SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
DATED AUGUST 31, 1995
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
CONSECO, INC.
State of Incorporation:
Indiana
Commission File IRS Employer Id.
No. 1-9250 No. 35-1468632
Address of Principal Executive Offices:
11825 North Pennsylvania Street
Carmel, Indiana 46032
Telephone No.
(317) 817-6100
<PAGE>
Page 2
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
INDEX
Page
----
<S> <C> <C>
Item 2. Acquisition or Disposition of Assets......................................................... 3
Item 7. Financial Statements and Exhibit
(a) CCP Insurance, Inc. and Subsidiaries Unaudited
Consolidated Financial Statements as of June 30, 1995, and for
the six months ended June 30, 1995 and 1994
Consolidated Balance Sheet........................................................... 6
Consolidated Statement of Operations................................................. 7
Consolidated Statement of Shareholders' Equity....................................... 8
Consolidated Statement of Cash Flows................................................. 9
Notes to Consolidated Financial Statements........................................... 10
CCP Insurance, Inc. and Subsidiaries Audited
Consolidated Financial Statements as of December 31,
1994 and 1993, and for each of the three years ended
December 31, 1994
Report of Independent Accountants.................................................... 13
Consolidated Balance Sheet........................................................... 14
Consolidated Statement of Operations................................................. 16
Consolidated Statement of Shareholders' Equity....................................... 17
Consolidated Statement of Cash Flows................................................. 18
Notes to Consolidated Financial Statements........................................... 19
(b) Pro Forma Consolidated Financial Information of Conseco, Inc. and Subsidiaries:
Pro Forma Consolidated Balance Sheet as of June 30, 1995............................. 46
Pro forma Consolidated Statement of Operations for the six months
ended June 30, 1995............................................................... 48
Pro forma Consolidated Statement of Operations for the year ended
December 31, 1994................................................................. 52
Notes to Pro Forma Consolidated Financial Statements................................. 56
(c) Exhibit
2.1 Agreement and Plan of Merger dated May 19, 1995
The Credit Agreement obtained by Conseco as described in Item
2 has been omitted as an exhibit to the Form 8-K, pursuant to
Item 601(b)(4)(iii) of Regulation S-K, because the total
amount of the Credit Agreement is less than 10 percent of the
total assets of the Registrant and its subsidiaries on a
consolidated basis. The Registrant hereby undertakes to
furnish copies of such documents to the Commission upon
request.
</TABLE>
<PAGE>
Page 3
CONSECO, INC. AND SUBSIDIARIES
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 31, 1995, Conseco, Inc. ("Conseco" or the "Company") acquired
all of the common stock of CCP Insurance, Inc. ("CCP") not owned by Conseco, in
a transaction pursuant to which CCP was merged with Conseco, with Conseco being
the surviving corporation (the "Merger"). The Merger was consummated pursuant to
an Agreement and Plan of Merger dated May 19, 1995 (the "Merger Agreement"). In
the Merger, each of the 11.8 million outstanding shares of CCP common stock not
owned by Conseco were converted into the right to receive $23.25 in cash. The
Merger and the Merger Agreement were approved by holders of a majority of CCP's
outstanding shares (other than shares held by the Company) at a special
stockholders meeting held on August 25, 1995.
The Merger and related transactions (including the repayment of the
existing $251.0 million revolving credit facility of Conseco) were funded with
available cash and net proceeds from a $600.0 million credit facility by and
among the Company and several financial institutions (the "Credit Agreement").
The sources and uses of the financing to complete the Merger and related
transactions are summarized below (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Credit agreement.................................................. $530.0
Cash on hand...................................................... 9.7
------
Total sources.................................................. $539.7
======
Uses of funds:
Purchase of all common equity interest in CCP,
not owned by Conseco........................................... $273.9
Settlement of outstanding stock options of CCP.................... 5.4
Repayment of revolving credit facility of Conseco................. 251.0
Debt issuance and other transaction costs......................... 9.4
------
Total uses..................................................... $539.7
======
</TABLE>
The Credit Agreement has two tranches. One tranche permits maximum
principal borrowings of $350.0 million ("Tranche A") and the other tranche
permits maximum principal borrowings of $250.0 million ("Tranche B"). On the
Merger date, the Company borrowed $280.0 million under Tranche A and $250.0
million under Tranche B.
Tranche A and Tranche B borrowings bear interest based on either an
offshore rate or a base rate. Offshore rates are equal to the reserve adjusted
Interbank Offered Rate plus an applicable margin based on: (i) Conseco's
aggregate outstanding bank debt; and (ii) the rating of Conseco's senior notes
by Moodys and Standard & Poor's. Such margin varies from .75 percent to 1.75
percent. Base rates are equal to the bank's reference rate plus the offshore
rate margin less 1.25 percent (provided such margin is not less than zero).
Borrowings under Tranche A and Tranche B bear interest at 7.5 percent through
September 29, 1995.
The principal amounts are payable according to the following schedule
(dollars in millions):
<TABLE>
<CAPTION>
Tranche A Tranche B
--------- ---------
<S> <C> <C>
1998 $ 10.0 $ -
1999 65.0 250.0 (a)
2000 65.0 -
2001 140.0 -
------ ------
Total principal amounts $280.0 $250.0
====== ======
<FN>
(a) The repayment date can be extended for an additional year on each
extension date to the year 2001 subject to defined conditions.
</FN>
</TABLE>
<PAGE>
Page 4
Mandatory prepayments are required as follows: (i) from 50 percent of
excess cash flow (the excess of amounts that may be payable to the parent
company from subsidiaries over dividends, expenses and other cash payments of
the parent company); (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 Conseco or any of its subsidiaries. The
Credit Agreement is secured by, among other things, pledges of: (i) the capital
stock of Conseco's wholly owned subsidiaries; and (ii) capital stock of Bankers
Life Holding Corporation owned by Conseco.
<PAGE>
Page 5
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(a). Financial Statements and Exhibit
(a) CCP Insurance, Inc. and Subsidiaries Unaudited Consolidated Financial
Statements as of June 30, 1995, and for the six months ended June 30, 1995 and
1994.
<PAGE>
Page 6
CCP INSURANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
June 30, December 31,
1995 1994
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1995 - $3,973.3; 1994 - $3,796.1)........................................... $4,002.0 $3,497.3
Mortgage loans................................................................. 243.1 251.4
Credit-tenant loans............................................................ 153.3 116.2
Policy loans................................................................... 136.5 136.4
Investment in Bankers Life Holding Corporation................................. 25.9 25.9
Investment in American Life Group, Inc. ....................................... 43.4 20.1
Other invested assets.......................................................... 65.0 30.6
Short-term investments......................................................... 153.9 123.0
Assets held in separate accounts............................................... 108.9 91.4
-------- --------
Total investments.................................................... 4,932.0 4,292.3
Accrued investment income........................................................ 76.9 70.1
Reinsurance receivables.......................................................... 38.5 42.6
Income taxes..................................................................... - 13.6
Cost of policies purchased....................................................... 189.6 345.2
Cost of policies produced........................................................ 118.1 111.9
Goodwill (net of accumulated amortization: 1995 - $9.4; 1994 - $8.4)............. 68.9 69.9
Other assets..................................................................... 12.8 14.7
--------- ---------
Total assets......................................................... $5,436.8 $4,960.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Insurance liabilities.......................................................... $4,351.7 $4,243.1
Income tax liabilities......................................................... 59.8 -
Investment borrowings.......................................................... 185.7 -
Other liabilities.............................................................. 36.6 48.1
Liabilities related to separate accounts....................................... 108.9 91.4
Notes payable ................................................................. 196.9 196.8
-------- --------
Total liabilities.................................................... 4,939.6 4,579.4
-------- --------
Shareholders' equity:
Common stock and additional paid-in capital (no par value, 200,000,000
shares authorized, shares issued and outstanding: 1995 - 23,334,623;
1994 - 25,543,516).......................................................... 153.3 197.8
Unrealized appreciation (depreciation) of securities (net of applicable
deferred income taxes: 1995 - $6.2; 1994 -($57.9)).......................... 29.1 (96.4)
Retained earnings.............................................................. 314.8 279.5
-------- --------
Total shareholders' equity........................................... 497.2 380.9
-------- --------
Total liabilities and shareholders' equity........................... $5,436.8 $4,960.3
======== ========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 7
CCP INSURANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------
1995 1994 1995 1994
------ ------ ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................................. $ 27.8 $ 28.1 $ 54.4 $ 58.2
Investment activity:
Net investment income............................................ 102.5 92.8 194.8 188.0
Net trading income .............................................. 3.5 - 3.6 -
Net realized gains .............................................. 14.4 9.4 14.8 10.9
------ ------ ------ ------
Total revenues........................................... 148.2 130.3 267.6 257.1
------ ------ ------ ------
Benefits and expenses:
Insurance policy benefits........................................... 19.5 16.2 38.7 35.1
Change in future policy benefits.................................... .4 .1 (2.5) (1.9)
Interest expense on annuities and financial products................ 55.5 51.6 106.3 105.4
Interest expense on notes payable................................... 5.2 2.3 10.5 5.1
Interest expense on investment borrowings .......................... 4.5 2.3 5.7 3.9
Amortization related to operations.................................. 9.5 6.3 18.7 13.1
Amortization related to realized gains.............................. 8.1 5.5 8.2 6.4
Other operating costs and expenses.................................. 12.3 9.9 25.2 22.2
------ ------ ------ -------
Total benefits and expenses.............................. 115.0 94.2 210.8 189.3
------ ------ ------ -------
Income before income taxes and extraordinary charge...... 33.2 36.1 56.8 67.8
Income tax expense..................................................... 11.6 13.6 20.5 24.9
------ ------ ------ -------
Income before extraordinary charge....................... 21.6 22.5 36.3 42.9
Extraordinary charge on extinguishment of debt, net of tax............. - - - 1.3
------ ------ ------ -------
Net income............................................... $ 21.6 $ 22.5 $ 36.3 $ 41.6
====== ====== ====== =======
Earnings per common share:
Weighted average shares ............................................ 23,335,000 27,988,000 23,405,000 28,386,000
========== ========== ========== ==========
Earnings before extraordinary charge................................ $.93 $.81 $1.55 $1.52
Extraordinary charge................................................ - - - .05
------- -------- -------- -------
Net income............................................... $.93 $.81 $1.55 $1.47
==== ==== ===== =====
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 8
CCP INSURANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Six months ended
June 30,
----------------------
1995 1994
------ -----
<S> <C> <C>
Common stock and additional paid-in capital:
Balance, beginning of period................................................ $197.8 $269.6
Cost of shares acquired................................................... (44.5) (34.9)
------ -------
Balance, end of period...................................................... $153.3 $234.7
====== ======
Unrealized appreciation (depreciation) of securities:
Balance, beginning of period................................................ $(96.4) $ 70.7
Change in unrealized appreciation (depreciation).......................... 125.5 (105.4)
------ ------
Balance, end of period...................................................... $ 29.1 $(34.7)
====== ======
Retained earnings:
Balance, beginning of period................................................ $279.5 $223.6
Net income ............................................................... 36.3 41.6
Dividends on common stock................................................. (1.0) (1.1)
------ ------
Balance, end of period...................................................... $314.8 $264.1
====== ======
Total shareholders' equity, end of period............................ $497.2 $464.1
====== ======
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 9
CCP INSURANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Six months ended
June 30,
----------------------
1995 1994
------ -----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 36.3 $ 41.6
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization.......................................................... 26.9 19.5
Income taxes.......................................................... 9.3 (1.8)
Interest credited to insurance liabilities............................ 106.3 105.4
Fees charged to insurance liabilities................................. (20.2) (22.3)
Insurance liabilities................................................. (16.4) (9.6)
Accrual and amortization of investment income......................... (7.3) (6.7)
Deferral of cost of policies produced................................. (36.6) (11.0)
Trading account securities............................................ - 18.0
Other................................................................. (8.0) 12.0
------- --------
Net cash provided by operating activities......................... 90.3 145.1
------- --------
Cash flows from investing activities:
Sales ...................................................................... 567.8 1,030.2
Maturities.................................................................. 94.2 170.4
Purchases................................................................... (867.9) (1,149.2)
Other ...................................................................... (32.0) -
------- --------
Net cash provided (used) by investing activities ................. (237.9) 51.4
------- --------
Cash flows from financing activities:
Deposits to insurance liabilities........................................... 363.5 156.7
Investment borrowings....................................................... 185.7 (14.6)
Withdrawals from insurance liabilities...................................... (325.2) (285.6)
Payments on notes payable................................................... - (46.7)
Purchases of Company's common stock......................................... (44.5) (34.9)
Dividends paid on common stock.............................................. (1.0) (1.1)
------- --------
Net cash provided (used) by financing activities.................. 178.5 (226.2)
------- --------
Net increase (decrease) in short-term investments................. 30.9 (29.7)
Short-term investments, beginning of period..................................... 123.0 209.9
------- -------
Short-term investments, end of period........................................... $ 153.9 $ 180.2
======== ========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 10
CCP INSURANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes should be read in conjunction with the notes to
consolidated financial statements contained in the 1994 Form 10-K of CCP
Insurance, Inc. (the "Company").
SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements as of June 30, 1995, and
for the three and six months ended June 30, 1995 and 1994, 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. Certain amounts from the prior period were reclassified to conform
to the 1995 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 maturities were
classified in the "held to maturity" category in 1995 or 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 1994
Form 10-K) resulted in the following cumulative effects on balance sheet
accounts as of June 30, 1995:
<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............................ $3,973.3 $ 28.7 $4,002.0
Investment in American Life Group, Inc....................... 26.2 17.2 43.4
Cost of policies purchased................................... 202.3 (12.7) 189.6
Cost of policies produced.................................... 123.3 (5.2) 118.1
Income tax liabilities ...................................... 54.1 5.7 59.8
Unrealized appreciation of securities........................ 6.8 22.3 29.1
</TABLE>
REINSURANCE
The cost of reinsurance ceded for policies containing mortality and
morbidity risks, which is deducted from insurance policy income, totaled $19.2
million and $23.4 million in the first six months of 1995 and 1994,
respectively. Reinsurance premiums assumed on policies containing mortality
risks totaled $1.5 million and $1.8 million in the first six months of 1995 and
1994, respectively. Reinsurance recoveries netted against insurance policy
benefits totaled $13.3 million and $17.8 million in the first six months of 1995
and 1994, respectively.
Certain annuity policies that were sold by Western National Life
Insurance Company ("WNL"), a former affiliate of the Company, and subsequently
ceded to the Company through a reinsurance agreement, with an accumulated
account balance of approximately $73 million at June 30, 1995, are subject to a
provision whereby they may be recaptured by WNL. WNL informed the Company in
February 1995 that it wished to exercise its option to recapture these policies.
This recapture will transpire upon the establishment of a mutually agreed upon
value for the business.
CHANGES IN SHAREHOLDERS' EQUITY
The Company repurchased approximately 3.5 million shares of its common
stock for $71.8 million during 1994 under its common stock repurchase program.
In January 1995, the Company announced that this program had been expanded to
6.0 million shares. During the first three months of 1995, approximately 2.2
million additional shares were repurchased by the Company for $44.5 million. No
shares were repurchased during the second quarter of 1995 and the Company
currently has no plans to repurchase additional shares.
<PAGE>
Page 11
CCP INSURANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
RELATED PARTY TRANSACTIONS
The Company's day-to-day operations are administered by subsidiaries of
Conseco, Inc. ("Conseco") pursuant to management and service agreements. Total
fees incurred by the Company under such agreements were $19.5 million and $18.5
million for the first six months of 1995 and 1994, respectively.
The Company collected premiums of $1.4 million and $1.7 million in the
first six months of 1995 and 1994, respectively, from guaranteed investment
contracts issued as investment options for qualified retirement plans maintained
by Conseco. Such premiums were recorded as deposits to insurance liability
accounts.
On June 28, 1995, Conseco borrowed $32 million from the Company in
exchange for a promissory note which bears interest at 6.4 percent and is due on
December 28, 1995. The note is classified as an other invested asset.
The Company is a limited partner in Conseco Capital Partners II, L.P.
