<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-9250
Conseco, Inc.
Indiana No. 35-1468632
State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
Address of principal executive offices Telephone
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [ x ] No [ ]
Shares of common stock outstanding as of July 28, 1995:
20,218,820
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
June 30, December 31,
1995 1994
-------- -------
(unaudited) (audited)
<S> <C> <C>
Investments:
Actively managed fixed maturities at
fair value (amortized cost:
1995 - $8,009.5; 1994 - $7,440.5). . . . . . . . $8,363.6 $ 7,067.1
Equity securities at fair value
(cost: 1995 - $40.6; 1994- $43.0) . . . . . . . . 41.6 39.6
Mortgage loans. . . . . . . . . . . . . . . . . . . 127.9 142.6
Credit-tenant loans . . . . . . . . . . . . . . . . 85.9 69.0
Policy loans. . . . . . . . . . . . . . . . . . . . 176.3 175.1
Investment in CCP Insurance, Inc. . . . . . . . . . 260.0 195.4
Other invested assets . . . . . . . . . . . . . . . 57.9 68.7
Trading account securities. . . . . . . . . . . . . - 21.6
Short-term investments. . . . . . . . . . . . . . . 317.9 295.4
Assets held in separate accounts. . . . . . . . . . 90.1 84.9
------- --------
Total investments. . . . . . . . . . . . . . . 9,521.2 8,159.4
Accrued investment income. . . . . . . . . . . . . . . 151.7 126.3
Reinsurance receivables. . . . . . . . . . . . . . . . 47.1 45.5
Income tax asset . . . . . . . . . . . . . . . . . . . 22.8 195.2
Cost of policies purchased . . . . . . . . . . . . . . 948.6 1,021.6
Cost of policies produced. . . . . . . . . . . . . . . 267.6 300.7
Goodwill (net of accumulated amortization:
1995 - $34.6; 1994 - $25.3) . . . . . . . . . . . . 760.6 687.7
Property and equipment (net of accumulated
depreciation: 1995 - $31.6; 1994 - $27.1) . . . . 90.8 89.1
Securities segregated for the future redemption
of redeemable preferred stock
of a subsidiary . . . . . . . . . . . . . . . . . . 37.6 36.2
Cash segregated for the retirement of
subordinated debentures of a subsidiary . . . . . . 15.1 24.2
Other assets . . . . . . . . . . . . . . . . . . . . . 139.7 126.0
-------- ---------
Total assets . . . . . . . . . . . . . . . . .$12,002.8 $10,811.9
========= =========
(continued on next page)
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE> 3
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
1995 1994
--------- -------
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities. . . . . . . . . . . . . . $ 8,886.2 $ 8,537.4
Investment borrowings. . . . . . . . . . . . . . 270.7 -
Other liabilities. . . . . . . . . . . . . . . . 370.4 318.0
Liabilities related to separate accounts . . . . 90.1 84.9
Notes payable of Conseco . . . . . . . . . . . . 448.6 191.8
Notes payable of Partnership II entities,
not direct obligations of Conseco. . . . . . . 308.0 331.1
Notes payable of Bankers Life
Holding Corporation, not direct
obligations of Conseco . . . . . . . . . . . . 272.2 280.0
--------- ---------
Total liabilities. . . . . . . . . . . . . . 10,646.2 9,743.2
Minority interest. . . . . . . . . . . . . . . . . . 413.2 321.7
--------- ---------
Shareholders' equity:
Preferred stock. . . . . . . . . . . . . . . . . 283.5 283.5
Common stock and additional paid-in capital,
no par value, 500,000,000 shares authorized,
shares outstanding: 1995 - 20,211,249;
1994 - 22,184,850. . . . . . . . . . . . . . . 153.3 165.8
Unrealized appreciation (depreciation)
of securities (net of applicable
deferred income taxes: 1995 - $20.6;
1994 - $(65.9)). . . . . . . . . . . . . . . . 34.5 (139.7)
Retained earnings. . . . . . . . . . . . . . . . 472.1 437.4
--------- -------
Total shareholders' equity . . . . . . . . . 943.4 747.0
--------- ---------
Total liabilities and shareholders' equity . $12,002.8 $10,811.9
========= =========
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE> 4
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income. . . . . $334.8 $312.9 $ 675.9 $634.0
Investment activity:
Net investment income . . . 186.6 73.4 366.0 141.9
Net trading income (losses) .7 (2.4) 2.3 (2.4)
Net realized gains (losses) 58.5 (4.0) 59.6 (11.6)
Fee revenue. . . . . . . . . . . 10.5 15.2 21.2 28.1
Equity in earnings of CCP
Insurance, Inc.. . . . . . . . 9.1 9.2 15.5 17.2
Equity in earnings of Western
National Corporation . . . . . - 9.5 - 31.4
Restructuring income . . . . . . - - - 65.3
Other income . . . . . . . . . . 3.5 .1 6.2 .2
----- ----- ------- ------
Total revenues. . . . . . . . 603.7 413.9 1,146.7 904.1
----- ----- ------- ------
Benefits and expenses:
Insurance policy benefits. . . . 251.6 224.0 507.4 456.3
Change in future policy benefits 9.1 8.7 15.7 19.8
Interest expense on annuities
and financial products . . . . 88.8 18.2 176.2 32.8
Interest expense on
notes payable. . . . . . . . . 21.0 11.7 41.9 25.2
Interest expense on
investment borrowings. . . . . 5.6 2.7 7.8 4.9
Amortization related to operations 43.4 32.3 85.5 62.5
Amortization related to
realized gains and losses. . . 32.5 - 35.1 (.9)
Other operating costs
and expenses . . . . . . . . . 55.8 52.9 110.9 105.9
----- ----- ------- ------
Total benefits and expenses . 507.8 350.5 980.5 706.5
----- ----- ------- ------
Income before income taxes,
minority interest and
extraordinary charge. . . . 95.9 63.4 166.2 197.6
Income tax expense (benefit) . . . . (33.4) 18.5 (7.3) 58.3
----- ----- ------- ------
Income before minority
interest and
extraordinary charge . . . 129.3 44.9 173.5 139.3
Minority interest. . . . . . . . . . 29.4 10.7 49.2 22.6
----- ----- ------- ------
Income before extraordinary charge. 99.9 34.2 124.3 116.7
Extraordinary charge on extinguishment
of debt, net of taxes and
minority interest . . . . . . . . . - - - 2.4
----- ----- ------- ------
(continued on next page)
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE> 5
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS, continued
(Dollars in millions, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income. . . . . . . . . . 99.9 34.2 124.3 114.3
Less preferred stock dividends . . . 4.6 4.6 9.2 9.3
----- ----- ------ ------
Net income applicable to
common stock . . . . . . . $95.3 $29.6 $115.1 $105.0
===== ===== ====== ======
Earnings per common share and
common equivalent share:
Primary:
Weighted average shares
outstanding . . . . . . . . . 21,323,000 26,487,000 21,576,000 27,396,000
Net income before
extraordinary charge. . . . . $4.47 $1.11 $5.33 $3.92
Extraordinary charge. . . . . . - - - (.09)
----- ----- ----- -----
Net income. . . . . . . . . . $4.47 $1.11 $5.33 $3.83
===== ===== ===== =====
Fully diluted:
Weighted average shares
outstanding . . . . . . . . . 25,782,000 30,996,000 26,029,000 31,905,000
Net income before
extraordinary charge. . . . . $3.87 $1.10 $4.78 $3.66
Extraordinary charge. . . . . . - - - (.08)
----- ----- ----- -----
Net income. . . . . . . . . . $3.87 $1.10 $4.78 $3.58
===== ===== ===== =====
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
/TABLE
<PAGE>
<PAGE> 6
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Six months ended
June 30,
-----------------
1995 1994
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning and end of period . . . . . . $ 283.5 $ 287.5
======= =======
Common stock and additional paid-in capital:
Balance, beginning of period . . . . . . . . . . $ 165.8 $ 102.8
Amounts related to stock options and
employee benefit plans . . . . . . . . . . . 2.4 18.8
Tax benefit related to issuance of
shares under employee benefit plans. . . . . .1 67.5
Cost of shares acquired charged to
common stock and additional
paid-in capital . . . . . . . . . . . . . . . (15.0) (16.7)
------- -------
Balance, end of period . . . . . . . . . . . . . $ 153.3 $ 172.4
======= =======
Unrealized appreciation (depreciation) of securities:
Balance, beginning of period . . . . . . . . . . $(139.7) $ 97.5
Change in unrealized appreciation (depreciation) 174.2 (216.0)
------- -------
Balance, end of period . . . . . . . . . . . . . $ 34.5 $(118.5)
======= =======
Retained earnings:
Balance, beginning of period . . . . . . . . . . $ 437.4 $ 654.8
Net income . . . . . . . . . . . . . . . . . . 124.3 114.3
Cost of shares acquired charged to
retained earnings. . . . . . . . . . . . . . (77.4) (240.0)
Dividends on common stock . . . . . . . . . . . (3.0) (6.3)
Dividends on preferred stock. . . . . . . . . . (9.2) (9.3)
------- -------
Balance, end of period . . . . . . . . . . . . . $ 472.1 $ 513.5
======= =======
Total shareholders' equity. . . . . . . . . . $ 943.4 $ 854.9
======= =======
<FN>
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE> 7
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Six months ended
June 30,
-----------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . $ 124.3 $ 114.3
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization and depreciation. . . . . . . . . 125.1 65.1
Income taxes . . . . . . . . . . . . . . . . . . (51.9) (27.4)
Insurance liabilities. . . . . . . . . . . . . . (3.3) 28.8
Interest credited to insurance liabilities . . . 176.2 32.8
Fees charged to insurance liabilities. . . . . . (31.5) (17.5)
Accrual and amortization of investment income. . (59.1) (13.4)
Deferral of cost of policies produced. . . . . . (121.7) (65.2)
Restructuring income . . . . . . . . . . . . . . - (65.3)
Equity in undistributed earnings of
Western National Corporation . . . . . . . . . - (30.4)
Equity in undistributed earnings of
CCP Insurance, Inc.. . . . . . . . . . . . . . (15.0) (16.7)
Trading account securities . . . . . . . . . . . 21.6 17.2
Minority interest. . . . . . . . . . . . . . . . 38.9 18.1
Extraordinary charge on extinguishment of debt . - 2.4
Other. . . . . . . . . . . . . . . . . . . . . . 45.9 (22.8)
--------- --------
Net cash provided by operating activities . . 249.5 20.0
--------- --------
Cash flows from investing activities:
Sales of investments. . . . . . . . . . . . . . . . 2,446.8 898.3
Maturities and redemptions. . . . . . . . . . . . . 63.3 84.7
Purchases of investments. . . . . . . . . . . . . . (3,009.9) (1,099.0)
Purchase of additional shares of
Bankers Life Holding Corporation . . . . . . . . (262.4) -
Cash received from reinsurance recapture. . . . . . - 158.8
Cash held by Western National Corporation
before deconsolidation
and the settlement of intercompany balances. . . - (352.5)
Proceeds from sale of shares of Western
National Corporation and related transactions . - 537.9
Other . . . . . . . . . . . . . . . . . . . . . . . (4.5) (39.7)
--------- --------
Net cash provided (used) by
investing activities . . . . . . . . . . . (766.7) 188.5
--------- --------
Cash flows from financing activities:
Issuance of capital stock . . . . . . . . . . . . .4 16.3
Issuance of notes payable of Conseco, net . . . . . 286.6 34.6
Payments on notes payable of Conseco . . . . . . . (30.0) (220.3)
Payments on notes payable of subsidiaries -
not direct obligations of Conseco . . . . . . . . (31.0) (11.0)
Payments to repurchase equity securities of Conseco (92.4) (256.7)
Payments to repurchase equity securities
of subsidiaries. . . . . . . . . . . . .. . . . . - (21.1)
Investment borrowings . . . . . . . . . . . . . . . 270.7 (17.4)
Deposits to insurance liabilities . . . . . . . . . 666.3 169.9
Withdrawals from insurance liabilities. . . . . . . (516.3) (81.6)
Dividends paid . . . . . . . . . . . . . . . . . . (14.6) (15.6)
--------- --------
Net cash provided (used) by
financing activities. . . . . . . . . . . . 539.7 (402.9)
--------- --------
Net increase (decrease) in
short-term investments . . . . . . . . . . 22.5 (194.4)
Short-term investments, beginning of period. . . . . 295.4 666.4
--------- --------
Short-term investments, end of period. . . . . . . . $ 317.9 $ 472.0
======== =========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 8
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following notes should be read in conjunction with the notes
to consolidated financial statements included in the 1994 Form 10-K
of Conseco, Inc. ("We", "Conseco" or the "Company").
