customary terms and conditions,
including approvals by: (i) the stockholders of Kemper, and under the terms of
the June 26, 1994, agreement (but not the November 2, 1994, proposal), the
stockholders of Conseco; (ii) regulatory authorities; and (iii) the boards and
shareholders of Kemper's mutual funds, and to obtaining the required financing.
The Company is exploring the possible sale of one or more of its equity
interests in WNC, CCP and BLH. Any such sale is subject to receiving fair
value. On October 7, 1994, Conseco filed a registration statement on Form S-3
to offer Conseco debt exchangeable at maturity into shares of common stock of
WNC. If consummated, the debt will be in lieu of the sale of the Company's
equity interest in WNC. Proceeds from any sale are anticipated to be used for
general corporate purposes or in connection with the Kemper merger.
Kemper, headquartered in Long Grove, Illinois, is a publicly held
financial services holding company with principal operations in asset
management, life insurance and securities brokerage.
<PAGE>
<PAGE> 36
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.
27.0 Financial Data Schedule
99.1 Pro Forma Consolidated Statements of Operations
b) Reports on Form 8-K.
A report on Form 8-K dated June 26, 1994, was filed with the
Commission to report under Item 5 the Merger Agreement between the
Registrant and Kemper Corporation.
A report on Form 8-K dated September 29, 1994, was filed with the
Commission to report: (i) under Item 2, the acquisition of The
Statesman Group, Inc.; (ii) under Item 7(a), the unaudited
consolidated financial statements of The Statesman Group, Inc. as of
June 30, 1994, and for the six months ended June 30, 1994 and 1993,
and the audited consolidated financial statements of The Statesman
Group, Inc. as of December 31, 1993 and 1992, and for each of the
three years ended December 31, 1993; and (iii) under Item 7(b), pro
forma consolidated financial information of Conseco, Inc. and
subsidiaries.
<PAGE>
<PAGE> 37
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: November 14, 1994 By: /s/ ROLLIN M. DICK
------------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
<PAGE> 1
<TABLE>
EXHIBIT 11.1
CONSECO, INC. AND SUBSIDIARIES
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding, beginning
of period 24,645,708 24,964,687 25,311,773 24,911,148
Weighted average shares issued
(acquired) during the period:
Treasury stock acquired (207,245) (115,500) (3,326,224) (151,255)
Exercise of stock options 16,912 437,429 3,516,551 399,968
Preferred stock conversions - - - 168
Common equivalent shares related to:
Stock options at average market price 846,419 3,563,599 913,076 3,745,146
Employee stock plans 437,805 372,257 434,961 363,573
----------- ----------- ------------ ------------
Weighted average primary
shares outstanding 25,739,599 29,222,472 26,850,137 29,268,748
=========== =========== ============ ============
Net income for primary
earnings per share:
Net income as reported $35,757,000 $52,220,000 $150,091,000 $235,145,000
Less preferred stock dividends (4,672,000) (5,099,000) (14,015,000) (15,895,000)
----------- ----------- ------------ ------------
Net income for primary earnings
per share $31,085,000 $47,121,000 $136,076,000 $219,250,000
=========== =========== ============ ============
Net income per primary common share $1.21 $1.61 $5.07 $7.49
===== ===== ===== =====
</TABLE>
<PAGE> 1
<TABLE>
EXHIBIT 11.2
CONSECO, INC. AND SUBSIDIARIES
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average primary shares
outstanding 25,739,599 29,222,472 26,850,137 29,268,748
Incremental common equivalent shares:
Related to options and employee stock plans
based on market price at the end of the
period 122 136,492 69 87,600
Related to convertible preferred stock 4,509,509 4,509,431 4,509,509 4,091,990
----------- ----------- ------------ ------------
Weighted average fully diluted
shares outstanding 30,249,230 33,868,395 31,359,715 33,448,338
=========== =========== ============ ============
Net income for fully diluted
earnings per share:
Net income as reported $35,757,000 $52,220,000 $150,091,000 $235,145,000
Less preferred stock dividends - (428,000) - (3,178,000)
----------- ----------- ------------ ------------
Net income for fully diluted
earnings per share $35,757,000 $51,792,000 $150,091,000 $231,967,000
=========== =========== ============ ============
Net income per fully diluted
common share $1.18 $1.53 $4.79 $6.94
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-Q FOR CONSECO,
INC. DATED SEPTEMBER 30, 1994 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 6,865,300
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 37,100
<MORTGAGE> 193,900 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,244,100
<CASH> 0
<RECOVER-REINSURE> 41,200
<DEFERRED-ACQUISITION> 1,355,900 <F2>
<TOTAL-ASSETS> 10,874,000
<POLICY-LOSSES> 7,623,400
<UNEARNED-PREMIUMS> 189,500
<POLICY-OTHER> 218,700
<POLICY-HOLDER-FUNDS> 217,400
<NOTES-PAYABLE> 912,800 <F3>
<COMMON> 172,100
0
287,500
<OTHER-SE> 327,200 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 10,874,000
954,200
<INVESTMENT-INCOME> 213,000
<INVESTMENT-GAINS> (21,000) <F5>
<OTHER-INCOME> 181,800 <F6>
<BENEFITS> 763,500 <F7>
<UNDERWRITING-AMORTIZATION> 86,400 <F8>
<UNDERWRITING-OTHER> 152,400
<INCOME-PRETAX> 275,800
<INCOME-TAX> 85,100
<INCOME-CONTINUING> 152,500
<DISCONTINUED> 0
<EXTRAORDINARY> (2,400)
<CHANGES> 0
<NET-INCOME> 150,100
<EPS-PRIMARY> 5.07
<EPS-DILUTED> 4.79
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $49,000 of credit-tenant loans.