("Partnership II"), a partnership formed by Conseco in 1994 to invest in
privately negotiated acquisitions of specialized annuity, life and accident and
health insurance companies and related businesses. Partnership II received
capital commitments of $624 million, which included a $25 million capital
commitment by the Company. The Company funded $1.9 million of its commitment in
connection with Partnership II's acquisition of American Life Group, Inc.
"American Life" (formerly The Statesman Group, Inc. prior to its name change in
August 1995) in September 1994; therefore, it has a remaining commitment of
$23.1 million.
PROPOSED MERGER
On May 21, 1995, the Company and Conseco announced a definitive merger
agreement under which Conseco would acquire the outstanding shares of the
Company that Conseco does not already own for $23.25 per share in cash. In the
transaction, the Company would be merged into Conseco, with Conseco being the
surviving corporation. The terms of the agreement were approved unanimously by a
special committee of the Company's independent directors. The special committee
received an opinion from the investment banking firm serving as its financial
advisor to the effect that the consideration to be received by the non-Conseco
stockholders of the Company is fair to such holders from a financial point of
view. The transaction requires the approval of holders of a majority of the
Company's outstanding shares (excluding shares held by Conseco) present in
person or represented by proxy at a special stockholders' meeting scheduled for
August 25, 1995. A definitive proxy statement for the special meeting dated
August 1, 1995 was first mailed to stockholders on or about August 2, 1995. On
August 1, 1995, Conseco owned 11,555,581 of the Company's common shares, or
approximately 49.5 percent of the common stock outstanding on that date.
<PAGE>
Page 12
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(a). Financial Statements and Exhibit, continued
(a), continued
CCP Insurance, Inc. and Subsidiaries Audited Consolidated
Financial Statements as of December 31, 1994 and 1993, and
for each of the three years ended December 31, 1994.
<PAGE>
Page 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders
CCP Insurance, Inc.
We have audited the accompanying consolidated balance sheet of CCP
Insurance, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CCP
Insurance, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years ended December 31, 1994, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 6, 1995
<PAGE>
Page 14
CCP INSURANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
December 31, 1994 and 1993
(Dollars in millions)
ASSETS
1994 1993
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value
(amortized cost: 1994 - $3,796.1; 1993 - $3,780.2).............. $3,497.3 $3,963.0
Mortgage loans..................................................... 251.4 305.1
Credit-tenant loans................................................ 116.2 87.1
Policy loans....................................................... 136.4 137.3
Investment in Bankers Life Holding Corporation..................... 25.9 29.3
Investment in The Statesman Group, Inc............................. 20.1 -
Other invested assets.............................................. 30.6 35.3
Trading account securities......................................... - 25.8
Short-term investments............................................. 123.0 209.9
Assets held in separate accounts................................... 91.4 79.7
-------- ---------
Total investments............................................. 4,292.3 4,872.5
Accrued investment income.............................................. 70.1 71.6
Reinsurance receivables................................................ 42.6 44.4
Income taxes........................................................... 13.6 -
Cost of policies purchased............................................. 345.2 175.5
Cost of policies produced.............................................. 111.9 42.3
Goodwill (net of accumulated amortization:
1994 - $8.4; 1993 - $6.4).......................................... 69.9 71.9
Other assets........................................................... 14.7 19.9
-------- ---------
Total assets.................................................. $4,960.3 $5,298.1
======== ========
<FN>
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 15
CCP INSURANCE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET (continued)
December 31, 1994 and 1993
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
1994 1993
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities.............................................. $4,243.1 $4,233.3
Income tax liabilities............................................. - 86.0
Investment borrowings.............................................. - 134.1
Other liabilities.................................................. 48.1 27.6
Liabilities related to separate accounts........................... 91.4 79.7
Notes payable...................................................... 196.8 173.5
-------- --------
Total liabilities............................................. 4,579.4 4,734.2
-------- --------
Shareholders' equity:
Common stock and additional paid-in capital (no par
value, 200,000,000 shares authorized, shares issued
and outstanding: 1994 - 25,543,516; 1993 - 29,049,968)........... 197.8 269.6
Unrealized appreciation (depreciation) of securities
(net of applicable deferred income taxes:
1994 - $(57.9); 1993 - $36.4).................................... (96.4) 70.7
Retained earnings ................................................. 279.5 223.6
-------- --------
Total shareholders' equity.................................... 380.9 563.9
-------- --------
Total liabilities and shareholders' equity.................... $4,960.3 $5,298.1
======== ========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 16
<TABLE>
<CAPTION>
CCP INSURANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions, except per share data)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance policy income.................................... $114.5 $127.8 $139.5
Investment activity:
Net investment income.................................... 367.8 412.9 380.4
Net trading income (losses).............................. (.9) 24.3 15.6
Net realized gains ...................................... 2.9 55.8 63.5
Equity in earnings of Bankers Life Holding Corporation..... - 1.2 .7
Gain on sale of stock by Bankers Life
Holding Corporation ................................... - 10.5 -
------- ------- ------
Total revenues ................................... 484.3 632.5 599.7
------- ------- -------
Benefits and expenses:
Insurance policy benefits.................................. 75.7 77.6 75.2
Change in future policy benefits........................... .1 (.6) 1.9
Interest expense on annuities and financial products....... 208.6 243.5 251.1
Interest expense on long-term debt......................... 10.7 16.1 26.1
Interest expense on investment borrowings.................. 5.2 4.4 2.3
Amortization related to operations......................... 25.3 29.4 23.2
Amortization related to realized gains..................... 3.7 36.4 45.9
Other operating costs and expenses......................... 54.6 52.2 55.1
------ ------ ------
Total benefits and expenses.......................... 383.9 459.0 480.8
------ ------ ------
Income before income taxes
and extraordinary charge.......................... 100.4 173.5 118.9
Income tax expense.............................................. 37.4 65.9 42.0
------ ------ ------
Income before extraordinary charge .................. 63.0 107.6 76.9
Extraordinary charge on extinguishment of
debt, net of tax........................................... 4.9 - 8.8
------ ------- ------
Net income 58.1 107.6 68.1
Less preferred stock dividends.................................. - - 3.8
------- ------- ------
Earnings applicable to common stock.................. $58.1 $107.6 $ 64.3
===== ====== ======
Earnings per common share and common equivalent share:
Weighted average shares ................................... 27,656,000 26,779,000 20,784,000
Earnings before extraordinary charge....................... $2.28 $4.02 $3.52
Extraordinary charge....................................... .18 - .43
------ ---------- --------
Net income .......................................... $2.10 $4.02 $3.09
===== ===== =====
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 17
<TABLE>
<CAPTION>
CCP INSURANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1994,
1993 and 1992
(Dollars in millions)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Preferred stock:
Balance, beginning of period.............................. $ - $ - $ 49.2
Dividends paid-in-kind of 15% Series C preferred stock - - 2.2
Redemption of preferred stock .......................... - - (51.4)
-------- ------- --------
Balance, end of period.................................... $ - $ - $ -
======= ======== ========
Common stock and additional paid-in capital:
Balance, beginning of period.............................. $269.6 $188.7 $ 56.7
Cost of shares acquired................................. (71.8) - -
Issuance of common stock and warrants................... - 80.9 132.0
------ ------- -------
Balance, end of period.................................... $197.8 $269.6 $188.7
====== ====== ======
Unrealized appreciation (depreciation) of securities:.........
Balance, beginning of period.............................. $ 70.7 $ 27.0 $ 9.2
Change in unrealized appreciation (depreciation)........ (167.1) 43.7 17.8
------- ------ -------
Balance, end of period.................................... $ (96.4) $ 70.7 $ 27.0
======= ======= =======
Retained earnings:
Balance, beginning of period.............................. $223.6 $118.1 $ 54.8
Net income.............................................. 58.1 107.6 68.1
Dividends on common stock............................... (2.2) (2.1) (1.0)
Dividends on preferred stock............................ - - (3.8)
------- ------- -------
Balance, end of period.................................... $279.5 $223.6 $118.1
====== ====== ======
Total shareholders' equity, end of period.......... $380.9 $563.9 $333.8
====== ====== ======
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 18
<TABLE>
<CAPTION>
CCP INSURANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1994, 1993
and 1992
(Dollars in millions)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................................... $ 58.1 $ 107.6 $ 68.1
Adjustments to reconcile net income to net.......................
cash provided by operating activities:
Amortization................................................... 29.0 65.8 69.1
Income taxes................................................... (5.4) 3.8 3.3
Interest credited to insurance liabilities..................... 208.6 243.5 251.1
Fees charged to insurance liabilities.......................... (43.1) (45.3) (57.5)
Insurance liabilities.......................................... (2.3) (29.6) 36.8
Accrual and amortization of investment income.................. (.7) (10.9) (26.1)
Deferral of cost of policies produced ........................ (37.3) (25.0) (32.8)
Equity in earnings of Bankers Life Holding Corporation......... - (1.2) (.7)
Gain on sale of stock by Bankers Life Holding Corporation...... - (10.5) -
Trading account securities..................................... 25.8 94.6 147.7
Other ....................................................... 35.7 (4.9) (4.6)
------- -------- --------
Net cash provided by operating activities................. 268.4 387.9 454.4
------- -------- --------
Cash flows from investing activities:
Sales ........................................................... 1,236.1 2,068.5 1,327.8
Maturities....................................................... 259.8 558.8 413.0
Purchases........................................................ (1,505.5) (3,015.4) (2,370.2)
-------- -------- ---------
Net cash used by investing activities .................... (9.6) (388.1) (629.4)
-------- -------- --------
Cash flows from financing activities:
Deposits to insurance liabilities................................ 450.7 368.5 539.4
Investment borrowings............................................ (134.1) 134.1 -
Issuance of debt securities, net................................. 196.8 - 192.6
Issuance of common stock, net.................................... - 80.9 111.2
Withdrawals from insurance liabilities........................... (605.0) (459.2) (404.3)
Payments on long-term debt....................................... (180.1) (62.3) (307.0)
Purchases of Company's common stock.............................. (71.8) - -
Redemption of preferred stock.................................... - - (34.1)
Dividends paid on common stock................................... (2.2) (2.1) (.5)
Dividends paid on preferred stock................................ - - (2.2)
-------- -------- --------
Net cash provided (used) by financing activities............ (345.7) 59.9 95.1
-------- -------- --------
Net increase (decrease) in short-term investments......... (86.9) 59.7 (79.9)
Short-term investments, beginning of period.......................... 209.9 150.2 230.1
------- -------- --------
Short-term investments, end of period................................ $ 123.0 $ 209.9 $ 150.2
======= ======== ========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
Page 19
CCP INSURANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
CCP Insurance, Inc. (the "Company") was formed in April 1992 by Conseco
Capital Partners, L.P. (the "Partnership") as an Indiana corporation to be the
holding company for the insurance companies previously acquired by the
Partnership: Great American Reserve Insurance Company ("Great American
Reserve"), Jefferson National Life Insurance Company ("Jefferson National") and
Beneficial Standard Life Insurance Company ("Beneficial Standard"). The
Partnership was organized in 1990 as a Delaware limited partnership by Conseco,
Inc. ("Conseco") to extend its activities of acquiring and operating life
insurance companies and related businesses. Conseco, through its subsidiaries,
was a 50 percent owner and sole general partner of the Partnership. Great
American Reserve, Jefferson National and Beneficial Standard were purchased by
majority-owned subsidiaries of the Partnership as of June 30, 1990, October 31,
1990 and March 31, 1991, respectively. Jefferson National was merged into Great
American Reserve on December 31, 1994.
In July 1992, the Company: (i) completed an initial public offering of
its common stock receiving net proceeds of $111.2 million; (ii) executed a
senior loan agreement for $200 million; and (iii) completed certain
recapitalization and related transactions. Including overallotment shares
purchased by the underwriters, the Company issued 8,010,700 shares in the
offering, representing a 31 percent ownership interest in the Company's
outstanding common stock. The remaining common shares were held by Conseco (36
percent) and others who exchanged their equity and debt investments in the
Partnership and its former subsidiaries for shares of the Company's common
stock.
The exchange of the equity and debt of the Partnership and its former
subsidiaries for the Company's common stock was accounted for in the
consolidated financial statements of the Company similarly to a pooling of
interests. The assets, liabilities and shareholders' equity of the Company and
its subsidiaries were combined at their prior carrying values; the results of
operations have been reported as if the exchange had occurred at the beginning
of the periods presented.
In September 1993, CCP completed a public offering of 9,545,000 shares of
its common stock. The offering included 3,039,268 shares sold by the Company and
6,505,732 shares sold by certain selling shareholders. Net proceeds of $80.9
million from the shares sold by the Company were added to the Company's general
funds. In a separate transaction also completed in September 1993, Conseco
purchased 2.0 million additional shares of the Company's common stock from the
same selling shareholders.
In December 1994, CCP completed a public offering of $200 million of its
10.5 percent senior notes due in 2004. Net proceeds of $196.8 million from the
sale of the notes were used to retire the Company's senior loan and for other
general corporate purposes, including the repurchase of shares of its common
stock under a program initiated in February 1994. During 1994, the Company
repurchased 3,507,400 shares of its common stock. On December 31, 1994, Conseco
owned 11,555,581 shares of CCP, or approximately 45.2 percent, of the common
stock outstanding.
The consolidated financial statements include CCP Insurance, Inc. and its
wholly owned subsidiaries. All acquisitions were accounted for as purchases and
are reflected in operations as of their effective dates. The costs to acquire
Great American Reserve, Jefferson National and Beneficial Standard were
allocated to the assets and liabilities purchased based on their fair values on
the date of acquisition. Intercompany transactions among the Company's
subsidiaries have been eliminated. Certain amounts from prior periods were
reclassified to conform to the 1994 presentation.
Investments
Fixed maturity investments are securities that mature more than one year
after they are issued and include bonds, notes receivable and preferred stocks
with mandatory redemption features. Effective December 31, 1993, the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), and
accordingly, classifies its fixed maturity and equity securities into the
following three categories:
- Actively managed fixed maturity securities are securities that may be
sold prior to maturity due to changes that might occur in market
interest rates, changes in a security's prepayment risk, the
management of income tax position, general liquidity needs, an
increase in loan demand, the need to increase regulatory capital,
changes in foreign currency risk, or similar
<PAGE>
Page 20
factors. Actively managed securities are carried at fair value and the
unrealized gain or loss is recorded to shareholders' equity, net of
tax and the related adjustments described below.
- Trading account securities are fixed maturity and equity securities
that are bought and held principally for the purpose of selling them
in the near term. Trading account securities are carried at estimated
fair value and the unrealized gain or loss is included as a component
of net trading income. No trading account securities were held at
December 31, 1994.
- All other fixed maturity securities are those securities which the
Company has the ability and positive intent to hold to maturity, and
are carried at amortized cost. The Company may dispose of such
securities under certain unforeseen circumstances, such as issuer
credit deterioration or regulatory requirements. No fixed maturities
were held in this category during 1994 or 1993.
The above categories for classifying fixed maturity and equity securities
are consistent with the Company's policy prior to adoption of SFAS 115, with one
exception, that net unrealized gains and losses on trading account securities,
which had previously been recorded as an adjustment net of tax to shareholders'
equity, are now recognized as trading income under the provisions of SFAS 115.
At December 31, 1993, the net unrealized loss on trading account securities
recorded in trading income as a result of adopting SFAS 115 was immaterial.
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 and the cost of policies
produced. When actively managed fixed maturity securities are stated at fair
value, an adjustment is made to the cost of policies purchased and the cost of
policies produced equal to the change in cumulative amortization that would have
been recorded if such securities had been sold at their fair value and the
proceeds reinvested at current yields. Furthermore, if future yields expected to
be earned on such securities decline, it may be necessary to increase certain
insurance liabilities. Adjustments to such liabilities are required when their
balances, in addition to future net cash flows including investment income, are
insufficient to cover future benefits and expenses. No such adjustments to
insurance liabilities were required in 1994 or 1993.
Unrealized gains and losses and the related adjustments described in the
preceding paragraph have no effect on earnings, but are recorded, net of tax, to
shareholders' equity. The following table summarizes the effect of these
adjustments as of December 31, 1994.