BASIS OF PRESENTATION
Our unaudited consolidated financial statements as of and for the
periods ended June 30, 1995 and 1994, reflect all adjustments,
consisting only of normal recurring items, which are necessary to
present fairly Conseco's financial position and results of
operations on a basis consistent with that of our prior audited
consolidated financial statements. We have reclassified certain
amounts from the prior period to conform to the 1995 presentation.
Consolidation issues. Prior to its initial public offering
("IPO") on February 15, 1994, Western National Corporation ("WNC")
was a wholly owned subsidiary of Conseco. We sold 60 percent of
our equity interest in WNC in the IPO. After 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.
Therefore, we had no earnings from WNC in the first six months of
1995 and our equity in earnings of WNC in the first six months of
1994 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 June 30, 1994.
Conseco Capital Partners II, L.P. ("Partnership II") acquired
American Life Group, Inc. ("American Life," formerly the Statesman
Group, Inc. prior to its name change in August 1995) on September
29, 1994 (the "Acquisition"). After the Acquisition, Partnership
II owns 80 percent of the outstanding shares of American Life'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 American Life,
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 American Life. Immediately after the Acquisition, Conseco,
through its direct investment and through its equity interests in
the investments made by Bankers Life Holding Corporation ("BLH"),
CCP Insurance, Inc. ("CCP") and WNC, had a 27 percent ownership
interest in American Life. At June 30, 1995, Conseco's ownership
interest in American Life had increased to 28 percent as the net
result of changes in our ownership percentage in BLH and CCP,
partially offset by: (i) the sale of Conseco's 40 percent equity
interest in WNC on December 23, 1994, and; (ii) the sale of a
portion of CCP's investment in American Life to an unaffiliated
company.
We accounted for the Acquisition of American Life using the
purchase method of accounting. Under purchase accounting, we
allocated the total purchase cost of American Life to the assets
and liabilities acquired based on their fair values, with the
excess of the total purchase cost over the fair value of the net
assets acquired recorded as goodwill.
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITIES
We classify fixed maturity investments into three categories:
"actively managed" (which are carried at estimated fair value),
"trading account" (which are carried at estimated fair value) and
"held to maturity" (which are carried at amortized cost). We did
not classify any fixed maturity investments in the trading account
or held to maturity categories at June 30, 1995.
Adjustments to carry actively managed fixed maturity investments
at fair value have no effect on our earnings. We record them, net
of tax and other adjustments, as an adjustment to shareholders'
equity. The following table summarizes the effect of these
adjustments on Conseco's actively managed fixed maturities and on
Conseco's investment in CCP (as a result of similar adjustments
made by CCP) as of June 30, 1995.
<PAGE>
<PAGE> 9
<TABLE>
<CAPTION>
Effect of fair value
Balance adjustment to
before actively managed Reported
adjustment fixed maturities amount
---------- -------------------- --------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturities. . . . $8,009.5 $ 354.1 $8,363.6
Investment in CCP Insurance, Inc.. . . . 257.2 2.8 260.0
Cost of policies purchased . . . . . . . 1,047.0 (98.4) 948.6
Cost of policies produced. . . . . . . . 279.9 (12.3) 267.6
Income tax asset . . . . . . . . . . . . 110.3 (87.5) 22.8
Minority interest. . . . . . . . . . . . 287.8 125.4 413.2
Unrealized appreciation of securities. . 1.2 33.3 34.5
</TABLE>
BANKERS LIFE HOLDING CORPORATION
On June 28, 1995, we completed the program to acquire
additional shares of BLH common stock approved by the Company's
Board of Directors on May 26, 1995. A total of 12.8 million
shares were purchased for $262.4 million in open market and
negotiated transactions during 1995. The shares purchased
represented 24 percent of the outstanding shares of BLH common
stock increasing our ownership of BLH to 82 percent (85 percent
including shares of BLH owned by CCP). We funded the acquisition
with available cash, proceeds from our revolving credit agreements
and a $32.0 million loan from CCP. Income tax expense was reduced
by $66.5 million in the second quarter of 1995 as a result of the
release of deferred income taxes previously accrued on
undistributed income related to BLH. Such deferred tax is no
longer required since we now own over 80 percent of BLH and the
income this tax relates to can be distributed to Conseco without
the payment of such tax.
We were required to use step-basis accounting when we acquired
additional shares of BLH common stock in 1995 and previous
acquisitions. As a result, the assets and liabilities of BLH
included in our June 30, 1995 consolidated balance sheet represent
the following combination of values: (i) the portion of BLH's net
assets acquired by Conseco in the November 1992 acquisition 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; (iii)
the portion of BLH's net assets acquired during 1995 is valued as
of the date of their purchase (for accounting convenience June 30,
1995, has been used); and (iv) the portion of BLH's net assets
owned by minority interests is valued based on a combination of (i)
- (iii) and the historical bases of the net assets acquired in the
initial acquisition in 1992.
The acquisition of additional shares of BLH common stock in
1995 had the following effects on Conseco's consolidated balance
sheet accounts (dollars in millions):
<TABLE>
<S> <C>
Income taxes. . . . . . . . 23.1
Cost of policies purchased. (189.9)
Cost of policies produced . 99.1
Goodwill. . . . . . . . . . (76.9)
Insurance liabilities . . . 24.5
Other . . . . . . . . . . . 1.8
Minority interest . . . . . (144.1)
------
Cash used . . . . . . . . $(262.4)
=======
/TABLE
<PAGE>
<PAGE> 10
PRO FORMA DATA
The pro forma data are presented as if the following
transactions had all occurred on January 1, 1994: (i) the
acquisition of additional shares of BLH common stock in 1995; (ii)
the acquisition of American Life by Partnership II; (iii) the IPO
of WNC; and (iv) the sale by Conseco of its remaining 40 percent
equity interest in WNC.
<TABLE>
<CAPTION>
Six months
ended
June 30,1994(a)
---------------
(Dollars in millions,
except per share data)
<S> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . $1,003.0
Income before extraordinary charge . . . . . . . . . . 61.4
Income before extraordinary charge per common share:
Primary. . . . . . . . . . . . . . . . . . . . . . 1.90
Fully diluted. . . . . . . . . . . . . . . . . . . 1.90
<FN>
(a) Excluded from revenues, income before extraordinary charge,
income before extraordinary charge per primary common share
and income before extraordinary charge per fully diluted
common share are amounts related to the IPO of WNC of $65.3
million, $42.4 million, $1.55 and $1.36, respectively.
</TABLE>
CHANGES IN NOTES PAYABLE
Notes payable of Conseco
In June 1995, the maximum borrowings permitted under our
revolving credit facility was increased by $50.0 million to $250.0
million. At June 30, 1995, we had drawn $225.0 million under this
facility. The average interest rate on the borrowings was 6.8
percent at June 30, 1995.
In June 1995, we borrowed $32.0 million from CCP. Such
borrowing is due in December 1995 and bears interest at 6.4
percent.
Notes payable of Partnership II entities (not direct obligations
of Conseco)
During March 1995, American Life made a scheduled $15.0 million
principal payment on its senior term loan. The interest rates on
this loan at June 30, 1995, were 8.25 percent for the $115.0
million borrowed under Tranche A and 8.75 percent for the $40.0
million borrowed under Tranche B.
During the six months ended June 30, 1995, $9.1 million
principal amount of American Life's debentures was converted and
retired. Cash to pay holders of the convertible debentures that
remain outstanding is being held in escrow until the convertible
debentures are retired.
Notes payable of BLH (not direct obligations of Conseco)
During April 1995, BLH made a scheduled $16.0 million principal
payment on its senior term loan. The interest rate on this loan
was 8.3 percent at June 30, 1995.
<PAGE>
<PAGE> 11
CHANGES IN CAPITAL STOCK
We repurchased 2.0 million shares of our common stock during the
first six months of 1995 as part of our previously announced stock
repurchase program. The total cost of shares repurchased during
the first six months of 1995 of $92.4 million was allocated to
shareholders' equity accounts as follows: (i) $15.0 million to
common stock and additional paid-in capital (such allocation was
based on the average common stock and paid-in capital balance per
share); and (ii) $77.4 million to retained earnings. In April
1995, we announced that we had terminated our common stock
repurchase program.