<F2> Includes $1,113,500 of cost of policies purchased.
<F3> Includes notes payable of Bankers Life Holding Corporation of $279,800 and
CCP II of $374,400 which are not direct obligations of Conseco.
<F4> Includes retained earnings of $530,800, offset by net unrealized depreciation
of securities of $203,600.
<F5> Includes net realized losses of $17,400 and a net trading loss of $3,600.
<F6> Includes fee revenue of $42,500, equity in earnings of Western National
Corporation of $38,900, equity in earnings of CCP Insurance, Inc. of $22,200,
restructuring income of $65,300 and other income of $12,900.
<F7> Includes insurance policy benefits of $680,100, change in future policy
benefits of $31,500 and interest expense on annuities and financial products
of $51,900.
<F8> Includes amortization of cost of policies purchased of $52,700 and cost
of policies purchased of $36,300 and amortization related to realized losses of
$(2,600).
</TABLE
</TABLE>
<PAGE> 1
<TABLE>
EXHIBIT 99.1
CONSECO, INC. AND SUBSIDIARIES
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1994
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco Statesman ------------------------------------- Pro Forma
as Reported as Reported Statesman(A) WNC (B) BLH (C) Total
----------- ----------- ------------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 954.2 $ 40.3 $ (.3) (1) $ (.1)(20) $ 994.1
Investment activity:
Net investment income 213.0 247.6 (.5) (2) .8 (20) 460.1
(.8) (2)
Net trading losses (3.6) (3.6)
Net realized gains (losses) (17.4) 4.9 (4.0) (2) 4.6 (20) (11.9)
Equity in earnings of CCP
Insurance, Inc. 22.2 (.2) (2) 22.0
Equity in earnings of Western
National Corporation 38.9 (11.1) (12) 27.8
Fee revenue 42.5 42.5
Restructuring income 65.3 (65.3) (13) -
Other income 12.9 4.3 17.2
------- ----- ---- ----- ---- -------
Total revenues 1,328.0 297.1 (5.8) (76.4) 5.3 1,548.2
------- ----- ---- ----- ---- -------
Benefits and expenses:
Insurance policy benefits 680.1 16.7 696.8
Change in future policy benefits 31.5 7.8 .8 (20) 40.1
Interest expense on annuities and
financial products 51.9 160.5 212.4
Interest expense on long-term debt 37.4 6.7 16.9 (3) (1.3) (14) .5 (20) 60.2
Interest expense on investment
borrowings 6.2 6.2
Amortization related to operations 95.3 29.6 2.3 (1) 4.9 (20) 135.6
3.5 (4)
Amortization related to realized gains (2.6) 2.8 (2.1)(5) .7 (20) (1.2)
Other operating costs and expenses 152.4 32.9 (7.2)(6) (2.8)(20) 175.3
------- ----- ---- ----- ---- -------
Total benefits and expenses 1,052.2 257.0 13.4 (1.3) 4.1 1,325.4
------- ----- ---- ----- ---- -------
Income before income taxes,
minority interest and
extraordinary charge 275.8 40.1 (19.2) (75.1) 1.2 222.8
Income tax expense 85.1 14.2 (7.1) (7) (22.0) (18) .5 (20) 70.7
------- ----- ---- ----- ---- -------
<FN>
(Continued on following page)
The accompanying notes are an integral part
of the pro forma consolidated statement of operations.