<TABLE>
<CAPTION>
Adjustment to Carry
Actively Managed
Balance Fixed Maturities Reported
before Adjustment at Fair Value Amount
----------------- ------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities......................... $3,796.1 $(298.8) $3,497.3
Cost of policies purchased................................ 219.2 126.0 345.2
Cost of policies produced................................. 95.6 16.3 111.9
Income tax asset (liability).............................. (43.7) 57.3 13.6
Unrealized appreciation (depreciation) of securities...... 2.8 (99.2) (96.4)
</TABLE>
Effective December 31, 1993, when the Company recognizes changes in
conditions that cause a fixed maturity investment to be transferred to a
different category (e.g., actively managed, held to maturity or trading), the
security is transferred to the new category at its fair value at the date of the
transfer. At the date of transfer, the security's unrealized gain or loss, which
was immaterial for 1994, is accounted for as follows:
- - For transfers to the trading category, the unrealized gain or loss is
recognized in earnings;
- - For transfers from the trading category, the unrealized gain or loss
already recognized in earnings is not reversed;
- - For transfers to actively managed from held to maturity, the unrealized
gain or loss is recognized in shareholders' equity; and
<PAGE>
Page 21
- - For transfers to held maturity from actively managed, the unrealized gain
or loss at the date of transfer continues to be reported in shareholders'
equity, but is amortized over the remaining life of the security as a yield
adjustment.
Prior to adopting SFAS 115, the fixed maturity investments were
transferred to the new category at the lower of cost or fair value at the date
of transfer. Unrealized losses were recognized upon such transfers; unrealized
gains were deferred until the final disposition of the securities. Transfers
between categories in 1993 and 1992 and the resulting impact on earnings were
immaterial.
Credit-tenant loans are commercial mortgage loans which require: (i) the
lease of the principal tenant to be assigned to the Company and to produce
adequate cash flow to fund substantially all the requirements of the loan, and
(ii) the principal tenant or the guarantor of such tenant's obligations to have
an investment-grade credit rating at the time of origination of the loan. These
loans are also secured by the value of the related property. The underwriting
guidelines consider such factors as: (i) the terms of the lease on the property;
(ii) the borrower's financial soundness and management ability, including
business experience and property management capabilities, and (iii) such
economic, demographic or other factors that may affect the income generated by
the property or its value. The underwriting guidelines also require a
loan-to-value ratio of 75 percent or less.
Mortgage and credit-tenant loans are stated at amortized cost. Policy
loans are stated at their current unpaid principal balances. Other invested
assets are accounted for using the equity method (principally investments in
unconsolidated operating limited partnerships) or in accordance with SFAS 115
(principally investments in unconsolidated limited partnerships which invest
solely in debt or equity securities). Short-term investments include commercial
paper, invested cash and other investments purchased with maturities less than
three months and are carried at amortized cost, which approximates estimated
fair value. The Company considers all short-term investments to be cash
equivalents.
Fees received and costs incurred in connection with the origination of
investments, principally mortgages and credit-tenant loans, are deferred. Fees,
costs, discounts and premiums are amortized as yield adjustments over the
contractual life of the investments. Anticipated prepayments on mortgage-backed
securities are taken into consideration in determining estimated future yields
on such securities.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar roll transactions to increase its return on
investments and increase liquidity. These transactions are accounted for as
collateral borrowings, where the amount borrowed is equal to the sales price of
the underlying securities.
The specific identification method is used to account for the disposition
of investments. The differences between sale proceeds and carrying values are
reported as gains and losses on investments, or as adjustments to investment
income if the proceeds are prepayments by issuers prior to maturity.
The Company regularly evaluates mortgage loans, credit-tenant loans and
other securities based on current economic conditions, past credit loss
experience and other circumstances of the investee. Impaired loans are revalued
at the present value of expected cash flows discounted at the loan's effective
interest rate when it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the agreement. A decline in a
security's net realizable value that is other than temporary is treated as a
realized loss and the cost basis of the security is reduced to its estimated
fair value. The Company accrues interest thereafter on the net carrying amount
of impaired loans.
Separate Accounts
Separate accounts represent funds for which investment income and gains
or losses accrue directly to certain policyholders. The assets of these accounts
are legally segregated and are not subject to the claims which may arise out of
any other business of the Company. Separate account assets are reported at
market value since the underlying investment risks are assumed by the contract
owners. The related liabilities are recorded at amounts equal to the underlying
assets and the fair value of those liabilities is equal to their carrying
amount.
<PAGE>
Page 22
Cost of Policies Purchased
The cost of policies purchased represents the portion of the cost to
acquire a subsidiary that is attributable to the right to receive future cash
flows from insurance contracts existing at the date of acquisition of the
subsidiary. The value of the cost of policies purchased is the actuarially
determined present value of the projected future cash flows from the acquired
policies.
The method used by the Company to value the cost of policies purchased is
consistent with the valuation methods used most commonly to value blocks of
insurance business, which is also consistent with the basic methodology
generally used to value assets. The method used by the Company is summarized as
follows:
- Identify the expected future cash flows from the blocks of business.
- Identify the risks inherent in realizing those cash flows (i.e., the
probability that the cash flows will be realized).
- Identify the rate of return that the Company believes it must earn in
order to accept the risks inherent in realizing the cash flows, based
on consideration of the factors summarized below.
- Determine the value of the policies purchased by discounting the
expected future cash flows by the Company's required discount rate.
Expected future cash flows used in determining such value are based on
actuarially determined projections of future premium collections, mortality,
surrenders, benefit payments, operating expenses, changes in insurance
liabilities, investment yields on the assets held to back the policy liabilities
and other factors. These projections take into account all factors known or
expected at the valuation date based on the collective judgment of the
management of the Company. Actual experience on purchased business may vary from
projections due to differences in renewal premiums collected, investment spread,
investment gains or losses, mortality and morbidity costs and other factors.
The discount rate used to determine the value of the cost of policies
purchased is the rate of return required in order for the Company to invest in
the business being acquired. In determining the rate of return to be used by the
Company, the following factors are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows as
described in the preceding paragraphs.
- The cost of capital to fund the acquisition.
- The perceived likelihood of changes in projected future cash flows
that might occur if there are changes in insurance regulations and tax
laws.
- The compatibility with other activities that may favorably affect
future cash flows.
- The complexity of the acquired company.
- Recent purchase prices (i.e., discount rates used in determining
valuations) on similar blocks of business.
After the cost of policies purchased is determined using the methods
described above, the amount is amortized based on the incidence of the expected
cash flows. For each of the Company's subsidiaries, the asset is amortized with
interest at the same rate used to determine the discounted value of the asset.
To the extent that past or future experience on purchased business varies
from projections due to differences in renewal premiums collected, investment
spread, investment gains or losses, mortality and morbidity costs and other
factors, amortization of
<PAGE>
Page 23
the cost of policies purchased is adjusted. For example, sales of fixed maturity
investments that result in a gain (or loss), but also reduce (or increase) the
future investment spread because the sale proceeds are reinvested at a lower (or
higher) earnings rate, may cause amortization to increase (or decrease)
reflecting the change in the incidence of cash flows. Amortization is also
adjusted for the current and future years to reflect: (i) the revised estimate
of future cash flows, and (ii) the revised interest rate (but not greater than
the rate initially used and not lower than the rate of interest earned on
invested assets) at which the discounted present value of such expected future
profits equals the unamortized asset balance.
Recoverability of the cost of policies purchased is evaluated annually by
comparing the current estimate of expected future cash flows (discounted at the
rate of interest earned on invested assets) to the unamortized asset balance by
line of insurance business. If such current estimate indicates that the existing
insurance liabilities, together with the present value of future net cash flows
from the blocks of business purchased, will not be sufficient to recover the
cost of policies purchased, the difference is charged to expense.
Cost of Policies Produced
Costs of producing new business (primarily commissions and certain costs
of policy issuance and underwriting, net of fees charged to the policy), which
vary with and are primarily related to the production of new business, are
deferred to the extent recoverable from future profits. Such costs are amortized
with interest as follows:
- For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from these
contracts, discounted using the interest rate credited to the policy.
- For immediate annuities with mortality risks, in relation to the
present value of benefits to be paid.
- For traditional life and accident and health products, in relation to
future anticipated premium revenue using the same assumptions that are
used in calculating the insurance liabilities.
Recoverability of the unamortized balance of the cost of policies
produced is evaluated at least annually. For universal life-type contracts and
investment-type contracts, the accumulated amortization is adjusted (whether an
increase or a decrease) whenever there is a material change in the incidence of
the estimated gross profits expected over the life of a block of business in
order to maintain a constant relationship between cumulative amortization and
the present value (discounted at the rate of interest that accrues to the
policies) of expected gross profits. For most other contracts, the unamortized
asset balance is reduced by a charge to income only when the present value of
future cash flows, net of policy liabilities, is not sufficient to cover such
asset balance.
Goodwill
The excess of the cost to acquire purchased companies over the net assets
acquired is recorded as goodwill and is amortized on the straight-line basis
over a 40-year period. The Company continually monitors the value of its
goodwill based upon estimates of future earnings. If it determines that goodwill
has been impaired, the carrying value is reduced and charged to expense (no such
changes have been made).
Insurance Liabilities
Recognition of Insurance Policy Income and Related Benefits and Expenses
Reserves for universal life-type and investment-type contracts are based on the
contract account balance, if future benefit payments in excess of the account
balance are not guaranteed, or on the present value of future benefit payments
when such payments are guaranteed. Additions to insurance liabilities for
universal life-type contracts are made if future cash flows including investment
income are insufficient to cover future benefits and expenses.
Premium deposits and benefit payments are recorded as increases or
decreases in a liability account rather than as revenue and expense for
investment contracts without mortality risk (such as deferred annuities and
immediate annuities with benefits paid only for a period certain) and for
contracts that permit the Company or the insured to make changes in the contract
terms (such as single- premium whole life and universal life). Amounts charged
against the liability account for the cost of insurance, policy administration
and surrender penalties are recorded as revenues. Interest credited to the
liability account and benefit payments made in excess of the contract liability
account balance are charged to expense.
Reserves for traditional and limited-payment contracts are generally
calculated using the net level premium method and
<PAGE>
Page 24
assumptions as to investment yields, mortality, withdrawals and dividends. The
assumptions are based on projections of past experience and include provisions
for possible adverse deviation. These assumptions are made at the time the
contract is issued or, in the case of contracts acquired by purchase, at the
purchase date.
Premiums are recognized as income when due for traditional insurance
contracts or, for short duration contracts, over the period to which the
premiums relate. Benefits and expenses are recognized as a level percentage of
earned premiums. Such recognition is accomplished through the provision for
future policy benefits and the amortization of cost of policies produced.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), the accounting treatment is similar to
traditional contracts. However, the excess of the gross premium over the net
premium is deferred and recognized in relation to the present value of expected
future benefit payments (when accounting for annuity contracts) or in relation
to insurance in force (when accounting for life insurance contracts).
Liabilities for incurred claims are determined using historical
experience and published tables for disabled lives and represent an estimate of
the present value of the remaining ultimate net cost of all reported and
unreported claims. Management believes these estimates are adequate. Such
estimates are periodically reviewed and any adjustments are reflected in current
operations.
The liability for future policy benefits for accident and health policies
consists of active life reserves and the estimated present value of the
remaining ultimate net cost of incurred claims. The active life reserves include
unearned premiums and additional reserves. The additional reserves are computed
on the net level premium method using assumptions for future investment yield,
mortality and morbidity experience. The assumptions are based on projections of
past experience and reflect provisions for possible adverse deviation.
The amount of dividends to be paid on participating policies (which are
not significant) is determined annually by the Company. The portion of the
earnings allocated to participating policyholders is recorded as an insurance
liability.
Reinsurance
In the normal course of business, the Company seeks to limit its exposure
to loss on any single insured and to recover a portion of the benefits paid by
ceding insurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company has set its retention limits for
acceptance of risk on life insurance policies at various levels up to $.5
million.
Assets and liabilities related to insurance contracts are reported before
the effects of reinsurance. Reinsurance receivables and prepaid reinsurance
premiums (including amounts related to insurance liabilities) are reported as
assets. Estimated reinsurance receivables are recognized in a manner consistent
with the liabilities related to the underlying reinsured contracts. Such amounts
have been presented in accordance with Statement of Financial Accounting
Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts."
Income Taxes
Income tax expense includes deferred taxes arising from temporary
differences between the tax and financial reporting basis of assets and
liabilities. Additionally, this liability method of accounting for income taxes
requires the effect of a tax rate change on accumulated deferred income taxes to
be reflected in income in the period in which the change is enacted.
Earnings Per Share
Primary net income per share is computed by dividing earnings, less
preferred dividend requirements, by the weighted average number of common and
common equivalent shares outstanding for the year. Equivalent shares were
computed for 1992 based on the number of shares of the Company's common stock
exchanged for the common stock and warrants of the former life subsidiaries of
the Partnership, which now comprise the operating subsidiaries of the Company.
Dilution related to stock options is not considered because it is immaterial.
There is no difference between primary and fully-diluted earnings per share.
<PAGE>
Page 25
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:
Investment securities: The estimated fair values for fixed maturity
securities (including redeemable preferred stocks) are based on quoted
market prices, where available. For fixed maturity securities not
actively traded, the estimated fair values are determined using values
obtained from independent pricing services or, in the case of private
placements, by discounting expected future cash flows using a current
market rate applicable to the yield, credit quality and maturity of the
investments. The estimated fair values for trading account securities are
based on quoted market prices.
Short-term investments: The estimated fair values for short-term
investments are based on quoted market prices. The carrying amount
reported in the consolidated balance sheet for these instruments
approximates their estimated fair value.
Mortgage loans, credit-tenant loans and policy loans: The estimated fair
values of these loans are determined by discounting future expected cash
flows using interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar characteristics
are aggregated for purposes of the calculations.
Other invested assets: The estimated fair values of other invested assets
are determined using quoted market prices for similar instruments or, for
an insignificant portion for which quoted market prices are not
available, are assumed to be equal to the carrying amount.
Insurance liabilities for investment contracts: The estimated fair values
of the Company's liabilities under investment-type insurance contracts
are determined using discounted cash flow calculations based on interest
rates currently being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
Investment borrowings: Due to the short-term nature of these borrowings
(terms generally less than 30 days), estimated fair values are assumed to
approximate the carrying (face) amount reported in the consolidated
balance sheet.
Notes payable: The estimated fair values of the Company's notes payable
are determined using discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
<PAGE>
Page 26
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
1994 1993
----------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes other than trading:
Actively managed fixed maturities.................. $3,497.3 $3,497.3 $3,963.0 $3,963.0
Mortgage loans..................................... 251.4 258.2 305.1 338.9
Credit-tenant loans................................ 116.2 101.1 87.1 87.1
Policy loans....................................... 136.4 136.4 137.3 137.3
Other invested assets.............................. 30.6 30.6 35.3 35.3
Short-term investments............................. 123.0 123.0 209.9 209.9
Trading account securities............................... - - 25.8 25.8
Financial liabilities issued for purposes other than trading:
Insurance liabilities for investment contracts <F1>. 3,344.1 3,344.1 3,339.0 3,339.0
Investment borrowings.............................. - - 134.1 134.1
Notes payable-senior unsecured notes............... 196.8 199.3 - -
Notes payable-senior secured note.................. - - 162.2 166.7
Notes payable-unsecured note related to
Jefferson National acquisition.................. - - 11.3 13.4
<FN>
<F1>The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1994
and 1993, because interest rates credited on the vast majority of
account balances approximate current rates paid on similar
investments and are not generally guaranteed beyond one year. Fair
values for the Company's insurance liabilities other than those for
investment contracts are not required to be disclosed. However, the
estimated fair values of liabilities for all insurance contracts are
taken into consideration in the Company's overall management of
interest rate risk, which minimizes exposure to changing interest
rates through the matching of investment maturities with amounts due
under insurance contracts.
