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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[ X ] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1994 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 [Fee Required]
For the transition period from to
Commission file number: 1-9250
Conseco, Inc.
Indiana No. 35-1468632
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State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
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Address of principal executive offices Telephone
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value New York Stock Exchange, Inc.
8-1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
3.25 Series D Cumulative
Convertible Preferred Stock New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days: Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of common stock held by nonaffiliates
(computed as of March 7, 1995): $744,663,522
Shares of common stock outstanding as of March 7, 1995:
20,194,265
DOCUMENTS INCORPORATED BY REFERENCE: The Registrant's definitive
proxy statement for the annual meeting of shareholders to be held
May 30, 1995 is incorporated by reference into Part III of this
Report.
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PART I
ITEM 1. BUSINESS OF CONSECO.
Background
Conseco, Inc. ("Conseco" or the "Company") is a holding
company which owns, operates and provides services to companies
in the financial services industry (primarily life insurance
companies to date). Historically, Conseco's earnings have
resulted from: (i) operating life insurance companies and other
financial services businesses; (ii) providing investment
management, administrative and other fee-based services to
affiliated businesses as well as non-affiliates; and (iii)
acquiring and restructuring life insurance companies in partnership
with other investors. Conseco's operating strategy for acquired
businesses is to consolidate and streamline management and
administrative functions, to realize superior investment returns
through active asset management, to eliminate unprofitable products
and distribution channels and to focus resources on the development
and expansion of profitable products and strong distribution
channels. The companies Conseco targets for acquisition have
profitable niche products, strong distribution systems and
progressive management teams who can work with Conseco to implement
Conseco's operating and growth strategies. The insurance companies
in which Conseco has made investments develop, market, issue and
administer primarily annuity, individual health insurance and life
insurance products.
Conseco was organized in 1979 as an Indiana corporation
and commenced operations in 1982. Its executive offices are
located at 11825 N. Pennsylvania Street, Carmel, Indiana 46032, and
its telephone number is (317) 817-6100. Since Conseco commenced
operations in 1982, it has completed 12 acquisitions of insurance
companies and related businesses, the first seven as wholly owned
subsidiaries and the last five through its acquisition
partnerships. Conseco Capital Partners, L.P. ("Partnership I"),
Conseco's first acquisition partnership, was dissolved in 1993
after distributing to its partners the securities of the companies
it had acquired. In early 1994, Conseco formed Conseco Capital
Partners II, L.P. ("Partnership II"), its second acquisition
partnership, to invest in acquisitions of life insurance companies
and related businesses. A wholly owned subsidiary of Conseco is
the sole general partner of Partnership II, as was the case with
Partnership I.
Conseco currently holds major ownership interests in the
following life insurance businesses: (i) Bankers Life Holding
Corporation ("BLH"), an NYSE-listed company in which Conseco
currently holds a 60 percent ownership interest (and which is the
parent company of Bankers Life and Casualty Insurance Company
("Bankers Life")); (ii) CCP Insurance, Inc. ("CCP"), an NYSE-listed
company in which Conseco currently holds a 49 percent ownership
interest; (iii) The Statesman Group, Inc. ("Statesman"),
Partnership II's first acquisition in September 1994, in which
Conseco holds a 25 percent ownership interest through its direct
investment and through its equity interests in BLH and CCP; and
(iv) Bankers National Life Insurance Company ("Bankers
National"),National Fidelity Life Insurance Company ("National
Fidelity") and Lincoln American Life Insurance Company ("Lincoln
American"),all of which are wholly owned by Conseco and which have
profitable blocks of in-force business, although new sales are
currently not being pursued. BLH and its subsidiaries are
collectively referred to hereinafter as BLH. Western National
Corporation ("WNC"), an NYSE-listed company, and its wholly owned
subsidiary, Western National Life Insurance Company ( Western
National"), were wholly owned subsidiaries until February 15, 1994,
when WNC completed an initial public offering ("IPO"). Conseco
sold a 60 percent interest in WNC in connection with the IPO and
sold its remaining 40 percent interest in a separate transaction on
December 23, 1994. WNC and its subsidiaries are collectively
referred to hereinafter as WNC.
On February 27, 1995, Conseco announced that its Board of
Directors had approved proposals to acquire, in separate
transactions, the outstanding shares of CCP and BLH that Conseco
does not currently own. Under the proposals, CCP and BLH would
merge into Conseco, with Conseco being the surviving corporation.
Under the proposals, each holder of the CCP shares, other than
Conseco, would receive $22.50 per share in cash, and each holder of
the BLH shares, other than Conseco, would receive $22.00 per
share in cash. Each proposed merger transaction requires the
approval of holders of a majority of the outstanding shares of the
company being acquired, (other than shares held by Conseco), voting
at a special shareholders' meeting.
Partnership II completed the acquisition of Statesman in
September 1994 and expects to make additional acquisitions using
partnership equity capital, together with mezzanine and debt
financing from various sources. Partnership II has equity capital
commitments (after deducting commitments used to acquire Statesman)
totaling $576.4 million from limited partner investors, primarily
large institutional investors. Such commitments to Partnership II
include $92.4 million from Conseco, $23.1 million from BLH and
$23.1 million from CCP. In addition, certain executive officers
and directors of Conseco and its affiliates have remaining
commitments to Partnership II of $29.9 million. Companies acquired
by Partnership II are required to be included in Conseco's
financial statements on a consolidated basis because such companies
are unilaterally controlled by Conseco.
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Conseco believes the use of the partnership vehicle for
acquisitions of life insurance companies enables it to: (i) broaden
its access to the capital markets; (ii) increase the size and
number of potential acquisitions it can effect; and (iii) generate
recurring fee income through management of the acquired companies
and their investments. Conseco participates in the acquisitions
effected by Partnership II through: (i) its direct and indirect
ownership interest in Partnership II; and (ii) incentive
compensation fees payable (if Partnership II generates returns in
excess of prescribed targets) by Partnership II to Conseco's wholly
owned subsidiary that acts as general partner of Partnership II.
As used herein the terms "Conseco" or the "Company" refer
to Conseco, Inc. and its consolidated subsidiaries, unless the
context requires otherwise.
INSURANCE OPERATIONS
BLH, with total assets of approximately $3.9 billion at
December 31, 1994, markets health and life insurance and annuity
products primarily to senior citizens through over 200 branch
offices and approximately 3,400 career agents. Most of BLH's
agents sell only BLH policies. Approximately 55 percent of the
$1,534.5 million of direct premiums collected by BLH in 1994 were
from the sale of individual health insurance, principally Medicare
supplement and long-term care policies. BLH believes that its
success in the individual health insurance market is attributable
in large part to its career agency force, which permits one-on-one
contacts with potential policyholders and builds loyalty to BLH
among existing policyholders. Its efficient and highly automated
claims processing system is designed to complement its personalized
marketing strategy by stressing prompt payment of claims and rapid
response to policyholder inquiries.
Conseco owns 31.9 million common shares of BLH (including
1.5 million shares purchased by Conseco to date in 1995), or 60
percent of its currently outstanding common shares. At December
31, 1994, the BLH shares owned by Conseco had a net carrying value
of $477.9 million, a fair value of approximately $576.9 million and
a cost of $313.1 million. BLH is included in Conseco's financial
statements on a consolidated basis.
Statesman, with total assets of approximately $5.4 billion
at December 31, 1994, is a financial services holding company
engaged primarily in the development, marketing, underwriting,
issuance and administration of annuity and life insurance products
in 47 states and the District of Columbia through its insurance
subsidiaries, American Life and Casualty Insurance Company
("American Life") and Vulcan Life Insurance Company ("Vulcan
Life"). Statesman collected $1.1 billion of insurance premiums
and annuity deposits in 1994, of which approximately 96 percent (99
percent of first year premiums and annuity deposits) were derived
from the sale of annuities. At December 31, 1994, Statesman had
291,000 individual policies and approximately 445 group policies
(representing 134,000 individual certificates of insurance) in
force. Statesman markets its annuity and life insurance products
primarily to middle-income individuals ages 45 and over, and
designs its products to meet such individuals' savings and
retirement planning objectives. Statesman markets it products
through a general agency and brokerage distribution system
comprised of approximately 22,000 independent licensed agents.
Partnership II owns 80 percent of the outstanding shares
of Statesman's common stock. Conseco, through its direct
investment and through its indirect interest in the investments
made by BLH and CCP, has approximately a 25 percent ownership
interest in Statesman. Statesman is included in Conseco's
financial statements on a consolidated basis.
CCP, with $5.0 billion of assets at December 31, 1994, is
a specialized insurance holding company whose subsidiaries Great
American Reserve Insurance Company ("GARCO") and Beneficial
Standard Life Insurance Company ("BSLIC") market, issue and
administer annuity, life and employee benefit-related insurance
products through two cost-effective distribution channels: (i)
educator market specialists, who sell tax-qualified annuities and
certain employee benefit-related insurance products primarily to
school teachers and administrators; and (ii) professional
independent producers who sell various annuity and life insurance
products aimed primarily at the retirement market. Approximately
81 percent of the $522.1 million of total premiums collected in
1994 were from the sale of annuity products.
Conseco owns 11.6 million shares of CCP, or 49 percent of
CCP's common shares currently outstanding. At December 31, 1994,
the CCP shares owned by Conseco had a net carrying value of
approximately $195.4 million, a fair value of approximately $235.4
million and a cost of $102.8 million. CCP is included in Conseco's
financial statements on an equity basis.
Conseco's wholly owned insurance subsidiaries had total
assets of approximately $.9 billion at December 31, 1994. They
have profitable in-force blocks of many annuity and life products,
but do not currently market their products to new customers. These
companies collected $88.5 million of premiums in 1994, including
$5.6 million of premiums from deposit funds maintained by employee
benefit plans of the Company.
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SERVICES PROVIDED FOR FEES
Conseco provides all affiliated and other unaffiliated
clients with various services including investment management,
mortgage origination and servicing, policy administration, data
processing, product marketing and executive management services.
In addition, subsidiaries of Conseco earn fees by: (i) providing
marketing services to financial institutions related to the
distribution of insurance and investment products; (ii) providing
financing services to Partnership II; and (iii) distributing
property and casualty insurance products as an independent agency.
Total fees from affiliates and nonaffiliates were $71.0 million,
$49.0 million and $30.2 million in 1994, 1993 and 1992,
respectively. To the extent that these services are provided to
entities that are included in the financial statements on a
consolidated basis, the intercompany fees are eliminated in
consolidation. Earnings in this segment increase when Conseco adds
new clients (either affiliated or unaffiliated) and when Conseco
increases the fee-producing activities conducted for clients.
ACQUISITION AND RESTRUCTURING
Conseco and its acquisition partnerships have completed 12
acquisitions since 1982:
<TABLE>
<CAPTION>
Year Company acquired Purchase price Acquired by
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(Dollars in millions)
<S> <C> <C> <C>
1982 Security National Life Insurance Company $ 1.3 Conseco
1983 Consolidated National Life Insurance Company 4.2 Conseco
1985 Lincoln American 25.0 Conseco
1986 Lincoln Income Life Insurance Company 32.3 Conseco
1986 Bankers National 117.6 Conseco
1987 Western National 261.7 Conseco
1989 National Fidelity 68.4 Conseco
1990 GARCO 135.0 Partnership I
1990 Jefferson National Life Insurance Company 171.0 Partnership I
1991 BSLIC 141.1 Partnership I
1992 Bankers Life 600.0 Partnership I
1994 Statesman 344.2 Partnership II
</TABLE>
All acquisitions were accounted for as purchases, with
activities of acquired companies included in Conseco's results of
operations beginning with the date of purchase.
Of the first seven companies acquired by Conseco, four were
subsequently sold (including Western National in 1994 as described
in note 2 to the consolidated financial statements) and three
remain as wholly owned subsidiaries. The first three companies
acquired by Partnership I are now wholly owned subsidiaries of CCP,
with two of them (Jefferson National Life Insurance Company and
GARCO) having been merged at the end of 1994. The fourth and final
acquisition of Partnership I is now a wholly owned subsidiary of
BLH.
Conseco records the activities of acquired companies in its
insurance operations segment. Conseco also provides services to
acquired companies, generating income in the fee for service
segment. Incentive compensation earned by exceeding prescribed
returns to the partners, and restructuring gains realized from the
sale of portions of the acquired entities, are recorded in the
acquisition and restructuring segment.
Conseco believes that the consolidation of the U.S. life
insurance industry will continue, and Conseco intends to
participate in this process. Conseco believes that, under
appropriate circumstances, it is more advantageous to acquire
companies with large books of in-force life and health insurance
and annuities than to produce new business because initial
underwriting costs have already been incurred and mature business
is generally less likely to terminate, making more predictable
profit analysis possible.
OPERATIONS
Conseco minimizes operating expenses by centralizing,
standardizing and more efficiently performing many functions common
to most life insurance companies. These functions include
underwriting and policy administration, accounting and financial
reporting, marketing, regulatory compliance, actuarial services and
asset management.
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Conseco's centralized management techniques resulted in
significant employee reductions and expense savings in the nine
insurance companies acquired between 1985 and 1992. The ratio of
aggregate operating expenses (excluding commissions) to premiums
collected for these nine companies was reduced from 11 percent for
the last year prior to acquisition to 7.9 percent for the second
full year following acquisition. The ratio of such expenses to
total assets of these companies decreased from 3.4 percent to 1.6
percent in the same periods.
The administration of BLH's individual health insurance,
unlike that of life insurance or annuities, involves a high volume
of claims processing, multiple contacts with policyholders and
generally higher operational costs. In 1994, BLH processed more
than five million policyholder claims. BLH has developed an
efficient and highly automated policyholder administration
operation to minimize the costs of such large volume processing and
deliver a high level of service to its policyholders, with special
emphasis on the prompt payment of claims. In most cases, BLH mails
a check within a week of receiving a claim from a policyholder. BLH
believes that its promptness in processing policyholder claims is
a major reason for its strong reputation for service and the
above-average persistency of its Medicare supplement products.
Conseco (through certain of its wholly owned subsidiaries) provides
BLH with certain investment advisory, executive consulting, data
processing, accounting, legal, mortgage loan servicing and
origination, and other services.
INVESTMENTS
Conseco Capital Management, Inc. ("CCM"), a registered
investment adviser wholly owned by Conseco, manages the investment
portfolios of Conseco's wholly owned subsidiaries, CCP, BLH,
Statesman and several nonaffiliated clients. CCM had approximately
$24.0 billion of assets (at fair value) under management at
December 31, 1994, of which $12.3 billion were assets of affiliated
companies and $11.7 billion were assets of nonaffiliated companies.
CCM's investment philosophy is to maintain a largely investment
grade fixed-income portfolio, provide adequate liquidity for
expected liability durations and other requirements and maximize
total return through active investment management.
Investment activities are an integral part of the Company's
business; investment income is a significant component of the
Company's total revenues. Profitability is significantly affected
by spreads between interest yields on investments and rates
credited on insurance liabilities. Substantially all credited
rates on single premium deferred annuities and flexible premium
deferred annuities may be changed annually. As of December 31,
1994, the average yield, computed on the cost basis of the
Company's investment portfolio, was 8.5 percent and the average
interest rate credited on the Company's liability portfolio was 5.9
percent.
The Company balances the duration of its invested assets with
the expected duration of benefit payments arising from insurance
liabilities. At December 31, 1994, the adjusted modified duration
of fixed maturities, trading securities and short-term investments
was 6.9 years. At December 31, 1994, the duration of the Company's
insurance liabilities was 6.4 years.
For information regarding the composition and diversification
of the investment portfolio of Conseco's subsidiaries, see
"Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations - Investments" and note 3 to
the consolidated financial statements.
COMPETITION
Conseco's businesses are highly competitive. The life
insurance industry consists of a large number of insurance
companies,many of which are substantially larger and have greater
financial resources, broader and more diversified product lines and
larger staffs than those of Conseco or its investees. Competition
also is encountered from the expanding number of banks, securities
brokerage firms and other financial intermediaries which market
insurance products and offer competing products, such as mutual
fund products,traditional bank investments and other investment and
retirement funding alternatives. Conseco also competes with many
of these companies and others in providing services for fees.
Insurers compete with other insurance companies, financial
intermediaries and other institutions based on a number of factors,
including pricing, service provided to distributors and
policyholders, and ratings. Conseco's subsidiaries must also
compete with other insurers to attract and retain the allegiance of
agents. Additionally, Partnership II typically competes with
other entities when it bids on companies it wishes to acquire.
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Financial institutions, school districts, marketing companies,
agents who market insurance products and policyholders use the
financial strength ratings assigned to an insurer by independent
rating agencies as one factor in determining which insurer's
annuity to market or purchase. Bankers Life, American Life and the
principal insurance subsidiaries of CCP are rated either "A or A-
(Excellent)" by A.M. Best. A.M. Best ratings for the industry
currently range from "A++ (Superior)" to "F ( In Liquidation)".
Publications of A.M. Best indicate that the "A" and "A-" ratings
are assigned to those companies that, in A.M. Best's opinion, have
achieved excellent overall performance when compared to the
standards established by A.M. Best and that have demonstrated a
strong ability to meet their obligations to policyholders over a
long period of time. A.M. Best's rating procedure includes
quantitative and qualitative evaluations of a company's financial
condition and operating performance. Its quantitative evaluation
is based on an analysis of a company's financial performance in the
areas of profitability, leverage/capitalization and liquidity.
A.M. Best's review also includes a qualitative evaluation of a
company's spread of risk, quality and appropriateness of the
reinsurance program, quality and diversification of assets,
adequacy of policy or loss reserves, adequacy of surplus, capital
structure, management experience and objectives, market presence
and policyholders' confidence. In addition, Bankers Life has a
claims paying ability rating of "AA-" from Duff &
Phelps Credit Rating Company ("Duff & Phelps") and the two CCP
companies have claims-paying ability ratings of "A+" from Duff
& Phelps. Duff & Phelps' claims-paying ability ratings range from
"AAA (Highest claims-paying ability)" to "DD (Company is under
an order of liquidation)." The "AA-" rating represents "Very high
claims-paying ability" and the "A+" rating represents "High
claims-paying ability." Statesman's principal operating
subsidiary, American Life, has a claims-paying rating of "A-
(Good)" from Standard & Poor's Corporation ("Standard & Poor's").
A rating of "A-" is assigned by Standard & Poor's to those
companies which, in its opinion, have a secure claims-paying
ability and whose financial capacity to meeting policyholder
obligations is viewed on balance as sound, but their capacity to
meet such policyholder obligations is somewhat more susceptible to
adverse changes in economic or underwriting conditions than more
highly rated insurers. Generally, rating agencies base their
ratings upon information furnished to them by the issuer and upon
their own investigations, studies and assumptions. A.M. Best's
ratings, Duff & Phelps' claims-paying ratings and Standard & Poor's
claims-paying ratings are based upon factors relevant to
policyholders, agents and intermediaries and are not directed
toward the protection of investors. There is no assurance that any
particular rating will continue for any given period of time or
that it will not be changed or withdrawn entirely if in the
judgement of the rating agency circumstances so warrant.
A.M. Best's rating and Standard & Poor's claims-paying ability
rating for American Life are in part based on Partnership II's
commitment to provide additional capital to American Life.
Partnership II's commitment provides that if, at December 31, 1995,
American Life Holding Company ("ALHC"), a wholly owned subsidiary
of Statesman, has a debt to equity ratio of greater than 1.1 to
1.0, Partnership II will cause additional equity (in the form of
either common or non-cash dividend paying preferred equity) to be
contributed to ALHC within 30 days after completion of the audited
financial statements for 1995 in an amount necessary to lower the
pro forma ratio of debt to equity at December 31, 1995, to not more
than 1.1 to 1.0, excluding the effects of reporting fixed
maturities at fair value as described in note 1 to the consolidated
financial statements. Furthermore, Partnership II has agreed to
reserve $50.0 million of its available capital from its investors
to meet this commitment until 30 days after the year-end 1995 audit
is completed.
Following the announcement of Conseco's intention to acquire
the outstanding shares of CCP and BLH that it does not already own,
A.M. Best, Duff and Phelps and Standard & Poor's put the
aforementioned ratings under review with negative implications. The
agencies have stated that they will meet with Conseco management
"to evaluate more fully the strategic and financial implications of
these potential acquisitions" before deciding on any rating
changes. It is not possible to determine if the final decisions of
the rating agencies will result in any modifications of the current
ratings; or the extent to which any such decision would affect
Conseco's subsidiaries' level of sales or the persistency of their
in-force business.
In the individual health insurance business, insurance
companies compete primarily on the basis of marketing, service and
price. The provisions of the Omnibus Budget Reconciliation Act of
1984 and the work of the National Association of Insurance
Commissioners ("NAIC") (an association of state regulators and
their staffs) have resulted in standardized policy features for
Medicare supplement products. This increases the comparability of
such policies and may intensify competition based on factors other
than product features. See " Insurance Operations - BLH" and
"Regulation."
The Company believes that its investee insurance companies are
able to compete effectively because: (i) they emphasize specialized
distribution channels where the ability to respond rapidly to
changing customer needs yields a competitive edge; (ii) they are
experienced in establishing and cultivating relationships with the
unique distribution networks and the independent marketing
companies operating in these specialized markets; (iii) they can
offer competitive rates as a result of their lower-than-average
operating costs and increased investment yields achieved by
applying active investment portfolio management techniques; and
(iv) they have reliable policyholder administrative services,
supported by customized data processing systems.
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UNDERWRITING
Under regulations promulgated by the NAIC as a result of the
Omnibus Budget Reconciliation Act of 1990 ("OBRA"), BLH may not
underwrite its Medicare supplement policies for certain first-time
purchasers. If a person applies for insurance within six months
following eligibility by reason of age, the application may not be
rejected due to medical conditions. For other prospective
policyholders, such as senior citizens who are transferring to
BLH's products, BLH's underwriting procedures are relatively
limited, except for policies providing prescription drug coverage.
BLH generally requires detailed underwriting procedures
designed to assess and quantify the insurance risks before issuing
long-term care and comprehensive major medical products to
individuals and groups. BLH's practice is to require medical
examinations of applicants (including blood and urine tests, where
permitted) for certain health insurance products and for life
insurance products which exceed prescribed policy amounts. These
requirements are graduated according to the applicant's age and may
vary by type of policy or product. BLH also relies on medical
records and each potential policyholder's written application,
which is generally prepared under the supervision of one of its
trained agents.
Substantially all the life insurance policies issued by
Conseco's subsidiaries are underwritten individually, although
standardized underwriting procedures have been adopted for certain
low face-amount life insurance coverages. After initial
processing, each file is reviewed and the necessary information
(such as medical examinations, doctors' statements and special
medical tests) is obtained to make an underwriting decision. After
the information is collected and reviewed, either (i) the policy is
issued as applied for or issued with an extra premium charge
because of unfavorable factors, or (ii) the application is
rejected. Group insurance policies are underwritten based on the
characteristics of the group and its past claim experience.
Underwriting with respect to SPDAs and FPDAs is minimal.
REINSURANCE
Consistent with the general practice of the life insurance
industry, the Company's subsidiaries reinsure portions of the
coverage provided by their insurance products with other insurance
companies under agreements of indemnity reinsurance. The Company's
subsidiaries also assume reinsurance from other insurers.
Reinsurance assumed is immaterial and accounted for in the same
manner as direct business.
Indemnity reinsurance agreements are intended to limit a life
insurer's maximum loss on a large or unusually hazardous risk or to
obtain a greater diversification of risk. Indemnity reinsurance
does not discharge the original insurer's primary liability to the
insured. The Company's reinsured business is ceded to numerous
reinsurers; the amount of business ceded to any one reinsurer is
not material. The Company believes the assuming companies are
able to honor all contractual commitments, based on the Company's
periodic reviews of their financial statements, insurance industry
reports and reports filed with state insurance departments.
As of December 31, 1994, the policy risk retention limit of
Conseco's subsidiaries on the life of one individual does not
exceed $.8 million; reinsurance ceded by Conseco's subsidiaries
represented 7 percent of gross combined life insurance in force and
reinsurance assumed by Conseco's subsidiaries represented .3
percent of net combined life insurance in force. At December 31,
1994, Conseco's largest reinsurer accounted for less than .08
percent of total insurance liabilities and less than 16 percent of
total reinsurance receivables.
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EMPLOYEES
At December 31, 1994, Conseco had approximately 3,550
employees, including approximately: (i) 1,000 home office
employees of Conseco; (ii) 1,500 home office employees of BLH;
(iii) 450 branch office employees of BLH; (iv) 325 employees of
Statesman; and (v) 250 employees of Marketing Distribution Systems
Consulting Group, Inc. ("Bankmark"). None of the Company's
employees is covered by a collective bargaining agreement. Conseco
believes that it has excellent relations with its employees.
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GOVERNMENTAL REGULATION
General
Conseco's insurance subsidiaries are subject to regulation and
supervision by the states in which they transact business. The
laws of these jurisdictions generally establish agencies with broad
regulatory authority, including powers to: (i) grant and revoke
licenses to transact business; (ii) regulate and supervise trade
practices and market conduct; (iii) establish guaranty
associations; (iv) license agents; (v) approve policy forms; (vi)
approve premium rates for some lines of business; (vii) establish
reserve requirements; (viii) prescribe the form and content of
required financial statements and reports; (ix) determine the
reasonableness and adequacy of statutory capital and surplus; and
(x) regulate the type and amount of permitted investments.
Most states also have enacted legislation which regulates
insurance holding company systems, including acquisitions,
extraordinary dividends, the terms of surplus debentures, the terms
of affiliate transactions, and other related matters. Currently,
the Company and its insurance subsidiaries have registered as
holding company systems pursuant to such legislation in Texas,
Missouri, Tennessee, California, Alabama, Iowa and Illinois, and
they routinely report to other jurisdictions. For further
information on state laws regulating the payment of dividends by
insurance company subsidiaries, see "Management's Discussion and
Analysis of Results of Operations and Financial Condition -
Consolidated Financial Condition" and note 13 to Conseco's
consolidated financial statements.
The federal government does not directly regulate the insurance
business. However, federal legislation and administrative policies
in several areas, including pension regulation, age and sex
discrimination, financial services regulation and federal taxation,
do affect the insurance business. Recently, increased scrutiny has
been placed upon the insurance regulatory framework, and a number
of state legislatures have considered or enacted legislative
proposals that alter, and in many cases increase, the authority of
state agencies to regulate insurance companies and holding company
systems. In addition, legislation has been introduced from time
to time in recent years which, if ever enacted, could result in the
federal government assuming a more direct role in the regulation of
the insurance industry.
State insurance regulators and the NAIC are continually
re-examining existing laws and regulations and their application to
insurance companies. The NAIC recently approved, and recommended
to the states for adoption and implementation, several regulatory
initiatives designed to decrease the risk of insolvency of
insurance companies in general. These initiatives include
risk-based capital ("RBC") requirements for determining the levels
of capital and surplus an insurer must maintain in relation to its
insurance and investment risks. The NAIC regulatory initiatives
also impose restrictions on an insurance company's ability to pay
dividends to its stockholders. These initiatives may be adopted by
the various states in which the Company's subsidiaries are
licensed, but the ultimate content and timing of any statutes and
regulations to be adopted by the states cannot be determined at
this time. It is not possible to predict the future impact of
changing state and federal regulation on the operations of the
Company, and there can be no assurance that existing insurance
related laws and regulations will not become more restrictive in
the future or that laws and regulations enacted in the future will
not be more restrictive.
The NAIC's RBC requirements, which became effective December
31, 1993, are used by insurance regulators as an early warning tool
to identify deteriorating or weakly capitalized companies for the
purpose of initiating regulatory action. Such requirements are not
designed as a mechanism for ranking adequately capitalized
companies. In addition, the formula defines a new minimum capital
standard which supplements the low, fixed minimum capital and
surplus requirements previously implemented on a state-by-state
basis.
The NAIC RBC requirements provide for four levels of regulatory
attention, depending on the ratio of the company's total adjusted
capital (defined as the total of its statutory capital, surplus,
asset valuation reserve and certain other adjustments) to its RBC.
If a company's total adjusted capital is less than 100 percent but
greater than or equal to 75 percent of its RBC, or if a negative
trend has occurred (as defined) and total adjusted capital is less
than 125 percent of RBC (the "Company Action Level"), the company
must submit a comprehensive plan to the regulatory authority which
discusses proposed corrective actions to improve its capital
position. If a company's total adjusted capital is less than 75
percent but greater than or equal to 50 percent of its RBC (the
"Regulatory Action Level"), the regulatory authority will perform
a special examination of the company and issue an order specifying
corrective actions that must be followed. If a company's total
adjusted capital is less than 50 percent but greater than or equal
to 35 percent of its RBC (the "Authorized Control Level"), the
regulatory authority may take any action it deems necessary,
including placing the company under regulatory control. If a
company's total adjusted capital is less than 35 percent of its RBC
(the "Mandatory Control Level") the regulatory authority is
mandated to place the company under its control. At December 31,
1994, the total adjusted capital for each of the primary insurance
subsidiaries of BLH, Statesman and CCP was greater than twice the
respective Company Action Levels.
<PAGE>
<PAGE> 9
The Texas Insurance Department adopted its own RBC
requirements, the stated purpose of which is to require a minimum
level of capital and surplus to absorb the financial,
underwriting, and investment risks assumed by an insurer. Texas'
RBC requirements differ from those adopted by the NAIC in two
principal respects: (i) the elements used to determine minimum
RBC levels in the respective calculation formulas differ and (ii)
the Texas Regulations do not contain "Action Levels" (like those
adopted by the NAIC) prescribing certain corrective actions if RBC
threshold levels are not met. However, the Commissioner of the
Texas Insurance Department does have the power to take similar
corrective actions if a company does not maintain the required
minimum level of capital and surplus. Under the Texas Regulations,
an insurer has met RBC requirements if its admitted assets exceed
its liabilities by at least 3 percent. Bankers National and some
insurance subsidiaries of CCP are domiciled in Texas and must
comply with Texas RBC requirements. At December 31, 1994, their
admitted assets exceeded liabilities by more than twice the
required 3 percent level.
Effective for statutory annual statements filed for the year
ending December 31, 1992, insurance companies are required to
establish an asset valuation reserve ("AVR") consisting of two
components: a "default component" which provides for future
credit-related losses on fixed maturity investments and an "equity
component" which provides for losses on all types of equity
investments, including real estate. Insurers are also required to
establish an interest maintenance reserve ("IMR") for fixed
maturity realized capital gains and losses, net of tax, related to
changes in interest rates. The IMR is required to be amortized
into earnings on a basis reflecting the remaining period to
maturity of the fixed maturity securities sold. These reserves are
not required for financial statements of the Company prepared in
accordance with generally accepted accounting principles ("GAAP").
The Life/Health Task Force of the NAIC recently adopted
Actuarial Guideline GGG (the "Guideline") which defines minimum
reserves for certain annuity products which have multiple benefit
streams (including certain of Conseco's subsidiaries' annuity
products). The requirements of the Guideline affect the accounting
for applicable contracts issued on or after January 1, 1981, in
financial statements prepared for state regulatory authorities for
years ending on or after December 31, 1995. Since some provisions
of the Guideline are subject to interpretation and no industry
guidance is available, the Company has not yet measured the
statutory impact of the implementation of the Guideline and cannot
predict its impact.
Most states have enacted legislation or adopted administrative
regulations which affect the acquisition of control of insurance
companies as well as transactions between insurance companies and
persons controlling them. The nature and extent of such
legislation and regulations vary from state to state. Most states,
however, require administrative approval of: (i) the acquisition
of 10 percent or more of the outstanding shares of an insurance
company incorporated in the state; or (ii) the acquisition of 10
percent or more of the outstanding stock of an insurance holding
company whose insurance subsidiary is incorporated in the state.
The acquisition of 10 percent of such shares is generally deemed to
be the acquisition of control for the purpose of the holding
company statutes. It requires not only the filing of detailed
information concerning the acquiring parties and the plan of
acquisition, but also the receipt of administrative approval prior
to the acquisition. In many states, an insurance authority may
find that control does not, in fact, exist in circumstances in
which a person owns or controls 10 percent or a greater amount of
securities.
Under the solvency or guaranty laws of most states in which
they do business, Conseco's insurance subsidiaries also may be
required to pay assessments (up to certain prescribed limits) to
fund policyholder losses or the liabilities of insolvent or
rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength. In certain instances,
the assessments may be offset against future premium taxes. Prior
to 1991 these assessments were not material. However, the amount
of such assessments has increased in recent years and may increase
in future years. The Company's share of such assessments accrued
by its insurance company subsidiaries and equity investees was $8.0
million for the year ended December 31, 1994. The likelihood and
amount of any other future assessments in addition to estimated
amounts accrued at December 31, 1994, cannot be estimated; they are
beyond the control of the Company.
As part of their routine regulatory oversight process,
insurance departments approximately once every three years conduct
periodic detailed examinations ("Triennial Examinations") of the
books, records and accounts of insurance companies domiciled in
their states. Such Triennial Examinations are generally conducted
in cooperation with the departments of two or three other states,
under guidelines promulgated by the NAIC. Examinations of one of
Conseco's and two of CCP's wholly owned subsidiaries through June
30, 1994, were recently completed, although final reports have not
yet been issued. The Company believes those examinations were
satisfactorily completed and is not aware of any conclusions
reached by the examiners which would have a material adverse effect
on Conseco's business. During 1995, the principal life insurance
subsidiaries of BLH expect to receive examinations. The principal
subsidiary of Statesman is currently under examination for the
years 1991, 1992 and 1993, and expects to receive its examinations
report in 1995. The Company anticipates that the current exam will
be completed and the conclusions reached should not have a material
adverse effect on the Company's business.<PAGE>
<PAGE> 10
Health Care
Federal and state regulations have had, and are expected to
continue to have, the effect of increasing the regulation of
Medicare supplement plans in all states. OBRA mandated, among
other things, standardized policy features in Medicare supplement
plans. In July 1991, the NAIC implemented regulations creating 10
model Medicare supplement plans (Plans A through J). Plan A
provides the least extensive coverage, Plan J the most extensive
coverage. Under NAIC regulations, insurers must offer Plan A, but
may offer any of the other plans at their option. BLH currently
offers nine of the model plans. BLH has declined to offer Plan J,
due in part to its high benefit levels and consequently high costs
to the consumer.
The NAIC model regulation concerning Medicare supplement
policies also regulates the profits that insurance companies may
earn in respect of any such policies. It provides that Medicare
supplement policies may not be issued unless it can be expected, as
estimated for the period for which the prescribed rate thereunder
is to provide coverage, to return to policyholders aggregate
benefits equal to at least: (i) 75 percent of the aggregate amount
of premiums earned in the case of group policies; or (ii) 65
percent of the aggregate amount of premiums earned in the case of
individual policies. Under this regulation, BLH must file a
Medicare Supplement Refund Calculation Form each year, and if its
actual loss ratio falls below ratios prescribed by the Form by more
than a de minimis amount, then BLH must make a refund to
policyholders. BLH has reviewed the loss ratios on business
subject to the NAIC model regulations and currently does not
believe any refunds will be required.
Numerous proposals have been introduced in Congress and the
state legislatures to reform the current health care system.
Proposals have included, among other things, modifications to the
existing employer-based insurance system, a quasi-regulated system
of "managed competition" among health plans and a single-payer,
public program. Changes in health care policy could significantly
affect BLH's business. For example, federal comprehensive major
medical or long-term care programs, if proposed and
implemented,could partially or fully replace some of BLH's current
products. However, the institution of such programs also could
create new opportunities for supplemental insurance similar to
BLH's Medicare supplement policies. Reform proposals also could
involve standardization of major medical or long-term care
coverages, impose mandated or targeted loss ratios or rate
regulation, require the use of community rating or other means that
limit the ability of insurers to differentiate among risks, or
mandate utilization review or other managed care concepts to
determine what benefits would be paid by insurers. These or other
proposals could increase the level of competition among health
insurers. In addition, changes could be made in Medicare that
could necessitate revisions in BLH's Medicare supplement products.
Other potential initiatives, designed to tax insurance premiums or
shift medical care costs from government to private insurers, could
have an adverse effect on BLH's business, although such taxes and
costs might be offset in whole or in part by increasing premiums.
Depending on their form, proposals designed to reduce health care
costs could reduce benefits payable by BLH. BLH is unable to
predict what changes to the country's health care system will be
enacted, and if enacted, their scope and effects on its business.
However, BLH continues to believe that its opportunities will grow
under any realistic and affordable health care reform scenario.
<PAGE>
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by
Conseco's subsidiaries generally provide the policyholder with an
income tax advantage, as compared to other saving investments such
as certificates of deposit and bonds, in that income taxation on
the increase in value of the product is deferred until receipt by
the policyholder. With other savings investments, the increase in
value is taxed as earned. Annuity benefits and life insurance
benefits which accrue prior to the death of the policyholder are
generally not taxable until paid. Life insurance death benefits
are generally exempt from income tax. Also, benefits received on
immediate annuities (other than structured settlements) are
recognized as taxable income ratably as opposed to the economic
accrual methods, which tend to accelerate taxable income into
earlier years and which are required for other investments. The
tax advantage for annuities and life insurance is provided in the
Internal Revenue Code (the "Code"), and is generally followed in
all states and other United States taxing jurisdictions.
Accordingly, it is subject to change by Congress and the
legislatures of the respective taxing jurisdictions.
Conseco's insurance company subsidiaries are taxed under the
life insurance company provisions of the Code. Provisions in the
Code require a portion of the expenses incurred in selling
insurance products to be deducted over a period of years, as
opposed to immediate deduction in the year incurred. This
provision increases the tax for statutory accounting purposes
which reduces statutory surplus and, accordingly, decreases the
amount of cash dividends that may be paid by the life insurance
subsidiaries. For 1994, the increase in the Company's current tax
due to this provision was $20.4 million.
<PAGE>
<PAGE> 11
The Company had regular tax loss carryforwards at December 31,
1994, of approximately $314.2 million, portions of which begin
expiring in 1999. However, the amount of such loss that may be
offset against current taxable income is subject to the following
limitations: (i) losses may be offset against income of other
corporate entities only if such entities are included in the same
consolidated tax return (and the Company's investees are currently
not eligible for inclusion in a single consolidated tax return);
(ii) losses incurred in non-life companies (which comprise most of
the loss carryforwards) may offset only a portion of income from
life companies in the same consolidated tax return; and (iii) some
loss carryforwards may not be available to offset taxable income of
entities acquired after the loss was incurred. However, the
Company believes it will be able to utilize the loss carryforwards
prior to their expiration.
ITEM 2. PROPERTIES.
The Company's principal operations are located on a 150-acre
corporate campus in Carmel, Indiana, immediately north of
Indianapolis. These facilities contain approximately 416,000
square feet of space in seven buildings which contain Conseco's
executive offices and certain administrative operations of its
subsidiaries. These facilities include sufficient capacity for
future growth.
BLH currently leases 300,000 square feet of executive office
and administration space in a single facility in downtown Chicago
under a 15-year lease agreement. BLH also leases approximately
100,000 square feet of warehouse space in a second Chicago facility
under a 10-year lease agreement executed in 1993. BLH leases more
than 200 sales offices totaling approximately 350,000 square feet.
All of the sales office leases are short-term in length, with
remaining lease terms ranging from one to five years.
Statesman owns the building housing its principal operations in
Des Moines, Iowa, consisting of approximately 107,000 square feet
of space. The land underlying the building is subject to a
long-term lease expiring in 2016, at which time title to the
building will pass to the lessor. Statesman owns another building
housing its operations in Birmingham, Alabama consisting of 44,000
square feet.
ITEM 3. LEGAL PROCEEDINGS.
Conseco and its subsidiaries are involved in lawsuits which are
primarily related to their operations. Most of these lawsuits
involve claims under insurance policies or other contracts of the
Company. Even though Conseco 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 or cost of
defense. Accordingly, none of the lawsuits currently pending,
either individually or in the aggregate, is expected to have a
material adverse effect on the Company's consolidated financial
condition or results of operations.