/TABLE
<PAGE>
<PAGE> 2
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, continued
for the nine months ended September 30, 1994
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco Statesman ------------------------------------- Pro Forma
as Reported as Reported Statesman(A) WNC (B) BLH (C) Total
----------- ----------- ------------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Income before minority interest
and extraordinary charge 190.7 25.9 (12.1) (53.1) .7 152.1
Less minority interest 38.2 6.8 1.0 (8) 50.4
2.5 (9)
(1.6)(10)
3.5 (11)
------ ----- ------ ------ ---- ------
Income before extraordinary
charge $152.5 $19.1 $(17.5) $(53.1) $ .7 $101.7
====== ===== ====== ====== ==== ======
Earnings before extraordinary
charge per common share and
common equivalent share:
Primary:
Weighted average shares 26,850,000 26,850,000
========== ==========
Earnings before
extraordinary charge $5.16 $3.27
===== =====
Fully diluted:
Weighted average shares 31,360,000 31,360,000
========== ==========
Earnings before
extraordinary charge $4.87 $3.25
===== =====
<FN>
The accompanying notes are an integral part
of the pro forma consolidated statement of operations.
</TABLE>
<PAGE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1993
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco Statesman --------------------------------------------------- Pro Forma
as Reported as Reported Statesman(A) WNC (B) BLH (C) CCP (D) Total
----------- ----------- ------------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,293.8 $50.0 ($.4) (1) $(20.8)(15) $ (.3)(20) $ - $1,322.3
Investment activity:
Net investment income 896.2 298.9 (.2) (2) (610.1)(15) (5.4)(19) (1.6)(26) 577.1
(1.1) (2) .4 (20)
Net trading income 93.1 (49.6)(15) 1.4 (20) 44.9
Net realized gains 149.5 24.8 (13.0) (2) (92.7)(15) 8.1 (20) 76.7
Equity in earnings of CCP
Insurance, Inc. 37.4 (.2) (2) 2.7 (27) 39.9
Equity in earnings of Western
National Corporation - 130.0 (15) 47.4
(82.6)(16)
Gain on sale of Bankers Life
Holding Corporation 101.5 (101.5)(21) -
Incentive earnings allocation
from the Partnership 36.6 (36.6)(21) -
Fee revenue 26.5 12.7 (15) 41.5
2.3 (17)
Other income 1.4 5.5 6.9
------- ----- ----- ------ ------ --- -------
Total revenues 2,636.0 379.2 (14.9) (710.8) (133.9) 1.1 2,156.7
------- ----- ----- ------ ------ --- -------
Benefits and expenses:
Insurance policy benefits 1,007.8 25.6 (101.9)(15) (.2)(20) 931.3
Change in future policy benefits 60.0 6.1 (19.3)(15) (3.2)(20) 43.6
Interest expense on annuities and
financial products 408.5 195.9 (333.1)(15) 271.3
Interest expense on long-term debt 58.0 6.1 25.7 (3) (11.0)(14) .2 (20) 86.2
(1.5)(22)
8.7 (23)
Interest expense on investment
borrowings 10.6 (6.2)(15) 4.4
Amortization related to operations 140.2 31.7 4.4 (1) (15.5)(15) 9.5 (20) 174.9
4.6 (4)
Amortization and change in future
policy benefits related to
realized gains 126.3 9.8 (3.2)(5) (84.3)(15) 5.6 (20) 54.2
Other operating costs and expenses 214.4 35.5 4.3 (15) .9 (20) 255.1
------- ----- ----- ------ ------ --- -------
Total benefits and expenses 2,025.8 310.7 31.5 (567.0) 20.0 - 1,821.0
------- ----- ----- ------ ------ --- -------
Income before income taxes,
minority interest and
extraordinary charge 610.2 68.5 (46.4) (143.8) (153.9) 1.1 335.7
Income tax expense 223.1 22.5 (13.5) (7) (74.5)(15) 2.4 (20) (.4)(28) 108.0
8.0 (18) (59.6)(24)
------- ----- ----- ------ ------ --- -------
<FN>
(Continued on following page)
The accompanying notes are an integral part
of the pro forma consolidated statement of operations.
</TABLE>
<PAGE>
<PAGE> 4
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS, continued
for the year ended December 31, 1993
(Dollars in millions, except per share amounts)
(unaudited)
Pro Forma
Adjustments Reflecting
Transactions Related
to Investment in:
Conseco Statesman --------------------------------------------------- Pro Forma
as Reported as Reported Statesman(A) WNC (B) BLH (C) CCP (D) Total
----------- ----------- ------------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Income before taxes, minority
interest and extraordinary
charge 387.1 46.0 (32.9) (77.3) (96.7) 1.5 227.7
Less minority interest 78.2 8.8 (1.6) (8) (21.9)(25) 65.5
(2.1) (10)
4.1 (11)
------ ------ ------ ------ ------ ---- ------
Income before extraordinary
charge $308.9 $ 37.2 $(33.3) $(77.3) $(74.8) $1.5 $162.2
====== ====== ====== ====== ====== ==== ======
Earnings before extraordinary
charge per common share
and common equivalent share:
Primary:
Weighted average shares 29,245,000 29,245,000
========== ==========
Earnings before
extraordinary charge $9.86 $4.84
===== =====
Fully diluted:
Weighted average shares 33,495,000 33,495,000
========== ==========
Earnings before
extraordinary charge $9.12 $4.74
===== =====
<FN>
The accompanying notes are an integral part
of the pro forma consolidated statement of operations.