During the first six months of 1995, we issued 44,848 shares of
common stock upon the exercise of stock options. Proceeds from the
exercise of options of $.4 million and the related tax benefit of
$.1 million were added to common stock and additional paid-in
capital.
During the first six months of 1995, we issued 4,051 shares of
common stock to employee benefit plans. Additionally, we added
$2.0 million to common stock and additional paid-in capital related
to employee benefit plans.
REINSURANCE
The cost of reinsurance ceded for policies containing mortality
or morbidity risks totaled $14.1 million and $12.2 million in the
first six months of 1995 and 1994, respectively. We deducted this
cost from insurance policy income. Reinsurance premiums assumed on
policies containing mortality risks totaled $1.9 million and $2.4
million in the first six months of 1995 and 1994, respectively.
Reinsurance recoveries netted against insurance policy benefits
totaled $13.3 million and $10.6 million in the first six months of
1995 and 1994, respectively.
CHANGES IN MINORITY INTEREST
Changes in the 1995 balances include the acquisition of 12.8
million shares of BLH common stock in 1995 (described above under
"Bankers Life Holding Corporation") which increased our common
ownership of BLH to 82 percent. Minority interest at June 30,
1995, included: (i) $105.4 million interest in the common stock of
BLH; (ii) $99.0 million interest in the redeemable preferred stock
of a subsidiary of American Life; (iii) $34.1 million interest in
preferred stock of American Life; (iv) $174.7 million interest in
Partnership II and the common stock of American Life and its
subsidiaries.
Changes in minority interest during the first six months of 1995
and 1994 are summarized below:
<TABLE>
<CAPTION>
1995 1994
---- ----
(Dollars in millions)
<S> <C> <C>
Minority interest, beginning of period. . . . . . . . . $321.7 $223.8
Changes in investments made by minority shareholders:
Purchase of shares of BLH common stock by Conseco . (144.1) -
Repurchase by BLH of its common stock . . . . . . . - (21.1)
Minority interests' equity in the change in
financial position of the Company's subsidiaries:
Net income . . . . . . . . . . . . . . . . . . . . 49.2 22.6
Unrealized appreciation (depreciation) of securities 196.7 (32.2)
Dividends. . . . . . . . . . . . . . . . . . . . . (10.3) (7.2)
------ ------
Minority interest, end of period . . . . . . . . . . . $413.2 $185.9
====== ======
</TABLE>
PENDING MERGER
On May 21, 1995, Conseco and CCP signed a definitive merger
agreement under which Conseco will acquire all of the approximately
11.8 million CCP shares that Conseco does not already own for
$23.25 per share in cash. The transaction requires the approval of
holders of a majority of CCP's outstanding shares (other than
shares held by Conseco) voting at a special stockholders meeting
which will be held on August 25, 1995.
SUBSEQUENT EVENT
American Life has filed a registration statement with the
Securities and Exchange Commission with respect to a proposed
public offering of 15.0 million shares of its common stock. The
offering includes 9.1 million shares held by American Life's
current shareholders and 5.9 million newly issued shares to be
offered directly by American Life. The current shareholders will
grant the underwriters an option to purchase up to 2.2 million
additional shares, representing their entire remaining interest in
American Life, to cover over-allotments, if any.<PAGE>
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion highlights material factors affecting
our results of operations and the significant changes in our
balance sheet items. Changes in 1995 and 1994 balances in the
consolidated financial statements are largely affected by the
transactions described in the notes to the consolidated financial
statements included herein and the notes to the consolidated
financial statements included in our 1994 Form 10-K. This
discussion should be read in conjunction with both sets of
consolidated financial statements and notes.
RESULTS OF OPERATIONS
Conseco generates earnings by:
- Operating life insurance companies;
- Providing services to affiliates and non-affiliates for
fees; and
- Acquiring and restructuring life insurance companies in
partnership with other investors (currently conducted
through Partnership II).
<PAGE>
<PAGE> 13
The following table shows the sources of Conseco's net income
(after taxes and minority interest) for the three and six months
ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
----------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . $17.6 $19.1 $31.1 $ 30.6
Net trading income (losses). . . 1.1 (.4) 1.1 (.4)
Net realized gains (losses) 1.9 (1.6) 1.6 (1.9)
----- ----- ----- -------
Net income. . . . . . . . . . 20.6 17.1 33.8 28.3
----- ----- ----- -------
American Life:
Operating earnings . . . . . . . 2.7 - 5.0 -
Net trading income . . . . . . . - - .1 -
Net realized gains . . . . . . . 2.8 - 2.9 -
----- ----- ----- -------
Net income. . . . . . . . . . 5.5 - 8.0 -
----- ----- ----- -------
WNC:
Operating earnings . . . . . . . - 8.8 - 26.3
Net trading income . . . . . . . - - - 2.6
Net realized gains . . . . . . . - - - 1.6
----- ----- ----- -------
Net income. . . . . . . . . . - 8.8 - 30.5
----- ----- ----- -------
CCP:
Operating earnings . . . . . . . 6.1 7.9 12.0 15.1
Net trading income . . . . . . . 1.1 - 1.1 -
Net realized gains. . . . . . 1.2 .7 1.3 .9
Extraordinary charge . . . . . . - - - (.5)
----- ----- ----- -------
Net income. . . . . . . . . . 8.4 8.6 14.4 15.5
----- ----- ----- -------
Wholly Owned Insurance Subsidiaries:
Operating earnings . . . . . . . 2.8 4.4 7.8 10.7
Net trading income (losses). . . (.6) .1 (.6) .1
Net realized gains (losses). . . .6 (.7) (.8) (5.7)
----- ----- ----- -------
Net income. . . . . . . . . . 2.8 3.8 6.4 5.1
----- ----- ----- -------
Total from operations of
life insurance companies:
Operating earnings . . . . . . . 29.2 40.2 55.9 82.7
Net trading income (losses). . . 1.6 (.3) 1.7 2.3
Net realized gains (losses). . . 6.5 (1.6) 5.0 (5.1)
Extraordinary charge . . . . . . - - - (.5)
----- ----- ----- -------
Net income. . . . . . . . . . 37.3 38.3 62.6 79.4
----- ----- ----- -------
Services provided for fees . . . . 5.3 5.7 11.8 11.8
----- ----- ----- -------
Restructuring income . . . . . . . 66.5 - 66.5 42.4
----- ----- ----- -------
Corporate and other:
Operating expenses, net of revenues (2.9) (4.7) (6.7) (8.2)
Interest expense on notes payable. . (4.6) (3.9) (8.8) (9.0)
Net trading losses . . . . . . . (.8) (.9) (.2) (.9)
Net realized gains (losses) (.9) (.3) (.9) .7
Extraordinary charge . . . . . . - - - (1.9)
----- ----- ----- --------
Net loss. . . . (9.2) (9.8) (16.6) (19.3)
----- ----- ----- --------
Consolidated earnings:
Operating earnings . . . . . . . 27.0 37.3 52.2 77.3
Net trading income (losses). . . .8 (1.2) 1.5 1.4
Net realized gains (losses). . . 5.6 (1.9) 4.1 (4.4)
Restructuring income . . . . . . 66.5 - 66.5 42.4
Extraordinary charge . . . . . . - - - (2.4)
----- ----- ------ ------
Net income. . . . . . . . . . $99.9 $34.2 $124.3 $114.3
===== ===== ====== ======
</TABLE>
<PAGE>
<PAGE> 14
The following table shows the source of Conseco's fully diluted
earnings per share for the three and six months ended June 30, 1995
and 1994.
<TABLE>
Three months Six months
ended June 30, ended June 30,
---------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operations of life insurance companies:
BLH:
Operating earnings . . . . . . . $ .68 $ .61 $1.19 $ .96
Net trading income (losses) . . . .04 (.01) .04 (.01)
Net realized gains (losses) . . . .08 (.05) .06 (.06)
----- ------ ----- ------
Net income. . . . . . . . . . . .80 .55 1.29 .89
----- ------ ----- ------
American Life:
Operating earnings. . . . . . . . .11 - .19 -
Net trading income. . . . . . . . - - - -
Net realized gains. . . . . . . . .11 - .11 -
----- ------ ----- ------
Net income. . . . . . . . . . . .22 - .30 -
----- ------ ----- ------
WNC:
Operating earnings . . . . . . . - .29 - .83
Net trading income. . . . . . . . - - - .08
Net realized gains. . . . . . . . - - - .05
----- ------ ----- ------
Net income. . . . . . . . . . . - .29 - .96
----- ------ ----- ------
CCP:
Operating earnings . . . . . . . .24 .25 .46 .47
Net trading income. . . . . . . . .04 - .04 -
Net realized gains. . . . . . . . .05 .02 .05 .03
Extraordinary charge. . . . . . . - - - (.02)
----- ------ ----- ------
Net income. . . .33 .27 .55 .48
----- ------ ----- ------
Wholly Owned Insurance Subsidiaries:
Operating earnings . . . . . . . .10 .15 .30 .34
Net trading losses. . . . . . . . (.02) - (.01) -
Net realized gains (losses) . . . .02 (.03) (.03) (.18)
----- ------ ----- ------
Net income. . . . . . . . . . . .10 .12 .26 .16
----- ------ ----- ------
Total from operations of life
insurance companies:
Operating earnings . . . . . . . 1.13 1.30 2.14 2.60
Net trading income (losses) . . .06 (.01) .07 .07
Net realized gains (losses) . . . .26 (.06) .19 (.16)
Extraordinary charge. . . . . . . - - - (.02)
----- ------ ----- ------
Net income. . . . . . . . . . . 1.45 1.23 2.40 2.49
----- ------ ----- ------
Services provided for fees. . . . . .21 .18 .46 .37
----- ------ ----- ------
Restructuring income. . . . . . . . 2.57 - 2.56 1.33
----- ------ ----- ------
Corporate and other:
Operating expenses, net of revenues (.11) (.14) (.26) (.26)
Interest expense on notes payable (.18) (.13) (.34) (.28)
Net trading losses. . . . . . . . (.03) (.03) (.01) (.03)
Net realized gains (losses) . . . (.04) (.01) (.03) .02
Extraordinary charge. . . . . . . - - - (.06)
----- ----- ----- ------
Net loss. . . . . . . . . . . . (.36) (.31) (.64) (.61)
----- ----- ----- ------
Consolidated earnings:
Operating earnings . . . . . . . 1.05 1.21 2.00 2.43
Net trading income (losses) . . . .03 (.04) .06 .04
Net realized gains (losses) . . . .22 (.07) .16 (.14)
Restructuring income. . . . . . . 2.57 - 2.56 1.33
Extraordinary charge. . . . . . - - - (.08)
----- ----- ----- -----
Net income. . . . . . . . . . . $3.87 $1.10 $4.78 $3.58
===== ===== ===== =====
</TABLE>
<PAGE>
<PAGE> 15
Additional Discussion of Consolidated Statement of Operations for
the First Six Months of 1995 Compared to the First Six Months of
1994 and the Second Quarter of 1995 Compared to the Second Quarter
of 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) the acquisition of American
Life on September 29, 1994; and (ii) changes in Conseco's
ownership in BLH, WNC, CCP and American Life.