</FN>
</TABLE>
<PAGE>
Page 27
2. INVESTMENTS:
At December 31, 1994, the amortized cost and estimated fair (carrying)
value of actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Amortized Unrealized Unrealized (Carrying)
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.................. $ 63.2 $ .2 $ 4.6 $ 58.8
Obligations of states and .....................
political subdivisions..................... 41.8 - 3.3 38.5
Debt securities issued
by foreign governments..................... .4 - - .4
Public utility securities...................... 874.2 7.0 86.7 794.5
Other corporate securities..................... 1,504.1 8.9 115.8 1,397.2
Mortgage-backed securities..................... 1,312.4 5.8 110.3 1,207.9
--------- -------- ------- ---------
Total............................. $3,796.1 $21.9 $320.7 $3,497.3
======== ===== ====== ========
</TABLE>
At December 31, 1993, the amortized cost and estimated fair (carrying)
value of actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Estimated
Gross Gross Fair
Amortized Unrealized Unrealized (Carrying)
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.................. $ 47.8 $ 6.3 $ - $ 54.1
Obligations of states and
political subdivisions..................... 34.7 1.3 1.1 34.9
Debt securities issued
by foreign governments..................... .4 .1 - .5
Public utility securities...................... 840.4 43.1 10.4 873.1
Other corporate securities..................... 1,633.0 113.3 14.4 1,731.9
Mortgage-backed securities..................... 1,223.9 48.8 4.2 1,268.5
-------- ------ ----- --------
Total............................. $3,780.2 $212.9 $30.1 $3,963.0
======== ====== ===== ========
</TABLE>
<PAGE>
Page 28
The following table sets forth the amortized cost and estimated fair
value of actively managed fixed maturities as of December 31, 1994, based upon
the source of the estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services................................................ $3,667.7 $3,372.3
Broker-dealer market makers........................................................... 118.3 116.2
Internally developed methods (calculated based on a
weighted average current market yield of 11.2 percent)............................ 10.1 8.8
-------- --------
Total.................................................................. $3,796.1 $3,497.3
======== ========
</TABLE>
The following table sets forth the quality of actively managed fixed
maturity investments as of December 31, 1994, classified in accordance with the
highest rating by a nationally recognized statistical rating organization or, as
to $44.7 million fair value of investments not rated by such firms, based on
ratings assigned by the National Association of Insurance Commissioners, (the
"NAIC") as follows: NAIC Class 1 is included in the "A" rating; Class 2, "BBB-";
Class 3, "BB-"; and Classes 4-6, "B+ and below."
<TABLE>
<CAPTION>
Percent of
Actively Managed Percent of
Investment Rating Fixed Maturities Total Investments
----------------- ---------------- -----------------
<S> <C> <C>
AAA .................................................... 39% 31%
AA .................................................... 6 5
A .................................................... 22 18
BBB+ .................................................... 9 7
BBB .................................................... 8 7
BBB- .................................................... 9 8
--- ---
Investment-grade..................................... 93 76
--- ---
BB+ .................................................... 2 2
BB .................................................... 1 1
BB- .................................................... 2 1
B+ and below................................................ 2 1
--- ---
Below investment-grade.................................. 7 5
--- ---
Total ............................................... 100% 81%
=== ==
</TABLE>
<PAGE>
Page 29
Below investment-grade actively managed fixed maturity investments,
summarized by the amount their amortized cost exceeds fair value, were as
follows at December 31, 1994:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds market value by 30% or more....................... $ 10.7 $ 6.9
Amortized cost exceeds market value by 15%,
but not more than 30%................................................ 60.6 46.7
Amortized cost exceeds market value by 5%,
but not more than 15%................................................ 79.0 70.7
All others............................................................... 104.4 109.6
------ ------
Total below investment-grade actively
managed fixed maturity investments............................. $254.7 $233.9
====== ======
</TABLE>
The amortized cost and estimated fair value of actively managed fixed
maturities at December 31, 1994, by contractual maturity, are shown below.
Actual maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties and because most mortgage-backed securities provide for periodic
payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- ----
(Dollars in millions)
<S> <C> <C>
Due in one year or less................................................ $ 29.5 $ 29.8
Due after one year through five years.................................. 190.5 187.4
Due after five years through ten years................................. 608.1 575.2
Due after ten years.................................................... 1,655.6 1,497.0
-------- --------
Subtotal.................................................. 2,483.7 2,289.4
Mortgage-backed securities............................................. 1,312.4 1,207.9
-------- ---------
Total ...................................................... $3,796.1 $3,497.3
======== ========
</TABLE>
<PAGE>
Page 30
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities....................................... $305.3 $337.6 $300.8
Mortgage loans......................................... 31.8 39.9 53.0
Credit-tenant loans.................................... 7.2 5.2 1.4
Policy loans........................................... 8.6 8.9 8.8
Other invested assets.................................. 5.7 4.3 1.2
Short-term investments................................. 9.1 7.9 11.6
Separate accounts...................................... 2.3 11.8 6.9
------ ------ ------
Gross investment income ..................... 370.0 415.6 383.7
Investment expenses.................................... 2.2 2.7 3.3
------ ------ ------
Net investment income........................ $367.8 $412.9 $380.4
====== ====== ======
</TABLE>
The carrying value of investments not accruing investment income totaled
$18.7 million, $17.8 million and $16.4 million at December 31, 1994, 1993 and
1992, respectively.
Trading income (losses), net of related expenses, were included in revenue
as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Gross gains............................................... $ 3.7 $33.2 $28.3
Gross losses.............................................. (2.5) (5.0) (9.4)
----- ----- -----
Net trading income before expenses.............. 1.2 28.2 18.9
Trading expenses.......................................... 2.1 3.9 3.3
----- ----- -----
Net trading income (losses)..................... $ (.9) $24.3 $15.6
===== ===== =====
</TABLE>
<PAGE>
Page 31
Realized gains, net of related expenses, were included in revenue as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities:
Gross gains................................................. $ 31.0 $ 80.7 $73.2
Gross losses................................................ (17.5) (5.8) (5.8)
Decline in net realizable value ............................ (1.4) (17.2) (1.6)
------- ------- -------
Net realized gains from actively managed
fixed maturities before expenses................... 12.1 57.7 65.8
Mortgage loans.................................................. (.6) 2.0 1.0
Other invested assets........................................... (2.2) - -
Other........................................................... (.7) - .3
------- ------- -------
Net realized gains before expenses..................... 8.6 59.7 67.1
Realized gain expenses.......................................... 5.7 3.9 3.6
------- -------- -------
Net realized gains ................................... $ 2.9 $ 55.8 $63.5
======= ====== =====
</TABLE>
The proceeds from sales of actively managed fixed maturity investments were
$1.2 billion, $2.1 billion and $1.3 billion for 1994, 1993 and 1992,
respectively.
Changes in unrealized appreciation (depreciation) of securities were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Investments carried at amortized cost:
Fixed maturities held to maturity........................... $ - $ - $(145.1)
======== ======== =======
Investments carried at estimated fair value:
Actively managed fixed maturities........................... $(481.6) $ 92.3 $ 90.5
Trading account securities.................................. - (1.6) (12.4)
Investment in Bankers Life Holding Corporation.............. (3.4) 11.9 -
Investment in The Statesman Group, Inc...................... (3.1) - -
Other invested assets....................................... (2.4) - -
-------- --------- --------
(490.5) 102.6 78.1
Adjustment for effect on other balance sheet accounts:
Cost of policies purchased.................................. 188.8 (19.1) (43.7)
Cost of policies produced................................... 40.3 (16.5) (7.5)
Income taxes................................................ 94.3 (23.3) (9.1)
-------- -------- --------
Change in unrealized appreciation (depreciation)
of securities......................................... $(167.1) $ 43.7 $ 17.8
======= ====== ========
</TABLE>
The amortized cost and fair (carrying) value of actively managed fixed
maturity investments in default as to the payment of principal or interest were
$12.2 million (net of recorded writedowns of $4.7 million) and $18.4 million,
respectively, at December 31, 1994. During 1994, 1993 and 1992, the Company
recorded writedowns of fixed maturity investments totaling $1.0 million, $.3
million and $1.6 million, respectively, as a result of changes in conditions
which caused it to conclude that it would not be able to collect all amounts due
according to the terms of the securities. Additionally, the Company wrote down
exchange-rate-linked
<PAGE>
Page 32
securities by $.4 million and $16.9 million in 1994 and 1993, respectively, due
to foreign currency fluctuations which caused it to conclude that the full
amount of its investment would not be realized. Most of these
exchange-rate-linked securities subsequently matured in 1993 and 1994; the
carrying value of such securities remaining at December 31, 1994, was
approximately $.7 million.
Investments in mortgage-backed securities at December 31, 1994, included
collateralized mortgage obligations ("CMOs") of $796.2 million and
mortgage-backed pass-through securities of $411.7 million. At December 31, 1994,
the par value, amortized cost and estimated fair value of investments in
mortgage-backed securities summarized by interest rates on the underlying
collateral were comprised of the following:
<TABLE>
<CAPTION>
Par Amortized Estimated
Value Cost Fair Value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-through securities:
Below 7%.................................................. $ 250.8 $ 250.4 $ 222.1
7% - 8%................................................... 130.8 132.0 120.0
8% - 9%................................................... 35.0 35.3 34.0
Above 9%.................................................. 34.7 35.0 35.6
Planned amortized class CMO instruments:
Below 7%.................................................. 139.2 128.9 110.8
7% - 8%................................................... 333.2 313.4 281.6
8% - 9%................................................... 177.1 172.4 159.3
Above 9%.................................................. 107.5 105.8 107.6
Other CMO instruments:
Below 7%.................................................. 9.7 14.0 12.7
7% - 8%................................................... 14.0 16.6 16.5
8% - 9%................................................... 30.9 29.2 29.4
Above 9%.................................................. 80.0 79.4 78.3
-------- -------- --------
Total mortgage-backed securities .................... $1,342.9 $1,312.4 $1,207.9
======== ======== ========
</TABLE>
The following table sets forth the amortized cost and estimated fair
value of mortgage-backed securities as of December 31, 1994, based upon the
source of the estimated fair value:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services.............................................. $1,223.8 $1,120.3
Broker-dealer market makers......................................................... 88.4 87.4
Internally developed methods (calculated based on a
current market yield of 9.2 percent)............................................ .2 .2
-------- --------
Total................................................................ $1,312.4 $1,207.9
======== ========
</TABLE>
At December 31, 1994, less than 3 percent of the book value of mortgage
loans held by the Company had defaulted as to principal or interest for more
than 60 days, were in foreclosure, had been converted to foreclosed real estate
or had been restructured while the Company owned them. The Company maintained a
loan loss reserve of $1.2 million on that date. Approximately 59 percent, 9
percent and 6 percent of the mortgage loans were on properties located in
California, Texas and Indiana, respectively. No other state comprised greater
than 5 percent of the mortgage loan balance.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar roll transactions to increase its return on
investments and increase liquidity. These transactions generally terminate after
30 days and are accounted for
<PAGE>
Page 33
as short-term collateralized borrowings. These borrowings, which were as high as
$298.6 million during 1994, averaged approximately $151 million in 1994 compared
to $155 million in 1993 and were collateralized by securities with fair values
approximately equal to the loan value. The weighted average interest rate on
short-term collateralized borrowings was 3.4 percent in 1994 and 2.8 percent in
1993.
Life insurance companies are required to maintain certain amounts of
assets on deposit with state regulatory authorities. Such assets had an
aggregate carrying value of $21.1 million at December 31, 1994.
Investments in a single entity in excess of 10 percent of shareholders'
equity at December 31, 1994, other than investments in affiliates and
investments issued or guaranteed by the U.S. government, all of which were
actively managed fixed maturity investments, were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Investment Cost Value
---------- ---- -----
(Dollars in millions)
<S> <C> <C>
Hydro-Quebec....................................... $41.8 $39.1
Pacific Gas & Electric............................. 44.9 38.3
</TABLE>
3. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
In March 1993, Bankers Life Holding Corporation ("BLH"), then a
subsidiary of the Partnership, completed an initial public offering of
19,550,000 shares of its common stock at $22 per share. In conjunction with this
offering, the Company's investment in the Partnership was exchanged for
1,513,131 shares of BLH common stock. During the first quarter of 1993, the
Company recognized equity in earnings of BLH of $1.2 million and a gain on the
sale of stock by BLH of $10.5 million. Effective with the date of the exchange,
the Company carries its investment in BLH at fair value. At December 31, 1994,
the Company's investment in BLH had an estimated fair value of $25.9 million and
an unrealized gain of $7.6 million, net of taxes of $.9 million. Shares of BLH
held by the Company are not freely tradable, and the sale of such shares may
require a registration statement with the Securities and Exchange Commission. On
March 1, 1995, BLH received a proposal from Conseco under which Conseco would
acquire the outstanding shares of BLH that Conseco does not currently own. Under
the proposal, BLH would merge into Conseco, with Conseco being the surviving
corporation. Each holder of BLH common shares, other than Conseco, would receive
$22 per share in cash. The proposed transaction requires the approval of holders
of a majority of BLH's outstanding shares (other than shares held by Conseco)
voting at a special shareholders' meeting.
In January 1994, Conseco announced the formation of Conseco Capital
Partners, II, L.P. ("Partnership II"), a partnership formed to invest in
privately negotiated acquisitions of specialized annuity, life and accident and
health insurance companies and related businesses. Partnership II received
capital commitments of $624 million, which included a $25 million capital
commitment by the Company as a limited partner of Partnership II. On September
29, 1994, the Company participated in funding the acquisition of The Statesman
Group, Inc. ("Statesman") by Partnership II. The Company indirectly acquired 3.2
percent of the outstanding common shares of Statesman through its $1.9 million
contribution to Partnership II. In a separate transaction, the Company purchased
$24.0 million of payment-in-kind ("PIK") preferred stock issued by Statesman,
although $3.0 million of this investment was later sold at cost to an
unaffiliated company. As partial consideration for the PIK preferred stock
purchases, the Company received 7.3 percent of Statesman's common shares
outstanding. Dividends on the Statesman PIK preferred stock are payable annually
through 2006 at 13 percent in additional shares of Statesman PIK preferred
stock. Thereafter, dividends will be payable quarterly in cash at a 15 percent
annual rate. During the fourth quarter of 1994, the Company recognized $.3
million of investment income for its equity in the earnings of Statesman. At
December 31, 1994, the carrying value of the Company's investment in Statesman
was $20.1 million, which included an unrealized loss of $2.8 million, net of
taxes of $.3 million.
<PAGE>
Page 34
4. INSURANCE LIABILITIES:
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality Rate December 31,
Assumption Assumption Assumption 1994 1993
---------- ---------- ---------- ---- ---
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Investment contracts............. N/A N/A <F3> $3,344.1 $3,339.0
Limited-payment contracts........ None <F1> 7% 158.4 154.4
Traditional life insurance Company
contracts..................... experience <F2> 8% 181.7 187.7
Universal life-type contracts.... N/A N/A N/A 472.0 478.3
Claims payable and other
policyholders' funds ............ N/A N/A N/A 86.9 73.9
-------- --------
Total insurance liabilities.................................................... $4,243.1 $4,233.3
======== ========
<FN>
<F1> Principally the 1971 Individual Annuitant Table and the 1965 - 70 and the
1975 - 80 Basic, Select and Ultimate Tables.
<F2> Principally modifications of the 1965 - 70 and 1975 - 80 Basic, Select
and Ultimate Tables.
<F3> At December 31, 1994 and 1993, approximately 89 percent and 85 percent,
respectively, of this liability represented account balances where future
benefits were not guaranteed. The weighted average interest rate on the
remainder of liabilities, representing the present value of guaranteed
future benefits, was approximately 6 percent at December 31, 1994.
</FN>
</TABLE>
Participating policies represented approximately 3.6 percent, 3.8 percent
and 3.3 percent of total life insurance in force at December 31, 1994, 1993 and
1992 respectively, and approximately 6.8 percent, 6.0 percent and 6.5 percent of
premium income for 1994, 1993 and 1992, respectively. Dividends on participating
policies amounted to $1.8 million, $2.0 million and $1.8 million in 1994, 1993
and 1992, respectively.
5. REINSURANCE:
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $45.0 million, $52.4 million and $51.8 million in 1994, 1993 and
1992, respectively, and has been deducted from insurance policy income. The
Company is contingently liable for claims reinsured if the assuming company is
unable to pay. Reinsurance recoveries netted against insurance policy benefits
totaled $31.6 million, $36.9 million and $35.3 million in 1994, 1993 and 1992,
respectively.