</TABLE>
<PAGE>
<PAGE> 5
BASIS OF PRESENTATION
The unaudited pro forma consolidated statements of operations of Conseco,
Inc. ("Conseco" or the "Company") are presented as if the following
transactions had all occurred on January 1, 1993: (1) the acquisition (the
"Acquisition") of The Statesman Group, Inc. ("Statesman") by Conseco Capital
Partners II, L.P. ("CCP II") (as described below and reported in the filing
under Form 8-K dated September 29, 1994); (2) the initial public offering of
Western National Corporation ("WNC") (as described below and reported in the
filing under Form 8-K dated February 15, 1994); (3) the initial public offering
of Bankers Life Holding Corporation ("BLH") and the purchase of additional
shares of common stock of BLH by Conseco (as described below and reported in
filings under Form 8-K dated November 9, 1992 and September 30, 1993) and (4)
the public offering of CCP Insurance, Inc. ("CCP Insurance") and the purchase
of additional shares of common stock of CCP Insurance by Conseco (as described
below and reported in the filing under Form 8-K dated September 30, 1993).
The pro forma consolidated financial statements are based on the
historical financial statements of Conseco, Statesman, WNC, BLH and CCP
Insurance and should be read in conjunction with the financial statements and
notes of those companies. The pro forma data are not necessarily indicative
of the results of operations of Conseco had those transactions occurred on
January 1, 1993, nor the results of future operations, nor do they reflect
changes that might have resulted from the current management of the companies
throughout the entire period. Certain amounts from the prior periods have been
reclassified to conform to the current presentation in the consolidated
statement of operations for the nine months ended September 30, 1994, included
in the Company's Form 10-Q for the nine months ended September 30, 1994.
PRO FORMA ADJUSTMENTS
(A) Transactions Relating to the Acquisition of Statesman
On September 29, 1994, CCP II, a Delaware limited partnership, completed
the Acquisition of Statesman. After the Acquisition and related financing
transactions, CCP II owns approximately 80 percent of the outstanding shares
of Statesman's common stock. Conseco formed CCP II in February 1994 with
several other investors for the purpose of investing in acquisitions of
annuity, life and accident and health insurance companies and related
businesses. Conseco Partnership Management, Inc., a wholly owned subsidiary
of Conseco, is the sole general partner of CCP II. Because a subsidiary of
Conseco is the sole general partner of CCP II, Conseco controls CCP II and
Statesman. Accordingly, Conseco's consolidated financial statements include
the accounts of CCP II and Statesman. Conseco, through its direct investment
and through its equity interest in the investments made by BLH, CCP Insurance
and WNC, has a 27 percent ownership interest in Statesman. The remaining 73
percent ownership interest in Statesman is described as the "Statesman
Minority Interest."
The Acquisition was consummated pursuant to an Agreement and Plan of
Merger dated May 1, 1994, providing for the merger of Statesman with a
subsidiary of CCP II. Statesman's former stockholders received $15.25 in cash
per common equivalent share plus a contingent payment right to receive up to
another $2.00 in cash per common equivalent share ("the Contingent
Consideration") based on the outcome of Statesman's pending litigation against
the U.S. Government concerning Statesman's former savings bank subsidiary (the
"Government Litigation").
<PAGE>
<PAGE> 6
The Acquisition and related transactions were funded with: (i) $45.0
million of cash contributions made to CCP II by its partners (including $7.2
million provided by wholly owned subsidiaries of Conseco, $1.8 million by BLH,
$1.8 million by CCP Insurance and $3.6 million by WNC), (ii) $57.0 million in
cash from the sale in a private placement of the payment-in-kind preferred
stock of Statesman (the "Statesman PIK Preferred Stock") (including $25.9
million purchased by BLH and $24.0 million purchased by CCP Insurance), (iii)
$150.0 million in cash from the sale in a public offering by ALHC Merger
Corporation, a subsidiary of CCP II which was merged into American Life Holding
Company ("ALHC"), a wholly owned subsidiary of Statesman, of its 11-1/4% Senior
Subordinated Notes due 2004 (the "ALHC Senior Subordinated Notes") and (iv)
$200.0 million in cash from a senior secured loan (the "ALHC Senior Term Loan")
obtained by ALHC Merger Corporation (collectively referred to herein as the
"Statesman Financing"). The sources and uses of this financing are summarized
below (dollars in millions).