<PAGE>
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
OPTIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
Officer Positions with Conseco, principal
name and age (a) Since occupation and business experience (b)
---------------- ----- --------------------------------------
<S> <C> <C>
Stephen C. Hilbert, 49 1979 Since 1979, Chairman of the Board and Chief Executive Officer,
since 1988, President of Conseco.
Ngaire E. Cuneo, 44 1992 Since 1992, Executive Vice President, Corporate Development;
from 1994, Director of Conseco; from 1986 to 1992, Senior
Vice President and Corporate Officer of General Electric
Capital Corporation.
Rollin M. Dick, 63 1986 Since 1986, Executive Vice President, Chief Financial Officer and
Director of Conseco.
Donald F. Gongaware, 59 1985 Since 1985, Executive Vice President and Director and, since 1989,
Chief Operations Officer of Conseco.
Lawrence W. Inlow, 44 1986 Since 1986, Executive or Senior Vice President, Secretary and General
Counsel of Conseco.
___________________
<FN>
(a) The executive officers serve as such at the discretion
of the Board of Directors and are elected at the annual
meeting of the Board.
(b) Business experience is given for at least the last five
years.
/TABLE
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
MARKET INFORMATION
The common stock of Conseco (trading symbol "CNC") has been
listed for trading on the New York Stock Exchange (the "NYSE")
since 1986. The following table sets forth the quarterly dividends
paid per share and the ranges of high and low sales prices per
share on the NYSE for the last two fiscal years, based upon
information supplied by the NYSE. All applicable share and per
share data in this Form 10-K have been adjusted for the two-for-one
stock split distributed on April 1, 1992.
<TABLE>
<CAPTION>
Period Market price Dividend
------ High Low paid
---- --- ----
<S> <C> <C> <C>
1993:
First Quarter $73-5/8 $45-3/8 $0.025
Second Quarter 67-3/8 44-5/8 0.025
Third Quarter 75-1/4 57-3/4 0.025
Fourth Quarter 75-3/4 53-1/2 0.125
1994:
First Quarter 66-1/4 53-1/8 0.125
Second Quarter 58-1/8 46-3/8 0.125
Third Quarter 52-3/8 43-1/4 0.125
Fourth Quarter 46-1/4 35-7/8 0.125
</TABLE>
As of March 7, 1995, there were approximately 12,600 holders of
the outstanding shares of common stock, including individual
participants in securities position listings.
DIVIDENDS
In October 1988, Conseco's Board of Directors adopted a policy
of paying regular quarterly cash dividends on its common stock.
The first such dividend was $.0125 per share. Subsequent
dividends, which were increased to $.015 per share effective with
the dividend paid October 1, 1990, to $.02 per share effective with
the dividend paid October 1, 1991, to $.025 per share effective
with the dividend paid January 4, 1993, and to $.125 per share
effective with the dividend paid October 1, 1993, have been paid on
the first business day of each calendar quarter, after review by
the Board of Directors of the Company's interim operating results.
On March 3, 1995, Conseco announced that its Board of Directors
intends to reduce its quarterly cash dividend to $.02 per share,
effective with the dividend to be paid in July 1995. The Company's
general policy is to retain most of its earnings. Retained
earnings have been used: (i) to finance the growth and development
of the Company's business through acquisitions or otherwise; and
(ii) to finance the repurchase of its common stock on those
occasions when the Company has determined that the use of funds for
stock repurchases would not interfere with other cash needs and
that its shares were undervalued in the market.
In February 1993, the Company issued $287.5 million liquidation
value Series D Cumulative Convertible Preferred Stock ("Preferred
Stock"), on which dividends ($3.25 per share) are cumulative from
the date of original issue and are payable quarterly, commencing
April 15, 1993. The terms of the Preferred Stock prohibit the
payment of cash dividends on capital stock ranking junior to the
Preferred Stock if the Company is not current in its dividend
payments on the Preferred Stock. The Company paid dividends on
the Preferred Stock of $18.6 million during 1994 and $13.5 million
during 1993 and is current on its payments.
The principal operating subsidiaries of Conseco are life
insurance companies organized under state laws and subject to
regulation by state insurance departments. These laws and
regulations limit the ability of insurance subsidiaries to make
cash dividends, loans or advances to a holding company such as
Conseco. However, these laws generally permit the payment, without
prior approval, of annual dividends which in the aggregate do not
exceed the greater of (or in a few states the lesser of): (i) the
subsidiary's prior year net gain from operations; or (ii) 10
percent of surplus attributable to policyholders at the prior
year-end, both computed on the statutory basis of accounting
prescribed for insurance companies. For further information on
state laws regulating the payment of dividends by insurance
subsidiaries, see "Management's Discussion and Analysis of Results
of Operations and Financial Condition - Consolidated Financial
Conditions" and note 13 to Conseco's consolidated financial
statements.<PAGE>
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- -----
(Amounts in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Premiums collected $1,879.1 $2,140.1 $1,464.9 $1,648.7 $1,361.4
Insurance policy income 1,285.6 1,293.8 378.7 280.8 152.8
Investment activity:
Net investment income 385.7 896.2 888.6 921.4 581.7
Net trading income (losses) (4.9) 93.1 35.9 50.7 6.0
Net realized gains (losses) (25.6) 149.5 124.3 123.3 4.5
Total revenues 1,862.0 2,636.0 1,523.9 1,391.8 753.3
Income before income taxes,
minority interest and
extraordinary charge 324.4 610.2 330.0 223.2 65.3
Earnings excluding trading
income (losses), realized
investment gains (losses),
and extraordinary charge(b) 174.9 245.3 138.1 61.5 35.1
Extraordinary charge on
extinguishment of debt, net of tax 4.0 11.9 5.3 5.0 -
Net income 150.4 297.0 169.5 116.0 41.7
Preferred dividends 18.6 20.6 5.5 6.8 5.6
Earnings applicable to common stock 131.8 276.4 164.0 109.2 36.1
PER SHARE DATA
Net income, primary $ 5.00 $ 9.45 $ 5.43 $ 4.10 $1.37
Net income, fully diluted 4.87 8.77 5.40 4.02 1.36
Earnings
excluding trading income
(losses), realized
investment gains (losses)
and extraordinary charge(b) 5.68 7.26 4.38 2.09 1.10
Dividends declared per common share .50 .30 .085 .07 .055
Book value per common share outstanding:
As reported 20.89 33.78 21.86 15.44 5.83
Excluding unrealized appreciation
(depreciation)(c) 27.10 30.33 20.49 N/A N/A
Shares outstanding at year-end 22.2 25.3 24.9 24.7 20.6
Average fully diluted shares outstanding 30.9 33.5 29.6 25.4 25.4
BALANCE SHEET DATA
Total assets $10,811.9 $13,749.3 $11,772.7 $11,832.4 $8,371.1
Long-term debt for which
Conseco is directly liable 191.8 413.0 163.2 177.6 268.9
Notes payable of BLH, not direct
obligations of Conseco(d) 280.0 290.3 392.0 - -
Notes payable of Partnership II
entities, not direct
obligations of Conseco (e) 331.1 - - - -
Notes payable related to Partnership I,
not direct obligations of Conseco - - - 319.3 258.1
Shareholders' equity:
As reported 747.0 1,142.6 594.3 431.6 180.2
Excluding unrealized appreciation
(depreciation)(c) 884.7 1,055.2 560.3 N/A N/A
<FN>
(a) For periods beginning with their acquisitions and ending June
30, 1992, the financial statements of the current subsidiaries
of CCP were consolidated with the financial statements of
Conseco. Following the completion of the initial public
offering by CCP, the Company no longer has unilateral control
to direct all of CCP's activities and, therefore, stopped
consolidating the financial statements of the CCP with the
financial statements of Conseco. The Company has included BLH
in its financial statements since November 1, 1992. Through
December 31, 1993, the financial statements of WNC were
consolidated with the financial statements of Conseco.
Following the completion of the IPO of WNC (and subsequent
disposition of Conseco's remaining equity interest in WNC), the
financial statements of WNC are no longer consolidated with the
financial statements of Conseco. As of September 29, 1994, the
Company began to include in its financial statements the newly
acquired Partnership II subsidiary, Statesman. Comparison of
consolidated financial information in the above table is
significantly affected by the Partnership I and Partnership II
acquisitions and the deconsolidation of WNC and CCP. Refer to
the notes to consolidated financial statements included
elsewhere herein for a description of business combinations.
<PAGE>
<PAGE> 15
(b) Represents net income excluding trading income (losses), net
realized gains (losses) and extraordinary charge, less
applicable expenses, amortization, changes in future policy
benefits, taxes and minority interest.
(c) Excludes the effect of reporting fixed maturities at fair value
which the Company began to do in 1992 as described in note 1 to
the consolidated financial statements.
(d) Represents notes issued by BLH in connection with its
acquisition.
(e) Represents notes payable issued or assumed by subsidiaries of
Partnership II in connection with the acquisition of
Statesman.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This discussion should be read in conjunction with the
accompanying consolidated financial statements, notes thereto and
financial statistics. Changes in 1994, 1993 and 1992 balances in
the consolidated financial statements are caused primarily by the
transactions described in note 1 "Significant Accounting Policies
- Basis of Presentation" and note 2 "Acquisitions/Dispositions" to
the consolidated financial statements.
RESULTS OF OPERATIONS
Conseco generates earnings by:
- Operating life insurance companies;
- Providing services to affiliates and nonaffiliates for
fees; and
- Acquiring and restructuring life insurance companies in
partnership with other investors (currently through
Partnership
II).
Life Insurance Company Operations
Conseco includes life insurance companies in its financial
statements on a consolidated basis if Conseco unilaterally controls
their operations - either by owning more than 50 percent of their
stock or by being the sole general partner of a partnership that
owns more than 50 percent of their stock. Conseco includes
significant investments in life insurance companies in its
financial statements on an equity basis if Conseco does not
unilaterally control their operations. Refer to notes 1 and 2 of
the consolidated financial statements for a description of changes
during the last three years in the companies included in Conseco's
consolidated financial statements.
Earnings in this segment increase when Conseco: (i) acquires
new companies; (ii) increases its ownership interest in the
partially owned companies; or (iii) improves the profitability of
owned companies by increasing their sales, investment income or
product profitability, or by reducing their expenses.
Services Provided for Fees
Conseco provides all affiliated and other unaffiliated clients
with various services, including investment management, mortgage
origination and servicing, policy administration, data processing,
product marketing and executive management services. In addition,
subsidiaries of Conseco earn fees by: (i) providing marketing
services to financial institutions related to the distribution of
insurance and investment products; (ii) providing financing
services to Partnership II; and (iii) distributing property and
casualty insurance products as an independent agency.
Earnings in this segment increase when Conseco adds new clients
(either affiliated or unaffiliated) and when Conseco increases
the fee-producing activities conducted for clients.
Restructuring Activities
Since commencing operations in 1982, Conseco has acquired 12
life insurance companies -- the first seven as wholly owned
subsidiaries, the next four through Partnership I and the last one
through Partnership II. Recent acquisition activity is described
in notes 1 and 2 to the consolidated financial statements. All
acquisitions have been accounted for as purchases. Therefore,
activities of the acquired companies have been included in
Conseco's results of operations beginning with the date of
purchase.
<PAGE>
<PAGE> 16
Of the first seven companies acquired as wholly owned
subsidiaries by Conseco, four were subsequently sold (including WNC
through an IPO in February 1994 and the subsequent sale of
Conseco's remaining interest in WNC in December 1994, as described
in note 2 to the consolidated financial statements) and three
remain as wholly owned subsidiaries. The first three companies
acquired by Partnership I (two of which were merged at the end of
1994) are now wholly owned subsidiaries of CCP in which Conseco
currently holds a 49 percent interest. The fourth and final
acquisition of Partnership I became a wholly owned subsidiary of
BLH, in which Conseco currently holds a 60 percent interest. In
addition, Conseco currently holds a 25 percent interest in the
acquisition made by Partnership II.
Conseco plans to accomplish future acquisitions of life
insurance businesses through Partnership II, of which a subsidiary
of Conseco is the sole managing general partner. Partnership II
was formed in early 1994 with commitments from investors for $624
million of capital. The purpose of Partnership II is to complete
acquisitions of insurance companies, build value within the
acquired companies and, ultimately, realize increased value for
the investing partners. The remaining capital commitments of
Partnership II (after deducting commitments used in the most recent
acquisition) totaled $576.4 million. Such commitments to
Partnership II include $92.4 million from Conseco, $23.1 million
from BLH, $23.1 million from CCP and $29.9 million from executive
officers and directors of Conseco and its affiliates.
Conseco records the activities of acquired companies in its
insurance operations segment. Conseco also provides services to
acquired companies, thereby generating income in the fee for
service segment. Incentive compensation earned by exceeding
prescribed returns to the partners and restructuring gains
realized from the sale of portions of the acquired entities are
reflected in the acquisition and restructuring segment.
<PAGE>
<PAGE> 17
Analysis of Net Income and Fully Diluted Earnings Per Share
The following table shows the sources of Conseco's net income
(after tax and minority interest) for the last three years:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings $ 68.9 $ 36.9 $ 4.8
Net trading income (losses) (.6) 6.9 .7
Net realized gains (losses) (3.4) 2.9 (.1)
Extraordinary charge - (3.1) -
------ ------ -----
Net income 64.9 43.6 5.4
------ ------ -----
Statesman operating earnings
and net income 1.5 - -
------ ------ -----
WNC:
Operating earnings 43.1 93.4 80.6
Net trading income 2.6 32.1 16.5
Net realized gains (losses) (7.1) 4.5 5.1
------ ------ -----
Net income 38.6 130.0 102.2
------ ------ -----
CCP:
Operating earnings 23.7 24.9 19.0
Net trading income (losses) (.2) 5.5 3.9
Net realized gains (losses) (.5) 4.2 4.9
Extraordinary charge (2.1) - (3.9)
------ ------ -----
Net income 20.9 34.6 23.9
------ ------ -----
Wholly owned life insurance
companies, excluding WNC:
Operating earnings 23.5 27.5 18.6
Net trading income (losses) (.7) 8.6 1.6
Net realized gains (losses) (9.1) (1.3) 4.1
------ ------ -----
Net income 13.7 34.8 24.3
------ ------ -----
Life Re net income - - 10.6
------ ------ -----
Total from operations of life
insurance companies:
Operating earnings 160.7 182.7 133.6
Net trading income 1.1 53.1 22.7
Net realized gains (losses) (20.1) 10.3 14.0
Extraordinary charge (2.1) (3.1) (3.9)
------ ------ -----
Net income 139.6 243.0 166.4
------ ------ -----
Services provided for fees - net income 25.1 14.3 14.5
------ ------ -----
(continued on next page)
/TABLE
<PAGE>
<PAGE> 18
(continued from previous page)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Restructuring activities:
Incentive earnings allocation - 22.3 3.6
Sale of stock 46.5 61.0 19.7
Loss incurred in terminated acquisition (23.3) - -
------ ------ ------
Net income 23.2 83.3 23.3
------ ------ ------
Corporate and other:
Operating expenses, net of revenues (16.1) (15.1) (11.1)
Interest expense (18.0) (19.9) (22.2)
Net trading losses (1.4) (.7) -
Net realized gains (losses) (.1) .9 -
Extraordinary charge (1.9) (8.8) (1.4)
------ ------ ------
Net loss (37.5) (43.6) (34.7)
------ ------ ------
Consolidated earnings:
Operating earnings 151.7 162.0 114.8
Net trading income (losses) (.3) 52.4 22.7
Net realized gains (losses) (20.2) 11.2 14.0
Restructuring income 23.2 83.3 23.3
Extraordinary charge (4.0) (11.9) (5.3)
------ ------ ------
Net income $150.4 $297.0 $169.5
====== ====== ======
/TABLE
<PAGE>
<PAGE> 19
The following table shows the sources of Conseco's fully
diluted earnings per share for the last three years:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings $2.23 $1.10 $ .16
Net trading income (losses) (.02) .21 .02
Net realized gains (losses) (.11) .08 -
Extraordinary charge - (.09) -
----- ----- -----
Net income 2.10 1.30 .18
----- ----- -----
Statesman operating earnings
and net income .05 - -
----- ----- -----
WNC:
Operating earnings 1.40 2.74 2.59
Net trading income .08 .93 .53
Net realized gains (losses) (.23) .13 .16
----- ----- -----
Net income 1.25 3.80 3.28
----- ----- -----
CCP:
Operating earnings .78 .74 .61
Net trading income (losses) (.01) .16 .13
Net realized gains (losses) (.02) .13 .15
Extraordinary charge (.07) - (.11)
----- ----- -----
Net income .68 1.03 .78
----- ----- -----
Wholly owned life insurance
companies, excluding WNC:
Operating earnings .77 .81 .59
Net trading income (losses) (.02) .25 .06
Net realized gains (losses) (.30) (.04) .13
----- ----- -----
Net income .45 1.02 .78
----- ----- -----
Life Re net income - - .26
----- ----- -----
Total from operations of life
insurance companies:
Operating earnings 5.23 5.39 4.21
Net trading income .03 1.55 .74
Net realized gains (losses) (.66) .30 .44
Extraordinary charge (.07) (.09) (.11)
----- ----- -----
Net income 4.53 7.15 5.28
----- ----- -----
Services provided for fees - net income .81 .42 .47
----- ----- -----
(continued on next page)
/TABLE
<PAGE>
<PAGE> 20
(continued from previous page)
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Restructuring activities:
Incentive earnings allocation - .66 .12
Sale of stock 1.51 1.83 .66
Loss incurred in terminated acquisition (.76) - -
----- ----- -----
Net income .75 2.49 .78
----- ----- -----
Corporate and other:
Operating expenses (.53) (.45) (.33)
Interest expense (.58) (.59) (.75)
Net trading losses (.05) (.02) -
Net realized gains - .03 -
Extraordinary charge (.06) (.26) (.05)
----- ----- -----
Net loss (1.22) (1.29) (1.13)
----- ----- -----
Consolidated earnings:
Operating earnings 4.93 4.77 3.60
Net trading income (losses) (.02) 1.53 .74
Net realized gains (losses) (.66) .33 .44
Restructuring income .75 2.49 .78
Extraordinary charge (.13) (.35) (.16)
----- ----- -----
Net income $4.87 $8.77 $5.40
===== ===== =====
/TABLE
<PAGE>
<PAGE> 21
The following table analyzes changes in Conseco's fully diluted
earnings per share:
<TABLE>
<CAPTION> 1994 1993
compared to compared to
1993 1992
---- ----
<S> <C> <C>
Fully diluted earnings per share:
Current year $ 4.87 $8.77
Prior year 8.77 5.40
------ -----
Net increase (decrease) $(3.90) $3.37
====== =====
Increase (decrease) related to changes in income:
Operations of life insurance companies:
Operating earnings:
Bankers $ .96 $1.09
Statesman .04 -
WNC (1.45) .51
CCP (.03) .23
Wholly owned life insurance companies,
excluding WNC (.12) .32
Life Re - (.26)
Net trading income (losses) (1.52) 1.01
Net realized gains (losses) (.89) (.10)
Extraordinary charge .03 .11
------ -----
Increase (decrease) from operations of
life insurance companies (2.98) 2.91
Services provided for fees .33 -
Restructuring activities (1.80) 2.04
Corporate and other .17 (.32)
------ -----
Total related to changes in income (4.28) 4.63
Increase (decrease) related to issuances and
repurchases of common
or common equivalent shares .38 (1.26)
------ -----
Net increase (decrease) $(3.90) $3.37
====== =====
</TABLE>
<PAGE>
<PAGE> 22
Additional Discussion of Consolidated Statement of Operations for
the Three Years Ended December 31, 1994:
The following tables and narratives summarize amounts reported
in the consolidated statement of operations. Many of the changes
from period to period resulted from: (i) acquisitions of new
affiliates; (ii) restructurings that changed Conseco's percentage
ownership in the affiliates; and (iii) changes in control of the
affiliates (which affected whether the affiliate was included in
Conseco's statement of operations under the consolidation or the
equity method of accounting).
Operations of Life Insurance Companies:
<TABLE>
<CAPTION>
BLH:
As included in Prior to
Conseco's consolidated acquisition by
financial statements Partnership I
-------------------- -------------
For the period
For the from acquisition Ten months
year ended through ended
December 31, December 31, October 31,
1994 1993 1992 1992
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,213.8 $1,200.7 $191.5 $ 944.1
Investment activity:
Net investment income 219.5 174.7 21.1 105.2
Net trading income (losses) (1.6) 31.5 2.4 -
Net realized gains (losses) (9.8) 43.6 7.0 (33.6)
Total revenues 1,437.0 1,450.5 222.5 1,013.8
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 883.8 864.3 120.1 720.3
Interest expense on annuities and
financial products 59.7 36.5 5.3 23.8
Interest expense on long-term debt 30.9 36.0 7.4 -
Amortization related to operations 118.3 116.9 25.6 79.4
Amortization related to
realized gains (losses) (3.2) 30.5 - -
Other operating costs and expenses 143.7 154.3 26.9 138.5
Income from continuing operations
before taxes, minority interest
and extraordinary charge 197.1 208.1 37.2 51.8
Income tax expense 76.5 80.2 14.9 5.9
Income from continuing operations
before minority interest 120.6 127.9 22.3 45.9
Minority interest 55.7 81.2 16.9 -
Extraordinary charge (net of
minority interest of $4.8 million) - (3.1) - -
Income from continuing operations 64.9 43.6 5.4 45.9
Earnings from discontinued operations - - - 16.6
Net income 64.9 43.6 5.4 62.5
Summarized by component, all net
of applicable expenses, taxes and
minority interest:
Operating earnings 68. 9 36.9 4.8 73.7
Net trading income (losses) (.6) 6.9 .7 -
Net realized gains (losses) (3.4) 2.9 (.1) (22.2)
Extraordinary charge on
extinguishment of debt - (3.1) - -
Earnings from discontinued
operations - - - 11.0
Net income 64.9 43.6 5.4 62.5
/TABLE
<PAGE>
<PAGE> 23
General. Conseco's 1992 earnings reflect a 44 percent
ownership interest in BLH from November 1, 1992, the date BLH was
acquired by Partnership I. In March 1993, BLH completed an IPO of
its common stock, thus reducing Conseco's ownership to 31 percent.
On September 30, 1993, Conseco acquired 13.3 million additional
common shares of BLH, increasing its ownership interest to 56
percent. In April 1994, BLH announced a program to repurchase up
to 2 million of its common shares in open-market or negotiated
transactions, with the timing and terms of the purchases to be
determined by management based on market conditions. During 1994,
BLH acquired 1.8 million shares of its common stock at a cost of
$35.7 million, which increased Conseco's ownership interest in BLH
to 58 percent. All activities of BLH are included in Conseco's
financial statements on a consolidated basis since November 1,
1992. However, Conseco's minority interest adjustment removes the
portion of BLH's net income applicable to other owners. To
enhance comparability, the amounts for the 10 months ended October
31, 1992, (prior to Partnership I's acquisition of BLH) are
presented separately.
At December 31, 1994, the BLH shares owned by Conseco had a net
carrying value of approximately $477.9 million, a fair value of
approximately $576.9 million, and a cost of $313.1 million.
Insurance policy income is comprised primarily of individual
health premiums, which increased as a result of new business,
improved persistency and rate increases.
Net investment income increased over the last three years
because of the growth of invested assets offset by lower yields.
Invested assets grew as a result of: (i) recurring operations;
(ii) the recapture in 1994 and 1993 of reinsurance treaties with
related assets totaling $398.5 million and $182 million,
respectively; and (iii) capital transactions in connection with
BLH's IPO, as discussed in the accompanying notes to the
consolidated financial statements. In addition, the redemption of
fixed maturity investments prior to their scheduled maturity dates
resulted in additional investment income (losses) of approximately
$(.4) million in 1994 and $.8 million in 1993.
Net trading income and losses often fluctuate from year to
year, based on market conditions for trading activities.
Net realized gains and losses often fluctuate from year to
year. BLH sold approximately $1.2 billion and $2.2 billion of
fixed maturity investments in 1994 and 1993, respectively.
Realized investment losses in the 10-month period ended October 31,
1992, included writedowns primarily related to BLH's derivative
collateralized mortgage obligations, most of which were disposed of
prior to Partnership I's acquisition of BLH.
Net realized gains and (losses) arise when securities are sold
in response to changes in the investment environment which create
opportunities to enhance the risk profile of the investment
portfolio. In those situations, existing securities can be
replaced with alternative securities without adversely affecting
either the quality of the portfolio or the matching of expected
maturities of assets and liabilities. Selling these securities at
a gain and reinvesting the proceeds at lower yields may, absent
other management action, tend to decrease future investment yields.
The Company believes, however, that such decreases will not
significantly affect future net income because: (i) additional
amortization of the cost of policies purchased and the cost of
policies produced is recognized in order to reflect reduced future
yields (see the following paragraph); (ii) interest rates credited
to some products can be reduced, diminishing the effect of the
yield decrease on the investment earnings spread; and (iii) the
investment portfolio grows as a result of reinvesting the realized
gains.
Realized investment gains (losses) affect the timing of the
amortization of cost of policies purchased and cost of policies
produced.
As a result of net realized gains (losses) from the sales of fixed
maturity investments, the total of amortization of cost of policies
purchased and cost of policies produced was increased (decreased)
by $(3.2) million in 1994 and $30.5 million in 1993.
Insurance policy benefits (including the change in future
policy benefits) have increased primarily because of: (i) an
increase in the mortality and morbidity based products in force;
and (ii) a slight increase in the ratio of policy benefits to
insurance policy income for BLH's individual health policies.
Conseco made purchase accounting adjustments to insurance
liabilities in conjunction with the acquisitions of BLH by
Partnership I in November 1992 and the acquisition of additional
shares of BLH by Conseco in September 1993 (as described in note 2
to the consolidated financial statements). These adjustments
caused insurance policy benefits (and change in future policy
benefits) to be lower in 1994 and 1993 than the amounts which would
have been recorded if insurance liabilities had not been adjusted
for the purchase. Such decline somewhat offsets the increase
described above. The ratio of policy benefits to insurance policy
income for BLH's individual health policies increased approximately
two percentage points, to approximately 63 percent, in 1994
compared to 1993. Federal legislation regarding the
standardization of Medicare supplement plans in 1991 (see "Business
of Conseco - Regulation"), including the establishment of minimum
loss ratios, will have the long-term effect of slightly increasing
Medicare supplement loss ratios, since a greater percentage of
BLH's in-force premium relates to policies issued after such
standardization.
<PAGE>
<PAGE> 24
Interest expense on long-term debt decreased by $5.1 million,
or 14 percent, in 1994. BLH reduced its long-term debt by $11.0
million in 1994 and $130.0 million in 1993 through scheduled and
unscheduled payments. Debt was incurred to finance the acquisition
of BLH by Partnership I effective October 31, 1992. Therefore,
BLH incurred interest expense for a full year in 1993, compared
with two months in 1992.
Other operating costs and expenses decreased by $10.6 million,
or 7 percent, in 1994 compared to 1993, including $12.7 million as
a result of these non-recurring items: (i) the resolution of
various contingencies; and (ii) modifications made to BLH's post
retirement benefit plans which resulted in a curtailment gain.
Extraordinary charge. In 1993 BLH retired all of its junior
notes, prepaid a portion of its senior term loan and repurchased
$20 million of its Series B Senior Subordinated Notes, resulting in
a net extraordinary charge of $7.9 million. Conseco's share of
this charge was $3.1 million.
Statesman:
<TABLE>
<CAPTION>
As included in
Conseco's consolidated Prior to
financial statements acquisition by Partnership II
-------------------- -----------------------------
For the period Nine months For the year
from acquisition ended ended
through December 31, September 30, December 31,
1994 1994 1993
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Insurance policy income $ 13.6 $ 40.2 $50.0
Investment activity:
Net investment income 95.2 247.6 298.9
Net realized gains .5 4.9 24.8
Total revenues 111.4 297.0 379.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 7.4 26.1 31.7
Interest expense on annuities and
financial products 63.3 158.8 195.9
Interest expense on long-term debt 8.7 6.7 6.1
Amortization related to operations 9.1 29.7 31.7
Amortization related to realized gains - 2.8 9.8
Acquisition and merger expenses - 7.2 -
Other operating costs and expenses 10.5 25.7 35.5
Income before taxes and minority interest 12.4 40.0 68.5
Income tax expense 5.3 14.2 22.4
Income before minority interest 7.1 25.8 46.1
Minority interest 5.6 6.8 8.8
Net income 1.5 19.0 37.3
Summarized by component, all net of
applicable expenses,
taxes and minority interest:
Operating earnings 1.5 17.6 27.4
Net realized gains - 1.4 9.9
Net income 1.5 19.0 37.3
</TABLE>
<PAGE>
<PAGE> 25
General. Conseco's 1994 earnings reflect its ownership
interest in Statesman from September 29, 1994, the date Statesman
was acquired by Partnership II. Immediately after the acquisition
of Statesman, Conseco, through its direct investment and through
its equity interests in the investments made by BLH, CCP and WNC,
had approximately a 27 percent ownership interest in Statesman. At
December 31, 1994, Conseco's ownership interest in Statesman
decreased to 25 percent as a result of (i) the sale of Conseco's 40
percent equity interest in WNC on December 23, 1994, and (ii) the
sale by a subsidiary of CCP of a portion of its investment in
Statesman, partially offset by Conseco's increased ownership
percentage in BLH and CCP due to stock repurchases made by BLH and
CCP. While all activities of Statesman are required to be included
in Conseco's financial statements on a consolidated basis for all
periods after September 29, 1994, the minority interest adjustment
removes from Conseco's net income the portion applicable to other
owners so that net income reflects only Conseco's applicable
ownership interest. To enhance comparability, the amounts for the
year ended December 31, 1993, and for the nine months ended
September 29, 1994, (which were prior to Partnership II's
acquisition of Statesman) are presented separately.
Insurance policy income relates primarily to premiums from
products with mortality and morbidity features and to surrender
charges on annuity products. Total 1994 insurance policy income
increased primarily from increased surrender charges earned on
annuity policy withdrawals, offset in part by a slight decrease in
life insurance premiums and policy fund charges. The increase in
surrender charges earned on annuity policy surrenders resulted from
an increase in the gross policy withdrawal and surrender payments.
The increase in withdrawal and surrender activity was due the
increased size of Statesman's annuity portfolio and, as the general
level of interest rates increased during 1994, to decisions by
policyholders to surrender policies and incur a surrender charge in
order to invest funds in higher-yielding alternative investments.
Net investment income for the three months ended December 31,
1994, reflects increased yields on invested assets resulting from
the application of purchase accounting. Net investment income in
1994 also reflects an increase in Statesman's average invested
assets, primarily from increased premium collections.
Net realized gains often fluctuate from year to year.
Insurance policy benefits (including change in future policy
benefits) increased primarily due to a larger volume of business in
force in 1994 and an increase in death benefits paid. .
Interest expense on annuities and financial products increased
in 1994 compared with 1993 as a result of increased annuity
deposits and increases in the interest rates credited on new
annuity fund deposits. The average rate credited on all insurance
liabilities was 5.8 percent and 5.6 percent at December 1994 and
1993, respectively.
Interest expense on long-term debt for the three months ended
December 31, 1994, reflects: (i) interest on debt incurred to
finance the acquisition of Statesman by Partnership II; and (ii)
interest incurred on the $69.0 million of 6-1/4 percent convertible
subordinated debentures issued in April 1993 ($44.8 million of
which were redeemed on or subsequent to the date of acquisition).
Acquisition and merger expenses incurred by Statesman related
to its acquisition by Partnership II include, among other things,
compensation expense recognized upon the cash redemption of certain
unexercised stock options and stock appreciation rights upon
consummation of the acquisition.
Minority interest for periods prior to September 30, 1994,
represents dividends on preferred stock of a subsidiary of
Statesman. Subsequent to that date, minority interest includes such
dividends and the portion of earnings applicable to other owners of
Statesman.
<PAGE> 26
<TABLE>
<CAPTION>
WNC:
As included in
For the year ended Conseco's consolidated
December 31, 1994 financial statements
Included in for the years ended
Conseco's Total December 31,
accounts WNC 1993 1992
-------- --- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $ - $ 27.4 $ 21.8 $ 48.0
Investment activity:
Net investment income - 637.5 610.1 507.8
Net trading income - 3.7 49.6 25.0
Net realized gains (losses) - (52.9) 92.7 72.4
Equity in earnings of WNC 40.2 - - -
Total revenues 40.2 615.7 774.2 653.2
Benefits and expenses
Insurance policy benefits and change
in future policy benefits - 119.2 121.2 130.2
Interest expense on annuities and
financial products - 344.2 333.1 267.1
Interest expense on notes payable - 9.6 - -
Interest expense on short-term
investment borrowings - 7.3 6.2 6.1
Amortization related to operations - 20.1 16.5 16.3
Amortization and change in future policy
benefits related to realized gains (losses) - (16.8) 84.3 64.6
Other operating costs and expenses - 18.0 8.4 12.1
Income before taxes 40.2 114.1 204.5 156.8
Income tax expense 1.6 40.8 74.5 54.6
Net income 38.6 73.3 130.0 102.2
Summarized by component, all net of applicable
expenses and taxes:
Operating earnings 43.1 94.2 93.4 80.6
Net trading income 2.6 2.4 32.1 16.5
Net realized gains (losses) (7.1) (23.3) 4.5 5.1
Net income 38.6 73.3 130.0 102.2
</TABLE>
Prior to the completion of its IPO, WNC was a wholly owned
subsidiary of Conseco. Conseco sold 60 percent of WNC in the IPO.
On December 23, 1994, Conseco sold its remaining 40 percent equity
interest in WNC. Amounts included in Conseco's accounts for the
year ended December 31, 1994, therefore include: (i) all of WNC's
earnings from January 1 through February 15, 1994, the date the IPO
was completed; and (ii) 40 percent of WNC's earnings for the period
from February 15 through December 23, 1994.
WNC's operating earnings during the above periods were affected
by the growth in invested assets from annuity sales, interest
income, and the recapture on March 31, 1994, of a $1.3 billion
block of business previously reinsured with subsidiaries of
Conseco, offset in part by fluctuations in prepayment income
included in net investment income and interest expense on notes
payable. WNC's net investment income included prepayment income of
$3.1 million in 1994, $18.0 million in 1993 and $12.8 million in
1992. WNC's net income was affected by these factors, and also
changes in realized gains (losses) and trading income.
<PAGE>
<PAGE> 27
CCP:
Prior to July 1, 1992, Conseco, as the sole general partner of
Partnership I, exercised unilateral control over CCP. Conseco,
therefore, was required to include the accounts of CCP in its
consolidated financial statements. After CCP's IPO, Conseco no
longer had unilateral control over CCP. Conseco, therefore,
includes CCP's results since the IPO in its financial statements on
the equity method.
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------------
1994 1993 1992
------------------- ------------------- -------------------
(Dollars in millions)
Included in Included in Included in
Total Conseco's Total Conseco's Total Conseco's
CCP accounts CCP accounts CCP accounts
--- -------- --- -------- --- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $114.5 $ - $127.8 $ - $139.5 $ 67.1
Investment activity:
Net investment income 367.8 - 412.9 - 380.4 187.0
Net trading income (losses) (.9) - 24.3 - 15.6 5.0
Net realized gains 2.9 - 55.8 - 63.5 22.7
Equity in earnings of CCP - 24.7 - 37.4 - 15.8
Equity in earnings of BLH - - 1.2 - .7 -
Gain on sale of stock by BLH - - 10.5 - - -
Total revenues 484.3 24.7 632.5 37.4 599.7 297.6
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 75.8 - 77.0 - 77.1 34.6
Interest expense on annuities
and financial products 208.6 - 243.5 - 251.1 124.5
Interest expense on
long-term debt 10.7 - 16.1 - 26.1 17.9
Interest expense on short-
term investment borrowings 5.2 - 4.4 - 2.3 1.6
Amortization related
to operations 25.3 - 29.4 - 23.2 13.4
Amortization and change in
future policy benefits related
to realized gains 3.7 - 36.4 - 45.9 13.7
Other operating costs and expenses 54.6 - 52.2 - 55.1 27.2
Income before taxes, minority
interest and extraordinary
charge 100.4 24.7 173.5 37.4 118.9 64.7
Income tax expense 37.4 1.7 65.9 2.8 42.0 18.6
Income before minority
interest and extraordinary
charge 63.0 23.0 107.6 34.6 76.9 46.1
Minority interest - - - - - 18.3
Extraordinary charge (4.9) (2.1) - - (8.8) (3.9)
Net income 58.1 20.9 107.6 34.6 68.1 23.9
Summarized by component, all net of applicable expenses,
taxes and minority interest:
Operating earnings 64.7 23.7 81.1 24.9 55.4 19.0
Net trading income (losses) (.6) (.2) 15.8 5.5 10.1 3.9
Net realized gains (losses) (1.1) (.5) 10.7 4.2 11.4 4.9
Extraordinary charge (4.9) (2.1) - - (8.8) (3.9)
Net income 58.1 20.9 107.6 34.6 68.1 23.9
</TABLE>
<PAGE>
<PAGE> 28
CCP's operating earnings for 1994 were adversely affected by:
(i) a reduction of $9.5 million in prepayment income included in
net investment income; and (ii) a charge of $4.2 million, net of
income tax of $2.2 million, for current and future guaranty fund
assessments on known insolvencies of life insurance companies; and
(iii) an increase in morbidity and mortality costs compared to 1993
of approximately $1.1 million, net of tax of $.6 million. CCP's
operating earnings in 1993 were affected by: (i) wider spreads
between investment yields and policy crediting rates on an
increasing base of invested assets; (ii) lower interest expense
resulting from the reduction in CCP's long-term debt through
scheduled and unscheduled principal payments and lower interest
rates; and (iii) the investment of the net proceeds (after
prepayment of certain debt) from CCP's IPO and from its secondary
public offering in September 1993. CCP's net investment included
prepayment income of $.8 million in 1994 and $10.3 million in 1993.
Total investment spread excluding prepayment income (the difference
between what CCP earns on its investments and what it credits to
policyholders) did not change materially between 1994 and 1993.
Conseco's equity in the earnings of CCP was affected by these
factors, and also by changes in Conseco's ownership interest in CCP
resulting from CCP's IPO and other transactions described in note
2 to the consolidated financial statements. In addition, Conseco's
equity in the earnings of CCP included an extraordinary charge of
$2.1 million in 1994 and $3.9 million in 1992 related to CCP's
prepayment of debt. At December 31, 1994, Conseco owned 45 percent
of the common stock of CCP. Such shares owned by Conseco had a net
carrying value of $195.4 million, a fair value of approximately
$235.4 million, and a total cost to Conseco of $102.8 million.
CCP participated in Partnership I's investment in BLH. In
conjunction with BLH's IPO, CCP's investment in Partnership I was
exchanged for approximately 2.8 percent of the common stock of BLH.
CCP had recognized equity in earnings of BLH of $1.2 million in
1993 (through the date of the IPO) and $.7 million in 1992. CCP
recognized a gain on the sale of stock by BLH of $10.5 million at
the time of the IPO. Since the IPO, CCP carries its investment in
BLH at fair value, with any unrealized gain or loss, net of income
tax, included directly in shareholders' equity.
Conseco's direct ownership in BLH, together with its indirect
ownership through CCP, represents a controlling interest in BLH.
Accordingly, Conseco accounts for its investment in BLH using the
consolidation method. Conseco's ownership interest in BLH through
CCP is included in the BLH segment. Conseco's ownership interest
in the gain recognized by CCP in conjunction with the BLH IPO is
included in Conseco's Restructuring Activities segment.