The Company has ceded policy liabilities under assumption reinsurance
agreements where all obligations under the insurance contracts have been ceded
to another company. Accordingly, insurance liabilities related to such policies
were not reported in the balance sheet. The Company believes the assuming
companies are able to honor all contractual commitments under the assumption
reinsurance agreements based on periodic reviews of financial statements,
insurance industry reports and reports filed with state insurance departments.
<PAGE>
Page 35
6. INCOME TAXES:
Income tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax assets (liabilities):
Investments...................................................... $ 50.8 $ 3.8
Cost of policies purchased and ..................................
cost of policies produced..................................... (150.0) (88.6)
Insurance liabilities............................................ 72.8 68.3
Unrealized depreciation (appreciation) .......................... 57.9 (36.4)
Other............................................................ (22.8) (25.2)
------- -------
Deferred income tax assets (liabilities)................ 8.7 (78.1)
Current income tax assets (liabilities).............................. 4.9 (7.9)
------- ------
Income tax assets (liabilities)......................... $ 13.6 $(86.0)
======= ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Current tax provision................................................ $29.7 $59.5 $ 40.5
Deferred tax provision............................................... 7.7 6.4 1.5
----- ----- ------
Income tax expense........................................ $37.4 $65.9 $ 42.0
===== ===== ======
</TABLE>
Income tax expense differed from that computed at the applicable federal
statutory rate (35 percent in 1994 and 1993 and 34 percent in 1992) for the
following reasons:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Federal tax on income before taxes at statutory rates................ $35.1 $60.7 $40.4
Additional tax on unrealized gains and income of prior
periods related to increase in corporate income tax rate......... - 2.4 -
State taxes ......................................................... 1.6 1.5 .5
Nondeductible items ................................................. .8 .7 .7
Taxes related to prior years......................................... - .7 -
Nontaxable investment income and dividends received deduction........ (.4) (.3) (.2)
Other................................................................ .3 .2 .6
----- ----- -----
Income tax expense........................................ $37.4 $65.9 $42.0
===== ===== =====
</TABLE>
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted on
August 10, 1993. The most significant provision of the Act affecting the Company
was the increase in the corporate income tax rate to 35 percent from 34 percent
effective for taxable income reported in 1993. In addition to increasing taxes
on current year income, the impact of the Act on the Company in 1993 was
additional expense of $1.3 million for a one-time adjustment to accumulated
deferred taxes related to prior years' income and $1.1 million for a one-time
adjustment to unrealized appreciation of securities. The impact of the other
provisions of the Act was not material to the Company.
The Internal Revenue Service ("IRS") completed an examination of
Beneficial Standard for the tax years 1986 - 1989, which are years prior to
Beneficial Standard's acquisition by the Company, and issued a notice of
deficiency. Beneficial Standard has filed
<PAGE>
Page 36
a petition with the Tax Court disputing the claimed deficiency. The seller of
Beneficial Standard is obligated to indemnify the Company for any additional
income taxes attributable to these years. The Company believes that, upon
completion of the appeal process, this examination will not have a material
impact on the Company's financial position or results of operations.
Great American Reserve, Jefferson National and Beneficial Standard are
currently being examined by the IRS for the years 1991 and 1992. The Company
believes that the outcome of these examinations will not have a material impact
on the Company's financial position or results of operations.
7. NOTES PAYABLE:
Notes payable consisted of the following:
<TABLE>
<CAPTION>
Amount
Outstanding
Net of
Unamortized
Par Value Discount and Estimated
Outstanding at Issuance Costs Fair Value
December 31, at December 31, at December 31,
Initially ---------------- ----------------- ---------------
Issued 1994 1993 1994 1993 1994 1993
------ ---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior unsecured notes issued in
December 1994............................... $200.0 $200.0 $ - $196.8 $ - $199.3 $ -
Senior secured note issued in July 1992........ 200.0 - 166.7 - 162.2 - 166.7
Unsecured note related to Jefferson
National acquisition issued in
November 1989............................. 10.0 - 13.4 - 11.3 - 13.4
------ ------ ------ ------ ------- ------
Total..................................... $200.0 $180.1 $196.8 $173.5 $199.3 $180.1
====== ====== ====== ====== ====== ======
</TABLE>
In December 1994, the Company completed a public offering of $200 million
of its 10.5 percent senior notes due in 2004. Proceeds from the offering of
approximately $196.8 million (after original issue discount and other associated
costs) were used to prepay in full the senior secured note, to repurchase common
shares of the Company, and for general corporate purposes. The retirement of the
senior secured note, which had a par value of $133.3 million at the time of
retirement, resulted in an extraordinary charge of $3.6 million, net of a $2.0
million tax benefit. The 10.5 percent senior notes bear interest payable
semi-annually on June 15 and December 15. The notes are unsecured and rank pari
passu with all other unsecured and unsubordinated indebetedness of the Company.
The notes are not redeemable prior to maturity.
In 1990, the Company issued a note with a par value of $10.0 million
which was due in 2000 in connection with the acquisition of Jefferson National.
Interest at the rate of 10 percent was payable in additional notes (scheduled to
mature in 2000) through November 1995 and at the rate of 12 percent thereafter,
payable in cash. In February 1994, the Company retired the note for $13.6
million, resulting in an extraordinary charge of $1.3 million, net of a $.7
million tax benefit. Also in connection with the Jefferson National acquisition,
the Company issued a note with a par value of $15.0 million which matures in
2000. However, under the terms of the note agreement, the principal balance of
the note plus accrued interest may be reduced for certain potential losses for
which the seller has agreed to indemnify the Company. The Company believes that
potential adjustments which approximate the note balance have been identified;
accordingly, the outstanding balance of the note has been classified as other
liabilities for financial reporting purposes.
In October 1993, the Company retired at par a $29.0 million unsecured
note which was due in 1998. This note, which was issued to the seller of Great
American Reserve and had an interest rate of 14 percent, was carried net of $.4
million of unamortized discount at the time of retirement. The write-off of the
unamortized discount was included with interest expense on long-term debt.
In July 1992, in connection with the initial public offering of its
common stock, the Company issued a senior secured note for $200.0 million and
completed certain recapitalization and related transactions. As a result, the
Company repaid the remaining balances on a $75.0 million senior secured note, a
$23.0 million subordinated note, a $119.0 million senior secured note, $6.7
<PAGE>
Page 37
million of subordinated notes ($3.0 million of which was exchanged for common
stock of the Company) and a $79.5 million senior secured note. Related interest
rate swap and cap agreements were also terminated. Furthermore, notes payable of
$9.5 million and $6.3 million, issued to Conseco in connection with the
acquisitions of Beneficial Standard and Jefferson National, respectively, were
also repaid. As a result of the early extinguishment of debt, the Company
recognized an extraordinary charge of $8.8 million, net of a $4.5 million tax
benefit. As discussed above, the senior secured note that was issued in 1992 was
retired in December 1994. The retired note contained an interest rate which
varied with prime or LIBOR and was 7.4 percent at the time of retirement. A
scheduled principal payment of $33.3 million was made on April 1, 1994, and the
remaining principal repayments would have been due in annual installments of
$33.3 million on April 1 in the years 1995 through 1998.
8. OTHER DISCLOSURES:
Litigation
From time to time, the Company and its subsidiaries are involved in
lawsuits which are related to their operations. In most cases, such lawsuits
involve claims under insurance policies or other contracts of the Company. Even
though the Company may be contesting the validity or extent of its liability in
response to such lawsuits, the Company has established reserves in its
consolidated financial statements which approximate its estimated potential
liability. Accordingly, none of the lawsuits currently pending, either
individually or in the aggregate, is expected to have a material effect on the
Company's consolidated financial position or results of operations.
Guaranty Fund Assessments
From time to time, mandatory assessments are levied on the Company's
insurance subsidiaries by life and health guaranty associations of most states
in which these subsidiaries are licensed to cover losses to policyholders of
insolvent or rehabilitated insurance companies. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state in order to pay claims on the basis of the proportionate share of premiums
written by member insurers in the lines of business in which the insolvent or
rehabilitated insurer engaged. These assessments may be deferred or forgiven in
certain states if they would threaten an insurer's financial strength and, in
some states, these assessments can be partially recovered through a reduction in
future premium taxes. The accompanying financial statements include accruals
($5.5 million at December 31, 1994) which approximate the Company's estimated
potential liability for guaranty assessments. Amounts for guaranty assessments
charged to expense in 1994, 1993 and 1992 were $8.8 million, $2.4 million and
$2.7 million, respectively. The 1994 amount includes a $5.5 million charge for
future guaranty assessments on known insolvencies in the life insurance
industry.
Related Party Transactions
The Company operates without direct employees through management and
service agreements with subsidiaries of Conseco. Total fees incurred by the
Company under such agreements were $37.3 million, $36.8 million and $34.4
million for 1994, 1993 and 1992, respectively.
<PAGE>
Page 38
At the time the Company acquired Great American Reserve, the acquiree
held a note receivable from Conseco with an original principal balance of $10.0
million that was recorded at its fair value. This note was retired by Conseco
for cash of $7.0 million in March 1993. At the time of retirement, the principal
balance and book value of the note were $7.0 million and $6.3 million,
respectively.
During 1994 and 1993, the Company collected premiums of $5.0 million and
$7.2 million, respectively, from guaranteed investment contracts issued as
investment options for qualified retirement plans maintained by Conseco and BLH.
9. SHAREHOLDERS' EQUITY:
Authorized preferred stock is 20,000,000 shares. All of the shares of
preferred stock previously issued as part of the financing of various
acquisitions were redeemed on July 21, 1992, in connection with the Company's
initial public offering and recapitalization. Of the preferred stock redeemed, a
portion was exchanged for shares of common stock of the Company and the
remainder was retired for cash of $33.8 million.
Changes in the number of shares of common stock outstanding for the years
ended December 31, 1994, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year...................................... 29,049,968 26,010,700 15,244,920
Shares issued in public offerings........................... - 3,039,268 8,010,700
Shares issued in exchange for debt and preferred stock...... - - 1,350,000
Shares issued for exercised warrants <F1>................... - - 1,405,080
Shares issued under stock option and
employee benefits plans.................................. 948 - -
Common shares repurchased................................... (3,507,400) - -
---------- ---------- ----------
Balance, end of year............................................ 25,543,516 29,049,968 26,010,700
========== ========== ==========
<FN>
<F1>In connection with the acquisitions of Great American Reserve and
Jefferson National, the Company issued warrants to purchase shares
of the Company's common stock at a nominal cost to the lenders who
provided acquisition financing. Such warrants were exercised in
1992.
</FN>
</TABLE>
Dividends declared on common stock for 1994, 1993 and 1992 were $.08,
$.08 and $.04 per common share, respectively. A liability was accrued for
dividends declared but unpaid at December 31, 1994, totaling $.5 million. Such
dividends were paid in January 1995.
During 1994, the Company repurchased approximately 3.5 million shares of
its common stock for $71.8 million.
The Company is authorized under its employee stock option plan to grant
options to purchase up to 1,750,000 shares of the Company's common stock at a
price not less than its market value on the date the option is granted. The
options are exercisable for up to 10 years from the date of grant and become
exercisable over a period of time which began in 1994. In addition to the shares
of common stock reserved for issuance under the employee stock option plan,
9,064 shares of common stock are reserved for issuance under the stock bonus and
deferred compensation program for directors.
<PAGE>
Page 39
Stock options activity was as follows:
<TABLE>
<CAPTION>
Number of Shares
Option Price 1994 1993 1992
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Outstanding at January 1,.................................$15.00 to $24.00 715,600 790,000 -
Granted during the year
1992 ................................................$15.00 to $18.75 - - 790,000
1993 ................................................$19.875 to $22.50 - 25,600 -
1994 ................................................$17.00 to $24.00 72,200 - -
Exercised during the year.................................$22.50 (840) - -
Canceled during the year..................................$15.00 to $22.50 (8,760) (100,000) -
------- -------- -------
Outstanding at December 31, ..............................$15.00 to $24.00 778,200 715,600 790,000
======= ======== =======
Portion thereof that is exercisable
at December 31,.......................................$22.50 3,200 - -
======== ======== =======
Available for future grant at December 31,................ 970,960 1,034,400 960,000
======= ========= =======
</TABLE>
10. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Direct premiums collected............................................ $563.9 $497.7 $664.5
Reinsurance assumed.................................................. 3.2 5.7 8.7
Reinsurance ceded.................................................... (45.0) (52.4) (51.8)
------ ------ ------
Premiums collected, net of reinsurance........................... 522.1 451.0 621.4
Less premiums on universal life and products
without mortality risk which are recorded
as additions to insurance liabilities......................... 450.7 368.5 539.4
------ ------ ------
Premiums on products with mortality risk,
recorded as insurance policy income.......................... 71.4 82.5 82.0
Fees and surrender charges........................................... 43.1 45.3 57.5
------ ------ ------
Insurance policy income.................................. $114.5 $127.8 $139.5
====== ====== ======
</TABLE>
The three states with the largest shares of the Company's premiums
collected in 1994 were Texas (19 percent), Florida (17 percent) and California
(10 percent). Minnesota, Indiana, Michigan, Ohio, Wisconsin, North Carolina and
Illinois each represented between 2.1 percent and 6.0 percent of collected
premiums. No other states's share of premiums collected exceeded 2.0 percent.
<PAGE>
Page 40
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Policy maintenance expense............................................. $23.0 $24.3 $28.1
Commission expense..................................................... 18.8 20.5 21.3
State premium taxes and guaranty fund assessments...................... 10.8 4.2 5.0
Holding company expenses............................................... 2.0 3.2 0.7
----- ----- -----
Other operating costs and expenses......................... $54.6 $52.2 $55.1
===== ===== =====
</TABLE>
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................. $175.5 $247.9 $343.2
Amounts acquired................................................... - - 11.1
Amortization related to operations:
Cash flow realized.............................................. (55.1) (71.1) (78.9)
Interest added.................................................. 39.4 47.4 58.8
Amortization related to gains on sales of investments.............. (3.4) (29.6) (42.6)
Amounts related to fair value adjustment
of actively managed fixed maturities ........................... 188.8 (19.1) (43.7)
------ ------ ------
Balance, end of year................................................... $345.2 $175.5 $247.9
====== ====== ======
</TABLE>
The cost of policies purchased includes 1992 additions of $6.4 million
acquired upon the purchase of a block of annuity business and $4.7 million
related to adjustments to the fair value of the net assets acquired with
Beneficial Standard. Based on current conditions and assumptions as to future
events on all policies in force, approximately 9.7 percent, 9.5 percent, 9.0
percent, 8.6 percent and 7.9 percent of the cost of policies purchased
(determined before the adjustment related to unrealized gains (losses) on
actively managed fixed maturities) as of December 31, 1994, are expected to be
amortized in each of the next five years, respectively. The average discount
rate for the cost of policies purchased was 18 percent at December 31, 1994.
Anticipated returns from the investment of policyholder balances are
considered in determining the amortization of cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments change the
incidence of profits on such policies because resulting gains (losses) are
recognized currently and the expected future yields on the investment of
policyholder balances are reduced (increased) when the sale proceeds are
invested at current rates. Accordingly, amortization of the cost of policies
purchased was increased by $3.4 million, $29.6 million and $42.6 million in
1994, 1993 and 1992, respectively, and amortization of the cost of policies
produced was increased by $.3 million, $6.8 million and $3.3 million in 1994,
1993 and 1992, respectively.
<PAGE>
Page 41
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year........................................... $ 42.3 $ 44.4 $23.5
Additions........................................................ 37.3 25.0 32.8
Amortization related to operations............................... (7.7) (3.8) (1.1)
Amortization related to gains on sales of investments............ (.3) (6.8) (3.3)
Amounts related to fair value adjustment
of actively managed fixed maturities ......................... 40.3 (16.5) (7.5)
------ ------ -----
Balance, end of year................................................. $111.9 $ 42.3 $44.4
====== ====== =====
</TABLE>
11. CONSOLIDATED STATEMENT OF CASH FLOWS:
Cash flows from operations include interest paid on debt of $8.6 million,
$14.9 million and $24.3 million in 1994, 1993 and 1992, respectively.