<TABLE>
<S> <C>
Sources of Funds:
ALHC Senior Term Loan:
Borrowed upon closing of the Acquisition $170.0
Borrowed upon determination of Government Litigation 30.0 (i)
ALHC Senior Subordinated Notes 150.0
Statesman PIK Preferred Stock 57.0
Common equity contribution from CCP II 45.0
------
Total sources $452.0
======
Uses of Funds:
Payment of cash consideration to acquire Statesman $314.1 (ii)
Payment upon determination of Government Litigation 30.1 (i)
Repayment of bank indebtedness of a subsidiary of Statesman 55.5 (iii)
Transaction fees and expenses 14.8
Purchase of surplus note from American Life and Casualty
Insurance Company ("American Life"), Statesman's
principal operating subsidiary 24.0
Cash retained 13.5
------
Total uses $452.0
======
<FN>
(i) In the event of an unfavorable determination of the Government Litigation,
$30.1 million would be paid to the holders of Statesman's 1988 Series I
and II Preferred Stock $1 Par (the "Statesman 1988 Series Preferred
Stock"), which is currently held by the U.S. Government. In the event of
a favorable determination of this litigation, the same amount,
representing a portion of the Contingent Consideration, would be paid to
the other former stockholders of Statesman.
(ii) This amount assumes conversion of all outstanding 6-1/4% Convertible
Subordinated Debentures due 2003 of Statesman (the "Convertible
Debentures"), which are convertible into an aggregate of 4,528,125 shares
of Statesman common stock. To the extent that any holders of the
Convertible Debentures do not convert such securities, the proceeds which
would have been used to pay such holders will be held in escrow until the
Convertible Debentures are converted by the holders thereof, are redeemed
by Statesman, or mature.
<PAGE>
<PAGE> 7
(iii)A subsidiary of Statesman was the borrower under a credit facility with
an outstanding balance of $55.5 million at the Acquisition date. The
outstanding balance under this facility was repaid with a portion of the
proceeds from the Statesman Financing.
</TABLE>
The pro forma adjustments are applied to the historical consolidated
statements of operations of Conseco and Statesman to account for the
Acquisition using the purchase method of accounting. Under purchase
accounting, the total purchase cost of Statesman will be allocated to the
assets and liabilities acquired based on their relative fair values as of the
date of acquisition, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. The cost allocations will be based on appraisals and
other studies, which are not yet completed. Accordingly, the final allocations
will be different from the amounts included in Conseco's consolidated balance
sheet at September 30, 1994, as filed in the Registrant's Form 10-Q for the
quarterly period ended September 30, 1994. Although the final allocations will
differ, the pro forma consolidated statement of operations reflects
management's best estimate based on currently available information.
Adjustments to give effect to the Acquisition and related transactions are
summarized as follows:
(1) Amortization of deferred acquisition costs and the recognition of
deferred revenues for policies sold by Statesman prior to January 1,
1993, are replaced with the amortization of cost of policies
purchased (amortized in relation to estimated profits on the policies
purchased with interest equal to the liability or contract rates
ranging from 5.3% to 8.2%).
(2) Net investment income and net realized gains of Statesman are adjusted
to include the effect of the restatement of (i) fixed maturities, (ii)
mortgage loan investments and (iii) interest rate swap and collar
agreements to estimated fair value as of January 1, 1993, the assumed
date of the Acquisition. The reported value and estimated fair value
of fixed maturities, mortgage loan investments and interest rate swap
and collar agreements as of January 1, 1993, are as follows (dollars
in millions):
<TABLE>
<CAPTION>
Reported Estimated
Value Fair Value
----- ----------
<S> <C> <C>
Fixed maturities $2,910.6 $2,980.0
Mortgage loan investments 87.1 88.2
Interest rate swap and collar agreements (.7) (7.5)
</TABLE>
In addition, net investment income is reduced to reflect the reduction
in short-term investments in connection with the purchase of
investments in CCP II and the Statesman PIK Preferred Stock by Conseco
and its consolidated subsidiaries. Additionally, equity in earnings
of CCP Insurance is reduced to reflect the reduction in net investment
income as a result of its investment in CCP II and the Statesman PIK
Preferred Stock.
No additional investment income is assumed to be earned on the cash
retained from the proceeds of the Statesman Financing after payment
of the costs of the Acquisition and related transactions. Pro forma
net realized gain (loss) represents the difference between (i) the
actual proceeds from the sales of investments and (ii) the fair
value of the investments as of the assumed date of the Acquisition,
adjusted for the accretion of discount or premium based on the new
cost basis.