Operations of Life Insurance Companies:
<TABLE>
<CAPTION>
BLH:
Three months Six months
ended June 30, ended June 30,
-------------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . $306.9 $300.0 $620.8 $603.6
Investment activity:
Net investment income . . . 63.7 55.1 124.5 103.0
Net trading income (losses) 2.4 (1.1) 2.6 (1.1)
Net realized gains (losses) 12.6 (1.0) 10.9 (2.9)
Total revenues. . . . . . . . . . 387.4 352.9 761.5 702.5
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits . 236.7 216.7 477.2 441.7
Interest expense on annuities
and financial products. . . . 18.3 15.3 38.0 25.6
Interest expense on notes payable 7.5 7.7 15.5 15.5
Interest expense on investment
borrowings . . . . . . . . . . 2.7 2.1 3.4 4.0
Amortization related to operations 30.8 31.2 61.0 59.6
Amortization related to
realized gains and losses . 7.6 1.1 6.6 .2
Other operating costs and expenses 35.7 34.3 71.6 73.1
Income before taxes and minority
interest . . . . . . . . . . . 48.1 44.5 88.2 82.8
Income tax expense. . . . . . . . 16.8 16.7 33.0 31.9
Income before minority interest . 31.3 27.8 55.2 50.9
Minority interest . . . . . . . . 10.7 10.7 21.4 22.6
Net income. . . . . . . . . . . . 20.6 17.1 33.8 28.3
Summarized by component, all net of
applicable expenses, taxes
and minority interest:
Operating earnings . . . . . . 17.6 19.1 31.1 30.6
Net trading income (losses) . . 1.1 (.4) 1.1 (.4)
Net realized gains (losses) . . 1.9 (1.6) 1.6 (1.9)
Net income. . . . . . . . . . . 20.6 17.1 33.8 28.3
</TABLE>
<PAGE>
<PAGE> 16
General. Conseco's earnings for the 1994 periods reflected a 57
percent ownership interest in BLH. During the last nine months of
1994, BLH acquired 1.8 million shares of its common stock at a cost
of $35.7 million. During the first six months of 1995, Conseco
acquired 12.8 million common shares of BLH at a cost of $262.4
million. These transactions increased Conseco's average ownership
interest in BLH to 60 percent for the first quarter of 1995 and 65
percent for the second quarter of 1995. All activities of BLH are
included in Conseco's financial statements on a consolidated basis.
However, Conseco's minority interest adjustment removes the portion
of BLH's net income applicable to other owners.
BLH participated in the investment by Partnership II in American
Life. Because a subsidiary of Conseco is the sole general partner
of Partnership II, Conseco controls American Life. Accordingly,
Conseco accounts for its investment in American Life using the
consolidation method. Conseco's ownership interest in American
Life through BLH is included in the American Life segment.
At June 30, 1995, the BLH shares owned by Conseco had a net
carrying value of $859.2 million, a fair value of $819.8 million
and a cost of $575.5 million.
Insurance policy income increased as a result of increases in
Medicare supplement and long-term care premiums, offset by the
anticipated decrease in comprehensive major medical product
premiums due to prior steps taken to improve the profitability of
this product.
Net investment income increased 16 percent to $63.7 million in
the second quarter of 1995 from $55.1 million in the second quarter
of 1994, and increased 21 percent to $124.5 million in the first
six months of 1995 from $103.0 million in the first six months of
1994. The increases were due to the growth of invested assets as
a result of: (i) recurring operations; and (ii) the recapture, on
April 1, 1994, of a reinsurance treaty with assets totaling $371.0
million.
Net realized gains (losses) often fluctuate from period to
period. BLH sold $1,035.5 million and $283.1 million of actively
managed securities during the second quarters of 1995 and 1994,
respectively, and $1,117.4 million and $718.3 million in the first
six months of 1995 and 1994, respectively. Net realized gains and
losses arise when securities are sold in response to changes in the
investment environment which create opportunities to enhance the
total return of the investment portfolio without adversely
affecting either the quality of the portfolio or the matching of
expected maturities of assets and liabilities.
Realized gains and losses affect the timing of the amortization
of cost of policies purchased and cost of policies produced. As
a result of realized gains and losses from the sales of fixed
maturity investments, amortization of the cost of policies
purchased and the cost of policies produced increased by $7.6
million and $1.1 million in the second quarters of 1995 and 1994,
respectively. As a result of realized gains and losses from the
sales of fixed maturity investments in the first six months of 1995
and 1994, amortization of cost of policies purchased and cost of
policies produced was increased by $6.6 million and $.2 million,
respectively.
Insurance policy benefits and change in future policy benefits
reflect: (i) the higher incidence of medical provider claims in the
Medicare supplement line; and (ii) the increase in in force on
which benefits are incurred.
Interest expense on annuities and financial products increased 20
percent to $18.3 million in the second quarter of 1995 from
$15.3 million in the second quarter of 1994. Such increase
reflects an increase in annuity liabilities resulting from
increased annuity deposits. This account increased 48 percent to
$38.0 million in the first six months of 1995 from $25.6 million in
the first six months of 1994. Such increase reflects an increase
in annuity liabilities resulting from: (i) the reinsurance
recapture transaction described above; and (ii) increased annuity
deposits.
Interest expense on notes payable decreased 2.6 percent to $7.5
million in the second quarter of 1995 from $7.7 million in the
second quarter of 1994, and remained the same at $15.5 million in
the first six months of 1995 and 1994. Interest expense in the
1995 periods compared to the 1994 periods reflects: (i) higher
interest rates on the senior term loan; and (ii) lower principal
balances as a result of scheduled payments of $11.0 million in
April 1994 and $16.0 million in April 1995.
Interest expense on investment borrowings in the corresponding
1995 and 1994 periods reflects changes in investment borrowing
activities. BLH's average investment borrowings were $200.7
million and $241.5 million in the second quarters of 1995 and 1994,
respectively, and $126.1 million and $246.2 million in the first
six months of 1995 and 1994, respectively. <PAGE>
<PAGE> 17
American Life:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- ------------------------------
1995 1994 1995 1994
------------- ------------- ----------- -------------
As included in Prior to As included in Prior to
Conseco's Acquisition by Conseco's Acquisition by
accounts Partnership II accounts Partnership II
-------- --------------- -------- ---------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income. $ 15.2 $12.8 $ 29.8 $26.3
Investment activity:
Net investment income 105.4 83.8 207.5 164.1
Net trading income . . .2 - .8 -
Net realized gains (losses) 48.3 (22.0) 52.1 (16.7)
Total revenues. . . . . . 170.8 76.0 293.6 176.4
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits . 7.9 8.0 16.0 16.9
Interest expense on
annuities and financial
products . . . . . 65.3 51.8 129.4 102.2
Interest expense on
notes payable. . . . . 8.6 2.2 17.4 4.1
Interest expense on
investment borrowings. 2.9 1.3 4.4 2.8
Amortization related
to operations . . . . 11.5 10.3 22.0 19.5
Amortization related to
realized gains and losses 26.8 - 29.2 2.8
Other operating costs and
expenses . . . . 8.1 9.2 16.1 17.4
Income (loss) before
taxes and minority interest 39.7 (6.8) 59.1 10.7
Income tax expense (benefit) 15.5 (2.9) 23.3 2.8
Income (loss) before
minority interest. . . 24.2 (3.9) 35.8 7.9
Minority interest . . . . 18.7 2.3 27.8 4.5
Net income (loss) . . . . 5.5 (6.2) 8.0 3.4
Summarized by component, all net of applicable
expenses, taxes, and minority interest:
Operating earnings . . 2.7 8.1 5.0 16.1
Net trading income . - - .1 -
Net realized gains (losses) . 2.8 (14.3) 2.9 (12.7)
Net income (loss) . . 5.5 (6.2) 8.0 3.4
</TABLE>
General. Conseco, through both its direct investment and its
equity interests in the investments made by BLH and CCP, had a 28
percent ownership interest in American Life at June 30, 1995.
While all activities of American Life 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
average ownership interest of 25 percent in the first quarter of
1995 and 26 percent in the second quarter of 1995. The 1994
amounts relate to periods which preceded the Acquisition and do not
reflect the application of purchase accounting.
Insurance policy income consists of premiums received on
traditional life insurance products and policy fund and surrender
charges assessed against investment type products. This account
increased 19 percent to $15.2 million in the second quarter of 1995
from $12.8 million in the second quarter of 1994, and increased 13
percent to $29.8 million in the first six months of 1995 from $26.3
million in the first six months of 1994. The increases occurred
primarily because increased annuity policy withdrawals resulted in
higher surrender charges. Surrender charges assessed against
annuity withdrawals for the first six months of 1995 were $7.4
million compared to $4.6 million for the first six months of 1994
while annuity policy withdrawals were $398.4 million and $232.6
million for the same periods, respectively. Surrender charges as
a percentage of annuity policy withdrawals declined in 1995 as a
result of increased withdrawals of a certain policy form whose
surrender charge was eliminated in 1995 upon such policies reaching
their sixth anniversary. In addition, the Company has experienced
increases in withdrawals during 1995 due to: (i) the increased size
of the Company's annuity portfolio; and (ii) the increase in
interest rates in the second half of 1994, which caused some
policyholders to surrender policies and incur a surrender charge to
invest funds in higher yielding alternative investments.