Income taxes of $33.7 million, $62.2 million and $34.7 million were paid
in 1994, 1993 and 1992, respectively.
The following non-cash items are not reflected in the consolidated
statement of cash flows: (i) issuance of paid-in-kind interest on unsecured
notes of $.2 million, $1.2 million and $1.2 million in 1994, 1993 and 1992,
respectively; (ii) exchange of debt and preferred stock for shares of common
stock amounting to $20.8 million in 1992, and (iii) issuance of paid-in-kind
dividends on preferred stock of $2.2 million in 1992.
Short-term investments having original maturities of three months or less
are considered to be cash equivalents. All cash is invested in short-term
investments.
12. 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 insurance subsidiaries reported the
following amounts to regulatory agencies, after appropriate eliminations of
intercompany accounts among such subsidiaries:
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus......................................................... $181.9 $172.2
Asset valuation reserve ("AVR")....................................................... 45.6 39.3
Interest maintenance reserve ("IMR").................................................. 107.8 107.4
Portion of surplus debentures carried as a liability.................................. 76.7 73.2
------ ------
Total...................................................................... $412.0 $392.1
====== ======
</TABLE>
Combined statutory net income of the Company's life insurance subsidiaries
was $53.7 million, $59.7 million and $46.4 million in 1994, 1993 and 1992,
respectively, after appropriate eliminations of intercompany accounts among such
subsidiaries.
As a result of the acquisitions and subsequent recapitalization
transactions of the insurance subsidiaries, a surplus debenture was issued by an
insurance subsidiary to its direct parent company. As required by the state
regulatory authorities, the debenture is classified as a part of statutory
capital and surplus of the subsidiary to the extent that such capital and
surplus equals the level of capital and surplus required by the regulators. The
balance of the debenture in excess of such amount is carried as a liability on
the statutory balance sheet. This amount, however, would be reclassified to
statutory capital and surplus to the extent subsequently needed to meet the
level of capital and surplus required by the regulators. The surplus debenture
is eliminated in the Company's consolidated financial statements.
<PAGE>
Page 42
Statutory accounting practices require that AVR and IMR be reported as
liabilities. The IMR captures all realized investment gains and losses, net of
tax, resulting from changes in interest rates and provides for subsequent
amortization of such amounts into statutory net income on a basis reflecting the
remaining lives of the assets sold. The AVR captures all realized, net of tax,
and unrealized investment gains and losses related to changes in
creditworthiness and is also adjusted each year based on a formula related to
the quality of the Company's investment portfolio.
The following table compares the consolidated pre-tax income determined on
a statutory accounting basis with such income reported herein in accordance with
generally accepted accounting principles:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Life insurance subsidiaries:
Pre-tax income as reported on a statutory accounting basis before deduction
of expenses paid to affiliates and transfers
to and from and amortization of the IMR ...................... $ 99.2 $197.9 $160.3
Adjustments for generally accepted accounting principles:
Investments valuation......................................... 9.6 14.1 15.4
Amortization related to operations............................ (25.3) (29.4) (23.2)
Amortization related to realized gains........................ (3.7) (36.4) (45.9)
Deferral of cost of policies produced......................... 37.3 25.0 32.8
Insurance liabilities valuation............................... (3.1) 4.3 (4.1)
Other liabilities............................................. (3.6) 2.0 7.1
Other......................................................... (.1) 1.9 1.5
------ ------ ------
Pre-tax income, generally accepted
accounting principles............................... 110.3 179.4 143.9
Non-life companies:
Interest expense................................................. (10.7) (16.1) (26.1)
Gain on sale of stock by Bankers Life Holding Corporation........ - 10.5 -
All other income and expense, net................................ .8 (.3) 1.1
------ ------ ------
Consolidated pre-tax income, generally
accepted accounting principles....................... $100.4 $173.5 $118.9
====== ====== ======
</TABLE>
State insurance laws generally restrict the ability of insurance
companies to pay dividends or make other distributions. Net assets of the
Company's insurance subsidiaries, determined in accordance with generally
accepted accounting principles, aggregated approximately $296.6 million at
December 31, 1994, of which approximately $61.3 million is available for
distribution in 1995 without the permission of state regulatory authorities.
Some states have adopted risk-based capital ("RBC") requirements,
effective December 31, 1993, to evaluate the adequacy of an insurer's statutory
capital and surplus in relation to its investment and insurance risks. The RBC
formula is designed as an early warning tool to help state regulators identify
possible weakly capitalized companies for the purpose of initiating regulatory
action. At December 31, 1994, the ratios of total adjusted capital to RBC, as
defined by the requirements, for both of the Company's primary subsidiaries were
greater than twice the level at which any regulatory attention is triggered.
<PAGE>
Page 43
13. LINES OF BUSINESS:
The Company operates principally in the single business segment of
providing individual life insurance and annuity coverage within the United
States. Within that segment, the significant lines of business are individual
life insurance, annuities and other insurance products (principally individual
and group accident and health insurance and group life insurance). Assets and
related investment income are allocated to the lines of business and to
corporate based on the source of the funds.
Information as to the Company's lines of business is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected, net of reinsurance:
Life.......................................................... $ 55.9 $ 62.0 $ 70.7
Annuities..................................................... 427.6 343.1 503.3
Accident and health and other................................. 38.6 45.9 47.4
-------- --------- --------
Total...................................................... $ 522.1 $ 451.0 $ 621.4
======== ========= ========
Revenues:
Life ......................................................... $ 114.5 $ 138.0 $ 140.6
Annuities..................................................... 317.2 401.9 383.7
Accident and health and other................................. 41.0 51.4 54.1
Corporate..................................................... 11.6 41.2 21.3
-------- --------- --------
Total...................................................... $ 484.3 $ 632.5 $ 599.7
======== ========= ========
Income before income taxes and extraordinary charge:
Life.......................................................... $ 15.9 $ 27.6 $ 25.5
Annuities..................................................... 82.4 113.9 80.7
Accident and health and other................................. 8.7 10.1 9.6
Corporate..................................................... 4.1 38.0 29.2
Interest expense.............................................. (10.7) (16.1) (26.1)
-------- -------- --------
Total ..................................................... $ 100.4 $ 173.5 $ 118.9
======== ======== ========
Assets:
Life.......................................................... $ 869.1 $ 987.9 $ 986.3
Annuities..................................................... 3,846.0 4,037.9 3,666.4
Accident and health and other................................. 75.3 83.9 75.4
Corporate..................................................... 169.9 188.4 128.4
-------- -------- --------
Total...................................................... $4,960.3 $5,298.1 $4,856.5
======== ======== ========
</TABLE>
<PAGE>
Page 44
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Earnings per common share for each quarter are computed independently of
earnings per share for the year. Due to the transactions affecting the weighted
average number of shares outstanding in each quarter and due to the uneven
distribution of earnings during the year, the sum of the quarterly earnings per
share may not equal the earnings per share for the year.
<TABLE>
<CAPTION>
1994
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C>
Insurance policy income............................ $ 30.1 $ 28.1 $ 30.0 $ 26.3
Revenues........................................... 126.8 130.3 116.5 110.7
Income before income taxes and
extraordinary charge........................... 31.7 36.1 19.4 13.2
Net income......................................... 19.1 22.5 12.6 3.9
Earnings per common share before
extraordinary charge........................... $ .71 $ .81 $.46 $.29
Extraordinary charge............................... .05 - - .14
----- ----- ----- ----
Earnings per common share.......................... $ .66 $ .81 $ .46 $.15
===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
1993
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C>
Insurance policy income........................... $ 32.3 $ 30.9 $ 34.3 $ 30.3
Revenues.......................................... 157.3 155.6 156.9 162.7
Income before income taxes ....................... 44.3 40.3 41.9 47.0
Net income........................................ 28.3 26.9 23.3 29.1
Earnings per common share ........................ $ 1.09 $1.03 $ .89 $1.00
</TABLE>
Quarterly results of operations are based on numerous estimates,
principally related to policy reserves, amortization of cost of policies
purchased, amortization of cost of policies produced and income taxes. Such
estimates are revised each quarter and are ultimately adjusted at the end of the
year. When such revisions are determined, they are reported as part of the
operations of the current quarter.
15. SUBSEQUENT EVENTS (UNAUDITED):
On January 3, 1995, the Company announced that its common share
repurchase program had been expanded to 6 million shares. In January and
February of 1995, the Company repurchased approximately 2.2 million of its
common shares for $44.7 million in open market transactions.
Certain annuity policies that were sold by Western National Life
Insurance Company ("WNL"), a former affiliate of the Company, and subsequently
ceded to the Company through a reinsurance agreement, with an accumulated
account balance of approximately $73 million at December 31, 1994, are subject
to a provision whereby they may be recaptured by WNL. WNL informed the Company
in February 1995 that it wished to exercise its option to recapture these
policies. This recapture will transpire upon the establishment of a mutually
agreed upon value of the business.
On March 1, 1995, the Company received a proposal from Conseco under
which Conseco would acquire the outstanding shares of CCP that it does not
currently own for $22.50 per share in cash . Under the proposal, CCP would merge
into Conseco, with Conseco being the surviving corporation. The proposed merger
transaction, which will be evaluated by a special committee of the Company's
independent board members, requires the approval of holders of a majority of the
Company's outstanding shares (other than shares held by Conseco) voting at a
special shareholders' meeting. The special committee has retained independent
counsel and an investment banking firm to advise it on the proposal. On March 9,
1995, Conseco held 11,555,581 shares of CCP, or approximately 49.5 percent of
the common stock outstanding on that date.
<PAGE>
Page 45
CONSECO, INC. AND SUBSIDIARIES
ITEM 7(b). Financial Statements and Exhibit, continued
(b) Pro forma consolidated financial statements of Conseco, Inc. and
subsidiaries.
<PAGE>
Page 46
Conseco, Inc.
Pro Forma Consolidated Balance Sheet
June 30, 1995
(Dollars in millions)
<TABLE>
<CAPTION>
Pro forma
adjustments
reflecting the
purchase of the
Conseco CCP Insurance remaining interest Pro forma
as reported as reported in CCP Insurance totals
----------- ----------- ---------------- ------
<S> <C> <C> <C> <C>
Assets:
Investments:
Actively managed fixed maturities
at fair value $ 8,363.6 $4,002.0 $ - $12,365.6
Equity securities at fair value 41.6 41.6
Mortgage loans 127.9 243.1 (3.0) (1) 368.0
Credit-tenant loans 85.9 153.3 (1.0) (1) 238.2
Policy loans 176.3 136.5 312.8
Investment in CCP Insurance, Inc. 260.0 (260.0) (3) -
Investment in Partnership II - 43.4 (43.4) (4) -
Investment in Bankers Life
Holding Corp. - 25.9 (25.9) (6) -
Other invested assets 57.9 65.0 (32.0) (8) 90.9
Short-term investments 317.9 153.9 .9 (1) 488.1
530.0 (2)
(5.4) (2)
(9.4) (2)
(273.9) (2)
(225.9) (2)
Assets held in separate accounts 90.1 108.9 199.0
-------- -------- ------- --------
Total investments 9,521.2 4,932.0 (349.0) 14,104.2
Accrued investment income 151.7 76.9 (2.1) (4) 226.5
Reinsurance receivables 47.1 38.5 85.6
Income tax assets 22.8 8.4 (5) -
(31.2) (9)
Cost of policies purchased 948.6 189.6 105.0 (1) 1,243.2
Cost of policies produced 267.6 118.1 (60.0) (1) 325.7
Goodwill, net of accumulated amortization 760.6 68.9 43.6 (1) 873.1
Property and equipment, net
of accumulated depreciation 90.8 90.8
Securities segregated for the
future redemption of redeemable
preferred stock of a subsidiary 37.6 37.6
Cash segregated for the retirement
of subordinated debentures of a
subsidiary 15.1 15.1
Other assets 139.7 12.8 152.5
--------- -------- ------- ---------
Total assets $12,002.8 $5,436.8 $(285.3) $17,154.3
========= ======== ======= =========
(continued on following page)
<FN>
The accompanying notes are integral part
of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 47
Conseco, Inc.
Pro Forma Consolidated Balance Sheet, continued
June 30, 1995
(Dollars in millions)
<TABLE>
<CAPTION>
Pro forma
adjustments
reflecting the
purchase of the
Conseco CCP Insurance remaining interest Pro forma
as reported as reported in CCP Insurance totals
----------- ----------- ---------------- ------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $ 8,886.2 $4,351.7 $ .4 (1) $13,238.3
Investment borrowings 270.7 185.7 456.4
Income tax liabilities - 59.8 8.2 (9) 36.8
(31.2)(9)
Other liabilities 370.4 36.6 (.9)(7) 406.1
Liabilities related to separate accounts 90.1 108.9 199.0
Notes payable of Conseco 448.6 295.9 (7) 926.2
(32.0)(8)
213.7 (8)
Notes payable of Partnership II entities,
not direct obligations of Conseco 308.0 308.0
Notes payable of Bankers Life Holding
Corp., not direct obligations of Conseco 272.2 272.2
Notes payable of CCP Insurance, Inc. - 196.9 16.8 (1) -
(213.7)(8)
--------- ------- ------- --------
Total liabilities 10,646.2 4,939.6 257.2 15,843.0
Minority interest 413.2 (34.6)(10) 359.5
(19.1)(6)
Shareholders' equity:
Preferred stock 283.5 283.5
Common stock and additional paid-in
capital 153.3 153.3 (153.3)(11) 153.3
Unrealized appreciation of securities 34.5 29.1 (29.1)(11) 34.5
Retained earnings 472.1 314.8 8.4 (5) 480.5
(314.8)(11)
--------- ------- ------- --------
Total shareholders' equity 943.4 497.2 (488.8) 951.8
--------- ------- ------- --------
Total liabilities and shareholders'
equity $12,002.8 $5,436.8 $(285.3) $17,154.3
========= ======== ======= =========
<FN>
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 48
Conseco, Inc.
Pro Forma Consolidated Statement of Operations
Reflecting the Purchase of the Remaining Interest in CCP Insurance, Inc.
for the six months ended June 30, 1995
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro forma
Conseco adjustments
pro forma reflecting
before the purchase of
purchase of the remaining
remaining interest CCP shares of Pro forma
in CCP (a) as reported CCP totals
--------- ------------ --- ------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 675.8 $ 54.4 $ - $ 730.2
Investment activity:
Net investment income 365.9 194.8 (1.1) (12) 553.2
(4.4) (13)
(2.0) (15)
Net trading income 2.3 3.6 5.9
Net realized gains 59.2 14.8 74.0
Equity in earnings of CCP Insurance, Inc. 15.5 (15.5) (14) -
Fee revenue 21.2 21.2
Other income 6.2 6.2
-------- ------ ------ --------
Total revenues 1,146.1 267.6 (23.0) 1,390.7
-------- ------ ------ --------
Benefits and expenses:
Insurance policy benefits 507.4 38.7 546.1
Change in future policy benefits 14.7 (2.5) 12.2
Interest expense on annuities and financial products 176.2 106.3 282.5
Interest expense on notes payable 48.3 10.5 11.9 (18) 70.0
(.7) (20)
Interest expense on investment borrowings 7.8 5.7 13.5
Amortization related to operations 85.1 18.7 1.1 (17) 104.9
Amortization related to realized gains 34.7 8.2 42.9
Other operating costs and expenses 113.1 25.2 138.3
------- ------ ------ --------
Total benefits and expenses 987.3 210.8 12.3 1,210.4
------- ------ ------ --------
Income before income taxes and minority interest 158.8 56.8 (35.3) 180.3
Income tax expense 57.3 20.5 (8.0) (21) 69.8
------- ------ ------ --------
Income before minority interest 101.5 36.3 (27.3) 110.5
Minority interest 34.9 (2.3) (22) 32.6
------- ------ ------ --------
Net income $ 66.6 $ 36.3 $(25.0) $ 77.9
======= ====== ====== ========
<FN>
(a) Amounts have been carried forward from page 50.
(continued on following page)
The accompanying notes are integral part
of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 49
Conseco, Inc.