<PAGE>
<PAGE> 8
(3) Interest expense is adjusted to reflect the following transactions
as if they occurred as of the assumed date of the Acquisition:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, 1993 September 30, 1994
----------------- ------------------
<S> <C> <C>
Use of proceeds to repay certain indebtedness $(2.2) $(3.1)
The assumed conversion of all of the
Convertible Debentures (3.1) (3.4)
The borrowings under the ALHC Senior
Term Loan (i) 13.0 9.7
The issuance of the ALHC Senior
Subordinated Notes (ii) 16.9 12.7
Amortization of debt issuance costs (iii) 1.1 1.0
----- -----
$25.7 $16.9
===== =====
<FN>
(i) Based on borrowings of $170.0 million ($130.0 million at an
assumed interest rate of 7.5% and $40.0 million at an assumed
interest rate of 8.0%).
(ii) Based on a principal amount of $150.0 million at an interest
rate of 11.25%.
(iii) Based on debt issuance costs of $6.8 million and $8.0 million
related to the ALHC Senior Subordinated Notes and the ALHC
Senior Term Loan, respectively, which are amortized at a level
yield over the term of such debt.
</TABLE>
A change in interest rates on the ALHC Senior Term Loan of .5% would
result in (i) an increase (or decrease) in pro forma interest
expense of $.9 million and $.6 million for the year ended December
31, 1993, and the nine months ended September 30, 1994,
respectively, and (ii) a decrease (or increase) in pro forma net
income of $.2 million and $.1 million for the same respective
periods. Under the terms of the ALHC Senior Term Loan, $30 million
will remain available to borrow at a later date when needed to pay
a portion of the Contingent Consideration or to pay to the holders
of the Statesman 1988 Series Preferred Stock upon the determination
of the Government Litigation. If such $30 million were outstanding
during 1993 and the nine months ended September 30, 1994 (with an
assumed interest rate of 7.5% during such periods), proforma
interest expense would increase by $2.3 million and $1.7 million,
respectively, and pro forma net income would decrease by $.4 million
and $.3 million, respectively.
(4) Amortization of goodwill calculated as of January 1, 1993, is
recognized over a 40-year period on a straight-line basis.
(5) Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining
the amortization of the cost of policies purchased. Amortization
of cost of policies purchased is adjusted to reflect amortization
related to pro forma realized gains by Statesman during the period.
<PAGE>
<PAGE> 9
(6) Other operating costs and expenses are reduced to eliminate the merger
costs incurred by Statesman during the nine months ended September 30,
1994, in connection with the Acquisition. Such amounts include, but
are not limited to, compensation expense recognized upon the cash
redemption by Statesman of certain unexercised stock options and stock
appreciation rights.
(7) All applicable pro forma adjustments to operations are tax effected
at the appropriate rate. Additionally, for the year ended December
31, 1993, income tax expense is increased by $.8 million to reflect
the effect of the increase in the corporate income tax rate to 35%
from 34% on adjustments to deferred income tax liabilities resulting
from pro forma adjustments.
(8) The Statesman Minority Interest in the earnings of Statesman is
recognized.
(9) In accordance with the CCP II partnership agreement, Conseco received
fees for services provided related primarily to the ALHC Senior Term
Loan and the ALHC Senior Subordinated Notes and were capitalized as
debt issue costs by ALHC. Accordingly, the fees resulting from these
transactions are eliminated in consolidation. Minority interest,
however, is adjusted to charge the Statesman Minority Interest for its
portion of such fees.
(10) After the Acquisition, investment advisory services are provided to
Statesman by a subsidiary of Conseco. Statesman's historical net
investment income is not reduced to reflect the advisory fees to be
paid under the agreement in excess of investment expenses incurred
prior to the Acquisition, since, in accordance with GAAP, such
intercompany fees are eliminated in consolidation. Minority interest,
however, is adjusted to charge the Statesman Minority Interest for its
portion of such investment advisory fees. Net investment income is
not increased to reflect any additional investment income and realized
gains which may be earned as a result of services provided by the
Conseco subsidiary.
(11) All investors in the Statesman PIK Preferred Stock, other than BLH and
CCP Insurance to the extent of Conseco's interest therein, have
approximately a 56 percent ownership interest in such Statesman PIK
Preferred Stock (the "Statesman PIK Preferred Minority Interest").
Income is reduced to reflect the dividends accrued on the Statesman
PIK Preferred Stock attributable to the Statesman PIK Preferred
Minority Interest.
(B) Transactions Relating to Investment in Western National Corporation
On February 15, 1994, WNC completed the initial public offering of 37.2
million shares of common stock, including overallotment shares purchased by
the underwriters. A total of 2.3 million shares were sold by WNC and 34.9
million shares were sold by Conseco. In addition, pursuant to an employment
agreement, Conseco sold .2 million shares to the President of WNC at the
initial public offering price less underwriting discounts and commissions.