<PAGE>
<PAGE> 18
Net investment income increased 26 percent to $105.4 million in
the second quarter of 1995 from $83.8 million in the second quarter
of 1994, on a 9.1 percent increase in average invested assets
(amortized cost basis) to $4.8 billion in the second quarter of
1995 compared to $4.4 billion in the second quarter of 1994. This
account increased 26 percent to $207.5 million in the first six
months of 1995 from $164.1 million in the first six months of 1994
on a 9.3 percent increase in average invested assets to $4.7
billion in 1995 compared to $4.3 billion in 1994. The percentage
increase in net investment income was greater than the percentage
increase in average invested assets during these periods because
the yield earned on average invested assets increased 125 basis
points to 8.89 percent in the first six months of 1995 from 7.64
percent in the first six months of 1994. The increase in yield
primarily resulted from the application of purchase accounting on
the Acquisition date. Additional investment income resulting
from the redemption of fixed maturity investments prior to their
regularly scheduled maturity dates is not material in these
periods.
Net realized gains (losses) often fluctuate from period to
period. American Life sold approximately $1.3 billion of
investments (principally fixed maturities) in the first six months
of 1995 compared to $.5 billion in the first six months of 1994
which sales resulted in net realized gains of $53.6 million in the
first six months of 1995 compared to $5.8 million in the first six
months of 1994. Net realized gains from sales of investments in
1994 were offset by a loss on certain interest rate swap contracts
that no longer effectively hedged interest rate risks in the
second quarter of 1994 and were therefore recorded at fair value,
resulting in a net realized loss of $21.3 million. Substantially
all of American Life's interest rate swap contracts were
terminated subsequent to the Acquisition with no additional loss.
In addition, during the first six months of 1995 and 1994, American
Life recorded realized losses on the writedown of investments
totaling $1.5 million and $1.2 million, respectively, as a result
of changes in conditions which caused American Life to conclude
that a decline in fair value of the investments was other than
temporary.
The increased level of investment activity in 1995 is the result
of more active investment portfolio management since the
Acquisition and planned changes in the fixed maturity investment
portfolio to reduce the portfolio's duration and exposure to more
volatile CMO investments. The declining interest rate environment
since the Acquisition date, which increased the market value of
fixed maturity investments, contributed to American Life's ability
to realize gains on investment sales in 1995.
Net realized gains affect the timing of the amortization of cost
of policies purchased and cost of policies produced. As a result
of net realized gains from the sales of fixed maturity investments,
additional amortization for the first six months was $29.2 million
in 1995 and $2.8 million in 1994.
Insurance policy benefits and change in future policy benefits
decreased 5.3 percent to $16.0 million in the first six months of
1995 from $16.9 million in the first six months of 1994 due to
higher death benefits incurred on annual renewable term policies
during
1994.
Interest expense on annuities and financial products increased by
26 percent to $65.3 million in the second quarter of 1995 from
$51.8 million in the second quarter of 1994, and increased 27
percent to $129.4 million in the first six months of 1995 from
$102.2 million in the first six months of 1994. The increases
reflect: (i) a larger block of annuity business in force in 1995;
(ii) higher crediting rates; and (iii) as a result of the
application of purchase accounting on the Acquisition date, the
expensing of the first year interest rate bonuses of approximately
$2.5 million in 1995 on policies issued prior to the Acquisition
date. Prior to the Acquisition date, such first year bonus
interest (related to policies issued prior to the Acquisition date)
was capitalized as a cost of policies produced. At June 30, 1995,
the weighted average crediting rate for the Company's annuity
liabilities excluding interest bonuses guaranteed for the first
year of the annuity contract was 5.4 percent compared to 5.2
percent at June 30, 1994.
Interest expense on notes payable increased in the 1995 periods
as a result of additional interest on debt incurred to finance the
Acquisition partially offset by reductions in interest expense
resulting from: (i) the conversion and retirement of $53.9 million
principal amount of convertible subordinated debentures; and (ii)
the repayment of bank debt that had been outstanding prior to the
Acquisition.
Interest expense on investment borrowings increased 57 percent to
$4.4 million in the first six months of 1995 from $2.8 million in
the first six months of 1994 as a result of a higher cost of funds
in 1995. American Life's average investment borrowings were $154.1
million and $158.3 million during the first six months of 1995 and
1994, respectively.
Amortization related to operations increased 12 percent to $11.5
million in the second quarter of 1995 from $10.3 million in
the second quarter of 1994, and increased 13 percent to $22.0
million in the first six months of 1995 from $19.5 million in the
first six months of 1994. Amortization related to operations in
1995 is comprised of amortization of: (i) goodwill established at
the Acquisition date; (ii) cost of policies purchased for business
in force at the Acquisition date; and (iii) the cost of policies
produced for business written subsequent to the Acquisition date.
Amortization related to operations in 1994 is comprised solely of
amortization of cost of policies produced.
Amortization related to realized gains increased in the 1995
period from the 1994 period primarily as a result of the increase
in realized gains.
Income tax expense increased to $23.3 million in the first six
months of 1995 from $2.8 million in the first six months of 1994.
This increase is partially due to the increase in pretax income to
$59.1 million in the 1995 period from $10.7 million in the 1994
period. The effective tax rate for the 1995 period of 39 percent
exceeded the statutory corporate federal income tax rate (35
percent) primarily because goodwill amortization is not deductible
for federal income tax purposes. The effective tax rate for the
1994 period of 26 percent was less than the statutory corporate tax
rate because of a reduction in the valuation allowance for net
operating loss carryforwards.
Minority interest in the 1994 periods includes dividends on
preferred stock of a subsidiary of American Life. Minority
interest in the 1995 periods included such dividends, plus: (i)
dividends on preferred stock held by minority shareholders of
American Life issued to finance a portion of the Acquisition; and
(ii) the portion of earnings applicable to minority shareholders.
<PAGE>
<TABLE>
<CAPTION>
CCP:
Three months ended June 30,
----------------------------------------------
1995 1994
-------------------- ----------------
Included in Included in
Total Conseco's Total Conseco's
CCP Accounts CCP Accounts
--- -------- --- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . . $ 27.8 $ - $ 28.1 $ -
Investment activity:
Net investment income. . . . . . . 102.5 - 92.8 -
Net trading income . . . . . . . . 3.5 - - -
Net realized gains . . . . . . . . 14.4 - 9.4 -
Equity in earnings of CCP . . . . . . - 9.1 - 9.2
Total revenues . . . . . . . . . . . . 148.2 9.1 130.3 9.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits. 19.9 - 16.3 -
Interest expense on annuities and
financial products . . . . . . . . 55.5 - 51.6 -
Interest expense on notes payable . . 5.2 - 2.3 -
Interest expense on investment borrowings 4.5 - 2.3 -
Amortization related to operations . 9.5 - 6.3 -
Amortization related to realized gains
and losses . . . . . . . . . . . . 8.1 - 5.5 -
Other operating costs and expenses. . 12.3 - 9.9 -
Income before taxes. . . . . . . . . . 33.2 9.1 36.1 9.2
Income tax expense . . . . . . . . . . 11.6 .7 13.6 .6
Net income . . . . . . . . . . . . . . 21.6 8.4 22.5 8.6
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . 14.8 6.1 20.6 7.9
Net trading income . . . . . . . . 2.3 1.1 - -
Net realized gains . . . . . . . . 4.5 1.2 1.9 .7
Net income . . . . . . . . . . . . 21.6 8.4 22.5 8.6
</TABLE>
<PAGE>
<PAGE> 20
<TABLE>
Six months ended June 30,
-----------------------------------------------
1995 1994
-------------------- ------------------
Included in Included in
Total Conseco's Total Conseco's
CCP Accounts CCP Accounts
--- -------- --- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . . . . $ 54.4 $ - $ 58.2 $ -
Investment activity:
Net investment income. . . . . . . . 194.8 - 188.0
Net trading income . . . . . . . . . 3.6 - - -
Net realized gains . . . . . . . . . 14.8 - 10.9 -
Equity in earnings of CCP . . . . . . - 15.5 - 17.2
Total revenues . . . . . . . . . . . . 267.6 15.5 257.1 17.2
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits. . . . . 36.2 - 33.2 -
Interest expense on annuities
and financial products. . . . . . . 106.3 - 105.4 -
Interest expense on notes payable . . 10.5 - 5.1 -
Interest expense on investment borrowings 5.7 - 3.9 -
Amortization related to operations . 18.7 - 13.1 -
Amortization related to realized gains
and losses 8.2 - 6.4 -
Other operating costs and expenses. . 25.2 - 22.2 -
Income before taxes and extraordinary
charge . . . . . . . . . . . . . 56.8 15.5 67.8 17.2
Income tax expense . . . . . . . . . . 20.5 1.1 24.9 1.2
Income before extraordinary charge . . 36.3 14.4 42.9 16.0
Extraordinary charge . . . . . . . . . - - 1.3 .5
Net income . . . . . . . . . . . . . . 36.3 14.4 41.6 15.5
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings . . . . . . . . . 29.3 12.0 40.6 15.1
Net trading income . . . . . . . . . 2.3 1.1 - -
Net realized gains . . . . . . . . . 4.7 1.3 2.3 .9
Extraordinary charge . . . . . . . . - - 1.3 .5
Net income . . . . . . . . . . . . . 36.3 14.4 41.6 15.5
</TABLE>
CCP's earnings decreased during the second quarter of 1995 and the
first six months of 1995 compared to the corresponding 1994 periods
as a result of: (i) increased interest expense, resulting from a
higher average note payable balance and higher interest rates; (ii)
increased amortization related to operations due to an increase in
annuities in force, an increase in expected profits from existing
business and revised surrender assumptions on certain blocks of
business; (iii) lower earnings on products with mortality and
morbidity risks, and (iv) increased operating expenses. These
factors were partially offset by increased earnings provided by
repurchase agreements and dollar roll transactions.
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 share repurchase program. Under this program,
CCP repurchased 5.2 million shares at a cost of $104.7 million
since June 30, 1994. Conseco's equity in the earnings of CCP in
the first six months of 1994 included a $.5 million extraordinary
charge related to CCP's prepayment of debt. At June 30, 1995,
Conseco owned 49 percent of the common stock of CCP (compared to 42
percent at June 30, 1994). At June 30, 1995, the shares owned by
Conseco had a net carrying value of $260.0 million, a fair value of
$262.9 million and a total cost of $102.8 million.<PAGE>
<PAGE> 21
CCP participated in the investment by Conseco Capital Partners,
L.P. ("Partnership I") 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. 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.
CCP also participated in the investment by Partnership II in
American Life. Because a subsidiary of Conseco is the sole general
partner of Partnership II, Conseco controls American Life.
Accordingly, Conseco also accounts for its investment in American
Life using the consolidation method. Conseco's ownership interest
in American Life through CCP is included in the American Life
segment.