<PAGE>
<PAGE> 29
Wholly Owned Insurance Subsidiaries of Conseco, excluding WNC:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Revenues:
Insurance policy income $ 58.2 $ 72.3 $ 81.4
Investment activity:
Net investment income 75.5 110.2 181.3
Net trading income (losses) (1.1) 13.4 3.2
Net realized gains (losses) (16.2) 11.5 22.2
Total revenues 116.4 207.4 288.1
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 64.8 82.3 90.0
Interest expense on annuities and
financial products 13.7 38.9 109.9
Amortization related to operations 5.7 7.6 16.2
Amortization related to realized gains (losses) (2.1) 11.5 15.1
Other operating costs and expenses 10.7 12.0 18.2
Income before taxes 23.5 55.0 38.1
Income tax expense 9.8 20.2 13.8
Net income 13.7 34.8 24.3
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings 23.5 27.5 18.6
Net trading income (losses) (.7) 8.6 1.6
Net realized gains (losses) (9.1) (1.3) 4.1
Net income 13.7 34.8 24.3
</TABLE>
Insurance policy income relates primarily to premiums from
products with mortality and morbidity features. Recent declines
have resulted from decreased emphasis on generating new premiums
from such products.
Net investment income declined over the last three years because
of the recapture of reinsurance by WNC from Conseco's other wholly
owned life insurance subsidiaries on March 31, 1993, which resulted
in a decrease of $1.3 billion in insurance liabilities and invested
assets. In addition, the redemption of fixed maturity investments
prior to their scheduled maturity date resulted in additional
investment income of approximately $.1 million in 1994, $3.7
million in 1993 and $7.5 million in 1992.
Net trading income and losses often fluctuate from year to year
based on market conditions for trading activities.
Net realized gains and losses often fluctuate from year to year.
The wholly owned subsidiaries sold fixed maturity investments of
$.2 billion in 1994, $.6 billion in 1993 and $.9 billion in 1992.
The effect of these sales on the amortization of cost of policies
purchased and cost of policies produced is discussed above under
BLH. Net realized gains (losses) increased (decreased)
amortization of the cost of policies purchased and the cost of
polices produced by $(2.1) million in 1994, $11.5 million in 1993
and $15.1 million in 1992.
Insurance policy benefits (including change in future policy
benefits) relate solely to policies with mortality and morbidity
features. These benefits have decreased over the last three years
due to the decreased emphasis on generating new premiums from such
products.
Interest expense on annuities and financial products decreased
over the last three years as a result of the reinsurance recapture
by WNC. The average rate credited on all insurance liabilities was
approximately 7.0 percent at December 31, 1994, 1993 and 1992.
Amortization related to operations decreased in 1993 as a result
of the reinsurance recapture previously discussed.
Other operating costs and expenses decreased over the last three
years primarily due to the reinsurance recapture by WNC.
<PAGE>
<PAGE> 30
<TABLE>
<CAPTION>
Life Re:
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Equity in earnings of Life Re $ - $ - $11.3
Income tax expense - - .7
Net income attributable to investment in Life Re - - 10.6
</TABLE>
Conseco sold its ownership interest in Life Re in November 1992,
thereby terminating this source of income.
Services Provided for Fees:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Revenue:
Investment management $ 39.9 $34.1 $25.0
Commissions 18.8 9.4 1.7
Administrative services, net of
directly related expenses 7.4 5.5 3.5
Financing services for Partnership II 4.9 - -
Total revenue 71.0 49.0 30.2
Less intercompany eliminations (13.0) (22.5) (17.3)
Revenues reported 58.0 26.5 12.9
Net income attributable to:
Investment management 18.6 14.7 12.3
Commissions (.8) (4.0) (.1)
Administrative services 4.8 3.6 2.3
Financing services for Partnership II 2.5 - -
Net income 25.1 14.3 14.5
</TABLE>
Conseco's fee revenues include: (i) fees for investment
management and mortgage origination and servicing; (ii) commissions
earned for insurance and investment product marketing and
distribution; (iii) administrative fees for policy administration,
data processing, product marketing and executive management
services; and (iv) fees for financing services provided to
Partnership II. Fees earned from services provided to consolidated
entities are eliminated.
In March 1993, Conseco acquired Bankmark, an insurance
marketing company which helps financial institutions provide
insurance and investment products to their customers. Through
Bankmark, financial institutions can offer products from several
insurance companies, including Conseco affiliated and nonaffiliated
companies. After its acquisition by Conseco, Bankmark began a
formal program to actively expand its business by developing
relationships with a few large money-center banks. As a result of
the costs incurred in conjunction with Bankmark's expansion,
Bankmark incurred a net loss of $.8 million in 1994 and $3.7
million in 1993.
Fee growth during the last three years came from new clients
(both affiliated and others) and from increasing Bankmark's
fee-producing activities. Bankmark's commission revenues totaled
$16.5 million in 1994, compared with $7.4 million in 1993.
<PAGE>
<PAGE> 31
Restructuring Activities:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Incentive earnings allocation $ - $ 36.6 $ 9.3
Gain on sale of stock 80.8 101.5 45.6
Expenses incurred in conjunction
with terminated acquisition 35.8 - -
Income tax expense 21.8 54.8 31.6
Net income 23.2 83.3 23.3
</TABLE>
Conseco earned incentive earnings allocations from Partnership
I when the total returns realized by the other partners exceeded
prescribed targets. Such amounts were recorded: (i) in 1992, based
on the returns resulting from the value of the CCP shares
distributed to the partners; and (ii) in 1993, based on the value
of BLH shares so distributed. Income from the sale of stock in
1992 resulted from Conseco's sale of its ownership in Life Re and
from Conseco's share of the gain realized from the public sale of
shares by CCP. The 1993 gain related to the public sale of shares
by BLH. Expenses incurred in conjunction with the terminated
acquisition are described in note 9 to the consolidated financial
statements.
Corporate and Other:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Net investment income $ 4.2 $12.4 $ 8.4
Interest expense on long-term debt 27.8 30.6 33.7
Other operating costs and expenses 28.7 35.9 26.2
Income tax benefit 18.7 17.6 17.3
Expenses before extraordinary charge 35.6 34.8 33.3
Extraordinary charge on extinguishment of debt 1.9 8.8 1.4
Net loss 37.5 43.6 34.7
</TABLE>
Corporate and other includes financing costs for debt on which
Conseco is directly liable and the costs associated with the
holding company operations.
Interest expense on long-term debt has declined over the last
three years because of: (i) the decrease in long-term debt through
scheduled and unscheduled principal payments; and (ii) the
refinancing of 12.75 percent senior subordinated notes, partially
offset by the $200 million senior secured loan used to acquire
additional shares of BLH in September 1993 (such debt was repaid in
February 1994) and amounts drawn on Conseco's revolving line of
credit during 1994 (such amounts were repaid in December 1994).
Other operating costs and expenses fluctuated over the last
three years principally as the result of compensation expense based
on the Company's earnings.
SALES
In accordance with generally accepted accounting principles,
insurance policy income shown in Conseco's consolidated statement
of operations consists of premiums received for policies which have
life contingencies or morbidity features. For annuity and
universal life contracts without such features, premiums collected
are not reported as revenues, but rather are reported as deposits
to insurance liabilities. Revenues for these products are
recognized over time in the form of investment income and surrender
or other charges.
<PAGE>
<PAGE> 32
Premiums collected by BLH in 1994 were $1,534.5 million, of
which $316.3 million were recorded as deposits to policy liability
accounts. This compares with $1,464.7 million collected ($263.7
million recorded as deposits) in 1993 and $1,368.9 million
collected ($233.3 million recorded as deposits) in 1992. BLH's
amounts in 1992, which are used as a basis of comparison in this
discussion include periods prior to Partnership I's acquisition of
BLH in November 1992. Collected premiums by type are provided in
the following table:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Individual health:
Medicare supplement $ 591.8 $ 565.5 $ 524.9
Long-term care 131.9 114.9 103.5
Other 116.5 142.4 160.5
-------- -------- --------
Total individual health 840.2 822.8 788.9
Annuities 291.6 239.1 187.0
Individual life and other 94.1 93.1 93.0
Group 308.6 309.7 300.0
-------- -------- --------
Total $1,534.5 $1,464.7 $1,368.9
======== ======== ========
</TABLE>
Medicare supplement policies accounted for approximately 39
percent of total collected premiums in the last three years.
Premiums from Medicare supplement policies increased in 1994
primarily due to a larger base of renewal premiums, improved
persistency and rate increases on renewal policies. During 1992,
BLH implemented a new strategy of pricing Medicare supplement
policies on an attained-age basis. This strategy, which produces
lower first-year premiums, along with an increase in the proportion
of policies sold with lower benefit levels, caused annualized new
business premiums from such new sales to decrease to $76.3 million
in 1994 compared with $80.5 million in 1993 and $83.0 million in
1992.
Long-term care plans accounted for 8.6 percent, 7.8 percent and
7.6 percent of total collected premiums in 1994, 1993 and 1992,
respectively. The increase was due to growth in new business and
a larger base of renewal premiums. Annualized new business
premiums were $27.9 million, $21.6 million and $18.1 million in
1994, 1993 and 1992, respectively.
Annuity premiums collected increased by 22 percent in 1994
following a 28 percent increase in 1993. BLH sold more single
premium deferred annuities because of an increased marketing
emphasis placed on annuity sales.
Collected premiums for other individual health products
decreased by 18 percent in 1994 following an 11 percent decrease in
1993. This decrease, which was anticipated, follows steps taken
previously to improve the profitability of the comprehensive major
medical product included in this category.
Premiums collected by Conseco's wholly owned subsidiaries were
$88.5 million, $142.2 million and $82.6 million in 1994, 1993 and
1992, respectively. These subsidiaries are no longer writing new
business, except that during 1994 and 1993, they collected $5.6
million and $61.8 million, respectively, of premiums from
guaranteed investment contracts and deposit funds for qualified
retirement plans maintained by the Company.
Premiums collected in 1993 and 1992 include $563.0 million and
$840.7 million, respectively, of premiums collected by WNC. As
previously discussed, Conseco's equity interest in WNC was sold in
1994.
Premiums collected by Statesman since Partnership II's
acquisition on September 29, 1994, were $284.4 million (compared to
$234.9 million collected by Statesman in the fourth quarter of
1993). Statesman's products include single premium deferred
annuities, flexible premium deferred annuities, interest sensitive
life insurance products (including universal life insurance),
traditional life insurance products and accident and health
insurance products. Of the $284.4 million in premiums collected
since Partnership II's acquisition, 65 percent was from single
premium deferred annuities, 30 percent was from flexible premium
deferred annuities, 4 percent was from life insurance products and
less than 1 percent was from accident and health insurance.
<PAGE>
<PAGE> 32
INVESTMENTS
The Company's investment strategy is to: (i) maintain a
predominately investment-grade fixed-income portfolio; (ii) provide
adequate liquidity for expected liability durations and other
requirements; and (iii) maximize total return through active
investment management. At December 31, 1994, the Company had
invested assets of approximately $8.2 billion. These assets were
primarily actively managed fixed maturities, as well as mortgage
loans, credit-tenant loans, policy loans, trading account
securities, investment in CCP, and short-term investments.
The following table summarizes investment yields earned over
the past three years and includes subsidiaries from the date of
their acquisition, and CCP and WNC until the date of their
deconsolidation.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Weighted average invested assets
(excluding investment in
unconsolidated subsidiaries):
As reported $4,707.2 $10,977.5 $9,524.5
Excluding unrealized
appreciation (depreciation)(a) 4,899.0 10,609.8 9,414.9
Net investment income 385.7 896.2 888.6
Yields earned:
As reported 8.2% 8.2% 9.3%
Excluding unrealized appreciation
(depreciation)(a) 7.9% 8.4% 9.4%
-------------
<FN>
(a) Excludes the effect of reporting fixed maturities at fair
value which the Company began to do in 1992 as described in
note 1 to the consolidated financial statements.
</TABLE>
Although investment income is a significant component of the
Company's total revenues, Conseco's profitability is determined by
spreads between interest rates earned and rates credited on annuity
contracts. At December 31, 1994, the average yield, computed on
the cost basis of the Company's investment portfolio, was 8.5
percent and the average interest rate credited on the Company's
total liability portfolio was 5.9 percent.
Actively Managed Fixed Maturities
Conseco's actively managed fixed maturity portfolio at December
31, 1994, was comprised primarily of debt securities of the U.S.
Government, public utilities and other corporations and
mortgage-backed securities. Mortgage-backed securities included
collateralized mortgage obligations ("CMOs") and mortgage-backed
pass-through securities.
At December 31, 1994, the Company's fixed maturity portfolio
had net unrealized losses of $373.4 million (equal to approximately
5.3 percent of the portfolio's carrying value), consisting of $25.1
million of unrealized gains and $398.5 million of unrealized
losses. Estimated fair values for fixed maturity investments were
determined based on estimates from nationally recognized pricing
services, broker-dealer market makers and internally developed
methods.
As discussed in the notes to the consolidated financial
statements, when the carrying values of actively managed fixed
maturity investments are adjusted for changes in fair value,
Conseco also adjusts the cost of policies purchased, cost of
policies produced and insurance liabilities. These adjustments
reflect the change in amortization that would be needed if those
fixed maturity investments had actually been sold at their fair
values and the proceeds reinvested at current interest rates.
At December 31, 1994, approximately 3.4 percent of Conseco's
invested assets and 4.0 percent of fixed maturity investments were
rated below investment grade by nationally recognized statistical
rating organizations (or, if not rated by such firms, with ratings
below Class 2 assigned by the National Association of Insurance
Commissioners). Conseco plans to maintain approximately the
present level of below investment grade fixed maturities. These
securities generally have greater risks than other corporate debt
investments, including risk of loss upon default by the borrower.
These securities generally are unsecured and often are subordinated
to other creditors. Issuers usually have high levels of
indebtedness and are more sensitive to adverse economic conditions,
such as recession or increasing interest rates, than are investment
grade issuers. The Company is aware of these risks and monitors
its below investment grade securities closely.
<PAGE>
<PAGE> 34
Conseco periodically evaluates the creditworthiness of each
issuer whose securities are held in the portfolio. Conseco pays
special attention to those securities whose market values have
declined materially for reasons other than changes in interest
rates or other general market conditions. The Company considers
available evidence to evaluate the realizable value of the
investment, the specific condition of the issuer, and the issuer's
ability to comply with the material terms of the security.
Evidence reviewed may include the recent operational results and
financial position of the issuer, information about its industry,
recent press releases, and other information. Conseco employs a
staff of experienced securities analysts in a variety of specialty
areas. Among other responsibilities, this staff compiles and
reviews such evidence. If evidence does not exist to support a
realizable value equal to or greater than the carrying value of the
investment and such decline in market value is determined to be
other than temporary, Conseco: (i) reduces the carrying amount to
its net realizable value, which becomes the new cost basis; and
(ii) reports the amount of the reduction as a realized loss.
Conseco recognizes any recovery of such reductions in the cost
basis of an investment as a realized gain only upon the sale,
repayment or other disposition of the investment. Conseco recorded
writedowns of investments of $1.0 million in 1994 as a result of
conditions which caused the Company to conclude that it would not
be able to collect all amounts due according to the terms of the
securities.
As of December 31, 1994, the amortized cost and estimated fair
value of fixed maturity investments in substantive default (i.e.,in
default due to nonpayment of interest or principal) were $9.8
million and $10.1 million, respectively. The Company had no fixed
maturity investment in technical (but not substantive) default
(i.e., in default, but not as to the payment of interest or
principal). There were no other fixed maturity investments about
which management had serious doubts as to the ability of the issuer
to comply on a timely basis with the material terms of the
instruments.
All mortgage-backed securities are subject to risks associated
with variable prepayments. As a result, these securities may have
a different actual maturity than planned at the time of purchase.
When securities having a carrying value greater than par are
backed by mortgages that prepay faster than expected, Conseco
records a charge to investment income. When securities having a
carrying value less than par prepay faster than expected, Conseco
records investment income.
The degree to which a mortgage-backed security is susceptible
to income fluctuations is influenced by: (i) the difference between
its carrying value and par; (ii) the relative sensitivity of the
underlying mortgages backing the security to prepayment in a
changing interest rate environment; and (iii) the repayment
priority of the security in the overall securitization structure.
The Company limits the extent of these risks by : (i) purchasing
securities which are backed by collateral with lower prepayment
sensitivity (such as mortgages priced at a discount to par value
and mortgages that are extremely seasoned); (ii) avoiding
securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities);
and (iii) investing in securities structured to reduce prepayment
risk (such as planned amortization class ("PAC") and targeted
amortization class ("TAC") collateralized mortgage obligations).
PAC and TAC instruments represented approximately 43 percent of the
Company's mortgage-backed securities at December 31, 1994. The
call-adjusted modified duration of the Company's mortgage-backed
securities at December 31, 1994, was 7.3 years.
If the Company determines that it will dispose of an investment
held in the actively managed fixed maturity category, the security
will be either sold or transferred to the trading account at its
fair value and the gain or loss will be recognized. There were no
such transfers in 1994. During 1994, the Company sold actively
managed fixed maturity securities with a $1.9 billion book value,
resulting in $9.3 million of investment losses (before related
expenses, amortization and taxes). Such securities were sold in
response to changes in the investment environment which created
opportunities to enhance the total return of the investment
portfolio without adversely affecting the quality of the portfolio
or the matching of expected maturities of assets and liabilities.
The realization of gains and losses affects the timing of the
amortization of the cost of policies produced and the cost of
policies purchased, as explained in note 11 to the consolidated
financial statements.
During 1994, fixed maturity investments with par values
totaling $66.9 million were redeemed prior to the scheduled
maturity date. As a result of such redemptions, Conseco recognized
losses of approximately $.1 million which were charged to
investment income.
Other Investments
Credit-tenant loans are loans on commercial properties where
the lease of the principal tenant is assigned to the lender and the
principal tenant, or any guarantor of such tenant's obligations,
has a credit rating at the time of origination of the loan of at
least BBB- or its equivalent. The underwriting guidelines consider
such factors as: (i) the lease term of the property; (ii) the
mortgagee's management ability, including business experience,
property management capabilities and financial soundness; and (iii)
such economic, demographic or other factors that may affect the
income generated by the property, or its value. The underwriting
guidelines also generally require a loan-to-value ratio of 75
percent or less. Credit-tenant loans are carried at amortized cost
and were $69.0 million at December 31, 1994, or .8 percent of
total invested assets. The total estimated fair value of
credit-tenant loans was $61.3 million at December 31, 1994.
<PAGE>
At December 31, 1994, the Company held mortgage loan
investments with a carrying value of $142.6 million (or 1.7 percent
of total invested assets) and a fair value of $146.7 million.
Approximately 91 percent of the mortgage loan investments were
commercial loans. Approximately 7 percent of the Company's
mortgage loan balance consisted of investments in junior and
residual interests of CMOs. Investments in junior and residual
interests of CMOs are instruments that entitle the Company to the
excess cash flows arising from the difference between: (i) the
cash flows required to make principal and interest payments on the
related senior interests in the CMOs; and (ii) the actual cash
flows received on the mortgage loan assets included in the CMO
portfolios. If prepayments vary from projections on the mortgage
loan assets included in such CMO portfolios, the total cash flows
to the Company from such junior and residual interests could change
from projected cash flows, resulting in a gain or loss.
Non-current mortgage loans were not significant at December 31,
1994. The Company had no realized losses on mortgage loans for the
year ended December 31, 1994. At December 31, 1994, the Company
had a loan loss reserve of $1.9 million. Approximately 11 percent,
10 percent and 10 percent of the mortgage loans were on properties
located in Texas, New York and Florida, respectively. No other
state comprised greater than 8 percent of the mortgage loan
balance.
At December 31, 1994, the Company held trading account
securities with a carrying value of $21.6 million. Trading account
securities are investments that are purchased with the intent to be
traded prior to their maturity, or are believed likely to be
disposed of in the foreseeable future as a result of market or
issuer developments. Effective December 31, 1993, with the
Company's adoption of Statement of Financial Accounting Standards
No. 115 ("SFAS 115"), trading account securities are carried at
estimated fair value, with the changes in fair value reflected in
the statement of operations. Prior to the adoption of SFAS 115,
unrealized gains or losses on trading account securities were
reflected as a component of shareholders' equity and not in the
statement of operations. The net unrealized gain (loss) on trading
account securities at December 31, 1994 and 1993, recorded in
trading income as a result of adopting SFAS 115, was immaterial.
Short-term investments totaled $295.4 million, or 3.6 percent of
invested assets at December 31, 1994, and consisted primarily
of commercial paper and repurchase agreements relating to
government securities.
CONSOLIDATED FINANCIAL CONDITION
Changes in the consolidated balance sheet of 1994 compared to
1993 reflected the operations of the Company and the capital and
financing transactions discussed below.
Total investments decreased principally because of: (i) the
unrealized loss adjustment to fixed maturity investments recognized
as an adjustment to shareholders' equity in accordance with SFAS
115; (ii) the sale of WNC (iii) the decrease in investment
borrowings described in the following paragraph; and (iv)
Conseco's repurchase of shares of its common stock. These
decreases were partially offset by: (i) the acquisition of
Statesman by Partnership II; and (ii) investments received by BLH
related to the recapture of annuity business ceded in prior years.
As part of its investment strategy, the Company enters into
reverse repurchase agreements and dollar-roll transactions
(specialized forms of collateralized lending involving
mortgage-backed securities) to increase its return on investments
and improve liquidity. These transactions are accounted for as
short-term collateralized borrowings and are collateralized by
pledged securities with fair values approximately equal to the loan
value. Conseco had no investment borrowings at December 31, 1994,
compared with investment borrowings of $427.7 million at December
31, 1993. The average amount of investment borrowings during 1994
was approximately $208.0 million, compared to $431.0 million during
1993.
Conseco's investment in CCP represents its share of the equity
of CCP. Such investment decreased during 1994 as a result of the
unrealized loss adjustment to fixed maturity investments recognized
by CCP in accordance with SFAS 115, offset by Conseco's equity in
the earnings of CCP.
Reinsurance receivables, which primarily represent liabilities
ceded under reinsurance agreements, decreased as a result of the
recapture of annuity business by BLH that had previously been ceded
to nonaffiliated companies as described in note 6 to the
consolidated financial statements.
Goodwill increased in 1994 as a result of the acquisition of
Statesman by Partnership II, as further described in note 2 to the
consolidated financial statements.
Insurance liabilities decreased primarily as a result of the
sale of WNC, partially offset by: (i) the acquisition of Statesman
by Partnership II; and (ii) the recapture of annuity business by
BLH that had previously been ceded.
<PAGE>
<PAGE> 36
Minority interest increased by $97.9 million during 1994
(further described in note 9 to the consolidated financial
statements). This was attributable to: (i) the minority interests'
equity in Statesman and its subsidiaries; and (ii) the minority
interest's equity in the net income of the Company's subsidiaries.
These changes were partially offset by: (i) the repurchase by BLH
of common shares held by the minority interest; (ii) the minority
interest's share of the unrealized depreciation of securities; and
(iii) dividends attributable to the minority interest.
Common stock and additional paid-in-capital increased by $63.0
million. This was a result of 3.9 million shares of common stock
issued pursuant to the Company's stock option and deferred
compensation programs for net proceeds and tax benefits of $16.9
million and $69.2 million, respectively. Additionally, $2.4
million was added to common stock and additional paid-in capital
relating to employee benefit plans. These increases were partially
offset by share repurchases, which reduced common stock and
additional paid-in capital by $25.5 million. As a result of
changes in common stock accounts, the number of common shares
outstanding decreased by 3.1 million shares.
Financial Ratios
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 2.26X 2.19X 1.54X 1.32X 1.17X
Ratio of earnings to fixed charges,
excluding interest on annuities
and financial products 4.55X 8.85X 6.24X 3.41X 1.97X
Ratio of earnings to fixed charges
on debt for which Conseco is
directly liable, excluding interest
on annuities and financial products 4.08X 12.73X 7.86X 3.67X 2.08X
Ratio of earnings to fixed charges
and preferred dividends 1.99X 2.04X 1.50X 1.30X 1.14X
Ratio of earnings to fixed charges
and preferred dividends, excluding
interest on annuities and financial
products 3.30X 6.00X 5.09X 2.99X 1.74X
Ratio of earnings to fixed charges
and preferred dividends for which
Conseco is directly liable,
excluding interest on annuities
and financial products 2.10X 6.49X 6.18X 3.04X 1.79X
Ratio of total debt (including
debt of CCP guaranteed by Conseco
until its retirement in 1993) to
total capital:
As reported .43X .34X .49X .49X .73X
Excluding unrealized
appreciation(depreciation)(a) .39X .36X .50X N/A N/A
Ratio of debt for which Conseco
is directly liable to total
capital:
As reported .20X .27X .22X .29X .60X
Excluding unrealized
appreciation(depreciation)(a) .18X .28X .23X N/A N/A
--------------------
<FN>
(a) Excludes the effect of reporting fixed maturities at fair value
which the Company began to do in 1992 as described in note 1 to
the consolidated financial statements.
</TABLE>
<PAGE> 37
Liquidity for Insurance Operations
Conseco's insurance operating companies generally receive
adequate cash flow from premium collections and investment income
to meet their obligations. Insurance policy liabilities are
primarily long-term and generally are paid from future cash flows.
Most of Conseco's assets, other than policy loans and its
investment in CCP, are invested in bonds and other securities,
substantially all of which are readily marketable. Although there
is no present need or intent to dispose of such investments, the
life companies could liquidate portions of their investments if
such a need arose. To increase their return on investments and
improve liquidity, the life companies from time to time will lend
U.S. Treasury securities in reverse repurchase agreements or lend
mortgage-backed securities in dollar-roll transactions.
Of the companies' total insurance liabilities at December 31,
1994, approximately 83 percent could be surrendered by the
policyholder, of which 78 percent were subject to penalty if
surrendered. Payment characteristics of the insurance liabilities
at December 31, 1994, were as follows (dollars in millions):
<TABLE>
<S> <C>
Payments under contracts containing
fixed payment dates:
Due in one year or less $ 79.1
Due after one year through five years 235.2
Due after five years through ten years 177.5
Due after ten years 548.5
--------
Total gross payments whose payment dates
are fixed by contract 1,040.3
Less amounts representing future interest
on such contracts 528.1
--------
Insurance liabilities whose payment dates
are fixed by contract 512.2
Insurance liabilities whose payment dates are
not fixed by contract 8,025.2
--------
Total insurance liabilities $8,537.4
========
</TABLE>
Of the above insurance liabilities under contracts containing
fixed payment dates, approximately 60 percent related to payments
that will be made on such date only if the contract holder is
living. Expected mortality is considered in determining the amount
of this liability. The remaining insurance liabilities with fixed
payment dates are payable regardless of the contract holder's
survival.
Approximately 20 percent of insurance liabilities were subject
to interest rates, ranging from 2 percent to 10 percent, fixed for
the life of the contract. The remaining liabilities generally were
subject to interest rates that could be reset at least annually.
The Company believes that it has adequate short-term
investments and readily marketable investment grade securities to
cover the payments under contracts containing fixed payment dates
plus any likely cash needs for all other contracts. The Company's
investment portfolio at December 31, 1994, included $.3 billion of
short-term investments, $2.9 billion of U.S. Government/agency and
mortgage-backed securities and $3.6 billion of publicly traded
investment grade bonds. The Company believes that such investments
could be readily sold at or near carrying value or used to
facilitate borrowings under reverse repurchase agreements. At
December 31, 1994, the Company's portfolio of bonds, notes and
redeemable preferred stocks had an aggregate unrealized loss of
$373.4 million.
Liquidity of BLH
As a holding company whose principal assets are the securities
of its insurance subsidiaries, BLH's ability to meet debt service
obligations and pay operating expenses and dividends depends
primarily on the receipt of sufficient funds from its subsidiaries.
Bankers Life Insurance Company of Illinois ("BLI", the parent of
Bankers Life) provides liquidity to BLH by paying principal and
interest on a surplus debenture and by paying dividends.
BLH provided BLI with funds to acquire Bankers Life. In
exchange, BLH received a $500 million surplus debenture from BLI.
he surplus debenture was approved by the Illinois Department of
Insurance ("DOI"). During 1994 and 1993, BLI repaid principal of
$25.0 million and $15.0 million, respectively, plus accrued
interest on the surplus debenture. BLI may repay principal and
interest on the surplus debenture only when the DOI is satisfied
that the financial condition of BLI warrants that action; such
approval may not be withheld if BLI submits satisfactory evidence
of surplus of at least the amount stipulated in the surplus
debenture.
<PAGE>
<PAGE> 38
A summary of maturity dates and amounts (dollars in millions)
of the surplus debenture is shown below. Interest is payable
quarterly generally at 2 percent above the prime rate (10.5 percent
at December 31, 1994).
<TABLE>
<S> <C>
1995 $ 30.0
1996 30.0
1997 30.0
1998 30.0
1999 30.0
Thereafter 310.0
------
Total $460.0
======
</TABLE>
BLI's ability to service its obligation under the surplus
debenture depends upon its ability to receive dividends and tax
sharing payments from Bankers Life. Bankers Life may pay dividends
up to $93.4 million without regulatory approval during 1995. Under
an intercompany tax sharing agreement, Bankers Life remits tax
payments to BLI based upon its tax liabilities calculated on a
separate company basis.
At December 31, 1994, BLH's debt service obligations included
a $99.0 million principal amount senior term loan payable in annual
installments and $180 million principal amount of senior
subordinated notes due in 2002. Future annual debt service
requirements are discussed in note 8 to the consolidated financial
statements.
At December 31, 1994, BLH had short-term investments of $88.7
million. Conseco believes that BLH could generate additional
liquidity, if needed in the future, by issuing equity on debt
securities or by converting existing assets to cash (such as the
sale or transfer of existing blocks of insurance through
reinsurance arrangements).
Of the proceeds from its IPO, BLH contributed $114 million to
the capital of its subsidiaries. BLH believes its life
subsidiaries are adequately capitalized and will not require
additional investment to maintain their current operations.
In addition to its debt service obligations, BLH uses cash to
pay for administrative services provided by Conseco's wholly owned
subsidiaries and to pay dividends on its common stock.
Liquidity of Statesman
Statesman relies on dividends from ALHC to fund its operating
expenses, dividends and interest expense. Statesman is not
expected to pay dividends on its common stock in the near future.
Statesman is obligated to continue to pay interest to holders of
its 6-1/4% Convertible Subordinated Debentures due 2003
("Debentures") who have not converted such securities. An
aggregate of $24.2 million principal amount of such Debentures
remains outstanding at December 31, 1994. Statesman expects a
substantial amount of its remaining Debentures to be converted in
1995, reducing its debt service costs. Amounts required to pay all
outstanding Debentures, including the optional conversion
consideration, are held in escrow until the Debentures are
converted, redeemed or mature.
In addition, depending on the outcome of the Statesman
Litigation as described in note 2 to the consolidated financial
statements, dividends may be payable on the Government Preferred
Stock. The Government Preferred Stock provides for cumulative
annual dividends of approximately $1.1 million; as of December 31,
1994, an aggregate of $5.8 million of such dividends had been
accrued but had not been paid.
Statesman has $57.0 million par value 1994 Series Preferred
Stock outstanding. Dividends on such preferred stock accrue
annually at 13 percent in additional shares through September 2006.
ALHC needs liquidity primarily to service its debt, pay
dividends on its capital stock and pay operating expenses. The
primary sources of funds for these payments are: (i) dividends on
the capital stock of American Life; (ii) interest payments on
surplus notes from American Life; and (iii) payments from American
Life and Vulcan Life under a tax sharing agreement.
<PAGE>
<PAGE> 39
ALHC has $150.0 million principal indebtedness outstanding
under its senior subordinated notes and $170.0 million principal
indebtedness under its senior term loan (see note 6 to the
consolidated financial statements). ALHC's annual interest
payments for 1995 will be: (i) approximately $16.9 million with
respect to the senior notes; and (ii) approximately $13.4 million
with respect to the senior term loan, (based on rates in effect at
December 31, 1994). ALHC currently plans to borrow an additional
$30.0 million under the senior term loan to fund the Contingent
Payment Rights as described in note 2 to the consolidated financial
statements or a payment to the holder of the Government Preferred
Stock. The outstanding principal balance under the senior term
loan must be repaid in installments beginning in 1995 through 2002
and bears interest at a variable rate.
Dividends on ALHC's common stock are limited by: (i) the rights
of holders of its preferred stock to receive cumulative dividends
in full before any dividends may be paid on common stock; and (ii)
the covenants of the senior term loan. ALHC currently has
redeemable preferred stock outstanding, on which aggregate
dividends of $8.8 million are payable annually. The two series of
redeemable preferred stock outstanding must be redeemed in 2007 and
2008 at their respective par values of $69.0 million and $30.0
million. ALHC holds zero coupon U.S. Treasury securities in escrow
which will provide adequate funds for the redemption of the
preferred shares on the mandatory redemption date of each issue.
Liquidity of Conseco (Parent Company)
The parent company (Conseco, Inc.) uses cash primarily to
service its debt, pay dividends on preferred and common stock and
meet administrative expenses. The wholly owned subsidiaries, BLH
and CCP provide liquidity to Conseco by paying dividends and fees
for services provided. The parent Company may also issue debt or
equity securities or sell all or a portion of its investments in
subsidiaries or affiliates. These sources have historically
provided adequate cash flow to fund (i) the needs of the parent
company's normal operations; (ii) internal expansion, acquisitions
and investment opportunities; (iii) the retirement of debt and
equity.
<PAGE>
<PAGE> 40
The following table shows the cash flow activity of the parent
company and its non-life subsidiaries:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Amounts received:
Dividends from wholly owned subsidiaries $ 3.3 $ 3.8 $ 72.0
Dividends from CCP, BLH and WNC 16.4 1.7 .3
Tax sharing payments from subsidiaries 13.7 101.9 -
Fees for shared costs from wholly owned
subsidiaries 1.1 15.4 12.5
Fees from CCP, BLH, WNC and Statesman 44.7 18.3 8.6
Fees from unaffiliated companies 30.1 20.4 13.3
Proceeds from the issuance of equity securities 3.2 281.7 6.3
Proceeds from the issuance of debt 158.0 393.4 -
Proceeds from the sale of shares of WNC and
related transactions 811.7 - -
Repayment of debt and redemption of
preferred stock by BLH and CCP - 118.3 12.1
Proceeds from the sale of stock of Life Re - - 64.0
Principal and interest on surplus debentures - - 78.3
Amounts paid:
Parent company costs (67.6) (62.9) (27.7)
Interest on debt of Conseco (21.2) (23.7) (21.5)
Interest on amounts due from Conseco
to life subsidiaries (9.3) (8.6) (10.3)
Common and preferred dividends (35.9) (23.0) (7.6)
Investments in equity investments - (59.5) -
Investment in consolidated subsidiaries (17.0) (391.4) (129.7)
Investment in Kemper Corporation common stock (24.7) - -
Expense incurred in terminated acquisition (17.5)
Payments to affiliates (58.8) - -
Payments on debt, including prepayments (378.4) (180.0) (24.8)
Repurchases of common stock (354.3) (25.3) (49.4)
Payments to retire preferred stock (3.3) (50.0) -
Income taxes (4.5) (91.1) -
Other .5 (14.5) (4.3)
------ ------ ------
Change in short-term investments of parent
and its non-life subsidiaries 90.2 24.9 (7.9)
Short-term investments, beginning of year 42.3 17.4 25.3
------ ------ ------
Short-term investments, end of year $132.5 $ 42.3 $ 17.4
====== ====== ======
</TABLE>
At December 31, 1994, the parent company and its non-life
subsidiaries had short-term investments of $132.5 million, of which
$8.1 million was expended in January 1995 for accrued interest and
dividends. The life subsidiaries are permitted to distribute an
additional $48.4 million to the parent company in 1995. The parent
company and its non-life subsidiaries had additional investments
in nonaffiliates of $40.4 million at December 31, 1994, which, if
needed, could be liquidated or contributed to the insurance
subsidiaries. Conseco believes that it could generate additional
liquidity, if needed in the future, through equity offerings, debt
issuance, or the conversion of existing assets to cash, including
the sale of a partial or entire interest in its affiliates.
Statutory Limitations on Payments by Life Insurance Subsidiaries
to Their Parent
As described in the preceding section, Conseco receives funds
from its wholly owned insurance subsidiaries from dividends and
fees for shared expenses. In connection with its acquisition of
certain life insurance subsidiaries, Conseco received surplus
debentures from the subsidiaries; the repayment terms were
established and approved by the applicable regulatory authorities
at the time of each acquisition. All such surplus debentures with
Conseco's wholly owned insurance subsidiaries were eliminated by a
contribution to the statutory capital of such subsidiaries at
December 31, 1992. Annual dividends in excess of maximum amounts
prescribed by state statutes (so-called "extraordinary dividends")
may not be paid without the approval of the insurance commissioner
of each state of domicile.
<PAGE>
<PAGE> 41
Statutory operating results and statutory surplus are determined
according to statutes adopted by each state in which the
subsidiaries do business. Statutory surplus bears no direct
relationship to equity as determined under generally accepted
accounting principles ("GAAP"). With respect to new business,
statutory accounting practices require that: (i) acquisition costs
and (ii) reserves for future guaranteed principal payments and
interest in excess of statutory rates, be expensed in the year the
new business is written. These items cause a statutory loss
("surplus strain") on many insurance products in the year they are
issued. The Company designs its products to minimize such
first-year losses, but certain products continue to cause a
statutory loss in the year written. For each product, the Company
controls the amount of new premiums written in order to manage the
effect of such statutory surplus strain.
Note 13 to the consolidated financial statements shows the
difference between pretax income reported using statutory
accounting practices (before deduction of expenses paid to
affiliates and transfers to and from IMR and the amortization of
IMR) and GAAP as follows:
<TABLE>
<CAPTION>
Statutory income
greater (less) than
Year GAAP income
---- -----------
(Dollars in millions)
<S> <C>
1994 $(90.8)
1993 46.5
1992 63.2
</TABLE>
Insurance departments in the states where the Company's life
insurance subsidiaries are domiciled or do business require
insurance companies to make annual and quarterly filings. Portions
of surplus, called the interest maintenance reserve ("IMR") and
the asset valuation reserve ("AVR"), are required to be
appropriated and reported as liabilities. The IMR captures all
investment gains and losses 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 investment gains and losses
related to changes in creditworthiness; it is also adjusted each
year based on a formula related to the quality and loss experience
of the Company's investment portfolio. These reserves affect the
ability of the Company's insurance subsidiaries to reflect
investment gains and losses in statutory earnings and surplus.
INFLATION
Inflation does not have a significant effect on Conseco's
balance sheet; the Company has minimal investments in property,
equipment or inventories.
Medical cost inflation has had a significant impact on BLH's
operations. These costs have continued to increase in recent years
in excess of the Consumer Price Index. Medical costs will likely
continue to rise, although recently the rate of increase has
slowed. The impact on BLH's operations depends upon its ability to
increase its premium rates. Such increases are subject to approval
by the insurance departments of each state in which BLH sells its
products. Prior to the standardization of Medicare supplement
plans, approximately two-thirds of the states permitted rate plans
with automatic escalation clauses. This permitted BLH, in periods
following initial approval, to adjust premium rates for changes in
Medicare deductibles and increases in medical cost inflation
without refiling with the regulators. Currently, all rate changes
for standardized plans must be individually approved by each
state. BLH's pricing of its new standardized supplement plans
reflects the impact of these filings and the lengthening of time
required to implement rate increases.
OUTLOOK
As indicated throughout this report, Conseco intends to
continue its strategy of growth through its three principal sources
of earnings: operating life insurance companies, providing
services for fees to the affiliated companies and others, and
acquiring and restructuring life insurance companies.
Growth Through Operations of Life Insurance Companies
Conseco's life insurance operations include: (i) BLH, in which
Conseco had a 58 percent ownership interest at December 31, 1994,
and a 60.3 percent ownership interest at February 28, 1995; (ii)
Statesman, in which Conseco has a 25 percent ownership interest;
(iii) CCP, in which Conseco had a 45 percent ownership interest at
December 31, 1994, and a 49.5 percent ownership interest at
February 28, 1995, and (iv) the wholly owned life insurance
subsidiaries, principally Bankers National and National Fidelity.