Pro Forma Consolidated Statement of Operations, continued
Reflecting the Purchase of the Remaining Interest in CCP Insurance, Inc.
for the six months ended June 30, 1995
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro forma
Conseco adjustments
pro forma reflecting
before the purchase of
purchase of the remaining
remaining interest CCP shares of Pro forma
in CCP (a) as reported CCP totals
---------- ----------- --- ------
<S> <C> <C>
Net income per common share and common equivalent share:
Primary:
Weighted average shares 21,576,000 21,576,000
========== ==========
Net income $2.66 $3.18
===== =====
Fully diluted:
Weighted average shares 26,029,000 26,029,000
========== ==========
Net income $2.56 $3.00
===== =====
<FN>
(a) Amounts have been carried forward from page 51.
The accompanying notes are in integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 50
Conseco, Inc.
Pro Forma Consolidated Statement of Operations
Reflecting Transactions Prior to the Purchase of the Remaining
Interest in CCP Insurance, Inc.
for the six months ended June 30, 1995
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro forma Conseco
adjustments pro forma
reflecting before the
additional purchase of
Conseco ownership remaining interest
as reported of BLH in CCP (a)
----------- ------ ----------
<S> <C> <C> <C>
Revenues:
Insurance policy income $ 675.9 $ (0.1) (25) $ 675.8
Investment activity:
Net investment income 366.0 (0.1) (25) 365.9
Net trading income 2.3 2.3
Net realized gains 59.6 (0.4) (25) 59.2
Equity in earnings of CCP Insurance, Inc. 15.5 15.5
Fee revenue 21.2 21.2
Other income 6.2 6.2
-------- ----- --------
Total revenues 1,146.7 (0.6) 1,146.1
-------- ----- --------
Benefits and expenses:
Insurance policy benefits 507.4 507.4
Change in future policy benefits 15.7 (1.0) (25) 14.7
Interest expense on annuities and financial products 176.2 176.2
Interest expense on notes payable 41.9 (0.7) (25) 48.3
7.1 (24)
Interest expense on investment borrowings 7.8 7.8
Amortization related to operations 85.5 (0.4) (25) 85.1
Amortization related to realized gains 35.1 (0.4) (25) 34.7
Other operating costs and expenses 110.9 2.2 (25) 113.1
-------- ----- --------
Total benefits and expenses 980.5 6.8 987.3
-------- ----- --------
Income before income taxes and minority interest 166.2 (7.4) 158.8
Income tax expense (benefit) (7.3) 66.5 (26) 57.3
(1.9) (27)
-------- ----- -------
Income before minority interest 173.5 (72.0) 101.5
Minority interest 49.2 (14.3) (25) 34.9
-------- ----- -------
Net income $ 124.3 $(57.7) $ 66.6
======== ===== =======
<FN>
(a) Amounts are carried forward to page 48.
(continued on following page)
The accompanying notes are integral part
of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 51
Conseco, Inc.
Pro Forma Consolidated Statement of Operations, continued
Reflecting Transactions Prior to the Purchase of the
Remaining Interest in CCP Insurance, Inc.
for the six months ended June 30, 1995
(Dollars in millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Pro forma Conseco
adjustments pro forma
reflecting before the
additional purchase of
Conseco ownership remaining interest
as reported of BLH in CCP (a)
----------- ------ ----------
<S> <C> <C>
Net income per common share and common equivalent share:
Primary:
Weighted average shares 21,576,000 21,576,000
========== ==========
Net income $5.33 $2.66
===== =====
Fully diluted:
Weighted average shares 26,029,000 26,029,000
========== ==========
Net income $4.78 $2.56
===== =====
<FN>
(a) Amounts are carried forward to page 49.
The accompanying notes are integral part
of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 52
Conseco, Inc.
Pro Forma Consolidated Statement of Operations
Reflecting the Purchase of the Remaining Interest in CCP Insurance, Inc.
Year ended December 31, 1994
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Conseco Pro forma
pro forma adjustments
before the reflecting the
purchase of the purchase of the
remaining interest CCP remaining interest Pro forma
in CCP (a) as reported in CCP totals
---------- ----------- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,325.3 $114.5 $ - $1,439.8
Investment activity:
Net investment income 647.0 367.8 (.5) (12) 1,009.2
(1.1) (13)
(4.0) (15)
Net trading losses (4.9) (0.9) (5.8)
Net realized gains (losses) (47.1) 2.9 (44.2)
Fee revenue 51.2 51.2
Equity in earnings of CCP Insurance, Inc. 24.5 (24.5) (14) -
Other income 21.8 21.8
-------- ------ ----- --------
Total revenues 2,017.8 484.3 (30.1) 2,472.0
-------- ------ ----- --------
Benefits and expenses:
Insurance policy benefits 932.1 75.7 1,007.8
Change in future policy benefits 48.9 0.1 49.0
Interest expense on annuities and financial products 299.5 208.6 3.0 (16) 511.1
Interest expense on notes payable 96.8 10.7 23.7 (18) 142.1
12.2 (19)
(1.3) (20)
Interest expense on investment borrowings 7.7 5.2 12.9
Amortization related to operations 167.1 25.3 (1.0) (17) 191.4
Amortization related to realized gains and losses (2.5) 3.7 1.2
Expenses in conjunction with terminated acquisition 35.8 35.8
Other operating costs and expenses 242.9 54.6 297.5
-------- ------ ------ --------
Total benefits and expenses 1,828.3 383.9 36.6 2,248.8
-------- ------ ------ --------
Income before taxes, minority interest and
extraordinary charge 189.5 100.4 (66.7) 223.2
Income tax expense 66.8 37.4 (15.5) (21) 88.7
-------- ------ ------ --------
Income before minority interest and extraordinary
charge 122.7 63.0 (51.2) 134.5
Minority interest 32.4 (.7) (22) 31.7
-------- ------ ------ --------
Income before extraordinary charge $ 90.3 $ 63.0 $ (50.5) $ 102.8
======== ====== ======= ========
<FN>
(a) Amounts have been carried forward from page 54.
(continued on following page)
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 53
Conseco, Inc.
Pro Forma Consolidated Statement of Operations, continued
Reflecting the Purchase of the Remaining Interest in CCP Insurance, Inc.
Year ended December 31, 1994
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Conseco Pro forma
pro forma adjustments
before the reflecting the
purchase of the purchase of the
remaining interest CCP remaining interest Pro forma
in CCP (a) as reported in CCP totals
--------- ------------ ------ ------
<S> <C> <C>
Income before extraordinary charge per common
share and common equivalent share:
Primary:
Weighted average shares ............................. 21,185,000 21,185,000
=========== ===========
Income before extraordinary charge ................. $3.38 $3.97
===== =====
Fully diluted:
Weighted average shares ............................. 25,636,000 25,636,000
========== ==========
Income before extraordinary charge .................. $3.38 $3.97
==== =====
<FN>
(a) Amounts have been carried forward from page 55.
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 54
<TABLE>
<CAPTION>
Conseco, Inc.
Pro Forma Consolidated Statement of Operations
Reflecting Transactions Prior to the Purchase of the Remaining Interest
in CCP Insurance, Inc.
Year ended December 31, 1994
(Dollars in millions, except per share amounts)
Conseco
Pro forma pro forma
AGP Pro forma adjustments before the
Pro forma as reported adjustments reflecting purchase of
adjustments (for the nine reflecting the additional remaining
Conseco reflecting the months ended purchase of ownership interest in
as reported sale of WNC 9/30/94) AGP of BLH CCP (a)
----------- ----------- -------- --- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income ................... $ 1,285.6 $ -- $ 40.2 $ (0.3)(29) $ (0.2)(25) $ 1,325.3
Investment activity:
Net investment income ................... 385.7 248.0 16.4 (30) (1.4)(25) 647.0
(0.8)(30) (.9)(23)
Net trading losses ...................... (4.9) (4.9)
Net realized losses ..................... (25.6) (16.8) (4.7)(25) (47.1)
Fee revenue .................................. 58.0 (6.8)(42) 51.2
Equity in earnings of Western National
Corporation ............................... 40.2 (40.2)(39) --
Equity in earnings of CCP Insurance, Inc. .... 24.7 (.2)(30) 24.5
Restructuring income ......................... 80.8 (80.8)(40) --
Other income ................................. 17.5 4.3 21.8
---------- ------- ------- ------ ----- --------
Total revenues .......................... 1,862.0 (127.8) 275.7 15.1 (7.2) 2,017.8
---------- ------- ------- ------ ----- --------
Benefits and expenses:
Insurance policy benefits ................. 915.4 16.7 932.1
Change in future policy benefits .......... 42.6 9.4 (3.1)(25) 48.9
Interest expense on annuities and financial
products ................................ 134.7 158.8 6.0 (29) 299.5
Interest expense on notes payable ......... 59.3 (3.3)(41) 6.7 17.6 (31) (0.7)(25) 96.8
17.2 (24)
Interest expense on investment borrowings 7.7 7.7
Amortization related to operations ........ 133.3 29.7 (6.8)(28) 4.0 (25) 167.1
6.9 (32)
Amortization related to realized gains
and losses .............................. (5.3) 2.8 (2.5)
Expenses in conjunction with terminated
acquisition ............................. 35.8 35.8
Other operating costs and expenses ........ 214.1 33.0 (7.2)(33) 3.0 (25) 242.9
---------- ------- ------- ------ ----- --------
Total benefits and expenses ............. 1,537.6 (3.3) 257.1 16.5 20.4 1,828.3
---------- ------- ------- ------ ----- --------
Income before taxes, minority interest
and extraordinary charge .............. 324.4 (124.5) 18.6 (1.4) (27.6) 189.5
Income tax expense ........................... 111.0 (37.0)(43) 6.7 .4 (34) (14.3)(27) 66.8
---------- ------- ------- ------ ----- --------
Income before minority interest
and extraordinary charge .............. 213.4 (87.5) 11.9 (1.8) (13.3) 122.7
Minority interest ............................ 59.0 6.7 (1.1)(35) (35.7)(25) 32.4
2.5 (36)
(1.4)(37)
2.4 (38)
---------- ------- ------- ------ ----- --------
Income before extraordinary charge ...... $ 154.4 $ (87.5) $ 5.2 $ (4.2) $22.4 $ 90.3
========== ======= ======= ====== ===== ========
<FN>
(a) Amounts have been carried forward to page 52.
(continued on following page)
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 55
<TABLE>
<CAPTION>
Conseco, Inc.
Pro Forma Consolidated Statement of Operations, continued
Reflecting Transactions Prior to the Purchase of the Remaining Interest
in CCP Insurance, Inc.
Year ended December 31, 1994
(Dollars in millions, except per share amounts)
Conseco
Pro forma pro forma
AGP Pro forma adjustments before the
Pro forma as reported adjustments reflecting purchase of
adjustments (for the nine reflecting the additional remaining
Conseco reflecting the months ended purchase of ownership interest in
as reported sale of WNC 9/30/94) AGP of BLH CCP (a)
----------- ----------- -------- --- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income before extraordinary charge
per common share and common
equivalent share:
Primary:
Weighted average shares 26,348,000 (5,163,000)(44) 21,185,000
========== ========== ==========
Income before extraordinary
charge $5.15 $3.38
===== =====
Fully diluted:
Weighted average shares 30,859,000 (5,223,000)(44) 25,636,000
========== ========== ==========
Income before extraordinary
charge $5.00 $3.38
===== =====
<FN>
(a) Amounts have been carried forward to page 53.
The accompanying notes are an integral
part of the pro forma consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
Page 56
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The unaudited pro forma consolidated statement of operations for the year
ended December 31, 1994, of Conseco, Inc. ("Conseco" or the "Company") is
presented as if the following transactions had all occurred on January 1, 1994:
(i) the acquisition of all of the outstanding common stock of CCP Insurance,
Inc. ("CCP"), not owned by Conseco and related transactions (including the
repayment of the existing $251.0 million revolving credit agreement); (ii) the
increase of Conseco's ownership of Bankers Life Holding Corporation ("BLH") to
82 percent (85 percent including shares of BLH owned by CCP), as a result of
purchases of common shares of BLH in open market and negotiated transactions
during the first six months of 1995; (iii) the Acquisition (the "Acquisition")
of American Life Group, Inc. ("AGP") (formerly The Statesman Group, Inc.) by
Conseco Capital Partners II, L.P. ("Partnership II"); (iv) the initial public
offering of Western National Corporation ("WNC"); and (v) the sale of Conseco's
remaining 40 percent equity interest in WNC. The unaudited pro forma
consolidated statement of operations for the six months ended June 30, 1995, is
presented as if the following transactions had occurred on January 1, 1994: (i)
the acquisition of all of the outstanding common stock of CCP not owned by
Conseco and related transactions; and (ii) the increase of Conseco's ownership
of BLH to 82 percent as a result of purchases of common stock of BLH in open
market and negotiated transactions during the first six months of 1995.
The unaudited pro forma consolidated balance sheet of Conseco is presented
as if the acquisition of all of the outstanding common stock of CCP not owned by
Conseco had occurred on June 30, 1995.
The pro forma consolidated financial statements are based on the historical
financial statements of Conseco, CCP, BLH, AGP and WNC and should be read in
conjunction with their respective financial statements and notes. The pro forma
data are not necessarily indicative of the results of operations or financial
condition of Conseco had those transactions occurred on January 1, 1994, 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.
PRO FORMA ADJUSTMENTS
Transactions relating to the acquisition of all of the outstanding common
stock of CCP
Effective August 31, 1995, Conseco acquired all of the common stock of CCP,
not owned by Conseco, in a transaction pursuant to which CCP was merged with and
into Conseco, with Conseco being the surviving corporation. In the transaction,
CCP's former shareholders, other than Conseco, received $23.25 in cash per
common share. This transaction and the related financing transaction are
referred to herein as the "CCP Merger Transaction." Conseco entered into a
credit agreement (the "Conseco Credit Facility") to finance the CCP Merger
Transaction. Hereinafter "CCP" refers to CCP or the former subsidiaries of CCP
which are wholly owned subsidiaries of Conseco after the CCP Merger Transaction.
The sources and uses of the financing to complete the CCP Merger
Transaction are summarized below (dollars in millions):
<TABLE>
<S> <C>
Sources of funds:
Conseco Credit Facility ...................................................... $ 530.0
Cash on hand ................................................................. 9.7
--------
Total sources ............................................................. $ 539.7
========
Uses of funds:
Purchase of all outstanding common stock of
CCP, not owned by Conseco ................................................. $ 273.9
Settlement of outstanding stock options of CCP ............................... 5.4
Repayment of revolving credit facility of Conseco ............................ 251.0 (i)
Debt issuance and other transaction costs .................................... 9.4
--------
Total uses ................................................................ $ 539.7
========
<FN>
(i) Conseco was the borrower under a revolving credit facility with an
outstanding balance of $225.9 million (including accrued interest of $.9
million) at June 30, 1995. The outstanding balance under this facility
(which totaled $251.0 million, including accrued interest, on the date of
acquisition) was repaid with a portion of the proceeds from the financing.
</FN>
</TABLE>
<PAGE>
Page 57
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The pro forma adjustments are applied to the historical consolidated
financial statements of Conseco and CCP using the step acquisition method of
accounting. Under this method, the total purchase cost of the common stock of
CCP not already owned by Conseco 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 total
purchase cost of the ownership interests in CCP acquired by Conseco in previous
acquisitions was allocated to the assets and liabilities acquired based on the
relative fair values as of the dates of their respective acquisitions.
Therefore, the values of the assets and liabilities of CCP included in Conseco's
pro forma consolidated financial statements represent the combination of the
following values: (i) the portion of CCP's net assets acquired by Conseco in the
initial acquisitions of CCP's subsidiaries made by Conseco Capital Partners,
L.P. is valued as of those respective acquisition dates; and (ii) the portion of
CCP's net assets acquired in the CCP Merger Transaction is valued as of the
assumed date of acquisition.
The cost allocations for the most recent purchase are based on: (i) the
values of the assets and liabilities acquired as of the purchase date; and (ii)
appraisals and other studies, which are not yet completed. Accordingly, the
final allocations will be different from the amounts included in the
accompanying pro forma consolidated financial statements. Although the final
allocations will differ, the pro forma consolidated financial statements reflect
management's best estimate based on currently available information as if the
CCP Merger Transaction had occurred on the assumed date of acquisition.