WNC:
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
first six months of 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 June 30, 1994.
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1994 June 30, 1994
------------------- ----------------
(Dollars in millions)
<S> <C> <C>
Equity in earnings of WNC. . . . . . . . $ 9.5 $31.4
Income tax . . . . . . . . . . . . . . . .7 .9
Net income . . . . . . . . . . . . . . . 8.8 30.5
Summarized by component, all net of
applicable expenses and taxes:
Operating earnings. . . . . . . . . . 8.8 26.3
Net trading income. . . . . . . . . . - 2.6
Net realized gains. . . . . . . . . . - 1.6
Net income. . . . . . . . . . . . . . 8.8 30.5
</TABLE>
<PAGE>
<PAGE> 22
Wholly Owned Insurance Subsidiaries:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- --------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income . . . . .$ 12.7 $13.0 $ 25.3 $30.5
Investment activity:
Net investment income . . . . . 17.5 18.3 34.6 38.9
Net trading income (loss) . . . (.8) .1 (.8) .1
Net realized losses . . . . . . (1.1) (2.1) (2.1) (9.7)
Total revenues . . . . . . . . . . 28.4 29.3 57.1 59.8
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 16.0 16.0 29.8 34.5
Interest expense on annuities
and financial products. 5.2 2.9 8.8 7.2
Amortization related to operations 1.2 1.4 2.4 2.8
Amortization related to
realized gains and losses . . (1.9) 1.1 (.7) (1.1)
Other operating costs and expenses. 3.2 4.9 6.1 8.7
Income before taxes . . . . . . . 4.9 5.0 11.2 7.4
Income tax expense . . . . . . . . 2.1 1.2 4.8 2.3
Net income . . . . . . . . . . . . 2.8 3.8 6.4 5.1
Summarized by component, all
net of applicable expenses
and taxes:
Operating earnings . . . . . . 2.8 4.4 7.8 10.7
Net trading income (loss) . . . (.6) .1 (.6) .1
Net realized gains (losses) . . .6 (.7) (.8) (5.7)
Net income . . . . . . . . . . 2.8 3.8 6.4 5.1
</TABLE>
Insurance policy income relates primarily to premiums from
products with mortality and morbidity features. Recent declines
resulted from decreased emphasis on generating new premiums from
these products.
Net investment income decreased 4 percent to $17.5 million in the
second quarter of 1995 from $18.3 million in the second quarter of
1994, and decreased 11 percent to $34.6 million in the first six
months of 1995 from $38.9 million in the first six months of 1994.
The decreases are primarily due to a reduction in income from other
invested assets, partially offset by an increase in investment
income related to separate account activities.
Net realized losses often fluctuate from period to period. The
wholly owned subsidiaries sold fixed maturity investments of $24.6
million and $51.2 million in the second quarters of 1995 and 1994,
respectively, and $34.2 million and $151.6 million were sold in the
first six months of 1995 and 1994, respectively. Such securities
were sold in response to changes in the investment environment
which created opportunities to enhance the total return of the
investment portfolio without adversely affecting the quality of the
portfolio or the matching of expected maturities of assets and
liabilities.
Insurance policy benefits and change in future policy benefits
relate solely to policies with mortality and morbidity features.
These benefits decreased in the 1995 periods primarily as a result
of a decrease in premiums from such products, partially offset by
adverse mortality experience in the second quarter of 1995.
Interest expense on annuities and financial products increased in
the 1995 periods primarily as a result of an increase in amounts
credited to separate accounts as a result of the aforementioned
increase in investment income related to these accounts. The
average rate credited on all insurance liabilities was
approximately 7.0 percent at June 30, 1995 and 1994.
<PAGE> 23
<TABLE>
<CAPTION>
Services Provided for Fees:
Three months Six months
ended June 30, ended June 30,
---------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Investment management. . . . . $ 11.6 $ 9.0 $ 22.7 $ 18.6
Commissions. . . . . . . . . . 2.7 5.9 5.7 9.2
Administrative services, net
of directly related expenses. 1.9 2.9 4.2 4.4
Total revenues . . . . . . . . . 16.2 17.8 32.6 32.2
Less intercompany eliminations . (5.7) (2.6) (11.4) (4.1)
Revenues reported. . . . . . . . 10.5 15.2 21.2 28.1
Net income attributable to:
Investment management. . . . . 5.5 3.8 10.5 8.7
Commissions. . . . . . . . . . (1.4) .1 (1.4) .3
Administrative services. . . . 1.2 1.8 2.7 2.8
Net income . . . . . . . . . . . 5.3 5.7 11.8 11.8
</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.
The growth in investment management revenues in the 1995 periods
was the result of fee-producing activities provided to American
Life partially offset by a reduction in the rates charged to WNC.
Commission revenues decreased in the 1995 periods as a result of:
(i) a decrease in commissions produced by Bankmark and (ii) the
inclusion in the 1994 periods of $2.3 million of revenues related
to the buyout of a marketing agreement by a bank.
<TABLE>
<CAPTION>
Restructuring Activities:
Three months Six months
ended June 30, ended June 30,
-------------- --------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Gain on sale of stock. . . . . . $ - $ - $ - $65.3
Income tax expense (benefit) . . (66.5) - (66.5) 22.9
Net income . . . . . . . . . . . 66.5 - 66.5 42.4
</TABLE>
Income tax expense was reduced by $66.5 million in the second
quarter of 1995 as a result of the release of deferred income taxes
previously accrued on undistributed income related to BLH. Such
deferred tax is no longer required since Conseco now owns over 80
percent of BLH and the income this tax relates to can be
distributed to Conseco without the payment of such tax.
The gain on sale of stock in the 1994 period related to the sale
of a 60 percent common equity interest in WNC.
<PAGE>
<PAGE> 24
Corporate and Other:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
-------------- --------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net investment income. . . . . . . $ 1.9 $ 1.5 $ 3.3 $ 3.2
Total revenues . . . . . . . . . . (.5) (.5) 1.7 3.0
Interest expense on notes payable. 7.1 6.0 13.5 13.9
Other operating costs and expenses 6.7 7.3 14.6 14.3
Income tax benefit . . . . . . . . 5.1 4.0 9.8 7.8
Loss before extraordinary charge . 9.2 9.8 16.6 17.4
Extraordinary charge on
extinguishment of debt . . . . - - - 1.9
Net loss . . . . . . . . . . . . . 9.2 9.8 16.6 19.3
</TABLE>
Corporate and other includes financing costs of notes payable for
which Conseco is directly liable and the costs associated with the
holding company operations.
Net investment income increased in the 1995 periods primarily as
a result of increased average invested assets.
Total revenues decreased in the six months ended June 30, 1995,
as a result of an increase in realized losses which often fluctuate
from period to period.
Interest expense on notes payable decreased in the first six
months of 1995 period as a result of the repayment of: (i) a $200
million note in February 1994; and (ii) notes payable with book
values totaling $19.2 million in March 1994; partially offset by an
increase in interest expense in the second quarter of 1995 as a
result of borrowings under Conseco's revolving credit agreement
described in the accompanying notes to the consolidated financial
statements. The Company prepaid the aforementioned notes in 1994
with the proceeds from the sale of shares of WNC. The prepayment
resulted in an extraordinary charge in the first quarter of
1994 of $1.9 million (net of a $1.0 million tax benefit).
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. We recognize revenues for these products
over time in the form of investment income and surrender or other
charges.
<PAGE>
<PAGE> 25
Premiums collected by BLH for the second quarter of 1995 were
$378.7 million, of which $75.1 million were recorded as deposits to
policy liability accounts. This compared to $370.2 million
collected and $84.1 million recorded as deposits to policy
liability accounts in the second quarter of 1994. Premiums
collected by BLH for the first six months of 1995 were $786.0
million, of which $156.8 million were recorded as deposits to
policy liability accounts. This compared to $755.2 million
collected and $147.2 million recorded as deposits to policy
liability accounts in the first six months of 1994. Collected
premiums by type are provided in the following table:
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
---------------- --------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Individual health:
Medicare supplement. $146.0 $138.4 $305.9 $296.3
Long-term care . . . 39.5 31.9 77.1 64.0
Other . . . . 24.2 29.7 50.1 62.1
------ ------ ------ ------
Total individual
health. 209.7 200.0 433.1 422.4
Annuities 70.7 70.2 150.7 131.9
Individual life. . . . . 24.3 23.1 48.3 46.4
Group and other. . . . . 74.0 76.9 153.9 154.5
------ ------ ------ ------
Total. . . . . . . . $378.7 $370.2 $786.0 $755.2
====== ====== ====== ======
</TABLE>
Medicare supplement premiums collected increased 5 percent to
$146.0 million in the second quarter of 1995 from $138.4 million in
the second quarter of 1994, and increased 3 percent to $305.9
million in the first six months of 1995 from $296.3 million in the
first six months of 1994. Long-term care collected premiums
increased 24 percent to $39.5 million in the second quarter of 1995
from $31.9 million in the second quarter of 1994, and increased 20
percent to $77.1 million in the first six months of 1995 from $64.0
million in the first six months of 1994. This increase is due to
growth in new business and a larger base of renewal premiums.
Collected premiums for other individual health products decreased
19 percent to $24.2 million in the second quarter of 1995 from
$29.7 million in the second quarter of 1994, and decreased 19
percent to $50.1 million in the first six months of 1995 from $62.1
million in the first six months of 1994. This decrease, which was
anticipated, follows steps previously taken by BLH to improve the
profitability of its comprehensive major medical product included
in this category.
Annuity premiums increased 1 percent to $70.7 million in the
second quarter of 1995 from $70.2 million in the second quarter of
1994, and increased 14 percent to $150.7 million in the first six
months of 1995 from $131.9 million in the first six months of 1994.
This increase was primarily due to increased sales of single
premium deferred annuities. BLH sold more single premium deferred
annuities because of an increased marketing emphasis placed on such
sales.
Premiums collected by American Life in the six months ended June
30, 1995 were $502.0 million, of which, $486.6 million were
recorded as deposits to policy liability accounts. This compared
to $564.2 million collected and $549.2 million recorded as deposits
to policy liability accounts in the six months ended June 30, 1994.