<PAGE>
<PAGE> 42
On February 27, 1995, Conseco announced that its board of
directors had approved proposals to acquire, in separate
transactions, the outstanding shares of CCP and BLH that it does
not already own. Under the proposal, CCP and BLH would merge into
Conseco, with Conseco being the surviving corporation. Each holder
of CCP shares other than Conseco would receive $22.50 per share in
cash. Each holder of BLH shares other than Conseco would receive
$22.00 per share in cash. Each proposed merger transaction
requires the approval of holders of a majority of outstanding
shares of the company being acquired (other than shares held by
Conseco) voting at a special stockholders' meeting.
CCP has: (i) a sizable and profitable block of in-force
business; and (ii) a distribution system that has the potential to
generate growth in the SPDA and 403(b) tax sheltered annuity
markets.
BLH's strategy is to continue to grow profitably its individual
health and other insurance business while maintaining appropriate
levels of capital and surplus. A primary area of focus is
expanding and enhancing the productivity of the career agency
force, which is BLH's main distribution system. During 1994, BLH's
agent force grew by 3 percent. BLH's growth strategy also
emphasizes increased cross-selling to existing policyholder
households and developing products tailored to meet specific
consumer needs. As a result of cross-selling, 1994 annualized new
business premiums increased 29 percent for long-term products and
23 percent for annuities.
The U.S. Congress and state legislatures are currently
considering various proposals relating to the country's health care
delivery system. BLH is unable to predict what changes to the
country's health care system will be enacted and, if enacted, their
scope and effects on its business. However, BLH continues to
believe that opportunities for its products will grow under any
realistic and affordable health care reform scenario.
Conseco believes that the statutory surplus of its insurance
subsidiaries and investees is adequate. Conseco expects that
statutory earnings in 1995 will exceed amounts needed by the
holding companies for debt service and other requirements. Such
excesses will be available to increase statutory capital of the
life insurance subsidiaries and investees so that their internal
growth can continue.
Services Provided for Fees
Conseco continues to provide various services to BLH,
Statesman, CCP and the wholly owned subsidiaries including
investment management, mortgage origination and servicing, policy
and claims administration, data processing, product marketing and
executive management services. Additionally, Conseco provides such
services to other unaffiliated clients, principally insurance
companies. Conseco intends to provide investment management
services to all companies acquired by Partnership II, and to
provide administrative, data processing and other services to such
companies when appropriate. Conseco also intends to expand its
service fee revenue by seeking similar arrangements with other
unaffiliated clients. Such arrangements would take advantage of
Conseco's ability to administer products and investments without
requiring Conseco to provide additional capital needed to support
those products. In March 1993, Conseco acquired Bankmark, an
insurance marketing company which develops relationships with
financial institutions to provide insurance and investment products
to their customers. After its acquisition by Conseco, Bankmark
began a formal program to actively expand its business by
developing relationships with a few large money-center banks.
Acquisition and Restructuring of Life Insurance Companies
The Company believes that a number of life insurance companies
will be available to be acquired in the next 10 years as a result
of strategic restructuring and consolidation within the life
industry. The Company expects to participate in such acquisitions
through Partnership II, using the capital provided by: (i) the
partnership; (ii) mezzanine capital that may be provided by the
individual partners of Partnership II and others; and (iii) debt
capital from various sources.
At the current time Conseco believes that some sources of
capital (primarily bank financing) are more available to life
insurance companies than in some prior periods. As a result: (i)
more restructuring and financing alternatives are available to
owners and managers of insurance companies so that fewer companies
are currently seeking buyers, such as Conseco; and (ii) more buyers
have access to such capital and are creating more competition to
purchase those companies that are available. Consequently, Conseco
believes it may be able to complete fewer acquisitions in the near
future while these conditions exist.
<PAGE>
<PAGE> 43
The Company believes there will be a period in the future when
it will be more difficult to obtain financing for acquisitions
because of conditions in the capital markets, causing a greater
dependence on equity capital financing, such as that obtained
through Partnership II. Conseco will actively seek alternative
capital sources, if needed, to finance acquisitions. If those
conditions in the capital markets continue, it may also affect the
availability of appropriate acquisition targets, if sellers of
insurance companies decide to wait for more favorable conditions.
In addition, Conseco's increased size and evolving strategies will
eliminate a number of potential acquisition candidates who are
either too small or are inappropriate strategic targets. However,
Conseco believes it has the resources and capabilities to continue
its strategy of acquiring and restructuring life insurance
companies. It also believes that its past record of successfully
acquiring, financing and operating life insurance companies will be
an advantage compared to others who may attempt to acquire
available candidates.
As part of its program of exploring opportunities to improve
its capital structure, Conseco continually reviews its corporate
structure and the need and desirability of restructuring the
existing debt and equity of the Company and its affiliates.
______________________________
<PAGE>
<PAGE> 44
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements
<S> <C>
Report of Management . . . . . . . . . . . . . . . . . . . . . . . . 45
Report of Independent Accountants. . . . . . . . . . . . . . . . . . 46
Consolidated Balance Sheet at December 31, 1994 and 1993 . . . . . . 47
Consolidated Statement of Operations for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . 49
Consolidated Statement of Shareholders' Equity
for the years ended December 31, 1994, 1993 and 1992 . . . . . . . 51
Consolidated Statement of Cash Flows for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . 52
Notes to Consolidated Financial Statements . . . . . . . . . . . . . 54
/TABLE
<PAGE>
<PAGE> 45
REPORT OF MANAGEMENT
To Our Shareholders
Management of Conseco, Inc. is responsible for the reliability
of the financial information in this annual report. The financial
statements are prepared in accordance with generally accepted
accounting principles, and the other financial information in this
annual report is consistent with that of the financial statements
(except for such information described as being in accordance with
regulatory or statutory accounting requirements).
The integrity of the financial information relies in large part
on maintaining a system of internal control that is established by
management to provide reasonable assurance that assets are
safeguarded and transactions are properly authorized, recorded and
reported. Reasonable assurance is based upon the premise that the
cost of controls should not exceed the benefits derived from them.
The Company's internal auditors continually evaluate the adequacy
and effectiveness of this system of internal control and actions
are taken to correct deficiencies as they are identified.
Certain financial information presented depends upon
management's estimates and judgments regarding the ultimate outcome
of transactions which are not yet complete. Management believes
these estimates and judgments are fair and reasonable in view of
present conditions and available information.
The Company engages independent accountants to audit its
financial statements and express their opinion thereon. They have
full access to each member of management in conducting their
audits. Such audits are conducted in accordance with generally
accepted auditing standards and include a review of internal
controls, tests of the accounting records, and such other auditing
procedures as they consider necessary to express an opinion on the
Company's financial statements.
The Audit Committee of the Board of Directors, composed solely
of nonmanagement directors, meets periodically with management,
internal auditors and the independent accountants to review
internal accounting control, audit activities and financial
reporting matters. The internal auditors and the independent
accountants have full and free access to the Audit Committee.
Stephen C. Hilbert Rollin M. Dick
Chairman of the Board, Executive Vice President and
President and Chief Financial Officer
Chief Executive Officer
<PAGE>
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders
Conseco, Inc.
We have audited the accompanying consolidated balance sheet of
Conseco, 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 Conseco, 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 in the period
ended December 31, 1994, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 6, 1995
<PAGE>
<PAGE> 47
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEET
December 31, 1994 and 1993
(Dollars in millions)
<CAPTION>
ASSETS
1994 1993
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair
value (amortized cost: 1994 - $7,440.5;
1993 - $9,526.5) $ 7,067.1 $ 9,821.7
Equity securities at fair value
(cost: 1994 - $43.0; 1993 - $30.2) 39.6 30.3
Mortgage loans 142.6 158.4
Credit-tenant loans 69.0 326.9
Policy loans 175.1 190.0
Investment in CCP Insurance, Inc. 195.4 244.3
Other invested assets 68.7 64.2
Trading account securities 21.6 105.8
Short-term investments 295.4 666.4
Assets held in separate accounts 84.9 81.1
--------- ---------
Total investments 8,159.4 11,689.1
Accrued investment income 126.3 168.3
Reinsurance receivables 45.5 511.1
Income taxes 195.2 -
Cost of policies purchased 1,021.6 623.7
Cost of policies produced 300.7 238.6
Goodwill (net of accumulated amortization:
1994 - $25.3; 1993 - $14.3) 687.7 320.6
Property and equipment at cost
(net of accumulated depreciation: 1994 - $27.1;
1993 - $21.1) 89.1 71.7
Securities segregated for future redemption
of preferred stock of a subsidiary 36.2 -
Cash segregated for the redemption of convertible
subordinated debentures of a subsidiary 24.2 -
Other assets 126.0 126.2
--------- ---------
Total assets $10,811.9 $13,749.3
========= =========
<FN>
(continued on next page)
The accompanying notes are an integral part
of the consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 48
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1994 and 1993
(Dollars in millions)
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities $ 8,537.4 $10,798.3
Income tax liabilities - 118.2
Investment borrowings - 427.7
Other liabilities 318.0 256.4
Liabilities related to separate accounts 84.9 79.0
Notes payable of Conseco 191.8 413.0
Notes payable of Partnership II entities, not direct
obligations of Conseco 331.1 -
Notes payable of Bankers Life Holding Corporation,
not direct obligations of Conseco 280.0 290.3
--------- ---------
Total liabilities 9,743.2 12,382.9
--------- ---------
Minority interest 321.7 223.8
--------- ---------
Shareholders' equity:
Preferred stock 283.5 287.5
Common stock and additional paid-in capital
(no par value, 500,000,000 shares authorized,
shares issued and outstanding: 1994 - 22,184,850;
1993 - 25,311,773) 165.8 102.8
Unrealized appreciation (depreciation) of securities
(net of applicable deferred income taxes:
1994 - $(65.9); 1993 - $41.8) (139.7) 97.5
Retained earnings 437.4 654.8
--------- ---------
Total shareholders' equity 747.0 1,142.6
--------- ---------
Total liabilities and shareholders' equity $10,811.9 $13,749.3
========= =========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 49
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions, except per share data)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance policy income $1,285.6 $1,293.8 $ 378.7
Investment activity:
Net investment income 385.7 896.2 888.6
Net trading income (losses) (4.9) 93.1 35.9
Net realized gains (losses) (25.6) 149.5 124.3
Fee revenue 58.0 26.5 12.9
Other income 17.5 1.4 1.5
Equity in earnings of Life Re - - 11.3
Equity in earnings of CCP Insurance,
Inc. 24.7 37.4 15.8
Equity in earnings of Western
National Corporation 40.2 - -
Restructuring income 80.8 138.1 54.9
------- ------- -------
Total revenues 1,862.0 2,636.0 1,523.9
------- ------- -------
Benefits and expenses:
Insurance policy benefits 915.4 1,007.8 334.7
Change in future policy benefits 42.6 60.0 40.2
Interest expense on annuities and
financial products 134.7 408.5 506.8
Interest expense on long-term debt 59.3 58.0 46.2
Interest expense on short-term
investment borrowings 7.7 10.6 8.8
Amortization related to operations 133.3 140.2 62.2
Amortization and change in future policy
benefits related to realized gains (5.3) 126.3 93.4
Expenses incurred in conjunction with
terminated acquisition 35.8 - -
Other operating costs and expenses 214.1 214.4 101.6
------- ------- -------
Total benefits and expenses 1,537.6 2,025.8 1,193.9
------- ------- -------
Income before income taxes, minority
interest and extraordinary charge 324.4 610.2 330.0
Income tax expense 111.0 223.1 124.6
------- ------- -------
Income before minority interest and
extraordinary charge 213.4 387.1 205.4
Less minority interest 59.0 78.2 30.6
------- ------- -------
<FN>
(Continued on next page)
The accompanying notes are an integral part
of the consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 50
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions, except per share data)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Income before extraordinary charge 154.4 308.9 174.8
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest 4.0 11.9 5.3
------ ------ ------
Net income 150.4 297.0 169.5
Less preferred stock dividends 18.6 20.6 5.5
------ ------ ------
Earnings applicable to common stock $131.8 $276.4 $164.0
====== ====== ======
Earnings per common share and common
equivalent share:
Primary:
Weighted average shares 26,348,000 29,245,000 29,479,000
Earnings before extraordinary charge $5.15 $9.86 $5.59
Extraordinary charge .15 .41 .16
----- ----- -----
Net income $5.00 $9.45 $5.43
===== ===== =====
Fully diluted:
Weighted average shares 30,859,000 33,495,000 29,603,000
Earnings before extraordinary charge $5.00 $9.12 $5.56
Extraordinary charge .13 .35 .16
----- ----- -----
Net income $4.87 $8.77 $5.40
===== ===== =====
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 51
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Preferred stock:
Balance, beginning of year $ 287.5 $ 50.0 $ 50.0
Series D preferred shares issued - 287.5 -
Preferred shares redeemed (4.0) (50.0) -
------- ------- ------
Balance, end of year $ 283.5 $ 287.5 $ 50.0
======= ======== ======
Common stock and additional paid-in capital:
Balance, beginning of year $ 102.8 $ 115.4 $139.5
Amounts related to stock options and
employee benefit plans 19.3 6.4 7.4
Tax benefit related to issuance of shares
under employee benefit plans 69.2 15.3 17.9
Cost of shares acquired charged to
common stock and additional paid-in
capital (25.5) (25.3) (49.4)
Cost of issuance of Series D
preferred shares - (9.0) -
------- ------- ------
Balance, end of year $ 165.8 $ 102.8 $115.4
======= ======== ======
Unrealized appreciation (depreciation)
of securities:
Balance, beginning of year $ 97.5 $ 42.9 $ 18.0
Change in unrealized appreciation (237.2) 54.6 24.9
------- ------- ------
Balance, end of year $(139.7) $ 97.5 $ 42.9
======= ======== ======
Retained earnings:
Balance, beginning of year $ 654.8 $ 386.0 $224.1
Net income 150.4 297.0 169.5
Cost of shares acquired charged
to retained earnings (337.0) - -
Dividends on common stock (12.2) (7.6) (2.1)
Dividends on preferred stock ( 18.6) (20.6) (5.5)
------- -------- ------
Balance, end of year $ 437.4 $ 654.8 $386.0
======= ======== ======
Total shareholders' equity $ 747.0 $1,142.6 $594.3
======= ======== ======
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 52
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 150.4 $ 297.0 $ 169.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 136.3 235.4 161.5
Income taxes (4.7) 5.6 1.2
Insurance liabilities 67.9 89.5 128.4
Interest credited to insurance liabilities 134.7 408.5 506.8
Fees charged to insurance liabilities (43.0) (38.8) (55.3)
Accrual and amortization of investment income (37.6) (34.0) (56.8)
Deferral of cost of policies produced (161.8) (159.7) (83.2)
Restructuring income (80.8) (138.1) (18.5)
Equity in undistributed earnings of Life Re - - (11.3)
Equity in undistributed earnings of
CCP Insurance, Inc. (23.8) (36.6) (15.6)
Equity in undistributed earnings of
Western National Corporation (37.3) - -
Trading account securities 23.4 287.0 750.1
Minority interest 45.1 77.2 28.9
Extraordinary charge on extinguishment of debt 4.0 11.9 5.3
Other (37.2) 16.0 .6
------ -------- --------
Net cash provided by operating activities 135.6 1,020.9 1,511.6
------ -------- --------
Cash flows from investing activities:
Proceeds from sale of shares of Western National
Corporation and related transactions, net of
cash held before deconsolidation and the
settlement of intercompany balances 459.2 - -
Sales of investments 1,932.9 6,386.2 4,155.3
Maturities and redemptions 148.2 1,428.9 1,044.8
Purchases of investments (2,749.8) (9,703.4) (6,925.6)
Cash received from reinsurance recapture 158.8 - -
Purchase of additional shares of Bankers
Life Holding Corporation - (237.6) -
Purchase of additional shares of CCP Insurance, Inc. - (59.5) -
Purchase of The Statesman Group, Inc. (215.3) - -
Purchase of Bankmark - (3.8) -
Acquisition of Partnership I companies - - (203.0)
Cash held by subsidiaries of CCP Insurance, Inc.
before public offering - - (350.6)
Other (31.3) (25.7) (16.0)
------ -------- --------
Net cash used by investing activities (297.3) (2,214.9) (2,295.1)
------ -------- --------
(continued on next page)
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 53
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of capital stock, net $ 16.9 $ 281.7 $ 6.3
Issuance of equity interests in subsidiaries, net 68.0 405.3 96.4
Issuance of notes payable of Conseco, net 158.0 393.4 -
Issuance of notes payable of subsidiaries,
net - not direct obligations of Conseco 306.4 - 584.4
Payments to repurchase equity securities of Conseco (366.5) (75.3) (49.4)
Payments to repurchase equity securities
of subsidiaries (35.7) (52.2) (21.7)
Payments on notes payable of Conseco (378.4) (157.2) (23.8)
Payments on notes payable of subsidiaries
- not direct obligations of Conseco (66.5) (127.3) (291.2)
Deposits to insurance liabilities 634.6 891.9 1,131.8
Investment borrowings (207.2) 220.4 280.8
Withdrawals from insurance liabilities (307.6) (563.9) (716.0)
Dividends paid (31.3) (23.0) (7.6)
------ -------- --------
Net cash provided (used) by
financing activities (209.3) 1,193.8 990.0
------ -------- --------
Net increase (decrease) in
short-term investments (371.0) (.2) 206.5
Short-term investments, beginning of year 666.4 666.6 460.1
------ -------- --------
Short-term investments, end of year $295.4 $ 666.4 $ 666.6
====== ======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 54
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The following summary explains the accounting policies we use
to arrive at some of the more significant numbers in our financial
statements. We prepare our financial statements in accordance with
generally accepted accounting principles ("GAAP"). We follow the
accounting standards established by the Financial Accounting
Standards Board ("FASB") and the American Institute of Certified
Public Accountants ("AICPA") and the Securities and Exchange
Commission.
Conseco, Inc. ("We," "Conseco" or "the Company") is a
specialized financial services holding company. We make
controlling strategic investments in insurance companies and
related businesses, manage the operations of those businesses to
increase their value, provide services to acquired companies and
other businesses, and seek to realize the increase in value that
our management brings to acquired companies through sale or
restructuring. The insurance companies in which we invest develop,
market, issue and administer annuity, individual health insurance
and life insurance products. Conseco provides administrative, data
processing and investment management services to affiliated and
nonaffiliated companies. Our principal wholly owned life insurance
subsidiaries are Bankers National Life Insurance Company, National
Fidelity Life Insurance Company ("National Fidelity") and Lincoln
American Life Insurance Company.
Consolidation issues. During 1990, Conseco formed Conseco
Capital Partners, L.P. ("Partnership I"), which raised and invested
$99.5 million of capital. Approximately half of this capital was
provided by Conseco; the balance was provided by other investors.
A wholly owned subsidiary of Conseco was the sole general partner
of Partnership I. Partnership I was the Company's vehicle for
acquiring four insurance companies: Great American Reserve
Insurance Company ("Great American Reserve") in June 1990,
Jefferson National Life Insurance Company ("Jefferson National") in
November 1990, Beneficial Standard Life Insurance Company
("Beneficial Standard") in March 1991 and Bankers Life and Casualty
Company and its subsidiary, Certified Life Insurance Company
(collectively, "Bankers Life") in November 1992. We accounted for
all of these acquisitions as purchases, reflecting the acquired
operations in our financial statements beginning with the
acquisition dates. As sole general partner, Conseco exercised
unilateral control over Partnership I. We were therefore required
to include the accounts of Partnership I and its majority-owned
subsidiaries in our consolidated financial statements until
Partnership I was liquidated on March 31, 1993. See note 2 for a
description of the activities of Partnership I.
CCP Insurance, Inc. ("CCP"), a newly organized holding company
for Partnership I's first three acquisitions, completed an initial
public offering (IPO) in July 1992. As a result of the IPO,
Conseco no longer had unilateral control over those entities and
stopped including their accounts in our consolidated financial
statements. We have included CCP and its subsidiaries in our
financial statements on the equity basis since July 1, 1992.
Bankers Life Holding Corporation, a company formed by
Partnership I to acquire Bankers Life (collectively referred to
herein as "BLH"), completed an IPO in March 1993. As a result of
the IPO, Conseco no longer had unilateral control of BLH. However,
after the acquisition by Conseco of additional shares of BLH in
September 1993, Conseco's ownership position in BLH increased to 56
percent. As described in note 2, Conseco owned 58 percent of the
equity of BLH at December 31, 1994. Accordingly, the accounts of
BLH are consolidated with Conseco's accounts in the accompanying
consolidated financial statements for both 1993 and 1994.
BLH's former owner continued to own 40 percent of BLH following
Partnership I's acquisition of BLH in 1992. Partnership I and
Conseco were therefore required to account for that acquisition as
a "step acquisition transaction" in accordance with the guidance
provided in Issue Number 88-16 of the Emerging Issues Task Force of
the Financial Accounting Standards Board entitled "Basis in
Leveraged Buyout Transactions." We also used step acquisition
accounting when we bought more BLH stock in September 1993. As a
result, the assets and liabilities of BLH included in Conseco's
1993 and 1994 consolidated balance sheets represent the following
combination of values: (i) the portion of BLH's net assets
acquired by Conseco in the November 1992 acquisition made by
Partnership I is valued as of that acquisition date; (ii) the
portion of BLH's net assets acquired in September 1993 is valued as
of that date, and (iii) the portion of BLH's net assets owned by
minority interests is valued based on BLH's financial statements.
<PAGE>
<PAGE> 55
Western National Corporation ("WNC"), a company formed in
October 1993 to be the holding company for Western National Life
Insurance Company ("Western National"), completed an IPO in
February 1994. Prior to the IPO, WNC was a wholly owned subsidiary
of Conseco. We sold 60 percent of our equity interest in the IPO.
As a result of the IPO, we no longer had unilateral control of WNC
and we ceased including the accounts of WNC in our consolidated
financial statements. We sold our remaining 40 percent interest in
WNC on December 23, 1994 (refer to note 2 for further discussion of
the transactions involving WNC). Our equity in earnings of WNC in
1994 therefore reflected: (i) all of WNC's earnings for the period
through February 15, 1994; and (ii) 40 percent of WNC's earnings
for the period from February 15, 1994, through December 23, 1994.
Conseco announced the closing of Conseco Capital Partners II,
L.P. ("Partnership II") on February 2, 1994. Partnership II will
invest in privately negotiated acquisitions of specialized annuity,
life and accident and health insurance companies and related
businesses. Partnership II received capital commitments totaling
$624 million from 36 investors, including $100 million from
Conseco, $25 million from BLH, $25 million from CCP, $50 million
from WNC and $33 million from executive officers and directors of
Conseco and its affiliates. In connection with the sale in
December 1994 of its 40 percent interest in WNC, Conseco agreed to
assume one-half of WNC's commitment to Partnership II.
Partnership II acquired The Statesman Group, Inc. ("Statesman")
on September 29, 1994 (as further described in note 2). As a
result of the acquisition of Statesman and related financing
transactions, Partnership II owns 80 percent of the outstanding
shares of Statesman's common stock. Because Conseco Partnership
Management, Inc., a wholly owned subsidiary of Conseco, is the sole
general partner of Partnership II, Conseco controls Partnership II
and Statesman even though its ownership interest is less than 50
percent. Because of this control, Conseco's consolidated financial
statements are required to include the accounts of Partnership II
and Statesman. Immediately after the acquisition of Statesman,
Conseco, through its direct investment and through its equity
interests in the investments made by BLH, CCP and WNC, had
approximately a 27 percent ownership interest in Statesman. At
December 31, 1994, Conseco's ownership interest in Statesman had
decreased to 25 percent as the net result of: (i) the sale of
Conseco's 40 percent equity interest in WNC on December 23, 1994;
(ii) the sale by a subsidiary of CCP of a portion of its investment
in Statesman; and (iii) an increase in Conseco's percentage
ownership in BLH and CCP due to stock repurchases by BLH and CCP.
We accounted for the acquisition of Statesman using the
purchase method of accounting. Under purchase accounting, we
allocated the total purchase cost of Statesman to the assets and
liabilities acquired, based on a preliminary determination of their
fair values. We may adjust this allocation when we make a final
determination of such values. We don't expect any adjustment to be
material, however. We recorded as goodwill the excess of the total
purchase cost over the fair value of the net assets.
Neither "consolidation" nor "non-consolidation" changes the
net income or shareholders' equity we report. Our consolidated
financial statements do not include the results of material
transactions between us and our consolidated affiliates, or among
our consolidated affiliates. We reclassified some figures in our
1993 and 1992 financial statements and notes to conform with the
1994 presentation.
Investments
Fixed maturities are securities that mature more than one year
after issuance. They include bonds, notes receivable and preferred
stocks with mandatory redemption features.
Equity securities include investments in common stocks and
non-redeemable preferred stock.
We implemented Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") as of December 31, 1993. We classified
all our fixed maturity and equity securities into three categories:
Actively managed - fixed maturity and equity securities that we
may sell prior to maturity in response to changes in interest
rates, issuer credit quality or our liquidity requirements. We
carry actively managed securities at fair value. We record any
unrealized gain or loss, net of tax and the related adjustments
described below, to shareholders' equity.
Trading account - fixed maturity and equity securities that we
buy principally for the purpose of selling in the near term.
We carry trading account securities at estimated fair value.
We include any unrealized gain or loss in net trading income.
<PAGE>
<PAGE> 56
Held to maturity - (all other fixed maturities) securities
which we have the ability and positive intent to hold to
maturity. When we own such securities (we own none currently),
we carry them at amortized cost. We may dispose of these
securities if the credit quality of the issuer deteriorates, if
regulatory requirements change or under other unforeseen
circumstances.
Our prior accounting for fixed maturity and equity investments
was consistent with SFAS 115, with one exception: previously, we
had recorded net unrealized gains and losses on trading account
securities as adjustments to shareholders' equity. Under SFAS 115,
these are recognized as trading income (loss). Net unrealized gain
(loss) on trading account securities at either December 31, 1993,
and 1994, was not material.
We consider the anticipated returns from investing policyholder
balances, including realized gains and losses, in determining the
amortization of the cost of policies purchased and the cost of
policies produced. When we state actively managed fixed maturities
at fair value, we also adjust the cost of policies purchased and
the cost of policies produced to reflect the change in cumulative
amortization that we would have recorded if we had sold these
securities at their fair value and reinvested the proceeds at
current yields. If future yields on such securities decline, it
may be necessary to increase certain of our insurance liabilities.
We are required to adjust such liabilities when their balances and
future net cash flows (including investment income) are
insufficient to cover future benefits and expenses.
Unrealized gains and losses and the related adjustments
described above have no effect on our earnings. We record them,
net of tax, to shareholders' equity. The following table
summarizes the effect of these adjustments on Conseco's actively
managed fixed maturities and Conseco's ownership interest in the
fixed maturity investment portfolio of CCP as of December 31, 1994:
<TABLE>
<CAPTION>
Effect of Fair Value
Adjustment to
Balance Actively Managed Reported
before Adjustment Fixed Maturities Amount
------------------ ---------------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities $7,440.5 $(373.4) $7,067.1
Investment in CCP Insurance, Inc. 240.2 (44.8) 195.4
Cost of policies purchased 937.8 83.8 1,021.6
Cost of policies produced 287.7 13.0 300.7
Income tax asset 87.1 108.1 195.2
Minority interest 397.3 (75.6) 321.7
Unrealized depreciation of securities (2.0) (137.7) (139.7)
</TABLE>
When there are changes in conditions that cause us to transfer
a fixed maturity investment to a different category (i.e., actively
managed, trading or held to maturity), we transfer it to the new
category at its fair value on the date of the transfer. We account
for the security's unrealized gain or loss (such amounts were
immaterial in 1994) as follows:
For a transfer to the trading category - we recognize the
unrealized gain or loss immediately in earnings.
For a transfer from the trading category - we do not reverse
the unrealized gain or loss already recognized in earnings.
For a transfer to actively managed from held to maturity - we
recognize the unrealized gain or loss immediately in
shareholders' equity.
<PAGE>
For a transfer to held to maturity from actively managed - we
continue to report the unrealized gain or loss at the date of
transfer in shareholders' equity, but we amortize the gain or
loss over the remaining life of the security as an adjustment
of yield.
Before we adopted SFAS 115, we transferred the above
investments to the new category at the lower of cost or fair value
at the date of transfer. We recognized any unrealized losses
immediately upon such transfers; we deferred any unrealized gains
until the final disposition of the securities. Transfers between
categories in 1993 and 1992 (and any resulting gains or losses)
were immaterial.
<PAGE>
<PAGE> 57
Credit-tenant loans are loans for commercial properties. When
we make these loans: (i) the lease of the principal tenant must be
assigned to Conseco; (ii) the lease must produce adequate cash flow
to fund substantially all the requirements of the loan; and (iii)
the principal tenant or the guarantor of such tenant's obligations
must have an investment-grade credit rating when the loan is made.
These loans also must be secured by the value of the related
property. Our underwriting guidelines take into account such
factors as:(i) the lease term of the property; (ii) the borrower's
management ability, including business experience, property
management capabilities and financial soundness; and (iii) such
economic, demographic or other factors that may affect the income
generated by the property, or its value. The underwriting
guidelines generally require a loan-to-value ratio of 75 percent or
less. We carry both credit-tenant loans and traditional mortgage
loans at amortized cost.
As part of our investment strategy, we may enter into reverse
repurchase agreements and dollar-roll transactions to increase our
investment return or improve our liquidity. We account for these
transactions as collateral borrowings, where the amount borrowed is
equal to the sales price of the underlying securities.
Other invested assets consist principally of investments in
unconsolidated limited partnerships. We generally account for them
using the equity method.
Policy loans are stated at their current unpaid principal
balances.
Short-term investments include commercial paper, invested cash
and other investments purchased with maturities of less than three
months. We carry them at amortized cost, which approximates their
estimated fair value. We consider all short-term investments to be
cash equivalents.
We defer any fees received or costs incurred when we originate
investments--principally credit-tenant loans and mortgages. We
amortize fees, costs, discounts and premiums as yield adjustments
over the contractual lives of the investments. We consider
anticipated prepayments on mortgage-backed securities in
determining estimated future yields on such securities.
We record the cost of each individual investment security.
When we sell, we report the difference between our sale proceeds
and our carrying value of the individual security as a realized
gain or loss on investments. If the proceeds result from
prepayments by the issuer prior to maturity, then those differences
are recorded as an adjustment to investment income.
We regularly evaluate all our credit-tenant loans, mortgage
loans and other investments based on current economic conditions,
credit loss experience and other investee-specific developments.
If there is a decline in a security's net realizable value that is
other than temporary, we treat it as a realized loss and we reduce
our cost basis of the security to its estimated fair value. If a
loan becomes impaired (i.e., it becomes probable that we will be
unable to collect all amounts due according to the contractual
terms of the agreement), we revalue the loan at the present value
of expected cash flows, discounted at the loan's effective interest
rate. We accrue interest thereafter on the net carrying amount of
impaired loans.
Separate Accounts
Separate accounts are funds on which investment income and
gains or losses accrue directly to certain policyholders. The
assets of these accounts are legally segregated. They are not
subject to the claims which may arise out of any other business of
Conseco. We report separate account assets at market value; the
underlying investment risks are assumed by the contract holders.
We record the related liabilities at amounts equal to the
underlying assets; the fair value of these liabilities is equal to
their carrying amount.
Cost of Policies Purchased
When we acquire an insurance company, we assign a portion of
its cost to the right to receive future cash flows from insurance
contracts existing at the date of the acquisition. This cost of
policies purchased represents the actuarially determined present
value of the projected future cash flows from the acquired
policies. To determine this value, we use a method which is
consistent with methods commonly used to value blocks of insurance
business and with the basic methodology generally used to value
assets. It can be summarized as follows:
- Identify the expected future cash flows from the blocks of
business.
<PAGE>
<PAGE> 58
- Identify the risks to realizing those cash flows (i.e.,
assess the probability that the cash flows will be
realized).
- Identify the rate of return that we must earn in order to
accept these risks, based on consideration of the factors
summarized below.
- Determine the value of the policies purchased by discounting
the expected future cash flows by the discount rate we need
to earn.
The expected future cash flows we use in determining such value
are based on actuarially determined projections of future premium
collections, mortality, surrenders, 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 Conseco's management. Our
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 we use to determine the value of the cost of
policies purchased is the rate of return we need to earn in order
to invest in the business being acquired. In determining this
required rate of return, we consider the following factors:
- The magnitude of the risks associated with each of the
actuarial assumptions used in determining expected future
cash flows (as described above).
- Our cost of the capital required to fund the acquisition.
- The likelihood of changes in projected future cash flows
that might occur if there are changes in insurance regulations
and tax laws.
- The acquired company's compatibility with other Conseco
activities that may favorably affect future cash flows.
- The complexity of the acquired company.
- Recent prices (i.e., discount rates used in determining
valuations) paid by others to acquire similar blocks of
business.
After we determine the cost of policies purchased, we amortize
that amount based on the incidence of the expected cash flows. For
acquisitions we made on or before November 19, 1992, we amortize
the asset with interest at the same rate used to determine the
discounted value of the asset. For acquisitions after November 19,
1992, including the acquisition of Statesman on September 29, 1994,
and the acquisition of additional shares of BLH on September 30,
1993, we amortize this asset using the interest rate credited to
the underlying policies.
If renewal premiums collected, investment spread, investment
gains or losses, mortality and morbidity costs or other factors
differ from our expectations, we adjust our amortization of the
cost of policies purchased. For example, the sale of a fixed
maturity investment may result in a gain (or loss). If the sale
proceeds are reinvested at a lower (or higher) earnings rate, there
may also be a reduction (or increase) in our future investment
spread. We must then increase (or decrease) amortization to
reflect the change in the incidence of expected cash flows. For
acquisitions made on or before November 19, 1992, we adjust
amortization in the current and future years to reflect: (i) our
revised estimate of future cash flows; and (ii) the revised
interest rate at which the discounted present value of such
expected future profits equals the unamortized asset balance (this
rate may not exceed the rate initially used and may not be lower
than the rate earned on invested assets). For acquisitions made
after November 19, 1992, we adjust amortization consistent with the
methods used with the cost of policies produced (described below).
<PAGE>
<PAGE> 59
We evaluate annually the recoverability of the cost of policies
purchased. We compare our current estimate of expected future cash
flows (discounted at the rate earned on our invested assets) to the
unamortized asset balance by line of insurance business. If our
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 be insufficient to recover the
cost of policies purchased, we charge the difference to expense.
Cost of Policies Produced
The costs directly related to producing new business are
referred to as cost of policies produced. They consist primarily
of commissions and certain costs of policy issuance and
underwriting, net of fees charged to the policy in excess of
ultimate fees charged. To the extent that they are recoverable
from future profits, we defer these costs and amortize them with
interest as follows:
- For universal life-type contracts and investment-type
contracts, in relation to the present value of expected gross
profits from the 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.
We evaluate annually the recoverability of the unamortized
balance of the cost of policies produced. For universal life-type
contracts and investment-type contracts, we increase or decrease
the accumulated amortization whenever there is a material change in
the estimated gross profits expected over the life of a block of
business. We do this in order to maintain a constant relationship
between the 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, we reduce the
unamortized asset balance (by a charge to income) only when the
present value of future cash flows, net of the policy liabilities,
is insufficient to recover the asset balance.
Goodwill
Goodwill is the excess of the amount we paid to acquire a
company over the fair value of its net assets. We amortize
goodwill on the straight-line basis over a 40-year period. We
continually monitor the value of our goodwill based on our
estimates of future earnings. If we determine that our goodwill
has been impaired, we reduce its carrying value with a
corresponding charge to expense (no such charges have been made).
Property and Equipment
We carry property and equipment at depreciated cost. We
depreciate property and equipment on a straight-line basis over the
estimated useful lives of the assets, which range from three to 50
years. Our depreciation expense was $8.3 million in 1994, $6.0
million in 1993 and $3.7 million in 1992.
Insurance Liabilities, Recognition of Insurance Policy Income
and Related Benefits and Expenses
<PAGE>
<PAGE> 60
Our reserves for universal life-type and investment-type
contracts are based either 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 (if
such payments are guaranteed). We make additions to insurance
liabilities if we determine that future cash flows (including
investment income) are insufficient to cover future benefits and
expenses.
For investment contracts without mortality risk (such as
deferred annuities and immediate annuities with benefits paid for
a period certain) and for contracts that permit either Conseco or
the insured to make changes in the contract terms (such as
single-premium whole life and universal life), we record premium
deposits and benefit payments as increases or decreases in a
liability account, rather than as revenue and expense. We record
as revenue any amounts charged against the liability account for
the cost of insurance, policy administration and surrender
penalties. We record as expense any interest credited to the
liability account and any benefit payments which exceed of the
contract liability account balance.
<PAGE>
<PAGE> 60
Our reserves for traditional and limited-payment life contracts
are generally calculated using the net level premium method, based
on assumptions as to investment yields, mortality, withdrawals and
dividends. We make these assumptions at the time the contract is
issued or, in the case of contracts acquired by purchase, at the
purchase date. We base these assumptions on projections from past
experience, making allowance for possible unfavorable deviation.
For traditional life insurance contracts, we recognize premiums
as income when due or, for short duration contracts, over the
period to which the premiums relate. We recognize benefits and
expenses as a level percentage of earned premiums. We accomplish
this by providing for future policy benefits and by amortizing
deferred policy acquisition costs.
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), our accounting
treatment is similar to that used for traditional contracts. An
exception is that we defer the excess of the gross premium over the
net premium and recognize it 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).
We establish reserves for the estimated present value of the
remaining net cost of all reported and unreported claims. We base
our estimates on past experience and on published tables for
disabled lives. We believe that the reserves we have established
are adequate. Final claim payments, however, may differ from the
established reserves, particularly when those payments may not
occur for several years. Any adjustments we make to reserves are
reflected in the results for the year during which the adjustments
are made.
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 include provisions for
possible adverse deviation.
For participating policies, we determine annually the amount of
dividends to be paid. We include as an insurance liability the
portion of the earnings allocated to participating policyholders.
Reinsurance
In the normal course of business, Conseco seeks to limit its
exposure to loss on any single insured and to recover a portion of
the benefits paid. We do this by ceding reinsurance to other
insurance enterprises or reinsurers under excess coverage and
coinsurance contracts. We limit how much risk per policy we will
retain. This retention limit does not exceed $.8 million on any of
our policies.
We report assets and liabilities related to insurance contracts
before the effects of reinsurance. We report reinsurance
receivables and prepaid reinsurance premiums (including amounts
related to insurance liabilities) as assets. We recognize
estimated reinsurance receivables in a manner consistent with the
liabilities related to the underlying reinsured contracts, in
accordance with Statement of Financial Accounting Standards No.
113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts."
Income Taxes
Our income tax expense includes deferred taxes arising from
temporary differences between the tax and financial reporting basis
of assets and liabilities. This liability method of accounting for
income taxes also requires us to reflect the effect of a tax rate
change on accumulated deferred income taxes in income in the period
in which the change is enacted.
Minority Interest
Our consolidated financial statements include all of the
assets, liabilities, revenues and expenses of Partnership I (for
periods prior to its liquidation on March 31, 1993), Partnership
II, and BLH. We make a charge against consolidated income for the
share of earnings of these partially owned entities allocable to
the minority interests. We show the shareholders' equity of such
entities allocable to the minority interests separately on our
consolidated balance sheet.
<PAGE>
<PAGE> 61
Earnings Per Share
We have adjusted all applicable share and per share data for
the two-for-one stock split distributed on April 1, 1992. We
compute primary net income per share by dividing earnings (less
preferred dividend requirements and an adjustment for the dilutive
securities of affiliates and of subsidiaries of Partnership I) by
the weighted average number of common and common equivalent shares
outstanding for the period. We compute fully diluted net income
per share the same basis, except that, if more dilutive: (i) the
number of common equivalent shares related to stock options is
based on the period-end market value of the shares, instead of the
average market value; and (ii) convertible preferred stock is
assumed to be converted into common shares.