Adjustments to give effect to the CCP Merger Transaction are
summarized below:
(1) Mortgage loans, credit-tenant loans, short-term investments, cost of
policies purchased, cost of policies produced, goodwill, insurance
liabilities and notes payable of CCP are adjusted to reflect the step
acquisition method of accounting as if Conseco's purchase of the
common stock of CCP not owned by Conseco was completed on June 30,
1995. Such adjustments reflect the interest rate environment which
existed on the date of the CCP Merger Transaction.
(2) Short-term investments are adjusted to reflect the sources and uses
of cash to complete the CCP Merger Transaction described in the
previous table.
(3) Conseco's investment in CCP had been reflected in Conseco's
historical consolidated balance sheet on the equity method. After the
CCP Merger Transaction, CCP is a wholly owned consolidated subsidiary
of Conseco.
(4) CCP's investment in Partnership II had been reflected in CCP's
historical consolidated balance sheet on the equity method. Such
investment and the accrued dividends on preferred stock of AGP are
eliminated in the pro forma consolidated balance sheet since
Partnership II is a consolidated subsidiary of Conseco.
(5) The deferred income tax liability account is reduced and retained
earnings is increased as a result of the release of amounts
previously accrued on income related to Conseco's investment in CCP.
Such deferred taxes are no longer required because the CCP Merger
Transaction was completed without incurring additional tax.
(6) CCP's investment in BLH is eliminated because BLH is a consolidated
subsidiary of Conseco. In addition, minority interest is adjusted to
reflect Conseco's increased ownership interest in BLH as a result of
the purchase of additional shares of CCP not owned by Conseco.
(7) Notes payable of Conseco are increased to reflect borrowings under
the Conseco Credit Facility (net of debt issuance costs) used to fund
the CCP Merger Transaction, partially offset by the repayment of the
revolving credit agreement of Conseco. Other liabilities are
decreased to reflect the payment of accrued interest on the revolving
credit agreement of Conseco which was repaid in connection with the
CCP Merger Transaction.
(8) After the CCP Merger Transaction, notes payable of CCP will become
direct obligations of Conseco. In addition, a note payable of $32.0
million due from Conseco to CCP is eliminated.
(9) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. In addition, the deferred tax
liabilities of CCP are netted against the deferred tax assets of
Conseco.
<PAGE>
Page 58
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(10) The minority interest account is adjusted to reflect Conseco's
increased ownership interest in AGP as a result of the purchase of
additional shares of CCP.
(11) The shareholders' equity accounts of CCP are eliminated when
consolidated with the accounts of Conseco.
(12) Net investment income is reduced to reflect the reduction in
short-term investments for cash used to complete the CCP Merger
Transaction and for the purchase of CCP's common stock by CCP in 1994
and 1995 (in excess of amounts available to purchase such stock from
the proceeds of the senior notes issued in December 1994) as if such
transactions were completed on January 1, 1994.
(13) CCP's investment in Partnership II is reflected in CCP's historical
financial statements on the equity method. CCP's equity in earnings
of Partnership II and the dividends on the AGP preferred stock held
by CCP are eliminated in the pro forma consolidated statement of
operations because Partnership II is a consolidated subsidiary of
Conseco.
(14) Conseco's equity in CCP's earnings before the CCP Merger Transaction
had been included in Conseco's historical consolidated statement of
operations on the equity method of accounting, because Conseco's
interest was significant, but Conseco did not unilaterally control
CCP's operations. After the CCP Merger Transaction, Conseco owns all
of CCP and, accordingly, the pro forma consolidated statements of
operations reflect Conseco's ownership in CCP on a consolidated
basis, as if the CCP Merger Transaction had occurred on January 1,
1994.
(15) Net investment income related to the ownership acquired in the CCP
Merger Transaction is adjusted to include the effect of adjustments
to the: (i) amortized cost basis of fixed maturity investments; (ii)
mortgage loan investments; (iii) credit- tenant loans; and (iv)
short-term investments to their estimated fair value as of January 1,
1994, reflecting the interest rate environment which existed at the
date of the CCP Merger Transaction.
(16) The bonus rate interest credited to annuities during the bonus rate
period related to the ownership interest acquired in the CCP Merger
Transaction, was deferred as cost of policies produced prior to the
CCP Merger Transaction. Amounts deferred are recognized as expense,
since these amounts are considered in determining the adjustment to
the cost of policies purchased and the amortization thereof.
(17) The amortization of cost of policies produced related to the
ownership interest acquired in the CCP Merger Transaction is replaced
with the amortization of the cost of policies purchased (amortized in
relation to estimated profits on the policies purchased with interest
equal to the liability or contract rates averaging approximately 5.5
percent). Such adjustment reflects the interest rate environment
which existed at the date of the CCP Merger Transaction.
(18) Interest expense is increased to reflect the borrowings made under
the Conseco Credit Facility at an interest rate of 7.5 percent,
partially offset by a reduction in interest expense due to the
repayment of the revolving credit agreement of Conseco. Interest
expense also reflects the amortization of debt issuance costs.
A change in interest rates on the Conseco Credit Facility of .5
percent would result in: (i) an increase (or decrease) in pro forma
interest expense of $1.3 million for the six months ended June 30,
1995, and $2.7 million for the year ended December 31, 1994, and (ii)
a decrease (or increase) in pro forma net income of $.9 million and
$1.7 million for the same respective periods.
(19) Interest expense is adjusted to reflect the following as if each had
occurred on January 1, 1994: (i) the issuance of CCP's 10 1/2% senior
notes in December 1994; and (ii) the repayment of the outstanding
principal balance of CCP's senior term loan using such proceeds. The
remaining proceeds from the notes are assumed to have been used for
purchases of CCP's common stock by CCP.
(20) Interest expense on notes payable of CCP is adjusted to reflect the
interest rate environment which existed at the date of the CCP Merger
Transaction.
(21) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item.
<PAGE>
Page 59
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(22) Minority interest is adjusted to reflect Conseco's increased interest
in AGP as a result of the purchase of additional shares of CCP not
owned by Conseco.
Transactions relating to acquisition of additional shares of BLH
During the first six months of 1995, Conseco purchased 12.8 million common
shares of BLH for $262.4 million in open market and negotiated transactions. The
shares purchased represented 24 percent of the outstanding shares of BLH common
stock, increasing Conseco's ownership of BLH to 82 percent (85 percent including
shares of BLH owned by CCP). The acquisition was funded with available cash,
proceeds from revolving credit agreements and a $32.0 million loan from CCP. The
acquisition was accounted for using the step acquisition method of accounting.
Under this method, the total purchase cost of the common stock acquired by
Conseco was 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 total purchase cost of the
ownership interest in BLH acquired by Conseco in previous acquisitions was
allocated to those assets and liabilities acquired based on their relative fair
values as of the dates of the respective acquisitions. Therefore, the values of
the assets and liabilities of BLH included in Conseco's historical consolidated
financial statements represent the combination of the following values: (i) the
portion of BLH's net assets acquired by Conseco in the initial acquisition made
by Conseco Capital Partners, L.P. on October 31, 1992, is valued as of that
acquisition date; (ii) the portion of BLH's net assets acquired by Conseco on
September 30, 1993, is valued as of that acquisition date; (iii) the portion of
BLH's net assets acquired during 1995 is valued as of the date of their purchase
(June 30, 1995, for accounting convenience); and (iv) the portion of BLH's net
assets owned by minority interests is valued based on a combination of (i) above
and the historical bases of the net assets acquired in the initial acquisition
in 1992.
(23) Net investment income is reduced to reflect the reduction in
short-term investments as if purchases of BLH common stock purchased
by BLH and Conseco during the period January 1, 1994, through June
30, 1995, were completed on January 1, 1994.
(24) Interest expense on notes payable is adjusted to reflect the funds
used to purchase the additional common shares of BLH.
(25) As described above, the purchase of additional shares of BLH is
accounted for as a step acquisition. The accounts for BLH are
adjusted to reflect the step acquisition method of accounting as if
purchases of BLH's common stock during 1994 and 1995 were completed
on January 1, 1994.
(26) The tax benefit of $66.5 million recognized as a result of the
release of deferred tax previously accrued on income related to BLH
is eliminated.
(27) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item. In addition, tax expense is adjusted to
reflect the reduction in tax expense as a result of Conseco's
increased ownership of BLH.
Transactions Relating to the Acquisition of AGP
On September 29, 1994, Partnership II, a Delaware limited partnership,
completed the Acquisition of AGP. After the Acquisition and related financing
transactions, Partnership II owns approximately 80 percent of the outstanding
shares of AGP's common stock. Conseco formed Partnership 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 Partnership II. Because a subsidiary of
Conseco is the sole general partner of Partnership II, Conseco controls
Partnership II and AGP. Accordingly, Conseco's consolidated financial statements
include the accounts of Partnership II and AGP. Conseco, through its direct
investment and through its equity interest in the investments made by BLH and
CCP has a 28 percent ownership interest in AGP at June 30, 1995. The remaining
72 percent ownership interest in AGP is described as the "AGP Minority
Interest." The Acquisition is further described in Conseco's Form 10-K for the
year ended December 31, 1994.
The pro forma adjustments are applied to the historical consolidated
statements of operations of Conseco and AGP to account for the Acquisition using
the purchase method of accounting as if the Acquisition had occurred on January
1, 1994. Under purchase accounting, the total purchase cost of AGP was allocated
to the assets and liabilities acquired based on their fair values as of the date
of acquisition.
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Adjustments to give effect to the Acquisition and related transactions are
summarized as follows:
(28) Pro forma adjustments are made to the amortization of the cost of
policies produced recognized in the period prior to the Acquisition.
The amortization related to policies sold prior to January 1, 1994,
is replaced with the amortization of the 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 percent to 8.2 percent and averaging 5.5 percent). Such
adjustment reflects the interest rate environment which existed on
the date of the Acquisition.
(29) The bonus interest credited to annuities during the bonus interest
rate period was deferred as cost of policies produced in the period
prior to the Acquisition. Amounts deferred related to policies sold
prior to January 1, 1994, are recognized as expense, since these
amounts are considered in determining the cost of policies purchased
and the amortization thereof.
Additionally, the recognition of certain deferred policy charges (net
of deferred policy charges collected) is eliminated, since these
amounts are also considered in determining the cost of policies
purchased and the amortization thereof.
(30) Net investment income for the period prior to the Acquisition is
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 their estimated fair value as of
January 1, 1994, reflecting the interest rate environment which
existed at the Acquisition date.
In addition, net investment income is reduced to reflect the
reduction in short-term investments in connection with the purchase
of investments in Partnership II and the payment-in-kind preferred
stock of AGP (the "AGP PIK Preferred Stock") by Conseco and its
consolidated subsidiaries. Additionally, equity in earnings of CCP is
reduced to reflect the reduction in net investment income as a result
of its investment in Partnership II and the AGP PIK Preferred Stock.
No additional investment income is assumed to be earned on the
approximately $13.6 million of cash retained from the proceeds of the
Acquisition financing after payment of the costs of the Acquisition
and related transactions.
No pro forma adjustment has been made for realized losses recognized
on interest rate swap contracts during the nine months ended
September 30, 1994 (comprising the majority of realized gains
(losses) for such period). AGP's current investment strategy does not
include investments in such contracts. If the Acquisition had
occurred on January 1, 1994, these contracts would have been
terminated at or about that date and the loss on such termination
would have been insignificant.
(31) Interest expense for the period prior to the Acquisition is adjusted
to reflect the financing transactions related to the Acquisition as
if they occurred as of the assumed date of the Acquisition. Such
interest expense reflects the interest rate environment which existed
at the Acquisition date.
(32) Amortization of goodwill is recognized over a 40-year period on a
straight-line basis. Amortization of goodwill for the period prior to
the Acquisition has been calculated based on the goodwill determined
at the Acquisition date.
(33) Other operating costs and expenses are reduced to eliminate the
merger costs incurred by AGP during the year ended December 31, 1994,
in connection with the Acquisition. Such amounts include, but are not
limited to, compensation expense recognized upon the cash redemption
by AGP of certain unexercised stock options and stock appreciation
rights.
(34) All applicable pro forma adjustments to operations are tax effected
at the appropriate rate.
(35) The deduction for the minority interests' share in the earnings of
AGP is recognized.
(36) In accordance with the Partnership II partnership agreement, Conseco
received fees for services provided related primarily to the
acquisition financing. Such amounts were capitalized as debt issue
costs by AGP. Accordingly, the fees resulting from these transactions
are eliminated in consolidation. Minority interest, however, is
adjusted for its portion of such fees.
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(37) After the Acquisition, investment advisory services are provided to
AGP by a subsidiary of Conseco. AGP'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 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.
(38) All investors in the AGP PIK Preferred Stock, other than BLH and CCP
to the extent of Conseco's interest therein, have approximately a 44
percent ownership interest in such AGP PIK Preferred Stock (the "AGP
PIK Preferred Minority Interest"). Income is reduced to reflect the
dividends accrued on the AGP PIK Preferred Stock attributable to the
AGP PIK Preferred Minority Interest.
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.
The shares issued in the offering and the related transaction represented a
60 percent interest in WNC. The remaining common shares, which represented a 40
percent interest, were 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. Conseco recognized a gain of approximately $42.4 million,
net of taxes of $22.9 million, as a result of these transactions.
On December 23, 1994, Conseco completed the sale of its remaining 40
percent equity interest in WNC to American General Corporation for $274.4
million in cash, or $11.00 for each of the 24,947,500 WNC shares owned by
Conseco. Conseco recognized a gain from the sale of approximately $4.1 million,
net of taxes of $11.4 million. Net cash proceeds from the sale were used for
general corporate purposes, including repurchases of Conseco common stock.
In connection with the sale of Conseco's remaining 40 percent equity
interest in WNC, Conseco agreed to a number of revisions to its insurance
services agreement with WNC. The revisions include a reduction, effective
January 1, 1995, in the investment services management fees charged to WNC from
the current blended effective rate of 18 basis points to a flat rate of 10 basis
points annually, which is the rate currently applicable to assets over $5
billion. The revisions also permit the termination of the insurance services
agreement as early as July 1996, without penalty, as opposed to the prior
10-year agreement, which was terminable after five years with penalty.
Adjustments to give effect to the sale of common stock of WNC by Conseco
and related transactions are summarized as follows:
(39) Equity in earnings of WNC is eliminated as a result of the sale of
common shares of WNC by Conseco. No investment income has been
assumed to be earned on the cash proceeds from the sale of WNC
shares.
(40) The restructuring income from the sales of common shares of WNC by
Conseco is eliminated.
(41) Interest expense is reduced to reflect the repayment of the $200
million senior unsecured loan using the proceeds from the WNC IPO.
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(42) Fee revenue is adjusted to reflect a reduction in investment services
management fees charged to WNC as if the revisions to the insurance
services agreement had occurred as of January 1, 1994.
(43) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
(44) Conseco repurchased approximately 7 million shares of its common
stock in 1994 in connection with its stock repurchase program. A
portion of the proceeds from the sale of WNC was used to either: (i)
pay debt incurred to finance the repurchases; or (ii) directly
repurchase shares.
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CONSECO, INC. AND SUBSIDIARIES
ITEM 7(c). EXHIBIT.
(c) Exhibit
2.1 Agreement and Plan of Merger dated as of May 19, 1995.*
The Credit Agreement obtained by Conseco as described in
Item 2 has been omitted as an exhibit to the Form 8-K,
pursuant to Item 601(b)(4)(iii) of Regulation S-K,
because the total amount of the Credit Agreement is less
than 10 percent of the total assets of the Registrant and
its subsidiaries on a consolidated basis. The Registrant
hereby undertakes to furnish copies of such documents to
the Commission upon request.
* Previously filed with Form 8-K dated August 31, 1995.
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Page 64
CONSECO, INC. AND SUBSIDIARIES
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.
Date: November 13, 1995
CONSECO, INC.
By: /s/ ROLLIN M. DICK
--------------------
Rollin M. Dick
Executive Vice President
and Chief Financial Officer