Net premiums collected declined in the first six months of 1995
compared to the first six months of 1994 as a result of several
factors. New annuity sales (which account for approximately 95
percent of American Life's premiums collected) have been negatively
impacted by a reduction of American Life's primary insurance
company subsidiary's ratings to "A-" by two nationally recognized
insurance company rating organizations as a result of the
Acquisition and related financing transactions. These ratings
declines have directly affected the subsidiary's competitive
position in the financial institution marketplace where many
financial institutions require an insurer's ratings to be at least
"A" resulting in a loss of certain former customers and foregone
opportunities for new sales. In addition, American Life has
generally maintained a less competitive crediting rate position on
new business since the Acquisition in order to manage its asset
growth relative to its capital position.
Premiums collected by Conseco's wholly owned insurance
subsidiaries increased 3 percent to $18.9 million in the second
quarter of 1995 from $18.4 million in the second quarter of 1994,
and decreased 10 percent to $39.9 million in the first six months
of 1995 from $44.4 million in the first six months of 1994.
Conseco's wholly owned subsidiaries are not actively marketing new
products.
<PAGE>
<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
Changes in the consolidated balance sheet between December 31,
1994, and June 30, 1995, reflect growth in Conseco's assets and
liabilities from the three earnings activities previously
discussed, together with the notes payable, capital stock and BLH
purchase transactions described in the accompanying notes to the
consolidated financial statements.
The increase in shareholders' equity in the first six months of
1995 resulted from earnings and the change in unrealized
appreciation (depreciation) to reflect the increase in the
estimated fair value of Conseco's investments. The increase was
partially offset by the stock repurchase program described in the
notes to the consolidated financial statements. The change in
unrealized appreciation (depreciation) of securities is recorded
consistent with the requirements of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities ("SFAS 115"). The change in unrealized
appreciation (depreciation) resulted from a decreasing interest
rate environment which generally caused the fair value of fixed
maturities to increase.
The ratio of debt (for which the Company is directly liable) to
total capital increased to .32 to 1 at June 30, 1995, from .20 to
1 at December 31, 1994, as a result of borrowings under the
Company's revolving credit agreement. The ratio of debt (for
which the Company is directly liable) to total capital excluding
unrealized appreciation (depreciation) of securities recorded
consistent with the requirements of SFAS 115 increased to .33 to 1
at June 30, 1995, from .18 to 1 at December 31, 1994. Book value
per common share was $32.65 at June 30, 1995, compared to $20.89 at
December 31, 1994. This increase was due to net income and the
change in unrealized appreciation (depreciation) of securities,
partially offset by the effect of the repurchases of shares of the
Company's common stock. Excluding unrealized appreciation
(depreciation) of securities recorded consistent with the
requirements of SFAS 115, the book value per common share was
$31.01 at June 30, 1995, compared to $27.10 at December 31, 1994.
The return on average common equity (computed excluding unrealized
appreciation (depreciation) of securities recorded consistent with
the requirements of SFAS 115) was 40 percent (annualized) for the
six months ended June 30, 1995, compared to 19 percent for the
year ended December 31, 1994. This increase occurred primarily
because of fluctuations in net realized gain (loss) and
restructuring income during these periods and a decrease in average
common shareholders' equity in the first six months of 1995
compared to the year ended December 31, 1994.
Dividends declared on common stock for the six months ended June
30, 1995, were $.145 per share. The Company reduced its quarterly
cash dividend from $.125 per share to $.02 per share, effective
with the dividend paid in July 1995.
INVESTMENTS
The amortized cost and estimated fair value of fixed maturities
(all of which were actively managed) were as follows at June 30,
1995:<PAGE>
<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. . . . . $ 208.8 $ 10.8 $ 1.0 $ 218.6
Obligations of states and political
subdivisions and foreign government
obligations 61.6 2.8 .9 63.5
Public utility securities. . . . . . 1,567.5 95.1 20.0 1,642.6
Other corporate securities . . . . . 3,636.8 187.3 25.7 3,798.4
Mortgage-backed securities . . . . . 2,534.8 132.7 27.0 2,640.5
-------- ------ ----- --------
Total fixed maturities . . . . . $8,009.5 $428.7 $74.6 $8,363.6
======== ====== ===== ========
</TABLE>
<PAGE>
<PAGE> 27
The following table sets forth fixed maturity investments at June
30, 1995, classified by rating categories. The category assigned
is the highest rating by Standard & Poors or Moody's Investor
Service, or as to $178.3 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 to 6, "B+ and below."
<TABLE>
<CAPTION>
Investment Percent of Percent of
rating fixed maturities total investments
--------- ---------------- -----------------
<S> <C> <C>
AAA. . . . . 35% 30%
AA . . . . . 9 8
A. . . . . . 26 23
BBB+ . . . 8 7
BBB. . . . . 11 10
BBB- . . . . 7 6
--- ---
Investment grade 96 84
--- ---
BB+. . . . . 1 1
BB . . . . . 1 1
BB-. . . . . 1 1
B+ and below 1 1
--- ---
Below investment grade 4 4
--- ---
Total fixed
maturities 100% 88%
=== ===
</TABLE>
Fixed maturities which were below investment grade had an
amortized cost of $317.4 million and an estimated fair value of
$322.2 million at June 30, 1995.
During the first six months of 1995 and 1994, the Company
recorded writedowns of fixed maturity investments of $3.7 million
and $.2 million, respectively. These writedowns were the result of
changes in conditions which caused us to conclude that a decline in
fair value of the investments was other than temporary. At June
30, 1995, fixed maturity investments in default as to the payment
of principal or interest had an aggregate amortized cost of $9.8
million and a fair value of $11.6 million.
Proceeds from the sales of invested assets were $2.5 billion for
the six months ended June 30, 1995. Such sales resulted in net
realized gains of $63.3 million. Proceeds from sales of invested
assets during the first six months of 1994 were $.9 billion. These
sales resulted in net realized losses of $11.4 million.
At June 30, 1995, fixed maturity investments included $2,640.5
million (32 percent of Conseco's fixed maturity investment
portfolio) of mortgage-backed securities, of which $1,834.9 million
were collateralized mortgage obligations ("CMOs") and $805.6
million were pass-through securities. CMOs are securities backed
by pools of pass-through securities and/or mortgages that are
segregated into sections or "tranches." These securities provide
for sequential retirement of principal, rather than the pro-rata
share of principal return which occurs through regular monthly
principal payments on pass-through securities.
The yield characteristics of mortgage-backed securities differ
from those of traditional fixed income securities. Interest and
principal payments occur more frequently, often monthly, and
mortgage-backed securities are subject to risks associated with
variable prepayments. Prepayment rates are influenced by a number
of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets
to changes in interest rates, a variety of economic, geographic and
other factors and the repayment priority of the securities in the
overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the
securities backed by these loans, increase when the level of
prevailing interest rates declines significantly below the interest
rates on such loans. Mortgage-backed securities purchased at a
discount to par will experience an increase in yield when the
underlying mortgages prepay faster than expected. Those securities
purchased at a premium that prepay faster than expected will incur
a reduction in yield. When interest rates decline, the proceeds
from the prepayment of mortgage-backed securities are likely to be
reinvested at lower rates than the Company was earning on the
prepaid securities. <PAGE>
<PAGE> 28
As interest rates rise, prepayments on mortgage-backed securities
decrease, because fewer underlying mortgages are refinanced. When
prepayments decrease, the average maturity and duration of the
mortgage-backed securities increase, which decreases the yield on
mortgage-backed securities purchased at a discount because the
discount is realized as income at a slower rate and increases the
yield on those purchased at a premium as a result of a decrease in
annual amortization of the premium.
The following table sets forth the par value, amortized cost and
estimated fair value of investment in mortgage-backed securities
at June 30, 1995, summarized by the interest rates on the
underlying collateral.
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-through securities:
Below 7 percent. . . . . . . . . . . . . . $ 311.1 $ 307.8 $ 300.1
7 percent - 8 percent. . . . . . . . . . . 467.7 464.7 463.3
8 percent - 9 percent. . . . . . . . . . . 37.1 37.3 37.9
9 percent and above. . . . . . . . . . . . 4.1 4.1 4.3
Planned amortization class CMO instruments:
Below 7 percent. . . . . . . . . . . . . . 361.5 329.2 335.1
7 percent - 8 percent. . . . . . . . . . . 336.3 318.8 322.4
8 percent - 9 percent. . . . . . . . . . . 67.0 67.2 67.3
9 percent and above. . . . . . . . . . . . 20.3 21.0 21.4
Targeted amortization class CMO instruments:
7 percent - 8 percent. . . . . . . . . . . 69.8 59.1 67.1
8 percent - 9 percent. . . . . . . . . . . 24.1 22.0 23.4
9 percent and above. . . . . . . . . . . . 30.0 30.7 31.0
Other CMO instruments:
Below 7 percent. . . . . . . . . . . . . . 209.0 169.8 190.8
7 percent - 8 percent. . . . . . . . . . . 585.1 474.6 532.3
8 percent - 9 percent. . . . . . . . . . . 190.6 171.8 186.1
9 percent and above. . . . . . . . . . . . 62.8 56.7 58.0
-------- -------- --------
Total mortgage-backed securities. . . . $2,776.5 $2,534.8 $2,640.5
======== ======== ========
</TABLE>
<PAGE>
<PAGE> 29
We limit our exposure to prepayment risk by: (i) generally
avoiding securities whose cost significantly exceeds par; (ii)
purchasing securities which are backed by collateral with lower
prepayment sensitivity (such as higher dollar mortgages included in
mortgage-backed securities issued by non-government entities and
mortgages that are seasoned); (iii) limiting investments in
securities whose values are heavily influenced by changes in
prepayments (such as interest only strips and accrual bonds); and
(iv) concentrating on intermediate-tranche CMOs and securities with
prepayment-protected structures (such as planned amortization class
("PAC") or targeted amortization class ("TAC") CMOs). PAC and TAC
investments are designed to amortize in a more predictable manner
by shifting the primary risk of prepayment of the underlying
collateral to other CMO tranches. PACs and TACs have more stable
cash flows than other CMO tranches because they have better call
protection in a declining interest rate environment and less
extension risk in a rising interest rate environment. PAC and TAC
instruments represented 33 percent of the Company's mortgage-backed
securities at June 30, 1995.
Included in the Company's CMO holdings at June 30, 1995, were
accrual bonds with a carrying value of $110.5 million. Accrual
bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin on these bonds. On each
accrual date, the principal balance is increased by the amount of
the interest (based upon the stated coupon rate) that otherwise
would have been payable. As such, these securities act much the
same as zero coupon bonds until cash payments begin. Cash payments
typically do not commence until earlier classes in the CMO
structure have been retired, which can be significantly influenced
by the prepayment experience of the underlying mortgage loan
collateral in the CMO structure. Because of the zero coupon
element of these securities and the potential uncertainty as to the
timing of cash payments, their market values and yields are more
sensitive to changing interest rates than other CMOs, pass-through
securities and coupon bonds.