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the
estimated fair values of financial instruments:
Investment securities. For fixed maturity securities
(including redeemable preferred stocks) and for equity and
trading account securities, we use quoted market prices, where
available. For fixed maturity securities not actively traded,
we use values obtained from independent pricing services or,
in the case of private placements, by discounting expected
future cash flows using a current market rate appropriate for
the yield, credit quality and maturity of the investment being
priced.
Short-term investments. We use quoted market prices. The
carrying amount reported on our consolidated balance sheet for
these instruments approximates their estimated fair value.
Mortgage loans, credit-tenant loans and policy loans. We
discount future expected cash flows based on interest rates
currently being offered for similar loans to borrowers with
similar credit ratings. We aggregate loans with similar
characteristics in our calculations.
Other invested assets. We have assumed that these assets,
which are not material, have a market value equal to carrying
value.
Interest rate swaps. We use fees currently charged to enter
into similar agreements, taking into account the remaining
terms of the agreements and the credit standing of the
counterparties.
Insurance liabilities for investment contracts. We use
discounted cash flow calculations based on interest rates
currently being offered for similar contracts having maturities
consistent with the contracts being valued.
Investment borrowings and notes payable. We use either: (i)
discounted cash flow analyses based on our current incremental
borrowing rates for similar types of borrowing arrangements; or
(ii) current market values for publicly traded debt.
<PAGE>
<PAGE> 62
Here are the estimated fair values of our financial
instruments:
<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 $7,067.1 $7,067.1 $9,821.7 $9,821.7
Equity securities 39.6 39.6 30.3 30.3
Mortgage loans 142.6 146.7 158.4 175.0
Credit-tenant loans 69.0 61.3 326.9 325.1
Policy loans 175.1 175.1 190.0 190.0
Other invested assets 68.7 68.7 64.2 64.2
Short-term investments 295.4 295.4 666.4 666.4
Trading account securities 21.6 21.6 105.8 105.8
Financial liabilities issued for purposes
other than trading:
Insurance liabilities for investment
contracts (1) 5,727.6 5,727.6 7,114.4 7,114.4
Interest rate swaps:
Recognized 10.6 10.6 - -
Unrecognized - - - (13.8)
Investment borrowings - - 427.7 427.7
Notes payable of Conseco 191.8 173.6 413.0 429.4
Notes payable of Bankers Life Holding
Corporation, not direct obligations
of Conseco 280.0 306.0 290.3 326.0
Notes payable of Partnership II
entities, not direct
obligations of Conseco 331.1 339.7 - -
-----------------
<FN>
(1) The estimated fair value of the liabilities for investment
contracts was approximately equal to its carrying value at
December 31, 1994, and 1993. This was because interest rates
credited on the vast majority of account balances approximate
current rates paid on similar investments and because these
rates are not generally guaranteed beyond one year. We are
not required to disclose fair values for insurance
liabilities, other than those for investment contracts.
However, we take into consideration the estimated fair values
of all insurance liabilities in our overall management of
interest rate risk. We attempt to minimize exposure to
changing interest rates by matching investment maturities with
amounts due under insurance contracts.
</TABLE>
<PAGE>
<PAGE> 63
2. ACQUISITIONS/DISPOSITIONS:
CCP Insurance, Inc.
In July 1992, CCP, a newly organized holding company for
Partnership I's first three acquisitions, completed an IPO of
8,010,700 shares of common stock. Net proceeds to CCP totaled
$111.2 million. The shares issued in the offering represented a 31
percent ownership interest in the common stock outstanding of CCP.
The remaining ownership interest in CCP was held by Conseco and
others who received common stock of CCP in a liquidating
distribution from Partnership I.
In September 1993, CCP completed a public offering in which CCP
sold 3.0 million shares of its common stock and certain
shareholders sold 6.5 million shares of CCP common stock. Proceeds
of approximately $80.9 million from the offering of common shares
by CCP (after underwriting and issuance costs) were added to CCP's
funds for general corporate purposes. CCP received no proceeds
from the sale of shares by the selling shareholders. In a separate
transaction, Conseco purchased 2.0 million shares of CCP common
stock from the selling shareholders for $53.6 million. In
addition, Conseco purchased .3 million shares of CCP common stock
in open market transactions for $5.9 million during 1993. After
these transactions, Conseco owned 40 percent of the common stock of
CCP.
In early 1994, CCP announced a program to repurchase up to 2.0
million shares of its common stock in the open market or through
negotiated transactions. In October 1994, CCP expanded the
repurchase program to 4.0 million shares. During 1994, CCP
acquired 3.5 million shares of its common stock under this program
at a cost of $71.8 million. CCP's repurchases increased Conseco's
ownership interest in CCP to 45 percent.
The Partnership I agreement provided for incentive compensation
to the general partner in the event returns to the limited partners
were in excess of prescribed targets. The distribution of CCP
shares to the limited partners in 1992 caused such targets to be
exceeded, resulting in incentive compensation to Conseco of $6.1
million, net of tax of $3.2 million. In addition, Conseco's income
in 1992 included $1.9 million, net of tax of $7.3 million,
representing Conseco's percentage share in the increase in CCP's
shareholders' equity account attributable to the proceeds from
CCP's IPO.
The closing price of CCP's shares on the New York Stock
Exchange on December 31, 1994, was $20.375 per share, indicating a
total fair value of Conseco's investment in CCP of $235.4 million.
Conseco's cost of these shares was $102.8 million. The CCP shares
held by Conseco are not freely tradable, and sale of such shares
may require a registration statement with the Securities and
Exchange Commission.
Bankers Life Holding Corporation
On November 9, 1992, Partnership I acquired BLH from
Southwestern Life Corporation (formerly I.C.H. Corporation, and
referred to in this report as "Southwestern Life"). The purchase
price of $600.0 million was funded with the net proceeds of the
following securities issued by BLH: (i) $175.0 million senior notes
to a group of lending banks; (ii) $200.0 million senior
subordinated notes; (iii) $45.0 million payment-in-kind junior
subordinated notes (including $8.3 million provided by Conseco and
$34.7 million provided by Southwestern Life); (iv) $158.3 million
of payment-in-kind preferred stock (of which $108.3 million was
provided by Conseco and $50.0 million was provided by Southwestern
Life); and (v) $66.7 million of common stock of BLH, including
$16.7 million directly provided by Southwestern Life and $50.0
million provided by Partnership I (including $25.5 million provided
by Conseco and $9.6 million provided by Southwestern Life). None
of the BLH notes are direct obligations of Conseco. As a result of
this acquisition, Conseco owned approximately 44 percent of the
common equity interest in BLH through its direct investments and
investments in Partnership I. For accounting convenience, the
acquisition was reported as of November 1, 1992, and Conseco made
adjustments to reflect financing costs for the period between that
date and the actual date of acquisition, November 9, 1992.
<PAGE>
<PAGE> 64
On March 25, 1993, BLH completed an IPO of 19.6 million shares
of its common stock at $22 per share. Proceeds from the offering
of $405.3 million (after underwriting and issuance costs) were used
by BLH to redeem all outstanding preferred stock, to retire all
junior subordinated debt, to prepay a portion of the senior debt
and for other corporate purposes. After the offering, Conseco
owned 31 percent of the common shares of BLH. As a result of the
offering, Conseco recorded a one-time gain of $58.8 million (net
of tax of $40.4 million) in the first quarter of 1993, representing
Conseco's direct percentage share of the increase in BLH's
shareholders' equity account attributable to the proceeds from the
offering. In addition, Conseco recorded a gain of $2.2 million
(net of tax of $.1 million) in the first quarter of 1993,
representing Conseco's indirect percentage share (through the
Company's ownership of CCP) of CCP's percentage share of the
increase in BLH's shareholders' equity account attributable to the
proceeds from the offering. The Partnership I agreement provided
for incentive compensation to Conseco as the general partner in the
event that returns to the limited partners were in excess of
prescribed targeted returns. The distribution of BLH shares to the
limited partners caused such targets to be exceeded, resulting in
incentive compensation to Conseco of $22.3 million, net of tax of
$14.3 million.
On September 30, 1993, Conseco acquired 13.3 million shares of
BLH common stock from Southwestern Life for $287.6 million. The
shares purchased represented 25 percent of BLH's outstanding
shares. Conseco paid for these shares by surrendering for
redemption $50.0 million stated value of Southwestern Life
preferred stock, and by paying $237.6 million in cash. Conseco
funded the cash payment using available cash and the net proceeds
from a $200.0 million senior unsecured loan. As described below,
the loan was repaid in February 1994, using the proceeds from the
IPO of WNC. The transaction with Southwestern Life increased
Conseco's ownership of BLH to 56 percent.
In April 1994, BLH announced a program to repurchase up to 2
million of its common shares in open-market or negotiated
transactions. During 1994, BLH acquired 1.8 million shares of its
common stock under this program at a cost of $35.7 million. BLH's
repurchases increased Conseco's ownership interest in BLH to 58
percent.
The closing price of BLH's shares on the New York Stock
Exchange on December 31, 1994, was $19.00 per share, indicating a
total fair value of Conseco's investment in BLH of $576.9 million.
Conseco's cost of these shares was $313.1 million; net equity
included in these consolidated financial statements is $477.9
million. Shares held by Conseco are not freely tradable, and sale
of such shares may require a registration statement with the
Securities and Exchange Commission.
Western National Corporation
On February 15, 1994, WNC completed the IPO of 37.2 million
shares of common stock. Of these shares, 2.3 million were sold by
WNC and 34.9 million were sold by Conseco. In addition, Conseco
sold .2 million shares to the president of WNC at the IPO price,
less underwriting discounts and commissions. In connection with
the organization of WNC and the transfer of the stock of Western
National to WNC by Conseco, WNC issued 60 million shares of its
common stock and a $150.0 million, 6.75 percent senior note due
March 31, 1996 (the "Conseco Note") to Conseco. On February 22,
1994, WNC completed a public offering of $150.0 million aggregate
principal amount of 7.125 percent senior notes due February 15,
2004. The net proceeds from the offering of $147.5 million (after
original issue discount, underwriting discount and offering
expenses) together with some of the proceeds from WNC's IPO of
common stock, were used to repay the Conseco Note.
The shares sold by Conseco represented a 60 percent interest in
WNC. Net pre-tax proceeds to Conseco from the repayment of the
Conseco Note and the sale of WNC shares totaled $537.3 million.
These proceeds were used to repay a $200 million senior unsecured
loan and for other general corporate purposes. In the first
quarter of 1994, Conseco reported 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 sold its remaining 40 percent
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
the repurchase of common stock of Conseco (see note 10).
<PAGE>
<PAGE> 65
The disposition of WNC as a result of the IPO was recorded in
the consolidated statement of cash flows as follows (dollars in
millions):
<TABLE>
<S> <C>
Fixed maturities $7,125.7
Mortgage loans 97.1
Credit-tenant loans 267.8
Investment in WNC (760.9)
Policy loans 71.6
Trading account securities 60.8
Other investments 19.4
Cost of policies purchased 61.9
Cost of policies produced 84.9
Income taxes 12.1
Reinsurance receivables 74.9
Insurance liabilities (7,379.9)
Other (87.9)
--------
Cash held by WNC prior
to deconsolidation (352.5)
Proceeds received upon disposition
of WNC 811.7
--------
Net cash provided by disposition
of WNC $ 459.2
========
</TABLE>
Marketing Distribution Systems Consulting Group, Inc.
("Bankmark")
Conseco acquired 95 percent of the outstanding common stock of
Bankmark in March 1993 for $6.1 million. Bankmark is a marketing
company which develops marketing relationships with financial
institutions to provide insurance and investment products to their
customers.
The Statesman Group, Inc.
On September 29, 1994, Partnership II completed the acquisition
of Statesman (the "Acquisition"). Under an Agreement and Plan of
Merger dated May 1, 1994, Statesman merged with a subsidiary of
Partnership II. Statesman's former stockholders received $15.25 in
cash per common equivalent share. They also received a contingent
payment right to receive up to another $2.00 in cash per common
equivalent share (the "Contingent Consideration"), based on the
outcome of Statesman's pending litigation against the U.S.
Government concerning Statesman's former savings bank subsidiary
(the "Statesman Litigation").
<PAGE>
<PAGE> 66
The Acquisition and related transactions were funded with: (i)
$45.9 million of cash contributions from Partnership II (including
$7.4 million provided by Conseco, $1.8 million by BLH, $1.8 million
by CCP and $3.7 million by WNC); (ii) $57.0 million in cash from
the sale in a private placement of payment-in-kind preferred stock
(the "Statesman PIK Preferred Stock") (including $25.9 million
purchased by BLH and $24.0 million purchased by CCP, $3.0 million
of which was sold by CCP in December 1994); (iii) $150.0 million in
cash from the sale in a public offering of 11-1/4% Senior
Subordinated Notes due 2004 (the "ALHC Senior Subordinated Notes");
and (iv) $200.0 million in cash from a senior secured loan (the
"ALHC Senior Term Loan"). The sources and uses of this financing
are summarized below (dollars in millions):
<TABLE>
<S> <C>
Sources of funds:
ALHC Senior Term Loan:
Borrowed upon closing of the Acquisition $170.0
To be borrowed upon determination of Statesman Litigation 30.0 (i)
ALHC Senior Subordinated Notes 150.0
Statesman PIK Preferred Stock 57.0
Common equity contribution from Partnership II 45.9
------
Total sources $452.9
======
Uses of funds:
Payment of cash consideration to acquire Statesman $314.1 (ii)
Payment upon determination of Statesman Litigation 30.1 (i)
Repayment of bank indebtedness of a subsidiary of Statesman 55.5 (iii)
Transaction fees and expenses 15.7
Purchase of surplus note from American Life and
Casualty Insurance Company, Statesman's
principal operating subsidiary 24.0
Cash retained 13.5
------
Total uses $452.9
======
---------------------------
<FN>
(i) In the event of a determination of the Statesman Litigation
that is unfavorable to Statesman, $30.1 million would be paid
to the holders of Statesman's 1988 Series I and II Preferred
Stock $1 Par (the "Statesman 1988 Series Preferred Stock").
This stock is currently held by the U.S. Government. In the
event of a favorable determination of this litigation, the
same amount, representing a portion of the Contingent
Consideration, would be paid to the other former stockholders
of Statesman.
(ii) This amount assumes conversion for redemption of all of
Statesman's outstanding 6-1/4% Convertible Subordinated
Debentures due 2003 (the "Convertible Debentures"). These
debentures were convertible into an aggregate of 4,528,125
shares of Statesman common stock. At December 31, 1994,
$24.2 million of the Convertible Debentures remained
outstanding. Cash in such amount is held in escrow for use
when the Convertible Debentures are converted, are redeemed
by Statesman, or mature.
(iii) A subsidiary of Statesman was the borrower under a credit
facility having an outstanding balance (including accrued
interest and fees) of $55.5 million at the Acquisition date.
This facility was repaid with a portion of the proceeds from
the financing.
</TABLE>
In accordance with the Partnership II agreement, Conseco earned
fees of $2.5 million (net of taxes of $1.3 million) for services
related to the financing of the Acquisition.
<PAGE>
<PAGE> 67
The acquisitions of CCP, BLH, Bankmark and Statesman described
above were recorded in the consolidated statement of cash
flows as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities $(3,906.0) $ - $ (721.3)
Mortgage loans (64.7) (.6) (22.5)
Policy loans (59.1) - (35.9)
Investment in CCP - (59.5) -
Trading account securities - - (377.2)
Other investments (51.9) 50.0 (35.6)
Cost of policies purchased (454.3) (118.4) (516.0)
Cost of policies produced - 73.3 (152.9)
Goodwill (355.4) (154.6) (100.9)
Income taxes (119.9) 14.3 32.7
Reinsurance receivables (5.6) - (638.7)
Cash segregated for future redemption of
Convertible Debentures (69.1) - -
Securities segregated for future redemption
of preferred stock (35.5) - -
Insurance liabilities 4,658.4 11.2 2,436.4
Notes payable 122.0 12.1 -
Minority interest 99.0 (117.8) -
Other 26.8 (10.9) (71.1)
--------- ------- --------
Cash used $ (215.3) $(300.9) $ (203.0)
========= ======= ========
</TABLE>
The following unaudited pro forma results of operations of the
Company are presented as if the following had occurred as of
January 1, 1993: (i) Partnership II's acquisition of Statesman;
(ii) the IPO of WNC; (iii) the sale by Conseco of its remaining 40
percent equity interest in WNC; (iv) the IPO of BLH; and (v)
Conseco's subsequent purchases of additional shares of BLH and CCP.
Prior operations of Bankmark are not included in the following
table; their effect is not material.
<TABLE>
<CAPTION>
1994 1993
---- ----
(Dollars in millions, except per share amounts)
<S> <C> <C>
Revenues $2,031.9 $2,102.1
Income before extraordinary charge 73.5 113.4
Earnings before extraordinary charge
per common share and common
equivalent share:
Primary $2.08 $3.17
Fully diluted 2.08 3.17
</TABLE>
<PAGE>
<PAGE> 68
The following unaudited pro forma results of operations of the
Company are presented as if the following had occurred as of
January 1, 1992: (i) Partnership I's acquisition of Bankers; (ii)
the IPOs of BLH and CCP; and (iii) Conseco's subsequent purchases
of additional shares of BLH and CCP.
<TABLE>
<CAPTION>
1992
----
(Dollars in millions, except per share amounts)
<S> <C>
Revenues $2,290.0
Income before extraordinary charge 189.7
Earnings before extraordinary charge per
common share and common equivalent share:
Primary $6.15
Fully diluted 6.12
</TABLE>
3. INVESTMENTS:
At December 31, 1994, the amortized cost and estimated fair
value of actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities
and obligations of United
States government
corporations and agencies $ 360.6 $ .7 $ 9.5 $ 351.8
Obligations of states and
political subdivisions 30.1 .1 1.3 28.9
Debt securities issued by
foreign governments 83.0 - 2.8 80.2
Public utility securities 1,303.7 6.4 83.5 1,226.6
Other corporate securities 2,953.1 11.8 144.4 2,820.5
Mortgage-backed securities 2,710.0 6.1 157.0 2,559.1
-------- ----- ------ --------
Total actively managed
fixed maturities $7,440.5 $25.1 $398.5 $7,067.1
======== ===== ====== ========
</TABLE>
<PAGE>
<PAGE> 69
The amortized cost and estimated fair value of actively managed
fixed maturities were as follows at December 31, 1993:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury
securities and obligations
of United States government
corporations and agencies $ 76.5 $ 3.9 $ 2.0 $ 78.4
Obligations of states and
political subdivisions 78.9 1.0 2.5 77.4
Debt securities issued
by foreign governments 2.9 .9 - 3.8
Public utility securities 2,255.1 80.6 28.2 2,307.5
Other corporate securities 4,029.7 206.8 38.3 4,198.2
Mortgage-backed securities 3,083.4 90.6 17.6 3,156.4
-------- ------ ----- --------
Total actively managed
fixed maturities $9,526.5 $383.8 $88.6 $9,821.7
======== ====== ===== ========
</TABLE>
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 pricing source used to determine estimated
fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services $6,437.0 $6,085.9
Broker-dealer market makers 967.1 944.5
Internally developed methods (calculated
based on a weighted-average current
market yield of 10.0 percent) 36.4 36.7
-------- --------
Total actively managed fixed maturities $7,440.5 $7,067.1
======== ========
/TABLE
<PAGE>
<PAGE> 70
The following table sets forth fixed maturity investments at
December 31, 1994, classified by rating categories. The category
assigned is the highest rating by a nationally recognized
statistical rating organization or, as to $152.9 million fair value
of fixed maturities not rated by such firms, the rating assigned by
the National Association of Insurance Commissioners ("NAIC"). For
purposes of the table, 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 Percent of
Investment rating fixed maturities total investments
----------------- ---------------- ------------------
<S> <C> <C>
AAA 41% 36%
AA 7 6
A 24 21
BBB+ 7 6
BBB 8 7
BBB- 9 7
--- --
Investment grade 96 83
--- --
BB+ 1 1
BB 1 1
BB- 1 1
B+ and below 1 1
--- --
Below investment grade 4 4
--- --
Total fixed maturities 100% 87%
=== ==
</TABLE>
The following table sets forth below investment grade fixed
maturity investments as of December 31, 1994, summarized by the
amount their amortized cost exceeds fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by 30% or more $ 3.5 $ 2.2
Amortized cost exceeds fair value by 15%, but not more than 30% 54.0 43.4
Amortized cost exceeds fair value by 5%, but not more than 15% 73.6 66.3
All others 165.0 168.4
------ ------
Total below investment grade
fixed maturity investments $296.1 $280.3
====== ======
</TABLE>
<PAGE> 71
The following table sets forth the amortized cost and
estimated fair value of actively managed fixed maturities at
December 31, 1994, by contractual maturity. (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 $ 35.8 $ 36.7
Due after one year through five years 569.7 556.9
Due after five years through ten years 1,349.1 1,298.1
Due after ten years 2,775.9 2,616.3
-------- --------
Subtotal 4,730.5 4,508.0
Mortgage-backed securities 2,710.0 2,559.1
-------- --------
Total actively managed fixed maturities $7,440.5 $7,067.1
======== ========
</TABLE>
Equity securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------ -----------------
Estimated Estimated
fair fair
Cost value Cost value
---- ----- ---- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Common stock $ 9.7 $ 7.7 $15.2 $15.3
Preferred stock, non-redeemable 33.3 31.9 15.0 15.0
----- ----- ----- -----
Total equity securities $43.0 $39.6 $30.2 $30.3
===== ===== ===== =====
/TABLE
<PAGE>
<PAGE> 72
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities $322.6 $777.6 $762.2
Equity securities 1.7 7.1 10.5
Mortgage loans 17.4 23.2 49.8
Credit-tenant loans 4.1 24.2 15.7
Policy loans 7.6 11.3 13.8
Other 13.3 23.8 8.6
Short-term investments 20.5 28.2 26.5
Separate accounts 2.6 5.9 6.1
------ ------ ------
Gross investment income 389.8 901.3 893.2
Investment expenses 4.1 5.1 4.6
------ ------ ------
Net investment income $385.7 $896.2 $888.6
====== ====== ======
</TABLE>
The carrying value of investments not accruing investment
income totaled $11.2 million, $19.6 million and $24.8 million at
December 31, 1994, 1993 and 1992, respectively.
The proceeds from sales of fixed maturity investments were $1.9
billion, $6.5 billion and $4.2 billion in 1994, 1993 and 1992,
respectively. Proceeds from the sales of trading account
securities were $.9 billion, $10.0 billion and $6.7 billion in
1994, 1993 and 1992, respectively.
Trading income (losses) from sales of trading account
securities, net of investment expenses, were included in revenue as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Gross gains $ 3.6 $129.5 $75.0
Gross losses (5.3) (26.4) (30.3)
----- ------ -----
Net trading income (losses) before
expenses (1.7) 103.1 44.7
Trading expenses 3.2 10.0 8.8
----- ------ -----
Net trading income (losses) $(4.9) $ 93.1 $35.9
===== ====== =====
</TABLE>
<PAGE>
<PAGE> 73
Realized gains (losses), net of realized gain expenses, were
included in revenue as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 12.5 $214.9 $141.4
Gross losses (21.8) (46.6) (16.4)
Decline in net realizable value of
fixed maturities (1.0) (7.9) -
------ ------ ------
Net realized gains (losses) from fixed
maturities before expenses (10.3) 160.4 125.0
Equity securities (2.4) 10.4 3.8
Mortgages - (6.1) (6.7)
Other (2.0) (2.1) 6.6
------ ------ ------
Net realized gains (losses) before
expenses (14.7) 162.6 128.7
Realized gain expenses 10.9 13.1 4.4
------ ------ ------
Net realized gains (losses) $(25.6) $149.5 $124.3
====== ====== ======
</TABLE>
Changes in unrealized appreciation (depreciation) on
investments were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities carried at amortized cost $ - $ - $(280.8)
======= ====== =======
Investments carried at estimated fair value:
Actively managed fixed maturities $(668.6) $148.8 $146.4
Equity securities (3.5) (6.5) 18.8
Other investments (10.9) 14.4 -
Trading account securities - (3.3) (42.0)
------ ------ ------
(683.0) 153.4 123.2
Equity in unrealized appreciation
(depreciation) of CCP's investments (70.8) 15.0 9.6
Adjustment for effect on other
balance sheet accounts:
Cost of policies purchased 115.9 (5.3) (26.8)
Cost of policies produced 134.3 (65.0) (56.3)
Insurance liabilities 39.1 (14.2) (24.9)
Income tax liabilities 107.7 (24.5) (8.2)
Minority interest 119.6 (4.8) 8.3
------- ------ -------
Change in unrealized appreciation
(depreciation) of investments $(237.2) $ 54.6 $ 24.9
======= ====== =======
</TABLE>
<PAGE>
<PAGE> 74
At December 31, 1994, net depreciation of equity securities
(before income tax) was $3.4 million, consisting of $.3 million of
appreciation and $3.7 million of depreciation.
At December 31, 1994, the amortized cost and fair value of
fixed maturity investments in default as to the payment of
principal or interest totaled $9.8 million and $10.1 million,
respectively. Conseco recorded writedowns of fixed maturity
investments of $1.0 million in 1994 and $7.9 million in 1993.
These writedowns were the result of changes in conditions which
caused the Company to conclude that it would not collect all
amounts due according to the terms of the securities. The Company
recorded no such writedowns in 1992.
Investments in mortgage-backed securities at December 31, 1994,
included collateralized mortgage obligations ("CMOs") of $2,042.7
million and mortgage-backed pass-through securities of $516.4
million. The following table sets forth the par value, amortized
cost and estimated fair value of investments in mortgage-backed
securities at December 31, 1994, summarized by interest rates on
the underlying collateral at December 31, 1994:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-through securities:
Below 7% $ 317.0 $ 315.9 $ 280.5
7% - 8% 183.3 183.0 168.5
8% - 9% 64.4 64.1 62.9
9% and above 4.4 4.4 4.5
Planned amortization class CMO instruments:
Below 7% 411.9 374.6 340.9
7% - 8% 404.5 375.9 344.1
8% - 9% 80.7 79.9 74.2
9% and above 29.0 29.8 29.0
Targeted amortization class CMO instruments:
Below 7% 60.1 49.9 48.2
7% - 8% 249.1 206.2 204.2
8% - 9% 16.9 15.5 15.1
9% and above 41.6 41.3 39.3
Other CMO instruments:
Below 7% 82.5 67.2 65.0
7% - 8% 607.5 484.3 470.4
8% - 9% 298.8 267.5 263.5
9% and above 167.6 150.5 148.8
-------- -------- --------
Total mortgage-backed securities $3,019.3 $2,710.0 $2,559.1
======== ======== ========
/TABLE
<PAGE>
<PAGE> 75
The following table sets forth the amortized cost and estimated
fair value of mortgage-backed securities as of December 31, 1994,
based upon the pricing source used to determine estimated fair
value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services $1,792.1 $1,660.4
Broker-dealer market makers 910.7 890.9
Internally developed methods (calculated based
on a current market yield of 11.9 percent ) 7.2 7.8
-------- --------
Total mortgage-backed securities $2,710.0 $2,559.1
======== ========
</TABLE>
At December 31, 1994, mortgage loans were comprised of 91
percent commercial loans and 7 percent junior and residual
interests in collateralized mortgage obligations. Approximately 11
percent, 10 percent and 10 percent of the mortgage loans were on
properties located in Texas, New York, and Florida, respectively.
No other state comprised greater than 8 percent of the mortgage
loan balance. At December 31, 1994, the Company had an allowance
for loss on mortgage loans of $1.9 million. The Company had no
realized losses on mortgage loans during 1994.
As part of its investment strategy, the Company enters into
reverse repurchase agreements and dollar-roll transactions to
increase its return on investments and improve its liquidity.
These transactions are accounted for as short-term collateralized
borrowings. Such borrowings averaged approximately $208.0 million
during 1994 (compared to an average of $431.0 million during 1993)
and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average
interest rate on short-term collateralized borrowings was 3.7
percent in 1994 and 2.4 percent in 1993.
Life insurance companies are required to maintain certain
investments on deposit with state regulatory authorities. Such
assets had an aggregate carrying value of $45.0 million at December
31, 1994.
Conseco had no investments in any 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.
<PAGE>
<PAGE> 76
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
CCP
Conseco's investment in 45 percent of the common stock of CCP
was carried on the equity basis at $195.4 million at December 31,
1994. This amount represents the effect of the transactions
described in note 2 and Conseco's equity in CCP's earnings. See
note 2 for a further description of Conseco's ownership of CCP.
In 1994, CCP repaid its senior loan using a portion of the
proceeds of a public offering of $200 million 10.5 percent senior
notes due 2004. This repayment resulted in an extraordinary charge
of $2.1 million to Conseco in 1994. In 1992, CCP repaid notes
payable with a balance of $230.7 million in conjunction with its
IPO. This repayment resulted in an extraordinary charge of $3.9
million to Conseco in 1992.
Conseco amortizes the difference of $22.8 million between the
carrying value of its investment in CCP and the amount of its
underlying equity in net assets on the straight-line basis over a
40-year period. The following tables summarize financial
information of CCP for the periods during which CCP and its
subsidiaries have been included in Conseco's financial statements
on the equity basis:
<TABLE>
<CAPTION>
December 31,
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Financial position:
Total assets $4,960.3 $5,298.1
Total investments 4,292.3 4,872.5
Cost of policies purchased 345.2 175.5
Cost of policies produced 111.9 42.3
Total liabilities 4,579.4 4,734.2
Insurance liabilities 4,243.1 4,233.3
Investment borrowings - 134.1
Notes payable 196.8 173.5
Common shareholders' equity 380.9 563.9
Amounts recorded by Conseco:
Investment in CCP $ 195.4 $ 244.3
</TABLE>
<PAGE>
<PAGE> 77
<TABLE>
<CAPTION>
Years ended December 31, Six months ended
1994 1993 December 31, 1992
---- ---- -----------------
(Dollars in millions)
<S> <C> <C> <C>
Results of operations:
Total revenues $484.3 $632.5 $318.0
Insurance policy income 114.5 127.8 72.4
Investment activity:
Net investment income 367.8 412.9 193.4
Net trading income (losses) (.9) 24.3 10.7
Net realized gains 2.9 55.8 40.7
Total benefits and expenses 383.9 459.0 249.9
Interest expense on annuities
and financial products 208.6 243.5 128.2
Interest expense on long-term debt 10.7 16.1 9.8
Income before income taxes and
extraordinary charge 100.4 173.5 68.1
Income tax expense 37.4 65.9 24.4
Income before extraordinary charge 63.0 107.6 43.7
Extraordinary charge on extinguishment
of debt, net of tax 4.9 - 8.3
Net income 58.1 107.6 35.4
Amounts recorded by Conseco:
Equity in earnings before
extraordinary charge $24.7 $37.4 $15.8
Fees received for services provided
by Conseco to CCP 12.0 10.6 4.5
Extraordinary charge 2.1 - 3.9
Dividends received .9 .8 .2
</TABLE>
WNC
See note 2 for a description of transactions affecting
Conseco's ownership of WNC. The following summarizes selected
account balances of WNC. All 1993 and 1992 amounts were
consolidated with the Company's accounts and 1994 was included on
the equity basis.
<TABLE>
<CAPTION>
December 31,
------------------
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Financial position:
Total assets $ - $8,369.7
Total investments - 7,918.1
Cost of policies purchased - 61.9
Cost of policies produced - 84.9
Total liabilities - 7,608.8
Insurance liabilities - 7,379.9
Total shareholders' equity - 760.9
</TABLE>
<PAGE>
<PAGE> 78
<TABLE>
<CAPTION>
1994 1993 1992
---------------------- ---- ----
Included in
Conseco's Total Total Total
Accounts WNC WNC WNC
-------- --- --- ---
(Dollars in millions)
<S> <C> <C> <C> <C>
Results of operations:
Total revenues $40.2 $615.7 $774.2 $653.2
Insurance policy income - 27.4 21.8 48.0
Investment activity:
Net investment income - 637.5 610.1 507.8
Net trading income - 3.7 49.6 25.0
Net realized gains (losses) - (52.9) 92.7 72.4
Equity in earnings of WNC 40.2 - - -
Total benefits and expenses - 501.6 569.7 496.4
Insurance policy benefits - 104.7 101.9 93.7
Interest expense on annuities
and financial products - 344.2 333.1 267.1
Income before income taxes 40.2 114.1 204.5 156.8
Income tax expense 1.6 40.8 74.5 54.6
Net income 38.6 73.3 130.0 102.2
</TABLE>
In 1994, the Company received fees totaling $16.3 million for
services it provided by Conseco to WNC. Conseco also received
dividends on WNC common stock totaling $3.0 million in 1994.
Life Re Corporation
At December 31, 1991, Conseco owned a 31 percent equity
interest (after exercise of warrants held by others) in the common
stock and $30.0 million of 12 percent junior preferred stock of
Life Re Corporation ("Life Re"), a company engaged in the life
reinsurance business. In November 1992, Life Re completed an
initial public offering of its common stock and redeemed all of the
common and preferred stock held by the Company. As a result,
Conseco recorded a gain of $15.2 million (net of tax of $21.2
million) in 1992. The following amounts related to Life Re were
recorded in Conseco's financial statements:
<TABLE>
<CAPTION>
1992
----
(Dollars in millions)
<S> <C>
Equity in earnings of Life Re $11.3
Net investment income received on preferred stock 3.0
Gain on sale of investment in Life Re 36.4
</TABLE>
<PAGE>
<PAGE> 79
5. 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 (c) $5,727.6 $ 7,114.4
Limited-payment contracts None (a) 8% 373.5 1,583.9
Traditional life insurance Company
contracts experience (b) 7% 663.8 632.7
Universal life-type contracts N/A N/A 6% 534.2 341.0
Individual accident and health Company Company 8% 569.2 545.1
experience experience
Group life and health N/A N/A 5% 22.2 14.2
Unearned premiums N/A N/A N/A 192.7 189.4
Claims payable and other
policyholders' funds N/A N/A N/A 454.2 377.6
-------- ---------
Total insurance liabilities $8,537.4 $10,798.3
======== =========
_____________
<FN>
(a) Principally the 1984 United States Population Table.
(b) Principally modifications of the 1965 - 70 Basic, Select and
Ultimate Tables.
(c) In 1994 and 1993: (i) approximately 99 percent and 94 percent
of this liability, respectively, represented account
balances where future benefits are not guaranteed; and (ii)
1 percent and 6 percent, respectively, represented the
present value of guaranteed future benefits determined using
interest rates ranging from 2 percent to 9 percent.
</TABLE>
Participating policies represented approximately 8 percent,
11 percent and 12 percent of total life insurance in force at
December 31, 1994, 1993 and 1992, respectively. Participating
policies represented approximately 2 percent, 3 percent and 8
percent of premium income for 1994, 1993 and 1992, respectively.
Dividends on participating policies amounted to $12.0 million,
$16.0 million and $11.1 million in 1994, 1993 and 1992,
respectively.
The sale of fixed maturity investments during 1993 reduced the
expected future yields on the investment of policyholder balances
to the extent that projected future cash flows on certain products
were insufficient to cover future benefits and expenses.
Accordingly, Conseco established additional estimated insurance
liabilities of $37.1 million by a charge to expense.
6. REINSURANCE:
Cost of reinsurance ceded where the reinsured policy contains
mortality risks totaled $33.4 million, $35.8 million and $41.9
million in 1994, 1993 and 1992, respectively. This cost was
deducted from insurance premium revenue. Conseco is contingently
liable for claims reinsured if the assuming company is unable to
pay. Reinsurance recoveries netted against insurance policy
benefits totaled $23.7 million, $31.0 million and $45.4 million in
1994, 1993 and 1992, respectively.
The Company has ceded certain policy liabilities under
assumption reinsurance agreements. Since all of Conseco's
obligations under the insurance contracts have been ceded to
another company, insurance liabilities related to such policies
were not reported in the balance sheet. Conseco believes the
assuming companies are able to honor all contractual commitments
under the assumption reinsurance agreements, based on its periodic
reviews of financial statements, insurance industry reports and
reports filed with state insurance departments.
<PAGE>
<PAGE> 80
Effective April 1, 1994, BLH recaptured certain annuity
business previously ceded to an unaffiliated company and retroceded
to an affiliate of Southwestern Life. The excess of liabilities
assumed of $390.2 million over assets acquired of $371.0 million
was capitalized as a component of cost of policies purchased.
Reserves related to these policies totaling $398.5 million were
included in reinsurance receivables at December 31, 1993.
On June 30, 1993, Western National recaptured certain annuity
business with insurance liabilities of $156.5 million that had
previously been reinsured with an unaffiliated company. Assets
with a fair value approximating the insurance liabilities were
transferred to the Company.
At December 31, 1992, insurance liabilities of approximately
$182.0 million were reinsured by BLH with a subsidiary of
Southwestern Life. During the first quarter of 1993, BLH
recaptured the reinsured business with assets approximately equal
to the insurance liabilities. Recapture fees of $15.5 million were
capitalized as a component of cost of policies purchased.
At December 31, 1994, Conseco's largest reinsurer accounted for
less than .08 percent of total insurance liabilities and less than
16 percent of total reinsurance receivables.
7. 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 $ 102.0 $ (67.9)
Cost of policies purchased and
cost of policies produced (380.7) (275.8)
Insurance liabilities 257.2 245.1
Other 34.5 17.9
Unrealized depreciation (appreciation) 65.9 (41.8)
Net operating loss carryforward 110.0 33.2
------ -------
Deferred income tax assets
(liabilities) 188.9 (89.3)
Current income tax assets (liabilities) 6.3 (28.9)
------ -------
Income tax assets (liabilities) $195.2 $(118.2)
====== =======
</TABLE>
The income tax asset at December 31, 1995 includes $6.3 million
which will be recovered upon the filing of the Company's tax
returns. The remaining $188.9 million is a deferred asset, of
which $108.1 million is attributed to the effect of the fair value
adjustment to actively managed fixed maturities pursuant to SFAS
115 and the remaining amount is predominantly due to the Company's
Net Operating loss ("NOL") carryforward. The Company has
determined that all of the benefits of this tax asset will be
eventually recovered although there are uncertainties surrounding
the realization of this asset. In making this determination as
related to the SFAS 115 adjustment, the Company has concluded that
it has the ability to hold these assets (primarily market
depreciated bonds) until such time as the Company can utilize the
benefits or the bond market returns to its normal interest rate
levels, and the Company has adopted a tax-planning strategy of not
selling significant amounts of depreciated bonds unless the losses
incurred will result in a tax benefit. With respect to determining
that the Company's NOL will be fully utilized, the Company is
relying upon its past history of earnings.
<PAGE>
<PAGE> 81
Income tax expense was as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Current tax provision $ 78.6 $162.9 $110.9
Deferred tax provision 32.4 60.2 13.7
------ ------ ------
Income tax expense $111.0 $223.1 $124.6
====== ====== ======
</TABLE>
Income tax expense differed from that computed at the
applicable federal statutory rate (35 percent during 1994 and 1993
and 34 percent during 1992) for the following reasons:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Tax on income before income taxes
at statutory rates $113.5 $213.6 $112.2
Additional tax on unrealized gains
and income from prior periods related
to increase in corporate income tax rate - 3.3 -
Nontaxable investment income - (.1) (.2)
Dividend received deduction on equity in
earnings of non-consolidated affiliates (13.7) (9.7) (3.8)
Tax on distribution of earnings of
consolidated subsidiaries 5.5 2.3 10.0
Nondeductible items 4.5 2.2 1.0
State taxes 3.1 11.9 4.2
Other (1.9) (.4) 1.2
------ ------ ------
Income tax expense $111.0 $223.1 $124.6
====== ====== ======
</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 for the year 1993. As a result of the increase in
the tax rate in 1993, the Company recognized additional tax expense
of $8.9 million, consisting of: (i) $5.6 million related to 1993
income; (ii) $1.9 million related to a one-time adjustment of
accumulated deferred taxes relating to prior years' income; and
(iii) $1.4 million related to unrealized appreciation of securities
at the date the new law was enacted. In addition, Conseco's equity
in earnings of CCP was reduced by $1.6 million as a result of the
Company's share of the additional tax expense recorded by CCP
because of the increase in the tax rate. The impact of other
provisions of the Act was not material to the Company.