Prior to the initial public offering, Western National Life Insurance Company
("Western") was a wholly owned subsidiary 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 the 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. Such transactions are described in the Prospectus dated
February 8, 1994 (the "Prospectus"), filed pursuant to Rule 424(b) with the
Securities and Exchange Commission, in connection with the Registration
Statement of WNC on Form S-1 (No. 33-70022). On February 22, 1994, WNC
completed a public offering of $150.0 million aggregate principal amount of its
7.125 percent senior notes due February 15, 2004 (the "Senior Notes"). The net
proceeds from the offering of $147.5 million (after original issue discount,
underwriting discount and estimated offering expenses) and certain proceeds
from WNC's initial public offering of common stock were used to repay the
Conseco Note.
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The shares issued in the offering 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 pre-tax 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. Conseco did not receive any proceeds from the
sale of 2.3 million shares by WNC.
Adjustments to give effect to the sale of common stock of WNC by Conseco
and related transactions are summarized as follows:
(12) Equity in earnings of WNC is adjusted to reflect (i) the reduction in
Conseco's ownership interest as a result of the initial public
offering and (ii) WNC's interest expense on the Senior Notes.
(13) The gain on the sale resulting from WNC's IPO and related transactions
is eliminated.
(14) Interest expense is reduced to reflect the repayment of the $200
million senior unsecured loan using the proceeds from the sales of WNC
shares.
(15) After the initial public offering by WNC, Conseco continues to own 40
percent of WNC but no longer exercises unilateral control over its
activities. Accordingly, Conseco's investment in WNC is reflected
under the equity method. Conseco's historical consolidated
statements of operations are adjusted to reflect Conseco's investment
in WNC on the equity basis from the beginning of the periods
presented.
(16) Equity in earnings of WNC is adjusted to reflect (i) the reduction in
Conseco's ownership interest as a result of the initial public
offering, (ii) WNC's interest expense on the Senior Notes and (iii)
increased operating expenses as a result of the new insurance services
agreement with Conseco and additional expenses expected to be incurred
over and above historical cost levels due to the creation of a
separate holding company structure with new management devoted
entirely to WNC.
(17) Fee revenue is adjusted to reflect the new insurance services
agreement with WNC.
(18) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
(C) Transactions Relating to Investment in Bankers Life Holding Corporation
Effective October 31, 1992, Conseco Capital Partners, L.P. (the
"Partnership") completed the acquisition of Bankers Life and Casualty Insurance
Company ("BLC") and its subsidiary, Certified Life Insurance Company,
(collectively "Bankers Life") through BLH. The acquisition was accounted for
as a purchase and was reflected in the operations of Conseco from its effective
date.
On March 25, 1993, BLH completed an initial public offering of 19.6
million shares of its common stock at $22 per share. Proceeds from the
offering of $405.3 million (after underwriting and issuance costs) were used
by BLH to redeem all outstanding preferred stock, to retire all junior
subordinated debt, to prepay a portion of the senior debt and for other
corporate purposes. After the offering, Conseco owned 31 percent of the common
shares of BLH. As a result of the offering, Conseco recorded a one-time gain
of $59.2 million (net of tax of $40.0 million), representing Conseco's direct
percentage share of the increase in BLH's shareholders' equity account
attributable to the proceeds of the offering. In addition, Conseco recorded
a gain of $2.2 million (net of tax of $.1 million), representing Conseco's
indirect percentage share (through the Company's ownership of CCP Insurance)
of CCP Insurance's percentage share of the increase in BLH's shareholders'
equity account attributable to the proceeds of the offering. The Partnership
was liquidated by distribution of all of its remaining assets to the partners
as of March 31, 1993. The Partnership agreement provided incentive
compensation to Conseco as the general partner in the form of transfers from
the limited partners of a portion of their returns in excess of prescribed
targeted returns. The distribution of BLH shares to the limited partners
caused such targets to be exceeded, resulting in incentive compensation to
Conseco of $21.9 million, net of tax of $14.7 million.
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On September 30, 1993, Conseco completed the acquisition of 13.3 million
shares of common stock of BLH from I.C.H. Corporation ("ICH") for $287.6
million. The shares purchased represented 24 percent of the outstanding shares
of common stock of BLH, increasing Conseco's ownership of shares of common
stock of BLH to 56 percent.
The purchase price for the shares acquired from ICH was paid by the
surrender for redemption of $50.0 million stated value of ICH preferred stock
owned by Conseco and the payment of $237.6 million in cash. The cash payment
was funded with available cash and the net proceeds from a $200.0 million
senior unsecured loan. Such loan was repaid in February 1994 by Conseco using
the proceeds from the sale of WNC common stock (see (B) relating to the WNC
initial public offering).
The acquisition is accounted for on a step-basis and, accordingly, (i) the
portion of BLH's net assets acquired by Conseco in the initial acquisition made
by the Partnership is valued as of that acquisition date (as described in note
1 to the consolidated financial statements included in the Company's 1993 Form
10-K), (ii) the portion of BLH's net assets most recently acquired by Conseco
is valued as of September 30, 1993, and (iii) the portion of BLH's net assets
owned by minority interests is valued based on BLH's consolidated financial
statements. The values of the assets and liabilities of BLH included in
Conseco's consolidated balance sheet at September 30, 1994, as filed in the
Registrant's Form 10-Q for the quarterly period ended September 30, 1994,
represented the combination of the values determined by the purchase accounting
described in the preceding sentence.