At June 30, 1995, the balance of mortgage loans was comprised of
91 percent commercial loans, 7 percent residual interests in
collateralized mortgage obligations and 2 percent residential
loans. Less than 1 percent of mortgage loans were noncurrent at
June 30, 1995. There were no realized losses on mortgage loans
during the six months ended June 30, 1995 and 1994. At June 30,
1995, the Company had a loan loss reserve of $2.2 million.
Investment borrowings averaged approximately $281 million during
the first six months of 1995, compared to approximately $269
million during the same period of 1994 and were collateralized by
investment securities with fair values approximately equal to the
loan value. The weighted average interest rate on such borrowings
was 5.5 percent and 3.7 percent in the six months ended June 30,
1995 and 1994, respectively.
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for the
Company's insurance subsidiaries by regulatory authorities differ
from generally accepted accounting principles. The Company's life
insurance subsidiaries that are included on a consolidated basis in
these financial statements reported the following amounts to
regulatory agencies at June 30, 1995, after appropriate
eliminations of intercompany accounts among such subsidiaries
(dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Statutory capital and surplus . . . . . $552.7
Asset valuation reserve ("AVR") . 70.0
Interest maintenance reserve ("IMR"). . 94.5
------
Total. . . . . . . . . . . . . $717.2
======
</TABLE>
At June 30, 1995, the ratio of such consolidated statutory
account balances to consolidated statutory liabilities (excluding
AVR, IMR, liabilities from separate account business and short-term
collateralized borrowings) was 8.4 percent, compared to a ratio of
9.1 percent at December 31, 1994. The decline in the ratio is
primarily due to $76.0 million of dividend payments made by the
life insurance subsidiaries to non-life parent companies, partially
offset by statutory earnings of such life subsidiaries.
In connection with BLH's acquisition, BLH increased the capital
of one of its life insurance subsidiaries (Bankers Life Insurance
Company of Illinois "BLI") by providing cash in exchange for a
surplus debenture. The remaining balance of the surplus debenture
of $430.0 million at June 30, 1995, is considered a part of BLI's
statutory capital and surplus. 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
("DOI") when its Director is satisfied that the financial condition
of BLI warrants that action. Such approval may not be withheld <PAGE>
<PAGE> 30
provided the surplus of BLI exceeds, after such payment,
approximately $128.0 million. BLI's surplus at June 30, 1995, was
$313.2 million. During April 1995, BLI made a scheduled principal
payment on the surplus debenture of $30.0 million plus accrued
interest.
BLI's ability to service its obligations under the surplus
debenture is dependent upon its ability to receive dividends and
tax sharing payments from its subsidiary, Bankers Life & Casualty
Insurance Company ("BLC"). BLC may, upon prior notice to the DOI,
pay dividends in any twelve-month period up to the greater of: (i)
statutory net gain from operations for the prior year; or (ii) 10
percent of statutory capital and surplus at the end of the prior
year. Additionally, as a condition to its 1992 acquisition, BLC
agreed not to pay dividends if, immediately after such payment,
BLC's ratio of adjusted capital to risk-based capital ("RBC") would
be less than 100 percent. Calculations using the RBC formula
indicate that BLC's adjusted capital is twice its total RBC at June
30, 1995. Dividends in excess of maximum amounts prescribed by the
state statutes may not be paid without DOI approval. During the
six months ended June 30, 1995, BLC paid regular dividends of $54.0
million. During the remainder of 1995, BLC may pay additional
dividends up to $39.4 million without regulatory approval.
The surplus of American Life's primary life insurance subsidiary
(American Life and Casualty Insurance Company) includes surplus
notes with a balance of $50.2 million at June 30, 1995. 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
surplus note payments may be made only out of an insurer's earned
surplus. At June 30, 1995, the subsidiary had earned surplus of
$115.7 million. During the first six months of 1995, the
subsidiary made a scheduled principal payment of $1.0 million on a
surplus note and paid $22.0 million of cash dividends to another
subsidiary of American Life (American Life Holding Company).
During the remainder of 1995, approximately $12.5 million is
available to be transferred from American Life and Casualty
Insurance Company to American Life Holding Company in the form of
dividends or surplus note payments without prior approval of the
Iowa Insurance Division.
During the first six months of 1995, our wholly owned life
insurance subsidiaries paid $40.0 million of ordinary dividends to
Conseco. During the remainder of 1995, our wholly owned insurance
subsidiaries may pay additional dividends up to $8.4 million
without the permission of state regulatory authorities.
<PAGE>
<PAGE> 31
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 1995, the shareholders voted upon the following
matters at the annual shareholders meeting:
a) The election of Stephen C. Hilbert, Ngaire E. Cuneo and M.
Phil Hathaway to serve three-year terms. The results of the
voting were as follows (there were no broker non-votes):
<TABLE>
<CAPTION>
Stephen Ngaire M. Phil
C. Hilbert E. Cuneo Hathaway
---------- --------- --------
<S> <C> <C> <C>
For 17,303,168 17,318,414 17,315,913
Withheld 378,777 363,531 366,032
</TABLE>
b) The approval of the Conseco, Inc. Amended and Restated
Deferred Compensation Plan. Shareholders cast 15,475,409
votes for and 1,922,490 votes against the Amended and
Restated Deferred Compensation Plan. There were 284,046
abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
11.1 Computation of Earnings Per Share - Primary.
11.2 Computation of Earnings Per Share - Fully Diluted.
27.0 Financial Data Schedule
b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CONSECO, INC.
Dated: August 14, 1995 By: /s/ ROLLIN M. DICK
----------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
EXHIBIT 11.1
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(unaudited)
Three months Six months
ended June 30, ended June 30,
------------------ -------------------
1995 1994 1995 1994
---- ---- ---- -----
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period. 22,184,850 25,849,939 22,184,850 25,311,773
Weighted average shares issued (acquired)
during the period:
Treasury stock acquired . . . (2,022,500) (703,979) (1,752,521) (2,662,583)
Exercise of stock options. . . . . . . . 41,603 17,663 33,887 3,377,730
Common equivalent shares related to:
Stock options at average market price . . . 682,055 897,729 687,406 946,404
Employee stock plans . . . 436,682 425,538 422,764 422,303
---------- ---------- ---------- ----------
Weighted average primary shares outstanding 21,322,690 26,486,890 21,576,386 27,395,627
========== ========== ========== ==========
Net income for primary earnings per share:
Net income as reported. . . . $99,870,000 $34,190,000 $124,292,000 $114,334,000
Less preferred stock dividends . . . (4,607,000) (4,672,000) (9,213,000) (9,343,000)
----------- ----------- ------------ ------------
Net income for primary
earnings per share . . . $95,263,000 $29,518,000 $115,079,000 $104,991,000
=========== =========== ============ ============
Net income per primary common share. . . $4.47 $1.11 $5.33 $3.83
===== ===== ===== =====
</TABLE>
<PAGE> 1
EXHIBIT 11.2
CONSECO, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(unaudited)
Three months Six months
ended June 30, ended June 30,
---------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average primary shares outstanding . . 21,322,690 26,486,890 21,576,386 27,395,627
Incremental common equivalent shares:
Related to options and employee stock plans based
on market price at the end of the period. . 12,316 73 6,167 -
Related to convertible preferred stock. . . . 4,446,765 4,509,509 4,446,765 4,509,509
---------- ----------- ----------- ----------
Weighted average fully diluted
shares outstanding. . . . . . 25,781,771 30,996,472 26,029,318 31,905,136
========== =========== =========== ==========
Net income for fully diluted
earnings per share:
Net income as reported. . . . $99,870,000 $34,190,000 $124,292,000 $114,334,000
Less preferred stock dividends . . . . - - - -
Net income for fully diluted
earnings per share. . . . . . $99,870,000 $34,190,000 $124,292,000 $114,334,000
=========== =========== ============ ===========
Net income per fully diluted
common share. . . . . . . . . $3.87 $1.10 $4.78 $3.58
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-Q FOR CONSECO,
INC. DATED JUNE 30, 1995 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 8,363,600
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41,600
<MORTGAGE> 213,800 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 9,521,200
<CASH> 0 <F2>
<RECOVER-REINSURE> 47,100
<DEFERRED-ACQUISITION> 1,216,200 <F3>
<TOTAL-ASSETS> 12,002,800
<POLICY-LOSSES> 8,229,200
<UNEARNED-PREMIUMS> 200,100
<POLICY-OTHER> 223,000
<POLICY-HOLDER-FUNDS> 233,900
<NOTES-PAYABLE> 1,028,800 <F4>
<COMMON> 153,300
0
283,500
<OTHER-SE> 506,600 <F5>
<TOTAL-LIABILITY-AND-EQUITY> 12,002,800
675,900
<INVESTMENT-INCOME> 366,000
<INVESTMENT-GAINS> 61,900 <F6>
<OTHER-INCOME> 42,900 <F7>
<BENEFITS> 699,300 <F8>
<UNDERWRITING-AMORTIZATION> 111,300 <F9>
<UNDERWRITING-OTHER> 110,900
<INCOME-PRETAX> 166,200
<INCOME-TAX> (7,300)
<INCOME-CONTINUING> 173,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,300
<EPS-PRIMARY> 5.33
<EPS-DILUTED> 4.78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $85,900 of credit-tenant loans.
<F2> Cash and cash equivalents are classified as short-term investments, which are
included in total investments.
<F3> Includes $948,600 of cost of policies purchased.
<F4> Includes notes payable of Bankers Life Holding Corporation of $272,200 and
Partnership II entities of $308,000 which are not direct obligations of Conseco.
<F5> Includes retained earnings of $472,100, and net unrealized appreciation
of securities of $34,500.
<F6> Includes net realized gains of $59,600 and net trading income of $2,300.
<F7> Includes fee revenue of $21,200, equity in earnings of CCP Insurance, Inc. of $15,500
and other income of $6,200.
<PAGE>
<F8> Includes insurance policy benefits of $507,400, change in future policy
benefits of $15,700 and interest expense on annuities and financial products
of $176,200.
<F9> Includes amortization of cost of policies purchased of $44,100 and cost
of policies produced of $32,100 and amortization related to realized losses of
$35,100.
</FN>
</TABLE>