At December 31, 1994, Conseco had federal income tax loss
carryforwards of $314.2 million were available (subject to various
statutory restrictions) for use on future tax returns. Portions of
these carryforwards begin expiring in 1999. Of the loss
carryforwards, $50.3 million may be used to offset income only from
the non-life insurance companies. None of the carryforwards are
available to reduce the tax provision for financial reporting
purposes.
The IRS has completed its examination of the Company for years
through 1990 and is currently conducting an examination for years
1991 through 1992. All amounts due determined by completed
examinations have been either paid or accrued. <PAGE>
<PAGE> 82
8. NOTES PAYABLE:
Notes payable that are direct obligations of the Company at
December 31, 1994 and 1993, were as follows:
<TABLE>
<CAPTION>
Amount
outstanding
net of
unamortized
Principal amount discount and Estimated
Outstanding at issuance costs fair value at
Initially December 31, at December 31, December 31,
issued 1994 1993 1994 1993 1994 1993
------ ---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Issued February 1993 $200.0 $195.0 $200.0 $191.8 $195.8 $173.6 $208.0
Issued September 1993 200.0 - 200.0 - 198.0 - 200.0
Issued June 1989 34.0 - 14.4 - 13.2 - 14.9
Issued June 1990 6.0 - 6.0 - 6.0 - 6.5
------ ------ ------ ------ ------ ------
Total $195.0 $420.4 $191.8 $413.0 $173.6 $429.4
====== ====== ====== ====== ====== ======
</TABLE>
In February 1993, the Company completed a public offering of
$200 million of 8-1/8% senior notes due in 2003. Interest on the
senior notes is payable semi-annually on February 15 and August 15.
The notes are unsecured and rank pari passu with all other
unsecured and unsubordinated indebtedness of the Company. The
notes are not redeemable prior to maturity. Proceeds from the
offering of approximately $195.6 million (after original issue
discount and other associated costs) were used to repurchase in
open market transactions or redeem the remaining outstanding 12.75
percent senior subordinated notes issued in July 1987, and for
general corporate purposes. The repurchase and redemption of the
senior subordinated notes resulted in an extraordinary charge of
$8.4 million, net of a $4.3 million tax benefit, in 1993.
On September 30, 1993, the Company executed a $200 million
senior unsecured loan due to a group of banks as financing for
Conseco's purchase of common shares of BLH (described in note 2).
As discussed in note 1, on February 15, 1994, the loan was repaid
in full, resulting in an extraordinary charge of $1.2 million (net
of a $.6 million tax benefit) in the first quarter of 1994.
In June 1989, the Company, as partial acquisition financing for
National Fidelity, executed a senior promissory note payable in the
amount of $34.0 million. This note was repaid in full in March
1994, resulting in an extraordinary charge of $.8 million (net of
a $.4 million tax benefit).
In June 1990, the Company, as partial acquisition financing for
Great American Reserve, executed a subordinated promissory note in
the amount of $6.0 million. This note was repaid in full in March
1994.
In 1994, the Company entered into revolving credit agreements
which provide a $140.0 million facility through May 1, 1997, and a
$60.0 million facility through December 7, 1995. The credit
agreements are with the same financial institution and have similar
terms. No amounts were drawn on either facility at December 31,
1994. The agreements permit borrowings based on defined rates plus
an applicable margin, based on the rating of the Company's
unsecured 8.125 percent senior notes. The Company pays a
commitment fee equal to .25 percent per annum on the average daily
unused commitments. The Company must prepay the borrowings under
the loan if certain ratios are not maintained. The largest balance
outstanding under the agreements during 1994 was $150 million and
the average balance was $31.8 million.
<PAGE>
<PAGE> 83
During 1992, the Company purchased in the market or called
$20.0 million par value of senior subordinated notes. These
redemptions resulted in an extraordinary charge of $1.4 million,
net of a $.7 million tax benefit.
The following notes payable, which are not direct obligations
of Conseco, were issued by BLH to finance its acquisition by
Partnership I:
<TABLE>
<CAPTION>
Amount
outstanding
net of
unamortized
Principal amount discount and Estimated
Outstanding at issuance costs fair value at
Initially December 31, at December 31, December 31,
issued 1994 1993 1994 1993 1994 1993
------ ---- ---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Senior term loan $175.0 $ 99.0 $110.0 $ 96.4 $106.4 $ 99.0 $110.0
Senior subordinated notes 200.0 180.0 180.0 183.6 183.9 207.0 216.0
------ ------ ------ ------- ------ ------
Total $279.0 $290.0 $280.0 $290.3 $306.0 $326.0
====== ====== ====== ====== ====== ======
</TABLE>
The $175.0 million senior term loan from a group of banks has
principal due in varying amounts through 1999. The interest rate
is based on either LIBOR plus an applicable margin or prime rate
plus an applicable margin for periods of one, two, three or six
months as selected by BLH from time to time (such rate was 7.75
percent at December 31, 1994). The applicable margin over prime
rate will vary from .75 percent to 1.5 percent, depending on:
(i) the principal amount of the senior term loan outstanding; and
(ii) a defined cash coverage ratio, based generally on cash flows
relative to certain fixed charges. The applicable margin over the
LIBOR rate will vary from 2.0 percent to 2.75 percent, depending on
such principal amount and ratio. Under the provisions of the note
agreement, the subsidiaries of BLH are limited in the amount of
dividends they may pay on common stock, and BLH must comply with
other covenants, including the maintenance of specific financial
ratios. The senior term loan is collateralized by the majority of
the common stock of BLH and the common stock and surplus debentures
issued by its life insurance subsidiary to BLH.
BLH's $200.0 million senior subordinated notes bear interest at
13 percent, payable semi-annually on May 1 and November 1. The
notes are due November 1, 2002, and may be redeemed, at the
Company's option, on or after November 1, 1997, at a redemption
price initially at 106.5 percent and declining thereafter. In
December 1993, BLH repurchased $20.0 million of the notes in open
market transactions for $24.0 million, resulting in an
extraordinary charge, net of tax, of $3.1 million. Conseco's share
of this charge ($1.0 million) was included as an extraordinary
charge in the consolidated financial statements.
As discussed in note 2, BLH issued $36.7 million of
paid-in-kind ("PIK") subordinated notes in connection with its
acquisition by Partnership I. The PIK subordinated notes were
subordinated in right of payment to the prior payment in full of
the senior term loan and, in certain circumstances, the senior
subordinated notes. In 1993, BLH retired all of its PIK
subordinated notes totaling $38.3 million and prepaid $55.0 million
of its senior term loan. Repayment of this debt resulted in an
extraordinary charge for BLH of $4.8 million, net of a $2.5 million
tax benefit, in 1993. Conseco's share of this charge ($2.1
million) was included as an extraordinary charge in the
consolidated financial statements.
<PAGE>
<PAGE> 84
At December 31, 1994, notes payable of Partnership II entities,
which are not direct obligations of Conseco, were as follows:
<TABLE>
<CAPTION>
Amount outstanding
Principal amount net of unamortized
Outstanding discount and Estimated
as of Outstanding issuance costs fair value
Acquisition at December 31, at December 31, at December 31,
date 1994 1994 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Senior term loan $170.0 $170.0 $163.1 $170.0
Senior subordinated notes 150.0 150.0 143.8 145.5
Convertible subordinated
debentures 69.0 24.2 24.2 24.2
------ ------ ------ ------
Total $389.0 $344.2 $331.1 $339.7
====== ====== ====== ======
</TABLE>
On September 29, 1994, American Life Holding Company ("ALHC")
executed a $200 million senior term loan with a group of banks as
partial financing for the acquisition of Statesman by Partnership
II. The loan has two tranches. One tranche has an aggregate
principal amount of $160.0 million ("Tranche A") and the other
tranche has an aggregate principal amount of $40.0 million
("Tranche B"). On the Acquisition date, $130.0 million and $40.0
million were borrowed under Tranche A and Tranche B, respectively.
The remaining $30.0 million is to be borrowed at a later date when
needed either to redeem the Statesman 1988 Series Preferred Stock
or to pay the Contingent Consideration, depending on the outcome of
the Government Litigation as further described in note 2.
Tranche A and Tranche B bear interest at a rate of either: (i)
the Bank's Alternate Reference Rate plus an applicable margin
payable monthly; or (ii) the Interbank Offered Rate ("IBOR") plus
an applicable margin for periods of one, two, three or six months
as selected from time to time. Such rate selected at December 31,
1994, was 8.3 percent for Tranche A and 8.8 percent for Tranche B.
The applicable margin for the rate based on the Alternate Reference
Rate will vary from .25 percent to 1.0 percent for Tranche A and
from .75 to 1.5 percent for Tranche B, depending on the principal
amount plus unused commitments. The applicable margin for the rate
based on IBOR will vary from 1.5 percent to 2.25 percent for
Tranche A and from 2.0 percent to 2.75 percent for Tranche B,
depending on the principal amount plus unused commitments.
Mandatory prepayments will be required: (i) from 50 percent of
excess cash flow (as defined in the loan agreement); (ii) upon the
sale or disposition of any significant assets other than in the
ordinary course of business; and (iii) upon the sale or issuance of
debt or equity securities of Statesman or any of its subsidiaries.
Under the provisions of the senior term loan, ALHC must comply with
various covenants, including the maintenance of specific financial
ratios and restrictions on the payment of dividends. The senior
term loan has as collateral, among other things, pledges of the
capital stock of ALHC's subsidiaries (American Life and Casualty
Insurance Company ("American Life," Statesman's primary operating
subsidiary) and American Life and Casualty Marketing Division Co.
("AMCO")) and the surplus notes of American Life held by ALHC. The
senior term loan is unconditionally guaranteed by Statesman and
AMCO. In addition, Partnership II has pledged to the lenders the
Statesman common stock owned by Partnership II.
<PAGE>
In September 1994, ALHC completed a public offering of $150
million of its 11-1/4% senior subordinated notes due September 15,
2004, in connection with the acquisition of Statesman by
Partnership II. Interest is payable semiannually on March 15 and
September 15. The senior subordinated notes are redeemable at the
option of ALHC, in whole or in part, at any time on and after
September 15, 1999, initially at 105.625 percent of their principal
amount, plus accrued interest, declining to 100 percent of their
principal amount, plus accrued interest, on and after September 15,
2001.
<PAGE>
<PAGE> 85
On the Acquisition date, Statesman's notes payable included
$69.0 million par value Convertible Subordinated Debentures
("Debentures") due 2003. Interest on the Debentures is payable
semiannually on May 1 and November 1. Prior to the Acquisition,
the Debentures were convertible into shares of Statesman's common
stock at a conversion ratio of 65.625 shares of common stock for
each $1,000 principal amount of Debentures. As a result of the
Acquisition, holders of the Debentures are entitled to receive at
their option the same consideration given to the holders of
Statesman common stock for each share of Statesman common stock
into which such securities were convertible prior to the
Acquisition. Through December 31, 1994, Debentures with a principal
amount of $44.8 million have been redeemed. Cash required to pay
all outstanding Debentures, including the optional conversion
consideration is held in escrow until the Debentures are converted,
redeemed or mature. The Debentures are redeemable, in whole or in
part, at the option of Statesman, at any time, on or after May 1,
1996, initially at 106 percent of the principal amount and
declining to 100 percent of the principal amount on or after May 1,
1999.
Principal amounts by maturity dates of the various notes
follows:
<TABLE>
<CAPTION>
Notes
Notes payable of
Notes payable payable of Partnership II
of Conseco BLH entities Total
---------- --- -------- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
1995 $ - $ 16.0 $ 15.0 $ 31.0
1996 - 18.0 17.0 35.0
1997 - 21.0 24.0 45.0
1998 - 22.0 26.5 48.5
1999 - 22.0 26.5 48.5
Thereafter 195.0 180.0 235.2 610.2
------ ------ ------ ------
Total par value $195.0 $279.0 $344.2 $818.2
====== ====== ====== ======
</TABLE>
Certain notes payable, not direct obligations of Conseco, were
issued by subsidiaries of Partnership I to finance portions of the
purchase prices of Great American Reserve, Jefferson National and
Beneficial Standard. In connection with the IPO and
recapitalization of CCP, a significant portion of CCP's debt was
retired, resulting in an extraordinary charge for CCP of $8.8
million, net of a $4.8 million tax benefit, in 1992. Conseco's
share of this charge ($3.9 million) was included as an
extraordinary charge in 1992 consolidated financial statements.
The remaining outstanding debt was no longer consolidated in the
consolidated financial statements, as described in note 1.
9. OTHER DISCLOSURES:
Leases
The Company rents office space, equipment and computer software
under noncancellable operating leases. Rental expense during 1994,
1993 and 1992, amounted to $18.8 million, $11.9 million and $6.2
million, respectively. Future required minimum rental payments as
of December 31, 1994, were as follows (dollars in millions):<PAGE>
<TABLE>
<S> <C>
1995 $ 16.7
1996 15.3
1997 14.0
1998 13.4
1999 12.1
Thereafter 75.6
------
Total $147.1
======
</TABLE>
<PAGE>
<PAGE> 86
Employment Arrangements
Some officers of the Company are employed pursuant to long-term
employment agreements. One of these agreements provides for a base
salary plus an annual bonus equal to 3 percent of the Company's
consolidated defined pretax profits. This agreement renews
annually for a five-year period unless either party notifies the
other, in which case the agreement expires five years from the last
renewal date. Additionally, a $1.9 million interest-free loan has
been granted to the officer. Repayment is due two years after
termination of the officer's employment contract.
Statesman has entered into employment continuation agreements
with certain of its officers and officers of its subsidiaries that
provide for payments to these officers of amounts up to four times
their annual compensation if the terms of their employment are
changed following the change of control that occurred September 29,
1994. The maximum contingent liability under the agreements at
December 31, 1994, is $6.7 million.
The Company has qualified defined contribution plans in which
substantially all employees of the Company's wholly owned
subsidiaries, BLH and Statesman are eligible to participate.
Company contributions, which match certain voluntary employee
contributions to the plan, totaled $1.7 million, $1.4 million and
$1.0 million in the years ended December 31, 1994, 1993 and 1992,
respectively, and may be made in cash or stock of Conseco or BLH.
The Company also has a stock bonus and deferred compensation
program for certain officers and directors of Conseco and its
wholly owned subsidiaries whereby the participants may voluntarily
defer a portion of their compensation. Company contributions vary
based on the profitability of the Company and the amount of
compensation voluntarily deferred by each participant. Each year's
contribution, which is fully funded in the form of Conseco's common
stock, vests five years later or upon certain other events. The
cost of the program is charged to expense over the vesting period
and amounted to $1.4 million, $2.3 million and $1.9 million in
1994, 1993 and 1992, respectively. The market value of Conseco's
common stock held under the program (included in other assets and
other liabilities) was $29.9 million and $39.4 million at December
31, 1994, and 1993, respectively.
BLH has a noncontributory, unfunded deferred compensation plan
for qualifying members of its career agency force. Benefits are
based on years of service and career earnings. The liability
recognized in the consolidated balance sheet for the agents'
deferred compensation plan was $29.5 million and $28.5 million at
December 31, 1994, and 1993, respectively, substantially all of
which represents vested benefits. Costs incurred on this plan,
primarily representing interest on unfunded benefit costs, were
$2.7 million and $2.8 million during 1994 and 1993, respectively.
Costs for 1992 were not significant.
<PAGE>
<PAGE> 87
BLH also provides certain health care and life insurance
benefits for eligible retired employees. Benefits are provided
under a contributory unfunded plan which includes cost-sharing
features determined at the discretion of management. During 1994
and 1993, several modifications were made to postretirement benefit
plans that: (i) established cost-sharing for certain future
retirees; (ii) established maximum annual costs and benefits; and
(iii) revised certain other benefits. Such changes made in 1993
resulted in a $45.0 million decrease in the accumulated post
retirement benefit obligation ("APBO"). As a result, the APBO was
reduced $27.6 million, goodwill was reduced by $17.9 million and
deferred income tax liability was increased by $9.7 million. The
remaining 1993 changes resulted in an unrecognized net reduction in
prior service costs of $11.9 million and an unrecognized gain of
$2.0 million. Such changes made in 1994 resulted in a $9.2 million
amendment gain and $5.2 million curtailment gain. The amendment
gain is amortized over the remaining service period of active plan
participants. The curtailment gain is included in other income.
Amounts related to the postretirement benefit plan consisted of the
following:
<TABLE>
<CAPTION>
December 31,
---------------
1994 1993
(Dollars in millions)
<S> <C> <C>
Retirees $ 5.8 $13.3
Fully eligible active plan participants 1.9 7.2
Other active plan participants .6 4.0
----- -----
Total APBO 8.3 24.5
Unrecognized net reduction in prior service costs 14.2 7.4
Unrecognized net gain 1.8 1.3
----- -----
Accrued liability included in other liabilities $24.3 $33.2
===== =====
</TABLE>
The net cost of providing these benefits, included in other
operating expenses, was comprised of the following:
<TABLE>
<CAPTION>
Two months
ended
Years ended December 31, December 31,
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Service cost $ .1 $1.1 $ .1
Interest cost 1.2 1.4 .4
Amortization (1.7) (.4) -
----- ---- ----
Net periodic cost $ (.4) $2.1 $ .5
===== ==== ====
</TABLE>
The discount rates used in determining the accumulated
postretirement benefit obligation were 8 percent and 7 percent at
December 31, 1994 and 1993, respectively. Future increases in
salaries and the assumed health care cost trend rates produce no
change in the accumulated postretirement benefit obligation at
December 31, 1994, because of the employer's maximum cost sharing
provisions discussed above. When computing the obligation at
December 31, 1993, the assumed annual increase in salary levels was
5.2 percent and the assumed annual increase in the per capita cost
of covered benefits was 12 percent in 1994 decreasing gradually to
5 percent in 2006 and remaining at that level thereafter.
BLH has an incentive stock option plan which is authorized to
grant employees or directors options to purchase shares of common
stock. A maximum of 3.5 million shares of common stock may be
issued under options and related rights granted under the plan.
The exercise price may not be less than the fair market value of
the underlying shares on the date of the grant. Options may become
exercisable immediately or over a period of time and remain
exercisable for up to 10 years after grant. At December 31, 1994,
options for a total of 1,253,850 shares at prices between $20.00
and $23.63 were outstanding of which 24,750 options were
exercisable and approximately 2.3 million shares were available for
future grant. The plan also authorized issuance of stock
appreciation rights or limited rights (rights exercisable only in
the event of a tender offer for or acquisition of 25 percent or
more of BLH's outstanding common stock), but none have been
granted.
<PAGE>
<PAGE> 88
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
condition 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. These assessments are to cover losses to policyholders
of insolvent or rehabilitated insurance companies. The
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 which
approximate the Company's estimated potential liability for
guaranty assessments. The Company's share of such assessments
incurred by its insurance company subsidiaries and equity investees
was $8.0 million in 1994, $2.9 million in 1993 and $3.5 million in
1992.
Interest Rate Swap Agreements
Prior to the Acquisition, Statesman entered into several
contracts to hedge interest rate risks. At the date of the
Acquisition, these contracts had ceased to effectively hedge the
risks and were recorded at their fair value pursuant to purchase
accounting. Conseco accounts for these contracts at estimated fair
value with changes in fair value reflected in earnings as they
occur.
No significant gain or loss was recognized on these contracts
during the three months ended December 31, 1994, and they are
carried in the balance sheet as a liability at their fair values of
$10.6 million at December 31, 1994.
Until these contracts expire in May 1996 or are disposed of,
Statesman remains exposed to the risk of interest rate fluctuation.
These contracts expose Statesman to additional liability as
follows:
- As to $250 million notional amount, at the amount of the LIBOR
increase in excess of .50 percent every six months,
- As to $250 million notional amount, at the amount by which
LIBOR is less than 6.00 percent, and
- As to $250 million notional amount, at the amount by which
LIBOR exceeds 7.35 percent.
In addition, these contracts subject Statesman to the risk that
the counterparty will fail to perform. The potential credit loss
is limited to the periodic net settlement amounts due to Statesman
under the agreements and nonperformance is not anticipated.
Expenses Related to Terminated Merger Agreement with Kemper
Corporation
In June 1994, Conseco entered into a merger agreement with
Kemper Corporation ("Kemper"). The merger agreement was terminated
in November 1994. In connection with the proposed merger with
Kemper, Conseco incurred pre-tax expenses totaling approximately
$35.8 million including: (i) $15.1 million of fees to banks for
financing commitments; (ii) $9.8 million loss on the decline in
fair value of Kemper common stock held by Conseco; and (iii) $10.9
million of legal, accounting and actuarial fees and other expenses.
Related Party Transactions
A director of the Company is a principal in several entities
that received a total of approximately $9.5 million from the
Company during the three years ended December 31, 1994, for the
sale of land and the construction of facilities, and approximately
$1.3 million for management and rental of offices. In 1989, the
Company loaned the director $8.0 million on an eight-year note with
interest at the prime interest rate plus one percentage point. The
note is repayable in annual installments of $1.0 million and had a
balance of $2.0 million at December 31, 1994.
Another director of the Company is the chairman of the board
and chief executive officer of a company that received a total of
approximately $.6 million from the company during the three years
ended December 31, 1994 for microfiche and related supplies.
Minority Interest
Minority interest represents the interest of investors other
than Conseco in BLH and Partnership II and its subsidiaries.
Minority interest at December 31, 1994, included: (i) $173.0
million interest in the common stock of BLH; (ii) $99.0 million
interest in the redeemable preferred stock of a subsidiary of
Statesman; (iii) $31.1 million interest in the Statesman PIK
Preferred Stock; and (iv) $18.6 million interest in the limited
partnership and common stock of Partnership II and its
subsidiaries.
Changes in minority interest during 1994 and 1993 are
summarized below:
<TABLE>
<CAPTION>
1994 1993
---- ----
(Dollars in millions)
<S> <C> <C>
Minority interest, beginning of year $223.8 $ 24.0
Changes in investments made by minority
shareholders:
Redeemable preferred stock of a
subsidiary of Statesman outstanding
at the Acquisition date 99.0 (i) -
Investment in Statesman PIK Preferred Stock 31.1 (ii) -
Investment in Partnership II 36.9 (ii) -
Change in investment in BLH - 178.9 (iii)
Repurchase of equity securities by BLH (35.7) (52.2)
Minority interests' equity in the change in
financial position of the Company's
subsidiaries:
Net income before extraordinary charge 59.0 78.2
Extraordinary charge - (4.6)
Unrealized appreciation (depreciation)
of securities (78.5) 1.8
Dividends (13.9) (2.3)
------ ------
Minority interest, end of year $321.7 $223.8
====== ======
---------------------
<FN>
(i) Consists of 2,760,000 shares of $2.16 Redeemable Cumulative
Preferred Stock (the "$2.16 Preferred Shares") and 1,200,000
shares of $2.32 Redeemable Cumulative Preferred Stock (the
"$2.32 Preferred Shares").
<PAGE> 90
The $2.16 Preferred Shares are entitled to cash dividends of
$2.16 per share per annum payable quarterly and may be
redeemed, in whole or in part, at any time after August 25,
1997, at $26.25 per share declining to $25.00 per share on or
after September 30, 2000, plus cumulative unpaid dividends.
The $2.16 Preferred Shares are mandatorily redeemable on
September 30, 2007.
The $2.32 Preferred Shares are entitled to cash dividends of
$2.32 per share per annum payable quarterly and may be
redeemed, in whole or in part, at any time after February 2,
1998, at $26.25 per share declining to $25.00 per share on or
after February 1, 2001, plus unpaid cumulative dividends.
The $2.32 Preferred Shares are mandatorily redeemable on
February 15, 2008.
Zero coupon U.S. Government bonds have been placed in an
escrow account to be used for the future redemption of
the $2.16 Preferred Shares and the $2.32 Preferred Shares on
or before their mandatory redemption dates. The aggregate
redemption values and the maturity dates of such bonds
correspond to the redemption values (excluding cumulative
unpaid dividends) and the mandatory redemption dates of the
$2.16 Preferred Shares and the $2.32 Preferred Shares. At
December 31, 1994, the bonds had an amortized cost of $36.2
million and an estimated fair value of $36.4 million.
(ii) See the description of the acquisition of Statesman in note
2.
(iii) Represents the change in minority interest attributable to
the minority interests' share of the net increase in BLH's
shareholders' equity resulting from the initial public
offering of BLH, partially offset by Conseco's purchase of
the common stock of BLH from a minority shareholder in
September 1993.
</TABLE>
10. SHAREHOLDERS' EQUITY:
Authorized preferred stock is 20,000,000 shares. Conseco
issued 100,000 shares of $55 Series B Redeemable Preferred
Stock("Series B preferred stock") with a stated value of $50.0
million ($500 per share) in 1987 and redeemed all of the shares at
stated value in 1993. Conseco issued 5,750,000 shares of Series D
Cumulative Convertible Preferred Stock ("Series D preferred stock")
with a stated value of $287.5 million ($50 per share) in January
1993 in a public offering. Annual dividends of $3.25 on each
Series D preferred share are cumulative from the date of original
issue and are payable quarterly. The Series D preferred stock is
convertible at the holder's option into shares of Conseco's common
stock at a conversion price of $63.75 per share, equivalent to a
ratio of approximately 0.7843 shares of common stock for each share
of preferred stock. Proceeds from the offering of approximately
$278.5 million (after underwriting and other associated costs) were
used to redeem the Series B preferred stock and were added to the
Company's general funds. During 1993, 274 Series D preferred
shares were converted to 215 common shares. In 1994, no Series D
preferred shares were converted to common shares. In December
1994, the Company repurchased 80,000 Series D preferred shares in
open market transactions in connection with its stock repurchase
program at a total cost of $3.3 million. Such preferred shares
would have been convertible into 62,745 shares of common stock.
Changes in the number of shares of common stock outstanding for
the years 1994, 1993 and 1992, were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year 25,311,773 24,911,148 24,676,658
Stock options exercised 3,865,454 849,232 2,086,272
Common shares converted from
Series D preferred shares - 215 -
Shares issued under
compensation plans 4,387 1,878 85,444
Treasury stock purchased (6,996,764) (450,700) (1,937,226)
---------- ---------- ----------
Balance, end of year 22,184,850 25,311,773 24,911,148
========== ========== ==========
</TABLE>
<PAGE>
<PAGE> 91
Dividends declared on common stock for 1994, 1993 and 1992, were
$.50, $.30 and $.085 per common share, respectively. A liability
was accrued for dividends declared but unpaid at December 31, 1994,
totaling $2.8 million. Such dividends were paid in January 1995.
The Company repurchased approximately 7 million shares of its
common stock for $360.2 million in 1994 in connection with its
stock repurchase program.
The Company's 1983 employee stock option plan was authorized to
grant options to purchase up to 12.0 million shares of the
Company's common stock at a price not less than its market value on
the date the option is granted. The 1983 stock option plan
continues to govern options granted thereunder, but expired in all
other respects in December 1993. A new plan was adopted in 1994
which authorizes the granting of options to purchase up to 6.0
million 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 date of grant and
may become exercisable immediately or over a period of time. The
plan also permits granting of stock appreciation rights.
Stock options granted were as follows:
<TABLE>
<CAPTION>
Number of shares
----------------------------------------------
Option price 1994 1993 1992
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Outstanding at January 1, $2.625 to $56.375 6,739,284 6,402,194 8,293,832
Granted during the year $41.875 to $59.250 3,195,500 - -
$52.375 to $56.375 - 1,461,400 -
$25.375 to $31.125 - - 216,490
Exercised during the year $2.625 to $53.250 (3,865,454) (849,232) (2,086,272)
Canceled during the year $3.063 to $59.250 (580,674) (275,078) (21,856)
--------- --------- ---------
Outstanding at December 31, $2.875 to $59.250 5,488,656 6,739,284 6,402,194
========= ========= =========
Portion thereof that
is exercisable at
December 31, $2.875 to $56.375 774,544 4,062,693 3,768,970
========= ========= =========
Available for future grant 3,122,500 - 2,791,994
========= ========= =========
</TABLE>
In addition to 8,611,156 shares of common stock reserved for
issuance under the 1983 and 1994 employee stock option plans,
694,759 shares of common stock are reserved for issuance under
stock bonus and deferred compensation plans. The common stock and
additional paid-in capital account was reduced by $6.8 million at
December 31, 1994, for the unearned portion of the incentive
deferred compensation program.
In February 1994, Conseco implemented an option exercise
program under which its chief executive officer and four of its
executive vice presidents exercised outstanding options to purchase
approximately 3.6 million shares of the Company's common stock. The
options would otherwise have remained exercisable until the years
1999 and 2000. As a result of the exercise, the Company realized
a tax deduction equal to the aggregate tax gain recognized by the
executives. The tax benefit of $67.8 million (net of payroll taxes
incurred of $2.9 million) and the proceeds from the exercise of
these options of $15.4 million were reflected as increases to
common stock and paid-in capital. The Company withheld sufficient
shares to cover federal and state taxes owed by the executives as
a result of the exercise transactions. Net of withheld shares, the
Company issued approximately 1.8 million common shares to the
executives. The Company also granted to the executive officers new
options to purchase a total of 3,016,000 shares of the Company's
common stock at $59.25 per share (the market price at the date of
such grant) under the 1994 Stock and Incentive Plan to replace the
shares surrendered for taxes and the exercise price on these and
other recent option exercises and as the 1994 incentive grant to
the executives.
<PAGE>
<PAGE> 92
11. 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 $1,907.4 $2,169.9 $1,513.4
Reinsurance assumed 5.1 6.0 2.2
Reinsurance ceded (33.4) (35.8) (50.7)
-------- -------- --------
Premiums collected, net
of reinsurance 1,879.1 2,140.1 1,464.9
Change in unearned premiums (3.9) 4.4 (11.6)
Less premiums on universal life and
products without mortality and morbidity
risk which are recorded as additions
to insurance liabilities 634.6 891.9 1,131.8
-------- -------- --------
Premiums on products with mortality
risk, recorded as insurance
policy income 1,240.6 1,252.6 321.5
Fees and surrender charges 43.0 38.8 55.3
Amortization of deferred policy fees 2.0 2.4 1.9
-------- -------- --------
Insurance policy income $1,285.6 $1,293.8 $ 378.7
======== ======== ========
</TABLE>
The five states with the largest shares of premiums collected
in 1994 were Illinois (13 percent), Florida (9.4 percent), Michigan
(7.2 percent), Texas (6.2 percent) and California (3.9 percent).
No other state accounted for more than 3 percent of total collected
premiums.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Commission expense $ 27.5 $ 31.6 $ 21.4
Other 186.6 182.8 80.2
------ ------ ------
Other operating costs and expenses $214.1 $214.4 $101.6
====== ====== ======
</TABLE>
Conseco considers anticipated returns from the investment of
policyholder balances in determining the amortization of the cost
of policies purchased and cost of policies produced. Sales of
fixed maturity investments change the incidence of profits on such
policies because gains (losses) are recognized currently and, if
the sale proceeds are reinvested at the current market yields, the
expected future yields on the investment of policyholder balances
are reduced (increased). Accordingly, amortization of the cost of
policies purchased was increased (decreased) by $(3.9) million,
$46.0 million and $63.3 million in the years ended December 31,
1994, 1993 and 1992, respectively, and amortization of the cost of
policies produced was increased (decreased) by $(1.4) million,
$43.2 million and $30.1 million in the years ended December 31,
1994, 1993 and 1992, respectively.
<PAGE>
<PAGE> 93
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 $ 623.7 $643.5 $575.5
Amounts acquired 454.3 3.8 527.1
Amortization related to operations:
Cash flow realized (184.8) (181.1) (108.0)
Interest added 108.6 115.8 69.4
Amortization related to gains on
sales of investments 3.9 (46.0) (63.3)
Amounts related to fair value adjustment
of actively managed fixed maturities 94.6 (5.3) (26.8)
Transferred to cost of policies produced
related to exchanged health policies (20.2) (28.4) -
Amounts related to purchase of additional
shares of BLH - 118.4 -
Amounts related to deconsolidation of CCP - - (330.4)
Amounts related to deconsolidation of WNC (61.9) - -
Reinsurance and other 3.4 3.0 -
-------- ------ ------
Balance, end of year $1,021.6 $623.7 $643.5
======== ====== ======
</TABLE>
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 $238.6 $290.8 $192.9
Additions 164.0 168.8 89.7
Acquired historical basis of BLH - - 152.9
Amortization related to operations (46.1) (69.4) (20.6)
Amortization of deferred revenue 1.6 1.3 1.0
Amortization related to gains on
sales of investments 1.4 (43.2) (30.1)
Amounts related to fair value adjustment
of actively managed fixed maturities 18.6 (65.0) (56.3)
Transferred from cost of policies
purchased related to exchanged
health policies, net of related
reserves 7.5 25.4 -
Amounts related to purchase of
additional shares of BLH - (73.3) -
Amounts related to reinsurance treaty - 3.2 -
Amounts related to deconsolidation
of WNC (84.9) - -
Amounts related to deconsolidation
of CCP - - (38.7)
------ ------ ------
Balance, end of year $300.7 $238.6 $290.8
====== ====== ======
</TABLE>
Based on current conditions and assumptions as to future events
on all policies in force, the Company expects to amortize
approximately 10 percent of the December 31, 1994, balance of cost
of policies purchased in 1995, 10 percent in 1996, 9 percent in
1997, 8 percent in 1998, and 7 percent in 1999. The discount rates
used to determine the amortization of the cost of policies
purchased prior to November 19, 1992, ranged from 15 percent to 20
percent during the three-year period ended December 31, 1994. The
discount rates used to determine the amortization of the cost of
policies purchased thereafter ranged from 5 percent to 7.5 percent.
<PAGE>
<PAGE> 94
12. CONSOLIDATED STATEMENT OF CASH FLOWS:
The following non-cash items were not reflected in the
consolidated statement of cash flows in 1994: (i) recapture of
insurance liabilities and invested assets totaling $390.2 million
and $371.0 million, respectively, described in note 6; (ii)
redemption of Debentures of a subsidiary with principal amount of
$44.8 million using segregated cash; and (iii) the tax benefit of
$69.2 million related to issuance of Conseco's common stock under
employee benefit plans. The following non cash-items were not
reflected in 1993: (i) the surrender for redemption $50.0 million
stated value of Southwestern Life preferred stock in exchange for
common shares of BLH (as described in note 2 to the consolidated
financial statements); (ii) recapture of insurance liabilities and
invested assets each totaling approximately $338.5 million in
connection with the recapture of reinsurance as described in note
6 to the consolidated financial statements; and (iii) the tax
benefit of $15.3 million related to issuance of Conseco's common
stock under employee benefit plans.
Cash flows from operations included interest paid on debt of
$54.3 million, $58.8 million and $42.7 million in 1994, 1993 and
1992, respectively. Income taxes paid were $99.8 million, $204.9
million and $108.5 million in 1994, 1993 and 1992, respectively.
13. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for the
Company's insurance subsidiaries by regulatory authorities differ
from GAAP. The Company's life 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 $651.2 $ 768.8
Asset valuation reserve 57.4 94.7
Interest maintenance reserve 83.0 272.0
------ --------
Total $791.6 $1,135.5
====== =========
</TABLE>
Combined statutory net income of the Company's life insurance
subsidiaries was $112.5 million, $162.3 million and $133.5 million
in 1994, 1993 and 1992, respectively, after appropriate
eliminations of intercompany accounts among such subsidiaries.
In connection with the acquisition of BLH, the capital of one
of the life insurance subsidiaries (Bankers Life Insurance Company
of Illinois) was increased by providing cash in exchange for a
surplus debenture. The remaining balance of the surplus debenture
of $460.0 million at December 31, 1994, is considered a part of
statutory capital and surplus of the life insurance subsidiary.
Payments to BLH of principal and interest on the surplus debenture
may be made from available funds only with the approval of the
Illinois Department of Insurance when its Director is satisfied
that the financial condition of the subsidiary warrants that
action. Such approval may not be withheld provided the surplus of
the subsidiary exceeds, after such payment, approximately $128
million. Such subsidiary's surplus at December 31, 1994, was
$327.4 million.
American Life's capital and surplus includes surplus notes with
a balance of $51.2 million at December 31, 1994. Each payment of
interest or principal on the surplus notes requires the prior
approval of the Iowa Insurance Division. The Iowa insurance law
also provides that payments of dividends on capital stock and
interest and principal on surplus notes may only be made out of an
insurer's earned surplus. At December 31, 1994, American Life had
earned surplus of $131.3 million. American Life follows certain
permitted accounting practices which are not specifically
prescribed in state laws, regulations, general administrative rules
and various NAIC publications. Such permitted accounting practices
do not enhance statutory surplus.
Statutory accounting practices require the asset valuation
reserve ("AVR") and the interest maintenance reserve ("IMR"), be
reported as liabilities. The purpose of these reserves is to
stabilize statutory surplus against fluctuations in the market
value of investments. The IMR captures all realized investment
gains and losses, net of income tax, on debt instruments resulting
from changes in interest rates and provides for subsequent
amortization of such amounts into statutory net income on a basis
reflecting the remaining lives of the assets sold. The AVR
captures all realized, net of income 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 and
loss experience of the Company's investment portfolio. <PAGE>
<PAGE> 95
Included in statutory capital and surplus shown above are the
following investments in affiliates, all of which are eliminated in
the consolidated financial statements prepared in accordance with
GAAP:
<TABLE>
<CAPTION>
1994 1993
------------------------ -------------------
Admitted Admitted
asset asset
Cost value Cost value
---- ----- ---- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Common stock of Conseco purchased in
open market transactions (9,294,476 shares
in 1994 and 9,098,476 shares in 1993) $ 39.6 $ 7.8 $ 30.7 $ -
Notes payable of Conseco and its non-life
subsidiaries 68.0 47.7 63.0 42.4
Common stock of BLH acquired from Southwestern
Life in exchange for preferred stock
of Southwestern Life previously held
(2,314,737 shares) 50.0 43.9 50.0 49.8
Common stock of Statesman (927,299 shares) 2.4 6.3 - -
Preferred stock of a non-life subsidiary 900.0 - 900.0 -
Investment in Partnership II 1.8 1.8 - -
Investment in Statesman PIK Preferred Stock 20.8 20.8 - -
</TABLE>
<PAGE>
<PAGE> 96
The following table compares the consolidated pretax income
determined on a statutory accounting basis with such income
reported herein in accordance with GAAP:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Life insurance subsidiaries:
Pretax income as reported on a statutory
accounting basis before deduction of
expenses paid to affiliates and
transfers to and from and amortization
of the IMR $229.2 $566.8 $380.1
GAAP adjustments:
Change in difference in carrying values
of investments 31.7 14.3 35.1
Eliminate financial reinsurance effects 4.4 12.8 1.3
Changes in cost of policies purchased (74.2) (110.7) (102.0)
Changes in cost of policies produced 123.3 51.1 40.0
Changes in insurance liabilities (27.1) (31.5) (23.5)
Reinsurance recapture 19.2 15.5 -
Other adjustments, net 13.5 2.0 (14.1)
------ ------ ------
GAAP pretax income 320.0 520.3 316.9
Non-life companies:
Interest expense (59.3) (58.0) (46.2)
Net gain on sale of stock of Life Re - - 36.4
Equity in earnings of CCP 24.7 37.4 15.8
Equity in earnings of WNC 40.2 - -
Restructuring income 80.8 - -
Loss on terminated acquisition (35.8) - -
Incentive earnings allocation from
Partnership I - 36.6 9.3
Gain on sale of stock by subsidiaries - 101.5 11.1
All other income and expense, net
(excluding amounts received from
affiliates) (46.2) (27.6) (13.3)
------ ------ ------
GAAP consolidated pretax income $324.4 $610.2 $330.0
====== ====== ======
</TABLE>
State insurance laws generally restrict the ability of insurance
companies to pay dividends or make other distributions. Net assets
of the Company's wholly owned life insurance
subsidiaries,determined in accordance with generally accepted
accounting principles, aggregated approximately $1.1 billion at
December 31, 1994, of which approximately $48.4 million is
available for distribution to Conseco in 1995 without the
permission of state regulatory authorities. On March 13, 1995, $40
million of such amount was distributed to Conseco.