The net assets of BLH acquired by Conseco were recorded under the purchase
method described above. Adjustments to give effect to the initial public
offering of BLH, the purchase of additional shares of common stock of BLH by
Conseco and the financing and capital restructuring transactions related to
these events as if such transactions occurred on January 1, 1993, are
summarized as follows:
(19) Net investment income is reduced as a result of the following
transactions in conjunction with Conseco's most recent purchase of
the common stock of BLH: (i) the redemption of ICH preferred stock
and (ii) the use of short-term investments to fund a portion of the
purchase.
(20) As described above, the purchase of BLH is accounted for as a step
acquisition. The values included in the historical consolidated
statements of operations of Conseco for the nine months ended
September 30, 1994, and the year ended December 31, 1993, are based
on values determined at the actual purchase dates of Conseco's
investments. Insurance policy income, net investment income, net
trading income, net realized gains, insurance policy benefits, change
in future policy benefits, interest expense on long-term debt,
amortization expense, other operating costs and expenses and income
tax expense are adjusted to reflect the effects of the purchase
method of accounting as if Conseco's purchases of the common shares
of BLH were completed on January 1, 1993.
(21) The gain on sale of stock by BLH and the incentive earnings
allocation from the Partnership which occurred concurrently with the
initial public offering are assumed to have occurred prior to the
period presented.
(22) Interest expense is reduced for the effects of the debt repaid from
the proceeds of the initial public offering of common stock by BLH.
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(23) Interest expense is recorded to reflect interest on the debt issued
to partially finance the most recent purchase of common stock of BLH
by Conseco. Interest expense is calculated based on an assumed rate
of 5.4 percent. Interest expense also reflects the amortization of
debt issuance costs.
(24) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
(25) Minority interest is adjusted to reflect the ownership of common
stock of BLH by minority interests subsequent to all of the
acquisition and financing transactions related to BLH's initial
public offering and the purchase of additional shares of common stock
of BLH by Conseco, as if such transactions had occurred on January
1, 1993.
(D) Transactions Related to Investment in CCP Insurance, Inc.
In July 1992, CCP Insurance, a holding company for the Partnership's first
three acquisitions (Great American Reserve Insurance Company acquired in June
1990, Jefferson National Life Insurance Company acquired in November 1990 and
Beneficial Standard Life Insurance Company acquired in April 1991), completed
an initial public offering of 8.0 million shares of its common stock, with net
proceeds to CCP Insurance totaling $111.2 million. The shares issued in the
offering represented a 31 percent ownership interest in the common stock
outstanding of CCP Insurance. After the initial public offering, the remaining
ownership interest in CCP Insurance was held by Conseco and others who
exchanged certain of their investments in the Partnership and its acquired
subsidiaries for common stock of CCP Insurance. CCP Insurance is included in
Conseco's historical financial statements on the equity basis effective July
1, 1992.
In September 1993, CCP Insurance completed a public offering in which CCP
Insurance sold 3.0 million shares of its common stock and certain shareholders
sold 6.5 million shares of CCP Insurance common stock. Proceeds of
approximately $80.9 million from the offering of common shares by CCP Insurance
(after underwriting and issuance costs) were added to CCP Insurance's funds for
general corporate purposes. CCP Insurance received no proceeds from the sale
of shares by the selling shareholders. In a separate transaction, Conseco
purchased 2.0 million shares of CCP Insurance common stock from the selling
shareholders for $53.6 million. In addition, Conseco purchased .3 million
shares of CCP Insurance common stock in open market transactions for $5.9
million during the nine months ended September 30, 1993. After these
transactions, Conseco owned 40 percent of the common stock of CCP Insurance.
The investment in CCP Insurance by Conseco has been recorded on the equity
method of accounting. The excess of the carrying value of Conseco's investment
in CCP Insurance over Conseco's underlying equity in CCP Insurance's net assets
is amortized on the straight-line basis over a 40-year period. Adjustments to
give effect to the additional purchases of CCP Insurance common stock by
Conseco, as if such transactions occurred on January 1, 1993, are summarized
as follows:
(26) Net investment income is reduced as a result of the use of short-term
investments to fund the additional purchases of CCP Insurance common
stock.
(27) As described above, Conseco owned 40 percent of CCP Insurance. The
adjustment to equity in earnings of CCP Insurance reflects the change
in Conseco's ownership in CCP Insurance as a result of the purchases
of additional shares of CCP Insurance common stock by Conseco.
(28) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