Most states have adopted risk-based capital ("RBC") rules to
evaluate the adequacy of statutory capital and surplus in relation
to 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 rules, for the primary
insurance subsidiaries of BLH, Statesman and CCP were greater than
twice the level at which regulatory attention is triggered.
<PAGE>
<PAGE> 97
14. BUSINESS SEGMENT AND DISTRIBUTION CHANNELS:
Conseco's earnings result from three different activities: (i)
operating life insurance companies; (ii) providing services to
affiliates and others for fees; and (iii) acquiring and
restructuring life insurance companies. Conseco's life insurance
operations through 1994 were primarily conducted through: (i) BLH
(which distributes Medicare supplement policies and other life and
health products to the senior citizens market through career
agents, most of whom sell only BLH's products); (ii) Statesman
(which distributes annuities and life insurance products through a
general agency and brokerage distribution system and which was
acquired through Partnership II in September 1994); (iii) WNC
(which distributes single premium deferred annuities through
financial institutions and other annuity products through personal
producing general agents and which was disposed of in 1994); (iv)
CCP (which distributes tax qualified annuities and certain employee
benefit-related products primarily to school teachers and
administrators through educator market specialists and annuities
and life insurance products through other diversified cost
effective distribution channels); and (v) Conseco's other wholly
owned subsidiaries (which have profitable blocks of in-force life
business, although new sales are currently not being emphasized).
<PAGE>
<PAGE> 98
Financial information related to these activities as included in
the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected, net of reinsurance
BLH $1,512.9 $ 1,436.9 $ 235.1
Statesman 283.2 - -
WNC - 561.0 833.3
CCP - - 320.5
Conseco's other wholly owned insurance
subsidiaries 83.0 142.2 76.0
--------- --------- ---------
Total $ 1,879.1 $ 2,140.1 $ 1,464.9
========= ========= =========
Revenues:
Insurance operations:
BLH $1,437.0 $ 1,450.5 $ 222.5
Statesman 111.4 - -
WNC 40.2 774.2 653.2
CCP 24.7 37.4 297.6
Conseco's other wholly owned
insurance subsidiaries 116.4 207.4 288.1
Life Re - - 11.3
--------- --------- ---------
Subtotal 1,729.7 2,469.5 1,472.7
Services provided for fees 69.9 49.0 30.2
Acquisition and restructuring of life
insurance companies 80.8 138.1 54.9
Corporate and other 2.2 14.1 9.3
Eliminations (20.6) (34.7) (43.2)
--------- --------- ---------
Total $ 1,862.0 $ 2,636.0 $ 1,523.9
========= ========= =========
Income before income taxes, minority interest
and extraordinary charge:
Insurance operations:
BLH $ 197.1 $ 208.1 $ 37.2
Statesman 12.4 - -
WNC 40.2 204.5 156.8
CCP 24.7 37.4 64.7
Conseco 's other wholly
owned insurance subsidiaries 23.5 55.0 38.1
Life Re - - 11.3
--------- --------- ---------
Subtotal 297.9 505.0 308.1
Services provided for fees 39.5 22.5 22.2
Acquisition and restructuring of life
insurance companies 45.0 138.1 54.9
Corporate and other (54.3) (52.4) (50.6)
Eliminations (3.7) (3.0) (6.2)
--------- --------- ---------
Total $ 324.4 $ 610.2 $ 328.4
========= ========= =========
Assets:
Insurance operations:
BLH $4,040.2 $4,146.1 $ 3,367.5
Statesman 5,449.7 - -
WNC - 8,369.7 7,640.6
CCP 195.4 244.3 130.5
Conseco wholly owned insurance subsidiaries 926.2 993.7 2,072.7
--------- --------- ---------
Subtotal 10,611.5 13,753.8 13,211.3
Servicing companies 49.9 34.4 11.8
Corporate and other 1,105.8 1,861.3 964.7
Eliminations (955.3) (1,900.2) (2,415.1)
--------- --------- ---------
Total $10,811.9 $13,749.3 $11,772.7
========= ========= =========
/TABLE
<PAGE>
<PAGE> 99
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
We compute earnings per common share for each quarter
independently of earnings per share for the year. The sum of the
quarterly earnings per share may not equal the earnings per share
for the year because of: (i) transactions affecting the weighted
average number of shares outstanding in each quarter; and (ii) the
uneven distribution of earnings during 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 $321.1 $312.9 $320.2 $331.4
Revenues 490.2 413.9 423.9 534.0
Income before income taxes,
minority interest
and extraordinary charge 134.2 63.4 78.2 48.6
Net income 80.1 34.2 35.8 .3
Earnings (loss) per common share
and common equivalent share:
Primary:
Earnings (loss) before
extraordinary charge $2.76 $1.11 $1.21 $ (.11)
Extraordinary charge .09 - - .06
----- ----- ----- ------
Net income (loss) $2.67 $1.11 $1.21 $ (.17)
===== ===== ===== ======
Fully diluted:
Earnings (loss) before
extraordinary charge $2.51 $1.10 $1.18 $ (.11)
Extraordinary charge .07 - - .06
----- ----- ----- ------
Net income (loss) $2.44 $1.10 $1.18 $ (.17)
===== ===== ===== ======
</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 $319.5 $322.8 $324.7 $326.8
Revenues 751.6 619.0 628.7 636.7
Income before income taxes,
minority interest
and extraordinary charge 251.1 112.8 123.0 123.3
Net income 131.5 51.4 52.2 61.9
Earnings per common share and common
equivalent share:
Primary:
Earnings before extraordinary
charge $4.69 $1.55 $1.61 $1.99
Extraordinary charge .37 - - .03
----- ----- ----- -----
Net income $4.32 $1.55 $1.61 $1.96
===== ===== ===== =====
Fully diluted:
Earnings before extraordinary
charge $4.31 $1.48 $1.53 $1.87
Extraordinary charge .33 - - .03
----- ----- ----- -----
Net income $3.98 $1.48 $1.53 $1.84
===== ===== ===== =====
/TABLE
<PAGE>
<PAGE> 100
Our quarterly results of operations are based on numerous
estimates, principally related to policy reserves, the amortization
of cost of policies purchased, the amortization of cost of policies
produced and income taxes. We revise all such estimates each
quarter and we ultimately adjust them to year-end amounts. When we
determine revisions are necessary, we report them as part of
operations of the current quarter.
16. SUBSEQUENT EVENT (UNAUDITED):
On February 27, 1995, Conseco announced that its board of
directors had approved proposals to acquire, in separate
transactions, the outstanding shares of CCP and BLH that Conseco
does not already own. Under the proposals, CCP and BLH would merge
into Conseco, with Conseco being the surviving corporation. Each
holder of CCP shares other than Conseco would receive $22.50 per
share in cash. Each holder of BLH shares other than Conseco would
receive $22.00 per share in cash. Each proposed merger transaction
would require the approval of holders of a majority of outstanding
shares of the company being acquired (other than shares held by
Conseco) voting at a special stockholders' meeting.
In January and February 1995, we repurchased on the open market
1.7 million of our common shares for $78.2 million.
On March 3, 1995, Conseco announced that its Board of Directors
intends to reduce its quarterly cash dividend to $.02 per share
(from the current $.125 per share), effective with the dividend to
be paid in July 1995.
<PAGE>
<PAGE> 101
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by Part III is hereby incorporated by
reference from the Registrant's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A within 120
days after December 31, 1994, except that the information required
by Item 10 regarding Executive Officers is included herein under a
separate caption at the end of Part I.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements. See Index to Financial Statements
on page XX for a list of financial statements included
in this Report.
2. Financial Statement Schedules. The following financial
statement schedules are included as part of this Report
immediately following the signature page:
Schedule II -- Condensed Financial Information of
Registrant (Parent Company)
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not
applicable, not required, or because the information they contain
is included elsewhere in the consolidated financial statements or
notes.
3. Exhibits. See Exhibit Index immediately preceding the
Exhibits filed with this report.
(b) Reports on Form 8-K. A report on Form 8-K dated December 23,
1994, was filed with the Commission to report under Item 5
the disposition of the Company's remaining 40 percent equity
interest in WNC to American General Corporation.
A report on Form 8-K dated September 29, 1994, was filed with
the Commission to report: (i) under Item 2, the acquisition
of The Statesman Group, Inc.; (ii) under Item 7(a), the
unaudited consolidated financial statements of The Statesman
Group, Inc. as of June 30, 1994, and for the six months ended
June 30, 1994 and 1993, and the audited consolidated financial
statements of The Statesman Group, Inc. as of December 31,
1993 and 1992, and for each of the three years ended
December 31, 1993; and (iii) under Item 7(b), pro forma
consolidated financial information of Conseco, Inc. and
subsidiaries.
<PAGE>
<PAGE>
<PAGE> 102
SIGNATURES
Pursuant to the requirements of Section 13 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, this 31st day of March, 1994.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
-----------------------------
Stephen C. Hilbert, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
Signature Title (Capacity) Date
--------- ---------------- ----
<S> <C> <C>
/s/ STEPHEN C. HILBERT
---------------------- Chairman of the Board, March 30, 1995
Stephen C. Hilbert President and Director
(Principal Executive Officer)
/s/ ROLLIN M. DICK
---------------------- Executive Vice President and Director March 30, 1995
Rollin M. Dick (Principal Financial Officer and
Principal Accounting Officer)
/s/ MICHAEL G. BROWNING
----------------------- Director March 30, 1995
Michael G. Browning
/s/ NGAIRE CUNEO
----------------------- Director March 30, 1995
Ngaire Cuneo
/s/ LOUIS P. FERRERO
------------------------ Director March 30, 1995
Louis P. Ferrero
/s/ DONALD F. GONGAWARE
------------------------ Director March 30, 1995
Donald F. Gongaware
/s/ M. PHIL HATHAWAY
------------------------ Director March 30, 1995
M. Phil Hathaway
/s/ DENNIS E. MURRAY, SR.
------------------------- Director March 30, 1995
Dennis E. Murray, Sr.
/s/ JAMES D. MASSEY
------------------------- Director March 30, 1995
James D. Massey
/TABLE
<PAGE>
<PAGE> 103
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and
Board of Directors
Conseco, Inc.
Our report on the consolidated financial statements of Conseco,
Inc. and Subsidiaries is included on page XX of this Form 10-K. In
connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in
the index on page XXX of this Form 10-K.
In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
Indianapolis, Indiana
March 6, 1995
<PAGE>
<PAGE> 104
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
<TABLE>
Condensed Financial Information of Registrant (Parent Company)
Balance Sheet
as of December 31, 1994 and 1993
(Dollars in millions)
ASSETS
<CAPTION>
1994 1993
----- ----
<S> <C> <C>
Short-term investments $ 111.1 $ 17.7
Actively managed fixed maturities 13.3 31.8
Equity securities 3.3 4.7
Trading account securities 17.2 6.6
Other invested assets 6.5 8.5
Investment in CCP Insurance, Inc. 195.4 244.3
Investment in Western National Corporation
(eliminated in consolidation) - 760.9
Investment in wholly owned subsidiaries excluding
Western National Corporation (eliminated in
consolidation) 115.4 207.8
Investment in Bankers Life Holding Corporation
(eliminated in consolidation) 477.9 518.8
Investment in Conseco Capital Partners II, L.P.
(eliminated in consolidation) 4.3 -
Receivable from subsidiaries (eliminated in
consolidation) 28.3 15.1
Income taxes 90.7 -
Other assets 42.4 45.1
-------- --------
Total assets $1,105.8 $1,861.3
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Income tax liabilities $ - $ 92.4
Notes payable 191.8 413.0
Notes payable to subsidiaries (eliminated
in consolidation) 18.9 58.2
Other liabilities due subsidiaries (eliminated
in consolidation) 90.4 97.7
Other liabilities 57.7 57.4
-------- --------
Total liabilities 358.8 718.7
-------- --------
Shareholders' equity:
Preferred stock 283.5 287.5
Common stock and additional paid-in capital
(no par value, 500,000,000
shares authorized, shares issued and
outstanding: 1994 - 22,184,850;
1993 - 25,311,773) 165.8 102.8
Unrealized appreciation of securities (net of
applicable deferred income taxes: 1994 -
$(65.9); 1993 - $41.8) (139.7) 97.5
Retained earnings 437.4 654.8
-------- --------
Total shareholders' equity 747.0 1,142.6
-------- --------
Total liabilities and shareholders' equity $1,105.8 $1,861.3
======== ========
<FN>
The accompanying note is an integral part
of the condensed financial information.
/TABLE
<PAGE>
<PAGE> 105
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Statement of Operations
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income $ 2.7 $ 8.4 $ 3.6
Dividends from subsidiaries (eliminated
in consolidation) 39.6 18.6 82.2
Equity in earnings of CCP Insurance, Inc. 24.7 37.4 15.8
Equity in earnings of Life Re - - 11.3
Equity in earnings of Western National
Corporation 40.2 - -
Fee and interest income from subsidiaries
(eliminated in consolidation) 4.3 12.0 46.5
Gain on sale of stock of Life Re - - 36.4
Gain on sale of stock by subsidiaries - 101.5 9.2
Restructuring income 80.8 36.6 9.3
Other income 1.4 1.7 4.1
------ ------ ------
Total revenues 193.7 216.2 218.4
------ ------ ------
Expenses:
Interest expense on long-term debt 20.6 22.8 22.8
Interest expense to subsidiaries
(eliminated in consolidation) 7.1 7.8 10.9
Operating costs and expenses 28.7 40.4 29.0
Expenses incurred in conjunction
with terminated acquisition 35.8 - -
Operating expenses of subsidiaries
(eliminated in consolidation) .6 .5 .5
------ ------ ------
Total expenses 92.8 71.5 63.2
------ ------ ------
Income before income taxes, equity
in undistributed earnings of
subsidiaries and extraordinary
charge 100.9 144.7 155.2
Income tax expense 8.5 44.2 31.5
------ ------ ------
Income before equity in
undistributed earnings
of subsidiaries and
extraordinary charge 92.4 100.5 123.7
Equity in undistributed earnings of
subsidiaries (eliminated in consolidation) 62.0 208.4 51.1
------ ------ ------
Income before extraordinary charge 154.4 308.9 174.8
Extraordinary charge on extinguishment of
debt, net of tax 4.0 11.9 5.3
------ ------ ------
Net income 150.4 297.0 169.5
Less preferred stock dividends 18.6 20.6 5.5
------ ------ ------
Earnings applicable to common stock $131.8 $276.4 $164.0
====== ====== ======
<FN>
The accompanying note is an integral
part of the condensed financial information.
</TABLE>
<PAGE> 106
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Statement of Cash Flows
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $150.4 $297.0 $169.5
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed earnings of
consolidated subsidiaries (62.0) (208.4) (51.1)
Equity in undistributed earnings
of equity investments (61.0) (36.6) (26.9)
Gain on sale of stock by subsidiaries - (101.5) (9.2)
Restructuring income (80.8) (36.6) (9.3)
Income taxes 25.5 39.3 1.1
Extraordinary charge on extinguishment
of debt, net of tax 4.0 11.9 5.3
Other 4.3 11.8 3.0
------ ------ -------
Net cash provided (used) by
operating activities (19.6) (23.1) 82.4
------ ------ -------
Cash flows from investing activities:
Proceeds from sale of shares of Western
National Corporation and related
transactions 811.7 - -
Redemption of debt and preferred stock
by subsidiaries - 118.3 53.5
Sales and maturities of investments 22.9 45.5 10.1
Sale of investment in Life Re - - 42.6
Investments in consolidated subsidiaries - (391.4) (129.7)
Payment to affiliate (58.8) - -
Purchases of investments (52.4) (76.2) -
Investment in Conseco Capital Partners
II, L.P. (4.3) - -
Investments in equity investments - (59.5) -
------ ------ -------
Net cash provided (used) by
investing activities 719.1 (363.3) (23.5)
------ ------ -------
Cash flows from financing activities:
Issuance of equity securities, net 3.2 281.7 6.3
Issuance of debt, net 158.0 393.4 -
Payments on debt (378.4) (180.0) (24.8)
Payments to retire equity securities (357.6) (75.3) (49.4)
Dividends paid (31.3) (23.0) (7.6)
------ ------ -------
Net cash provided (used) by financing
activities (606.1) 396.8 (75.5)
------ ------ -------
Net increase (decrease) in
short-term investments 93.4 10.4 (16.6)
Short term investments, beginning of year 17.7 7.3 23.9
------ ------ -------
Short term investments, end of year $111.1 $ 17.7 $ 7.3
====== ====== =======
<FN>
The accompanying note is an
integral part of the condensed financial information.
</TABLE>
<PAGE> 107
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
Note to Condensed Financial Information
Basis of Presentation
The condensed financial information should be read in
conjunction with the consolidated financial statements of Conseco,
Inc. The condensed financial information includes the accounts and
activity of the Parent Company and its non-insurance subsidiaries
which act as the holding companies for the Company's life insurance
subsidiaries and investees.
<PAGE>
<PAGE> 108
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
SCHEDULE III
Supplementary Insurance Information
(Dollars in millions)
<CAPTION>
Amortization
of
Cost of policies Insurance cost of policies
produced and Insurance Net policy benefits produced and Other
cost of policies Insurance policy investment and cost of policies operating
Segment purchased liabilities income income expenses(1) purchased(2) expenses(3)
------- --------- ----------- ------ ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
BLH $ 791.8 $3,040.8 $1,213.8 $ 219.5 $943.5 $ 108.2 $188.2
Statesman 472.8 4,843.8 13.6 95.2 70.7 6.7 21.6
WNC - - - - - - -
CCP - - - - - - -
Conseco's other
wholly owned
subsidiaries 57.7 652.8 58.2 75.5 78.5 2.1 12.3
Services provided
for fees - - - - - - 32.4
Corporate and
other - - - 4.2 - - 56.5
Eliminations - - - (8.7) - - (18.9)
-------- -------- -------- ------ -------- ------ ------
Total $1,322.3 $8,537.4 $1,285.6 $385.7 $1,092.7 $117.0 $292.1
======== ======== ======== ====== ======== ====== ======
1993
BLH $680.6 $ 2,756.7 $1,200.7 $174.7 $ 900.8 $143.5 $198.1
WNC 146.8 7,379.9 21.8 610.1 454.3 63.7 51.7
CCP - - - - - - -
Conseco's other
wholly owned
subsidiaries 34.9 661.7 72.3 110.2 121.2 17.6 13.6
Services provided
for fees - - - - - - 25.1
Corporate and
other - - - 12.4 - - 66.5
Eliminations - - (1.0) (11.2) - (.9) (29.4)
-------- -------- -------- ------ -------- ------ ------
Total $862.3 $10,798.3 $1,293.8 $896.2 $1,476.3 $223.9 $325.6
======== ======== ======== ====== ======== ====== ======
1992
BLH $661.2 $ 2,490.2 $191.5 $ 21.1 $125.4 $ 25.2 $ 34.7
WNC 165.2 6,894.3 48.0 507.8 397.3 80.9 18.2
CCP - - 67.1 187.0 159.1 26.1 47.7
Conseco's other
wholly owned
subsidiaries 107.9 1,996.9 81.4 181.3 199.9 29.9 20.2
Services provided
for fees - - - - - - 7.6
Corporate and
other - - - 8.4 - - 59.9
Eliminations - (1,342.4) (9.3) (17.0) - (9.5) (28.7)
-------- -------- -------- ------ -------- ------ ------
Total $934.3 $10,039.0 $378.7 $888.6 $881.7 $152.6 $159.6
======== ======== ======== ====== ======== ====== ======
-------------------------
<FN>
(1) Includes insurance policy benefits, change in future policy
benefits and interest expense on annuities and financial
products.
(2) Includes additional amortization related to gains on sales of
investments.
(3) Includes interest expense on long-term debt, interest expense
on short-term investment borrowings, change in future policy
benefits related to realized gains and other operating costs
and expenses.
/TABLE
<PAGE>
<PAGE> 109
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
SCHEDULE IV
Reinsurance
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Life insurance in force:
Direct $28,002.9 $21,554.5 $22,916.9
Assumed 72.7 89.8 108.0
Ceded (2,008.0) (1,754.1) (2,383.9)
--------- --------- ---------
Net insurance in force $26,067.6 $19,890.2 $20,641.0
========= ========= =========
Percentage of assumed to net .3% .5% .5%
=== == ===
Premiums recorded as revenue for generally
accepted accounting principles:
Direct $1,268.9 $1,282.4 $361.2
Assumed 5.1 6.0 2.2
Ceded (33.4) (35.8) (41.9)
-------- -------- ------
Net premiums $1,240.6 $1,252.6 $321.5
======== ======== ======
Percentage of assumed to net .4% .5% .7%
=== === ===
/TABLE
<PAGE>
<PAGE> 110
<TABLE>
EXHIBIT INDEX
Annual Report on Form 10-K
of Conseco, Inc.
<CAPTION>
Exhibit
No. Document
---- --------
<S> <C>
2.1 Stock Purchase and Redemption Agreement dated September 11, 1993 by and between I.C.H.
Corporation and Bankers National Life Insurance Company was filed with the Commission as
Exhibit 2.1 to the Registrant's Report on Form 8-K dated September 30, 1993, and is incorporated
herein by this reference.
2.2 Letter Agreement dated September 11,1993 between the Registrant and I.C.H. Corporation was filed
with the Commission as Exhibit 2.2 to the Registrant's Report on Form 8-K dated September 30,
1993, and is incorporated herein by this reference.
2.3 Agreement and Plan of Merger dated as of May 1, 1994 by and among Conseco Capital Partners II,
L.P., CCP II Acquisition Company and The Statesman Group, Inc. was filed with the Commission
as Exhibit 2.1 to the Registrant's Report on Form 8-K dated September 29, 1994, and is
incorporated herein by this reference.
3.1 Amended and Restated Articles of Incorporation of the Registrant were filed with the Commission
as Exhibit 3.1 to the Registration Statement on Form S-2, No. 33-8498; Articles of Amendment
thereto, as filed September 9, 1988 with the Indiana Secretary of State, were filed with the
Commission as Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K for 1988; and Articles
of Amendment thereto, as filed June 13, 1989 with the Indiana Secretary of State, were filed with
the Commission as Exhibit 3.1.2 to the Registrant's Report on Form 10-Q for the quarter ended June
30, 1989, and Articles of Amendment thereto, as filed June 29, 1993 with the Indiana Secretary of
State, were filed with the Commission as Exhibit 3.1.3 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1993, and is incorporated herein by this reference.
3.2 Amended and Restated By-Laws of the Registrant effective February 10, 1986 were filed with the
Commission as Exhibit 3.2 to its Registration Statement on Form S-1, No. 33-4367, and an
Amendment thereto was filed with the Commission as Exhibit 3.2.1 to Amendment No. 2 to its
Registration Statement on Form S-1, No. 33-4367; and are incorporated herein by this reference.
4.8 Indenture dated as of February 18, 1993, between the Registrant and Shawmut Bank Connecticut,
National Association, as Trustee, for the 8 1/8 percent Senior Notes due 2003, was filed with the
Commission as Exhibit 4.8 to the Registrant's Annual Report on Form 10-K for 1992, and is
incorporated herein by this reference.
4.11 Articles of Amendment to the Registrant's Articles of Incorporation as filed January 22, 1993, with
the Indiana Secretary of State establishing the designations, rights and preferences of the Series
D Cumulative Convertible Preferred Stock were filed with the Commission as Exhibit 4.11 to the
Registrant's Annual Report on Form 10-K for 1992, and is incorporated herein by this reference.
4.12 Indenture dated as of September 29, 1994 between ALHC Merger Corporation and LTCB Trust
Company and First Supplemental Indenture dated as of September 29, 1994 between American Life
Holding Company and the Trustee for the 11 1/4% Senior Subordinated Notes due 2004 were filed
with the Commission as Exhibit 4.12 to the Registrant's Report on Form 8-K dated September 29,
1994, and are incorporated herein by this reference.
4.13 Indenture dated as of November 1, 1992 between Bankers Life Holding Corporation ("BLH"), and
Shawmut Bank Connecticut, National Association (formerly The Connecticut National Bank), as
Trustee, relating to the Senior Subordinated Notes due 2002 of BLH was filed with the Commission
as Exhibit 4.2 to BLH's Registration Statement on Form S-1, No. 33-55026, and is incorporated
herein by this reference. The Registrant agrees to furnish the Commission upon its request a copy
of any instrument defining the rights of holders of long-term debt of the Registrant and its
consolidated subsidiaries.
/TABLE
<PAGE>
<PAGE> 111
<TABLE>
<CAPTION>
Exhibit
No. Document
---- --------
<S> <C>
10.1.2 Employment Agreement dated January 1, 1987, between the Registrant and Stephen C. Hilbert was
filed with the Commission as Exhibit 10.1.2 to the Registrant's Annual Report on Form 10-K for
1986, and Amendment No. 1 thereto were filed with the Commission as Exhibit 10.1.2 to the
Registrant's Annual Report on Form 10-K for 1987; and are incorporated herein by this reference.
10.1.3 Employment Agreement dated July 1, 1991, between the Registrant and Rollin M. Dick was filed
with the Commission as Exhibit 10.1.3 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.4 Employment Agreement dated July 1, 1991, between the Registrant and Donald F. Gongaware was
filed with the Commission as Exhibit 10.1.4 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.5 Employment Agreement dated July 1, 1991, between the Registrant and Lawrence W. Inlow was
filed with the Commission as Exhibit 10.1.5 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.9 Secured Promissory Note of Stephen C. Hilbert and Pledge Agreement between the Registrant and
Stephen C. Hilbert dated February 25, 1988, were filed with the Commission as Exhibit 10.1.9 to
the Registrant's Report on Form 10-Q for the quarter ended March 31, 1988, and are incorporated
herein by this reference.
10.1.10 Employment Agreement dated August 17, 1992, between the Registrant and Ngaire E. Cuneo was
filed with the Commission as Exhibit 10.1.10 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1992, and is incorporated herein by this reference.
10.8 The Registrant's Stock Option Plan was filed with the Commission as Exhibit B to its definitive
Proxy Statement dated December 10, 1983; Amendment No. 1 thereto was filed with the
Commission as Exhibit 10.8.1 to its Report on Form 10-Q for the quarter ended June 30, 1985;
Amendment No. 2 thereto was filed with the Commission as Exhibit 10.8.2 to its Registration
Statement on Form S-1, No. 33-4367; Amendment No. 3 thereto was filed with the Commission as
Exhibit 10.8.3 to the Registrant's Annual Report on Form 10-K for 1986; Amendment No. 4 thereto
was filed with the Commission as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for
1987; Amendment No. 5 thereto was filed with the Commission as Exhibit 10.8 to the Registrant's
Report on Form 10-Q for the quarter ended September 30, 1991; and are incorporated herein by this
reference.
10.8.3 The Registrant's Cash Bonus Plan was filed with the Commission as Exhibit 10.8.3 to the
Registrant's Report on Form 10-Q for the quarter ended March 31, 1989, and is incorporated herein
by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred Compensation Program was filed with
the Commission as Exhibit 10.8.4 to the Registrant's Annual Report on Form 10-K for 1992, and
is incorporated herein by this reference.
10.8.6 Conseco Performance - Based Compensation Bonus Plan for Executive Vice Presidents was filed
with the Commission as Exhibit B to the Registrant's definitive Proxy Statement dated April 29,
1994, and is incorporated herein by this reference. .
*10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation Plan.
*10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus and Deferred Compensation
Program.
10.8.9 Conseco Performance-Based Compensation Bonus Plan for Executive Vice Presidents, was filed as
Exhibit B to the Registrant's definitive Proxy Statement dated April 29, 1994 and is incorporated
herein by reference.
/TABLE
<PAGE>
<PAGE> 112
<TABLE>
<CAPTION>
Exhibit
No. Document
---- --------
<S> <C>
10.18.9 Promissory Note of Michael Browning dated January 1, 1990 in the principal amount of $8,000,000
and Collateral Assignment of Corporate Stock evidencing a collateralized loan from Lincoln Income
Life Insurance Company were filed with the Commission as Exhibit 10.18.9 to the Registrant's
Report on Form 10-Q for the quarter ended March 31, 1990, and are incorporated herein by this
reference.
10.18.20 Construction Agreement dated February 7, 1994 between the Registrant and Browning Construction,
Inc. was filed with the Commission as Exhibit 10.18.20 to the Registrant's Annual Report on Form
10-K for 1993, and is incorporated herein by this reference.
10.18.21 Agency Agreement dated December 17, 1993 between Bankers National Life Insurance Company
and Browning Investments, Inc. was filed with the Commission as Exhibit 10.18.21 to the
Registrant's Annual Report on Form 10-K for 1993, and is incorporated herein by this reference.
10.18.22 Agreement to Assign Contract for Purchase of Real Estate dated January 7, 1994 between Bankers
National Life Insurance Company and Carmel Drive Realty, Inc. was filed with the Commission as
Exhibit 10.18.22 to the Registrant's Annual Report on Form 10-K for 1993, and is incorporated
herein by this reference.
10.18.23 Contract for Purchase of Real Estate dated January 7, 1994 between Bankers National Life Insurance
Company and Meridian Mile Associates, L.P. was filed with the Commission as Exhibit 10.18.23
to the Registrant's Annual Report on Form 10-K for 1993, and is incorporated herein by this
reference.
10.18.24 Development Agreement dated January 7, 1994 between Bankers National Life Insurance Company
and Browning Investments, Inc. was filed with the Commission as Exhibit 10.18.24 to the
Registrant's Annual Report on Form 10-K for 1993, and is incorporated herein by this reference.
10.18.25 Construction Agreement dated July 29, 1993 between Bankers National Life Insurance Company
and Browning Construction, Inc. was filed with the Commission as Exhibit 10.18.25 to the
Registrant's Annual Report on Form 10-K for 1993, and is incorporated herein by this reference.
10.23 Aircraft Lease Agreement dated December 22, 1988, between General Electrical Capital
Corporation and Conseco Investment Holding Company was filed with the Commission as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for 1988, and is incorporated herein by this
reference.
10.23.1 Amendment to Aircraft Lease Agreement dated December 22, 1988, between General Electric
Capital Corporation and Conseco Investment Holding Company was filed with the Commission as
Exhibit 10.23.1 to the Registrant's Annual Report on Form 10-K for 1993, and is incorporated
herein by this reference.
10.24 Aircraft Lease Agreement dated April 26, 1991 between General Electric Capital Corporation and
Conseco Investment Holding Company was filed with the Commission as Exhibit 10.29 to the
Registrant's Report on Form 10-Q for the quarter ended September 30, 1991, and is incorporated
herein by this reference.
10.24.1 Amendment to Aircraft Lease Agreement dated April 26, 1991, between General Electric Capital
Corporation and Conseco Investment Holding Company was filed with the Commission as Exhibit
10.24.1 to the Registrant's Annual Report on Form 10-K for 1993, and is incorporated herein by this
reference.
10.25 Aircraft Lease Purchase Agreement dated December 28, 1993, between MetLife Capital Corporation
and Conseco Investment Holding Company was filed with the Commission as Exhibit 10.25 to the
Registrant's Annual Report on Form 10-K for 1993, and is incorporated herein by this reference.
/TABLE
<PAGE>
<PAGE> 113
<TABLE>
<CAPTION>
Exhibit
No. Document
---- --------
<S> <C>
10.30 Stock Acquisition Agreement dated February 20, 1992, relating to Bankers Life and Casualty
Company was filed with the Commission, as Exhibit 10.30 to the Registrant's Annual Report on
Form 10-K for 1991 and Amendments thereto were filed with the Commission as Exhibit 2 to the
Registrant's Report on Form 8-K dated November 20, 1992; and are incorporated herein by this
reference.
10.31 Helicopter Lease Agreement dated April 9, 1992 between General Electric Capital Corporation and
Conseco Investment Holding Company was filed with the Commission as Exhibit 10.31 to the
Registrant's Report on Form 10-Q for the quarter ended June 30, 1992, and is incorporated herein
by this reference.
10.32 Aircraft Lease Agreement dated October 6, 1993, between General Electric Capital Corporation and
Conseco Investment Holding Company and the associated Assignment Agreement dated October
25, 1993, between General Electric Capital Corporation and Nationsbanc Leasing Corporation were
filed with the Commission as Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for
1993, and are incorporated herein by this reference.
10.33.1 U.S. Purchase Agreement dated February 8, 1994 among Western National Corporation, Conseco
Investment Holding Company, Conseco, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner
& Smith Incorporated, Dean Witter Reynolds Inc., Goldman, Sachs & Co. and Ladenburg, Thalmann
and Co., Inc. as representatives of the several underwriters named therein was filed with the
Commission as Exhibit 10.33.1 to the Registrant's Annual Report on Form 10-K for 1993, and is
incorporated herein by this reference.
10.33.2 International Purchase Agreement dated February 8, 1994 among Western National Corporation,
Conseco Investment Holding Company, Conseco, Inc., and Merrill Lynch International Limited,
Dean Witter International Ltd., Goldman Sachs International Limited and Ladenburg, Thalmann &
Co. Inc., as Lead Managers of the several managers named therein was filed with the Commission
as Exhibit 10.33.2 to the Registrant's Annual Report on Form 10-K for 1993, and is incorporated
herein by this reference.
10.34 Separation Agreement dated February 8, 1994 between Conseco, Inc. and Western National
Corporation was filed with the Commission as Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for 1993, and is incorporated herein by this reference.
10.35 Stock Purchase Agreement dated December 2, 1994 between American General Corporation and
Conseco Investment Holding Company was filed with the Commission as Exhibit 10.35 to the
Registrant's Report on Form 8-K dated December 23, 1994, and is incorporated herein by this
reference.
10.36 Lease dated as of December 18, 1992 between LaSalle National Trust, N.A. as trustee and Bankers
Life and Casualty Company relating to the lease of executive office and administration space by BLH
was filed with the Commission as Exhibit 10.17 to Amendment No. 1 to BLH's Registration
Statement on Form S-1, No. 33-55026, and is incorporated herein by this reference.
10.37 Lease dated as of August 20, 1993 between REO Holding Corporation and Bankers Life and
Casualty Company relating the lease of warehouse space by BLH was filed with the Commission as
Exhibit 10.14 to BLH's Report on Form 10-K for 1994, and is incorporated herein by this reference.
*11.1 Computation of Earnings Per Share - Primary.
*11.2 Computation of Earnings Per Share - Fully Diluted.
*12.1 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends.
*12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends for Which Conseco is
Directly Liable.
/TABLE
<PAGE>
<PAGE> 114
<TABLE>
<CAPTION>
Exhibit
No. Document
---- --------
<S> <C>
*21 List of Subsidiaries.
*23 Consent of Independent Accountants
*27 FINANCIAL DATA SCHEDULE
*Filed herewith
/TABLE
<PAGE>
<PAGE> 115
<TABLE>
<CAPTION>
Exhibit
No. Document
---- --------
Executive Compensation Plans and Arrangements
<S> <C>
10.1.2 Employment Agreement dated January 1, 1987, between the Registrant and Stephen C. Hilbert was
filed with the Commission as Exhibit 10.1.2 to the Registrant's Annual Report on Form 10-K for
1986, and Amendment No. 1 thereto were filed with the Commission as Exhibit 10.1.2 to the
Registrant's Annual Report on Form 10-K for 1987; and are incorporated herein by this reference.
10.1.3 Employment Agreement dated July 1, 1991, between the Registrant and Rollin M. Dick was filed
with the Commission as Exhibit 10.1.3 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.4 Employment Agreement dated July 1, 1991, between the Registrant and Donald F. Gongaware was
filed with the Commission as Exhibit 10.1.4 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.5 Employment Agreement dated July 1, 1991, between the Registrant and Lawrence W. Inlow was
filed with the Commission as Exhibit 10.1.5 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1991, and is incorporated herein by this reference.
10.1.9 Secured Promissory Note of Stephen C. Hilbert and Pledge Agreement between the Registrant and
Stephen C. Hilbert dated February 25, 1988, were filed with the Commission as Exhibit 10.1.9 to
the Registrant's Report on Form 10-Q for the quarter ended March 31, 1988, and are incorporated
herein by this reference.
10.1.10 Employment Agreement dated August 17, 1992, between the Registrant and Ngaire E. Cuneo was
filed with the Commission as Exhibit 10.1.10 to the Registrant's Report on Form 10-Q for the
quarter ended September 30, 1992, and is incorporated herein by this reference.
10.8 The Registrant's Stock Option Plan was filed with the Commission as Exhibit B to its definitive
Proxy Statement dated December 10, 1983; Amendment No. 1 thereto was filed with the
Commission as Exhibit 10.8.1 to its Report on Form 10-Q for the quarter ended June 30, 1985;
Amendment No. 2 thereto was filed with the Commission as Exhibit 10.8.2 to its Registration
Statement on Form S-1, No. 33-4367; Amendment No. 3 thereto was filed with the Commission as
Exhibit 10.8.3 to the Registrant's Annual Report on Form 10-K for 1986; Amendment No. 4 thereto
was filed with the Commission as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for
1987; Amendment No. 5 thereto was filed with the Commission as Exhibit 10.8 to the Registrant's
Report on Form 10-Q for the quarter ended September 30, 1991; and are incorporated herein by this
reference.
10.8.3 The Registrant's Cash Bonus Plan was filed with the Commission as Exhibit 10.8.3 to the
Registrant's Report on Form 10-Q for the quarter ended March 31, 1989, and is incorporated herein
by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred Compensation Program was filed with
the Commission as Exhibit 10.8.4 to the Registrant's Annual Report on Form 10-K for 1992, and
is incorporated herein by this reference.
10.8.6 Conseco Performance - Based Compensation Bonus Plan for Executive Vice Presidents was filed
with the Commission as Exhibit B to the Registrant's definitive Proxy Statement dated April 29,
1994, and is incorporated herein by this reference. .
*10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation Plan.
/TABLE
<PAGE>
<PAGE> 116
<TABLE>
<CAPTION>
Exhibit
No. Document
---- --------
<S> <C>
*10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus and Deferred Compensation
Program.
10.8.9 Conseco Performance-Based Compensation Bonus Plan for Executive Vice Presidents, was filed as
Exhibit B to the Registrant's definitive Proxy Statement dated April 29, 1994 and is incorporated
herein by reference.
</TABLE>
<PAGE> 1
CONSECO, INC. AMENDED AND RESTATED DEFERRED COMPENSATION PLAN
Effective as of January 1, 1995
Article I. Introduction and Purpose of Plan
1.1 Establishment of the Plan. Conseco, Inc., an Indiana
corporation (the "Company") hereby establishes a deferred
compensation plan for certain of its eligible Employees known as
the "CONSECO, INC. DEFERRED COMPENSATION PLAN" (the "Plan"), which
Plan is effective for the Plan Year beginning January 1, 1995 and
for each Plan Year thereafter until termination of the Plan.
1.2 Purpose. The purpose of the Plan is to provide a
Participant with a retirement income based on Employer
contributions and Participant salary deferrals. The Plan is
intended to provide unfunded, deferred compensation benefits to a
select group of management or highly compensated employees within
the meaning of Section 201(2) of the Employee Retirement Income
Security Act of 1974, as amended.
1.3 Application of the Plan. The provisions of this Plan are
applicable only for Participants who are in the active employ of an
Employer on or after January 1, 1995.
Article II. Definitions
Whenever used in the Plan, the following terms shall have the
meanings as set forth in this Article II.
2.1 "Administrator" means a committee consisting of the
Chief Financial Officer, Chief Operations Officer and General
Counsel of the Company or such other directors or officers of the
Company who may be appointed by the Committee.
2.2 "Beneficiary" means the person, persons, or legal
entity entitled to receive benefits under this Plan which become
payable in the event of the Participant's death, as provided in
Article VIII.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as
amended. Reference in the Plan to any section of the Code shall be
deemed to include any amendments or successor provisions to such
section and any regulations under such section.
2.5 "Committee" means a committee of the Board which shall be
(i) appointed by the Board; (ii) constituted so as to permit the
Plan to comply with Rule 16b-3; and (iii) constituted solely of
"outside directors," within the meaning of Section 162(m) of the
Code and applicable interpretive authority thereunder. No member
of the Committee shall be eligible to be a Participant under the
Plan or shall have been granted or awarded equity securities
pursuant to any other plan of the Company or any of its affiliates
in the preceding year from the date of any service on such
committee unless Rule 16b-3 permits disinterested directors to
participate in such plans. The Committee may exercise any and all
authority of the Administrator provided for herein and take any and
all action the Administrator is permitted to take hereunder.
<PAGE>
<PAGE> 2
2.6 "Company Stock" means the shares of common stock of the
Company.
2.7 "Compensation" means the total amount of authorized base
salary plus cash bonuses earned by an Employee for personal
services rendered to an Employer for the calendar year.
2.8 "Deferral" means the annual amount of Compensation that
a Participant elects to defer pursuant to a properly executed
Voluntary Salary Deferral Agreement.
2.9 "Disability" means a Participant's total and permanent
disability, as determined in accordance with the long term
disability plan applicable to the Participant; provided, however,
that in no event shall disability be deemed to have occurred if it
results from a Participant's engagement in a criminal activity,
habitual drunkenness, addiction to narcotics, or from an
intentionally self-inflicted injury.
2.10 "Early Retirement" means the Participant's termination of
employment following attainment of age fifty-five (55) and
completion of five (5) years of service with an Employer.
2.11 "Employee" means any common law employee of an Employer.
2.12 "Employer" means the Company and such Subsidiaries of the
Company as are named as Employers by the Committee and have adopted
the Plan.
2.13 "Employer Contribution Account" means an account
established for bookkeeping purposes only to reflect Employer
Contributions for each Participant pursuant to Section 5.1 of this
Plan. Employer Contributions for each Participant for each Plan
Year shall be converted to Units as of the last day of such Plan
Year by dividing the total amount of Employer Contributions for the
calendar year by the average price of one share of Company Stock
for the calendar year. Such average price shall be determined by
averaging the closing price of one share of Company Stock each day
to obtain a monthly average price, and averaging the monthly
average prices to obtain an annual average price. Such Employer
Contributions shall thereafter be accounted for solely in Units. In
the event the Company declares cash dividends with respect to
Company Stock, the Employer Contribution Account for each
Participant shall be credited with additional Units equal to the
number determined by dividing the dollar value of the cash dividend
that would have been attributable to the number of Units in the
Employer Contribution Account for such Participant had the Units in
fact been Company Stock by the value of the Company Stock on the
date the cash dividend was paid.
<PAGE>
<PAGE> 3
2.14 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time.
2.15 "Normal Retirement" means the Participant's termination
of employment following attainment of age sixty (60).
2.16 "Participant" means an Employee or former Employee who
has been enrolled in this Plan and who has an account under the
Plan.
2.17 "Plan" means the Conseco, Inc. Deferred Compensation Plan
as set forth herein and as it may be amended from time to time.
2.18 "Plan Year" means the period from January 1 through
December 31.
2.19 "Retirement" means Early Retirement or Normal Retirement.
2.20 "Rule 16b-3" means Securities and Exchange Commission
Rule 16b-3 promulgated under the Exchange Act, as such may be
amended from time to time, and any successor rule, regulation or
statute fulfilling the same or a similar function.
2.21 "Salary Deferral Account" means an account established
for bookkeeping purposes only to reflect each Participant's
Deferrals under this Plan. Each Participant's Salary Deferral
Account will earn a rate of return each calendar year which is
determined with reference to an index to be selected by the
Committee prior to the beginning of that year. Such interest will
be credited to each Participant's Salary Deferral Account monthly.
2.22 "Subsidiary" means any entity that is more than fifty
percent (50%) owned, directly or indirectly, by the Company.
2.23 "Units" means an amount of deferred compensation having
reference to Company Stock with one Unit referencing one share of
Company Stock. The maximum number of Units that may be allocated
to the Employer Contribution Account of all Participants under the
Plan in the aggregate shall be 150,000 Units. Such maximum number
shall be adjusted as appropriate to reflect any stock dividend,
stock split, recapitalization, merger or other similar event
affecting the Company.
<PAGE>
<PAGE> 4
2.24 "Voluntary Salary Deferral Agreement" means the agreement
between a Participant and an Employer to defer receipt by the
Participant of Compensation not yet earned. Such agreement shall
state the Deferral amount to be withheld from a Participant's pay
and shall become effective no earlier than the first day of the
Plan Year following the execution of such agreement except as
otherwise designated by the Administrator.
Article III. Participation in the Plan
3.1 Eligibility. Each Employee who received Compensation in
the prior Plan Year in excess of an amount determined prior to the
beginning of each Plan Year by the Committee, in its complete
discretion, (provided, however, that such amount shall not be less
than $100,000) shall be eligible to participate in the Plan on the
first day of the Plan Year. Notwithstanding the forgoing, any
Employee designated by the Committee shall be eligible to
participate in the Plan on such date as is designated by the
Committee.
3.2 Enrollment. An eligible person under Section 3.1 of the
Plan may enroll in the Plan by completing an annual Voluntary
Salary Deferral Agreement and submitting it to the Administrator.
Except as specifically so designated by the Administrator, each
annual Voluntary Salary Deferral Agreement must be submitted prior
to the first day of the Plan Year to which it relates in order to
be effective for that year, and shall be irrevocable for such Plan
Year, once made.
3.3 Duration of Participation. An Employee who becomes a
Participant shall be eligible to continue to actively participate
in the Plan and elect to make Deferrals until such person's
termination of employment, or until the first day of any Plan Year
following a Plan Year in which the Participant does not receive
Compensation in excess of $100,000 (or such other figure as is
determined by the Committee prior to the beginning of any Plan
Year); provided, however, the Committee may continue eligibility to
participate at its discretion.
Article IV. Deferral of Compensation
4.1 Deferrals. By completing a Voluntary Salary Deferral
Agreement, an eligible Participant may defer any whole percentage
of Compensation for the Plan Year. Amounts deferred shall be
allocated to the Participant's Salary Deferral Account on the last
day of each month.
4.2 Modifications to Amount Deferred. A Participant may
change Deferrals with respect to Compensation for the next Plan
Year by submitting a new properly executed Voluntary Salary
Deferral Agreement to the Administrator prior to the first day of
that Plan Year.
<PAGE>
<PAGE> 5
Article V. Employer Contributions
5.1 Employer Contributions.
(a) Fixed Contribution.
The Employer shall make a matching contribution on
behalf of each Participant for the Plan Year equal to one hundred
percent (100%) of the Participant's Deferrals not in excess of
three percent (3%) of the Participant's Compensation for that year.
(b) Profit Sharing Contribution.
Prior to the first day of each Plan Year, the
Committee shall establish two performance goals (hereinafter
sometimes referred to as Target I and Target II) for that year
based on the Company's targeted operating results. Once
established, the Committee, in its sole discretion, may revise such
performance goals at any time to take into account occurrences
other than those occurrences in the ordinary course of business for
the year. If a performance goal for a Plan Year is reached, the
Employer shall make a matching contribution on behalf of each
Participant for the Plan Year as follows:
(1) For each such Class 1 Participant, a matching
contribution equal to one hundred percent (100%) of the
Participant's Deferrals not in excess of five percent (5%) of the
Participant's Compensation for that year if Target I is reached and
an additional matching contribution of one hundred percent (100%)
of the Participant's Deferrals not in excess of five percent (5%)
of the Participant's Compensation for that year if Target II is
reached.
(2) For each such Class 2 Participant, a matching
contribution equal to one hundred percent (100%) of the
Participant's Deferrals not in excess of three and three-fourths
percent (3.75%) of the Participant's Compensation for that year if
Target I is reached and an additional matching contribution of one
hundred percent (100%) of the Participant's Deferrals not in excess
of three and three-fourths percent (3.75%) of the Participant's
Compensation for that year if Target II is reached.
(3) For each such Class 3 Participant, a matching
contribution of one hundred percent (100%) of the Participant's
Deferrals not in excess of two and one-half percent (2.5%) of the
Participant's Compensation for that year if Target I is reached and
an additional matching contribution of one hundred percent (100%)
of the Participant's Deferrals not in excess of two and one-half
percent (2.5%) of the Participant's Compensation for that year if
Target II is reached.
<PAGE>
<PAGE> 6
Participants shall be assigned to Classes 1 - 3 by the Committee in
its sole discretion prior to the beginning of each Plan Year,
subject to modification at any time by the Committee in its sole
discretion.
(c) Discretionary Contributions.
Notwithstanding anything herein to the contrary, the
Employer shall make additional Employer Contributions in such
amounts, if any, as the Committee shall determine in its sole
discretion. Such additional Employer Contributions shall be
allocated in such manner as the Committee shall determine.
(d) Timing of Allocation of Contributions.
Employer Contributions shall be allocated to each
eligible Participant's Employer Contribution Account effective as
of the last day of the Plan Year to which the contributions relate.
Article VI. Vesting
The value of each Employer Contribution made on behalf of a
Participant pursuant to Section 5.1 shall vest on the earlier of
the following: (i) the Participant's death, (ii) the Participant's
Disability, (iii) the Participant's Retirement, or (iv) the fourth
anniversary of the last day of the Plan Year for which that
contribution was made, provided that the Participant has been an
Employee of the Employer or an affiliate of the Employer
continuously from the date when the contribution was made until
that date. Each Participant's Salary Deferral Account shall be one
hundred percent (100%) vested at all times.
Article VII. Distribution of Benefits
7.1 Commencement of Payment.
(a) Distribution of a Participant's Salary Deferral
Account shall be made in cash beginning as soon as administratively
feasible following the earlier of (i) Separation from Service, or
(ii) the fourth anniversary of the last day of the Plan Year in
which the Deferrals were made unless the Participant elects an
additional four (4)-year deferral in writing prior to that date and
immediately preceding each subsequent four (4)-year anniversary of
that date thereafter.
(b) Distribution of one-half (1/2) of each Employer
Contribution shall be made in Company Stock and cash in lieu of
fractional shares (or all in cash if so determined by the
Administrator in its complete discretion or in the event no
exemption from registration has been obtained or no registration
has been made of the Company Stock under applicable federal or any
state securities laws) beginning as soon as administratively
feasible following the earlier of (i) the later of the
Participant's Separation from Service or attainment of age sixty
(60), or (ii) the fourth anniversary of the last day of the Plan
Year for which the Employer Contribution was made unless the
Participant elects an additional four (4)-year deferral in writing
prior to that date and immediately preceding each subsequent four
(4)-year anniversary of that date thereafter.
<PAGE>
<PAGE> 7
(c) Distribution of the vested portion of a
Participant's Employer Contribution Account not distributed
pursuant to Section 7.1(b) shall be made in Company Stock and cash
in lieu of fractional shares (or all in cash if so determined by
the Administrator in its complete discretion or in the event no
exemption from registration has been obtained or no registration
has been made of the Company Stock under applicable federal or any
state securities laws) beginning as soon as administratively
feasible following the later of the Participant's Separation from
Service or attainment of age sixty (60).
(d) "Separation from Service" means the severance of a
Participant's employment with the Employer for any reason,
including Retirement, Disability or death. The non-vested portion
of a Participant's Employer Contribution Account shall be forfeited
upon a Participant's Separation from Service for reasons other than
the Participant's Retirement, Disability or death.
7.2 Manner of Distributions.
(a) Distribution of a Participant's Salary Deferral
Account from the Plan shall be made in a lump sum; provided,
however, that if distribution is made as a result of a
Participant's Separation from Service, the Participant may
irrevocably elect equal annual installments over a period of up to
ten (10) years in writing prior to the Participant's Separation
from Service.
(b) Distribution of the vested portion of a
Participant's Employer Contribution Account shall be made in a lump
sum; provided, however, that if distribution is made as a result of
a Participant's Separation from Service, the Participant may
irrevocably elect equal annual installments over a period of up to
ten (10) years in writing prior to the Participant's Separation
from Service or, for a Participant whose Separation from Service
occurs for reasons other than Retirement or Disability, prior to
the later of: (i) the Participant's Separation from Service, or
(ii) the Participant's fifty-ninth (59th) birthday. However,
notwithstanding anything herein to the contrary, distributions
resulting from Early Retirement shall be made in a lump sum at age
sixty (60) unless the Participant irrevocably elects equal annual
installments over a period of not less than five (5) years nor more
than ten (10) years in writing prior to the Participant's Early
Retirement; provided, however, that if the Participant shall obtain
a position with a competing company or with a company in a
competing industry prior to the Participant's attainment of age
sixty (60), the Participant shall forfeit that portion of his
Employer Contribution Account which would not have been vested upon
the Participant's Separation from Service but for the Participant's
Early Retirement.
<PAGE>
<PAGE> 8
7.3 Death Distributions. In the event a Participant dies
prior to distribution of his or her benefit pursuant to Section
7.2, the Participant's Salary Deferral Account and the
Participant's Employer Contribution Account shall be distributed to
the Participant's Beneficiary in a lump sum as soon as
administratively feasible following the Participant's death.
Distribution of the Participant's Salary Deferral Account shall be
made in cash while the vested portion of the Participant's Employer
Contribution Account shall be distributed in Company Stock and cash
in lieu of fractional shares (or all in cash if so determined by
the Administrator in its complete discretion or in the event no
exemption from registration has been obtained or no registration
has been made of the Company Stock under applicable federal or any
state securities laws) as soon as administratively feasible.
Article VIII. Beneficiary Information
8.1 Designation. A Participant shall have the right to
designate a Beneficiary and amend or revoke such designation at any
time, in writing. Such designation, amendment or revocation shall
be effective upon receipt by the Administrator. If no Beneficiary
is designated as provided above, the person, persons or legal
entity designated by the Participant to receive benefits under the
ConsecoSave Plan shall be considered the designated Beneficiary.
8.2 Failure to Designate a Beneficiary. If no designated
Beneficiary survives the Participant and benefits are payable
following the Participant's death, the Administrator shall direct
that payment of benefits be made to the person or persons in the
first of the following classes of successive preference
Beneficiaries.
The Participant's:
(a) spouse,
(b) children, per stirpes,
(c) parents,
(d) brothers and sisters,
(e) estate.
<PAGE>
<PAGE> 9
Article IX. Administration and General Provisions.
9.1 Administration. The Administrator shall be charged with
the administration and interpretation of the Plan but may delegate
the ministerial duties hereunder to such persons as it determines.
The Administrator may adopt such rules as may be necessary or
appropriate for the proper administration of the Plan. The
decision of the Administrator in all matters involving the
interpretation and application of the Plan shall be final and shall
be given the maximum possible deference allowed by law.
9.2 Funding of the Plan. Benefits under the Plan shall be
paid out of the general assets of the Employer employing or that
employed the Participant. Benefits payable under the Plan shall be
reflected on the account records of the Employer but shall not be
construed to create or require the creation of a trust, custodial,
or escrow account. No Employee or Participant shall have any
right, title, or interest whatever in or to any investment
reserves, accounts, or funds that the Employer may purchase,
establish, or accumulate to aid in providing benefits under the
Plan. Nothing contained in the Plan, and no action taken pursuant
to its provisions, shall create a trust or fiduciary relationship
of any kind between the Employer and an Employee or any other
person. Neither a Participant nor survivor or beneficiary of a
Participant shall acquire any interest greater than that of an
unsecured creditor of the Employer employing or that employed the
Participant.
9.3 Payment of Expenses. The expenses of administering the
Plan shall be paid by the Employer employing or that employed the
Participant.
9.4 Indemnity for Liability. The Company shall indemnify
members of the committee comprising the Administrator, and each
other person acting at the direction of the Administrator, against
any and all claims, losses, damages, expenses, including counsel
fees, incurred by such persons and any liability, including any
amounts paid in settlement with the Administrator's approval,
arising from such person's action or failure to act, except when
the same is judicially determined to be attributable to the gross
negligence or willful misconduct of such person.
9.5 Incompetence. Every person receiving or claiming
benefits under the Plan shall be conclusively presumed to be
mentally competent until the date on which the Administrator
receives a written notice, in a form and manner acceptable to the
Administrator, that such person is incompetent, and that a
guardian, conservator, or other person legally vested with the care
of such person's person or estate has been appointed; provided,
however, that if the Administrator shall find that any person to
whom a benefit is payable under the Plan is unable to care for such
person's affairs because of incompetency, any payment due (unless
a prior claim therefor shall have been made by a duly appointed
legal representative) may be paid as provided in the ConsecoSave
Plan. Any such payment so made shall be a complete discharge of
liability therefor under the Plan.
<PAGE>
<PAGE> 10
9.6 Nonalienation. No benefit payable at any time under the
Plan shall be subject in any manner to alienation, sale, transfer,
assignment, pledge, attachment, garnishment, or encumbrance of any
kind, and shall not be subject to or reached by any legal or
equitable process (including execution, garnishment, attachment,
pledge, or bankruptcy) in satisfaction of any debt, liability, or
obligation, prior to receipt. Any attempt to alienate, sell,
transfer, assign, pledge, or otherwise encumber any such benefit,
whether presently or thereafter payable, shall be void.
9.7 Employer-Employee Relationship. The establishment of
this Plan shall not be construed as conferring any legal or other
rights upon any Employee or any person for a continuation of
employment, nor shall it interfere with the rights of the Employer
to discharge any Employee or otherwise act with relation to the
Employee. The Employer may take any action (including discharge)
with respect to any Employee or other person and may treat such
person without regard to the effect which such action or treatment
might have upon such person as a Participant of this Plan.
9.8 Tax Liability. The Employer may withhold from any
payment of benefits hereunder any taxes required to be withheld and
such sum as the Employer may reasonably estimate to be necessary to
cover any taxes for which the Employer may be liable and which may
be assessed with regard to such payment except the Employer's
portion of Federal Insurance Contributions Act ("FICA") taxes.
9.9 Adjustment in Number of Units. In the event of any stock
dividend of the Company Stock or any split-up or combination of
shares of the Company Stock, appropriate adjustment shall be made
by the Administrator in the number of Units standing to the credit
of each Participant in the Employer Contribution Account.
9.10 Section 16 Compliance. With respect to persons subject
to Section 16 of the Exchange Act, transactions under the Plan are
intended to comply with all applicable conditions of Rule 16b-3 or
its successors under the Exchange Act. To the extent any provision
of the Plan or action by the Administrator or the Committee fails
to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
9.11 Section 162(m). It is intended that the Plan comply
fully with and meet all the requirements of Section 162(m) of the
Code so that Employer contributions and distributions of Company
Stock and cash in lieu thereof shall constitute "performance-based"
compensation within the meaning of such section. If any provision
of the Plan would disqualify the Plan or would not otherwise permit
the Plan to comply with Section 162(m) as so intended, such
provision shall be construed or deemed amended to conform with
Section 162(m); provided that no such construction or amendment
shall have an adverse effect on the economic value to a Participant
of any benefit previously accrued hereunder.
<PAGE>
<PAGE> 11
Article X. Amendment and Termination
10.1 Amendment and Termination. The Company reserves the
right to change or discontinue this Plan by action of the Board in
its discretion; provided, however, that in the case of any person
to whom benefits under this Plan had accrued upon termination of
employment prior to such Board action, or in the case of any
Participant who would have been entitled to benefits under this
Plan had the Participant's employment ceased prior to such change
or discontinuance, the benefits such person had accrued under this
Plan prior to such change or discontinuance shall not be adversely
affected thereby (unless such change is required in order to cause
the benefits under the Plan to qualify as performance-based
compensation within the meaning of Section 162(m) of the Code and
applicable interpretive authority thereunder); and provided,
further, that the Board may not, without approval of the
shareholders of the Company, amend the Plan:
(a) to increase the maximum number of shares which may be
issued pursuant to the Plan;
(b) to materially modify the requirements as to eligibility
for participation in the Plan or materially increase
the benefits accruing to Participants under the Plan;
or
(c) to decrease any authority granted to the Administrator
hereunder in contravention of Rule 16b-3.
Notwithstanding anything herein to the contrary, nothing contained
herein shall restrict the Company's right to terminate the Plan and
immediately distribute all benefits accrued hereunder in a single
lump sum payment.
<PAGE>
<PAGE> 12
IN WITNESS WHEREOF, the Company and the Employers have caused
this Plan to be signed by their respective duly authorized officers
effective as of January 1, 1995.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
--------------------------------
Stephen C. Hilbert,
Chairman of the Board,
President and Chief
Executive Officer
BANKERS NATIONAL LIFE INSURANCE
COMPANY
By: /s/ DONALD F. GONGAWARE
--------------------------------
Donald F. Gongaware,
President and Chief
Operating Officer
CONSECO CAPITAL MANAGEMENT, INC.
By: /s/ MAXWELL E. BUBLITZ
--------------------------------
Maxwell E. Bublitz, President
and Chief Executive Officer
CONSECO RISK MANAGEMENT, INC.
By: /s/ DONALD M. COLLINS
--------------------------------
Donald M. Collins, President
CONSECO MORTGAGE CAPITAL, INC.
By: /s/ THOMAS A. MEYERS
--------------------------------
Thomas A. Meyers, Senior
Vice President
<PAGE>
<PAGE> 13
MDS OF NEW JERSEY, INC.
By: /s/ ROBERT C. LEONARD
--------------------------------
Robert C. Leonard, President
and Chief Executive Officer
CBC INSURANCE AGENCY SERVICES,INC.
By: /s/ ROBERT C. LEONARD
---------------------------------
Robert C. Leonard, President
and Chief Executive Officer
<PAGE> 1
AMENDMENT TO THE AMENDED AND RESTATED
CONSECO STOCK BONUS AND DEFERRED COMPENSATION PROGRAM
This Amendment to the Amended and Restated Conseco Stock Bonus
and Deferred Compensation Program (the "Amendment") is to be
effective as of December 30, 1993 to amend the Amended and Restated
Conseco Stock Bonus and Deferred Compensation Program which was
effective on December 21, 1992 (the "Plan").
AMENDMENT
1. The first sentence of Section 2.01(m) of the Plan is
amended in its entirety to read as follows:
(m) Quasi-Investment shall mean any investment
selected by the Participant for use in
measuring amounts to be credited to or debited
from the Elective Deferral Account and, for
periods after December 31, 1994, the Cash
Allocation Account in the nature of investment
income or loss.
2. The first paragraph of Section 5.02(a) of the Plan is
amended in its entirety to read as follows:
Each year the Company shall determine the
Annual Contribution Amount to be set aside for
the Basic Annual Allocation and the Additional
Annual Allocation; provided, however, no
determination shall be made and no amount
shall be set aside for the calendar year of
1994 or thereafter.
3. Section 5.05 of the Plan is hereby amended in its
entirety to read as follows:
(a) On December 31, 1994, the balance in the
Cash Allocation Account of each Participant on
that date, representing the sum of such
Participant's Basic Annual Allocations and
Additional Annual Allocations for the three
years ended December 31, 1993, together with
any additional amounts credited thereto
pursuant to Section 7.02 hereof, shall be
converted to Stock Units pursuant to this
Section and shall be added to the
Participant's Stock Allocation Account. The
number of Stock Units to be added on such date
shall be the greater of:
<PAGE>
<PAGE> 2
(1) the quotient obtained by dividing the
balance of the Cash Allocation Account by
the average daily closing price of the
Company's common stock computed for the
four-year (or, for any Participant
designated as such during the second,
third or fourth year of such period,
computed for the three-year, two-year or
one-year period, respectively, which
includes such Participant's date of
designation) based on information
reported by the New York Stock Exchange
or such other exchange or national market
system for which such information is
available (the "Exchange"), or
(2) the sum of the quotients obtained by
separately dividing the Basic and
Additional Annual Allocations added to
the Cash Allocation Account for each year
of the period ended December 31, 1993 by
the average daily price of the Company's
common stock as reported by the Exchange
for the calendar year for which each such
Basic or Additional Annual Allocation was
made.
(b) If a person was a Participant at sometime
during any period described in the first
sentence of Section 5.05 but was not a
Participant on the last day of that period,
and if such Participant's Cash Allocation
Account was fully vested under the terms of
Section 6.01 on the last day that person was a
Participant, then the balance of such
Participant's Cash Allocation Account shall be
converted to Stock Units in a manner
consistent with the provisions of Section
5.05(a) except as follows:
(1) the average daily closing price of the common
stock of the Company used in the calculation
describe in Section 5.05(a)(1) shall be
computed for the period beginning the first
day of the four-year period ending December
31, 1994 or, if later, the first day of the
year in which the person became a Participant
and ending the day that the person ceased to
be a Participant; and
(2) the average daily closing price of the common
stock of the Company used in the calculation
described in Section 5.05(a)(2) for the year
in which the person ceased to be a Participant
shall be the average for the period beginning
the first day of such year and ending the day
the person ceased to be a Participant.
<PAGE>
<PAGE> 3
(c) After December 31, 1994, the Cash Allocation
Account shall not be converted to Stock Units,
and amounts credited to the Cash Allocation
Account pursuant to Sections 7.01 and 7.02
hereof will accumulate until distribution as
provided for in Section IX hereof.
4. The following provisions shall be added to the end of
Section 9.01:
Amounts accumulated in the Participant's Cash
Allocation Account pursuant to Sections 7.01
and 7.02 hereof since January 1, 1995 shall be
distributed to the Participant on the same
date or dates designated by the Participant in
his Irrevocable Deferral Election Form as the
date of distributions of vested amounts. At
the time of such distribution, the Company, at
its election, may distribute the amount in
cash or in kind based upon the Quasi-Investment
selected by the Participant for determining the
income or loss to be reflected on amounts in
the Cash Allocation Account; provided, however,
that when the Participant has chosen an equity
security of the Company as the Quasi-Investment,
the Company shall make the payment of benefits
from a Participant's account in cash.
5. Section 7.01 of the Plan is amended in its entirety to
read as follows:
7.01 Interest on Elective Deferral Account and Cash
Allocation Account
(a) The amounts credited to a Participant's
Elective Deferral Account and, for
periods after December 31, 1994, each
Participant's Cash Allocation Account
shall be credited at the end of each
month with income (or charged with
losses) as if such amounts were invested
in the Quasi-Investments selected by the
Participant. It shall be assumed that
all amounts added to the accounts and all
distributions removed from the accounts
occurred as of the last day of the month.
<PAGE>
<PAGE> 4
(b) Any amount in the Participant's Elective
Deferral Account for which no Quasi-
Investment has been designated as a
measure for crediting increases or
decreases (in the nature of income or
loss) shall be treated as if such amount
had been invested in the Conseco Series
Trust - Money Market Portfolio and shall
be credited in accordance with the
average monthly rate earned by said fund,
before the reduction for management fees
paid to the fund's investment adviser.
For periods after December 31, 1994, any
amount in the Participant's Cash
Allocation Account for which no Quasi-
Investment has been designated at the
beginning of any year as a measure for
crediting increases or decreases (in the
nature of income or loss) shall be
treated as if such amount has been
invested in an investment yielding the
interest rate for ten-year treasury notes
as of the beginning of such year.
(c) All decisions by the Participant with
respect to Quasi-Investments must be
evidenced in writing. A decision to
select a Quasi-Investment or to cease to
use a Quasi-Investment as a tracking
measure shall become effective no earlier
than seven (7) days following the date
the decision is reduced to writing and
filed with the Company. The decision to
cease to use a Quasi-Investment as a
tracking measure may only be made if the
sale of such Quasi-Investment by an
actual investor were feasible at that
time.
(d) Except for Quasi-Investments in
securities of the Company, commissions
and other transaction costs, which would
have been incurred had the Company
actually bought or sold a Quasi-
Investment, shall be charged against the
Participant's Elective Deferral Account
and Cash Allocation Account. Such costs
shall be determined by the Company and
shall be based upon the transaction costs
that the Company would have paid had it
purchased or sold the Quasi-Investment.
In the event that the Quasi-Investment is
not readily marketable, its value on the
date it ceases to be used as a tracking
measure must be based upon the price
associated with a valid offer to the
Company from an independent party to
purchase the Quasi-Investment.
<PAGE>
<PAGE> 5
6. Except as provided for in this Amendment, the Plan
shall continue in full force and effect.
<PAGE> 1
CONSECO, INC. AND SUBSIDIARIES
Exhibit 11.1
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
Years ended December 31,
----------------------------------
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
Shares outstanding, beginning of year 25,311,773 24,911,148 24,676,658
Weighted average shares issued (acquired) during the year:
Shares issued under employee stock plans 3,486 1,666 15,127
Treasury stock acquired (3,855,820) (226,116) (1,043,909)
Exercise of stock options 3,607,197 512,072 1,399,224
Preferred stock conversions - 161 -
Common equivalent shares related to:
Stock options at average market price 863,603 3,680,380 4,167,851
Employee stock plans 417,883 365,538 263,649
------------ ------------ ------------
Weighted average primary shares outstanding 26,348,122 29,244,849 29,478,600
============ ============ ============
Net income for primary earnings per share:
Net income as reported $150,398,000 $297,016,000 $169,461,000
Elimination of income as if warrants to purchase
common stock of an affiliate and certain
subsidiaries of Partnership I were exercised - - (3,962,000)
------------ ------------ ------------
Adjusted net income 150,398,000 297,016,000 165,499,000
Less preferred stock dividends (18,632,000) (20,567,000) (5,500,000)
------------ ------------ ------------
Net income for primary earnings per share $131,766,000 $276,449,000 $159,999,000
============ ============ ============
Net income per primary common share $5.00 $9.45 $5.43
===== ===== =====
</TABLE>
<PAGE> 1
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Exhibit 11.2
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
Years ended December 31,
----------------------------------
1994 1993 1992
----- ---- ----
<S> <C> <C> <C>
Weighted average primary shares outstanding 26,348,122 29,244,849 29,478,600
Incremental common equivalent shares:
Related to options and employee stock plans based
on market price at end of period 4,493 53,966 124,708
Related to convertible preferred stock 4,506,611 4,196,370 -
------------ ------------ ------------
Weighted average fully diluted shares outstanding 30,859,226 33,495,185 29,603,308
============ ============ ============
Net income for fully diluted earnings per share:
Net income as reported $150,398,000 $297,016,000 $169,461,000
Elimination of income as if warrants to purchase
common stock of an affiliate and certain
subsidiaries of Partnership I were exercised - - (3,962,000)
------------ ------------ ------------
Adjusted net income 150,398,000 297,016,000 165,499,000
Less preferred stock dividends - (3,178,000) (5,500,000)
------------ ------------ ------------
Net income for fully diluted earnings per share $150,398,000 $293,838,000 $159,999,000
============ ============ ============
Net income per fully diluted common share $4.87 $8.77 $5.40
===== ===== =====
</TABLE>
<PAGE> 1
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
and Preferred Dividends - Consolidated Basis
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Pretax income from operations:
Net income $150.4 $ 297.0 $169.5
Add income tax expense 111.0 223.1 124.6
Add extraordinary charge on extinguishment of debt 4.0 11.9 5.3
Add minority interest 59.0 78.2 30.6
Less equity in undistributed earnings of CCP. (23.8) (36.6) (15.8)
Less equity in undistributed earnings of WNC (37.2) - -
Less equity in undistributed earnings of Life Re - - (11.3)
------ -------- ------
Pretax income from operations 263.4 573.6 302.9
------ -------- ------
Add fixed charges:
Interest expense on annuities and financial products 134.7 408.5 506.8
Interest expense on long-term debt, including amortization 59.3 58.0 46.2
Interest expense on investment borrowings 7.7 10.6 8.8
Other .9 .6 .8
Portion of rental(1) 6.2 3.9 2.0
------ -------- ------
Fixed charges 208.8 481.6 564.6
------ -------- ------
Adjusted earnings $472.2 $1,055.2 $867.5
====== ======== ======
Ratio of earnings to fixed charges 2.26X 2.19X 1.54X
===== ===== =====
Ratio of earnings to fixed charges, excluding
interest on annuities and financial products 4.55X 8.85X 6.24X
===== ===== =====
Fixed charges $208.8 $481.6 $564.6
Add dividends on preferred stock (multiplied by the rate
of pretax income to income before minority interest
and extraordinary charge) 28.3 34.6 13.1
------ -------- ------
Adjusted fixed charges 237.1 516.2 577.7
------ -------- ------
Adjusted earnings $472.2 $1,055.2 $867.5
====== ======== ======
Ratio of earnings to fixed
charges and preferred dividends 1.99X 2.04X 1.50X
===== ===== =====
Ratio of earnings to fixed charges and
preferred dividends, excluding interest
on annuities and financial products 3.30X 6.00X 5.09X
===== ===== =====
---------------------------
<FN>
(1) Interest portion of rental is assumed to be 33 percent.
</TABLE>
<PAGE> 1
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Exhibit 12.2
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividends
for Which Conseco is Directly Liable
for the years ended December 31, 1994, 1993 and 1992
(Dollars in millions)
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Pretax income from operations:
Net income $150.4 $297.0 $169.5
Add income tax expense 34.3 146.6 93.1
Add extraordinary charge on extinguishment of debt 4.0 11.9 5.3
Less equity in undistributed earnings of CCP (23.8) (36.6) (15.8)
Less equity in undistributed earnings of WNC (37.2) - -
Less equity in undistributed earnings of BLH (51.6) (49.4) -
Less equity in undistributed earnings of Statesman (1.6) - -
Less Conseco's equity in undistributed earnings
of Partnership I - - (19.8)
Less equity in undistributed earnings of Life Re - - (11.3)
------ ------ ------
Pretax income 74.5 369.5 221.0
------ ------ ------
Add fixed charges:
Interest expense on annuities and financial products 13.8 372.0 377.0
Interest expense on long-term debt for which Conseco is
directly liable, including amortization 19.7 22.3 22.4
Interest expense on investment borrowings 1.0 6.6 7.0
Other .9 .6 .8
Portion of rental(1) 2.6 2.0 2.0
------ ------ ------
Fixed charges 38.0 403.5 409.2
------ ------ ------
Adjusted earnings $112.5 $773.0 $630.2
====== ====== ======
Ratio of earnings to fixed charges 2.96X 1.92X 1.54X
===== ===== =====
Ratio of earnings to fixed charges, excluding
interest on annuities and financial products 4.08X 12.73X 7.86X
===== ===== =====
Fixed charges $38.0 $403.5 $409.2
Add dividends on preferred stock (multiplied by the
rate of pretax income to income before minority
interest and extraordinary charge) 22.8 30.3 8.8
------ ------ ------
Adjusted fixed charges 60.8 433.8 418.0
------ ------ ------
Adjusted earnings $112.5 $773.0 $630.2
====== ====== ======
Ratio of earnings to fixed
charges and preferred dividends 1.85X 1.78X 1.51X
===== ===== =====
Ratio of earnings to fixed charges and
preferred dividends, excluding interest
on annuities and financial products 2.10X 6.49X 6.18X
===== ===== =====
-------------------------------------
<FN>
(1) Interest portion of rental is assumed to be 33 percent.
</TABLE>
<PAGE> 1
Exhibit 21
<TABLE>
<CAPTION>
LIST OF SUBSIDIARIES
NAME(1) JURISDICTION
------- ------------
<S> <C>
Conseco Investment Holding Company Delaware
Bankers National Life Insurance Company Texas
National Fidelity Life Insurance Company Missouri
Conseco Capital Management, Inc. Delaware
Conseco Mortgage Capital, Inc. Delaware
Conseco Partnership Management, Inc. Indiana
Conseco Private Capital Group, Inc. Indiana
Conseco Risk Management, Inc. Indiana
Lincoln American Life Insurance Company Tennessee
CNC Real Estate, Inc. Delaware
Conseco Entertainment, Inc. Indiana
Bankers Life Holding Corporation (2) Delaware
Bankers Life Insurance Company of Illinois Illinois
Bankers Life and Casualty Company Illinois
Certified Life Insurance Company California
Marketing Distribution Systems Consulting Group, Inc. (3) Delaware
Conseco Capital Partners II, L.P. (4) Indiana
The Statesman Group, Inc. (5) Delaware
American Life Holding Company Delaware
American Life and Casualty Insurance Company Iowa
Vulcan Life Insurance Company (6) Alabama
American Life and Casualty Marketing Division Co. Iowa
-------------------------
<FN>
(1) Except as otherwise indicated, each company is a direct or
indirect wholly owned subsidiary of Conseco, Inc.
(2) Conseco owns approximately 60 percent of the outstanding
shares.
(3) Conseco owns approximately 95 percent of the outstanding
shares.
(4) Conseco and its subsidiaries own 15 percent of the total
limited partnership interest and Conseco Partnership
Management, Inc. owns a 1 percent general partnership
interest.
(5) Conseco owns approximately 25 percent ownership interest
through its direct ownership in Conseco Capital Partners
II, L.P. and indirect interest through Bankers Life Holding
Corporation and CCP Insurance, Inc.
(6) American Life and Casualty Insurance Company owns 98
percent of Vulcan Life Insurance Company.
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the
registration statements of Conseco, Inc. on Form S-8 (File Nos.
33-57079, 33-56901, 33-57931, 33-40556, 33-58710 and 33-58712) of
our report dated March 6, 1995, on our audits of the consolidated
financial statements and financial statement schedules of Conseco,
Inc. as of December 31, 1994 and 1993, and for the years ended
December 31, 1994, 1993 and 1992, which report is included in this
Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
March 6, 1995
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARYFINANCIAL
INFORMATION EXTRACTED FROM FORM 10-K FOR
CONSECO,INC. DATED DECEMBER 31, 1994 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<DEBT-HELD-FOR-SALE> 7,067,100
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 39,600
<MORTGAGE> 211,600 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 8,159,400
<CASH> 0
<RECOVER-REINSURE> 45,500
<DEFERRED-ACQUISITION> 1,332,900 <F2>
<TOTAL-ASSETS> 10,811,900
<POLICY-LOSSES> 7,890,500
<UNEARNED-PREMIUMS> 192,700
<POLICY-OTHER> 224,400
<POLICY-HOLDER-FUNDS> 229,800
<NOTES-PAYABLE> 802,900 <F3>
<COMMON> 165,800
0
283,500
<OTHER-SE> 297,700 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 10,811,900
1,285,600
<INVESTMENT-INCOME> 385,700
<INVESTMENT-GAINS> (30,500) <F5>
<OTHER-INCOME> 221,200 <F6>
<BENEFITS> 1,092,700 <F7>
<UNDERWRITING-AMORTIZATION> 117,000 <F8>
<UNDERWRITING-OTHER> 214,100
<INCOME-PRETAX> 324,400
<INCOME-TAX> 111,000
<INCOME-CONTINUING> 213,400
<DISCONTINUED> 0
<EXTRAORDINARY> (4,000)
<CHANGES> 0
<NET-INCOME> 150,400
<EPS-PRIMARY> 5.00
<EPS-DILUTED> 4.87
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $69,000 of credit-tenant loans.
<F2> Includes $1,032,200 of cost of policies purchased.
<F3> Includes notes payable of Bankers Life Holding Corporation of $280,000 and
CCP II of $331,100 which are not direct obligations of Conseco.
<F4> Includes retained earnings of $437,400, offset by net unrealized depreciation
of securities of $139,700.
<F5> Includes net realized losses of $25,600 and a net trading loss of $4,900.
<F6> Includes fee revenue of $58,000, equity in earnings of Western National
Corporation of $40,200, equity in earnings of CCP Insurance, Inc. of $24,700,
restructuring income of $80,800 and other income of $17,500.
<F7> Includes insurance policy benefits of $915,400, change in future policy
benefits of $42,600 and interest expense on annuities and financial products
of $134,700.
<F8> Includes amortization of cost of policies purchased of $76,200 and cost
of policies produced of $46,100 and amortization related to realized losses of
$(5,300).
</TABLE
</TABLE>
