UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] 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 November 1, 1996: 66,995,311
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
September 30, December 31,
1996 1995
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Actively managed fixed maturity securities at fair value (amortized cost:
1996 - $16,138.0; 1995 - $12,355.1).......................................................... $15,959.8 $12,963.3
Equity securities at fair value (cost: 1996 - $104.6; 1995 - $34.6)............................ 104.2 36.6
Mortgage loans................................................................................. 372.5 339.9
Credit-tenant loans............................................................................ 393.8 259.1
Policy loans................................................................................... 526.0 307.6
Other invested assets.......................................................................... 211.0 91.2
Short-term investments......................................................................... 212.3 189.9
Assets held in separate accounts............................................................... 300.4 227.0
--------- ---------
Total investments........................................................................ 18,080.0 14,414.6
Accrued investment income......................................................................... 276.7 207.8
Cost of policies purchased........................................................................ 1,847.1 1,030.7
Cost of policies produced......................................................................... 541.0 391.0
Reinsurance receivables........................................................................... 400.6 84.8
Income taxes...................................................................................... 138.9 -
Goodwill (net of accumulated amortization: 1996 - $71.9; 1995 - $48.0)............................ 1,524.7 894.1
Property and equipment (net of accumulated depreciation: 1996 - $58.6; 1995 - $36.3)............. 105.9 88.7
Securities segregated for the future redemption of redeemable preferred stock of a subsidiary..... 45.0 39.2
Other assets...................................................................................... 216.1 146.6
--------- ---------
Total assets............................................................................. $23,176.0 $17,297.5
========= =========
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
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2
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CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1996 1995
---- ----
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities.......................................................................... $18,150.7 $13,378.4
Income tax liabilities......................................................................... - 93.3
Investment borrowings.......................................................................... 539.4 298.1
Other liabilities.............................................................................. 482.0 329.6
Liabilities related to separate accounts....................................................... 300.1 227.0
Notes payable of Conseco....................................................................... 1,169.0 871.4
Notes payable of Bankers Life Holding Corporation, not direct obligations of Conseco........... 418.1 301.5
Notes payable of American Life Holdings, Inc., not direct obligations of Conseco............... 13.0 283.2
--------- ---------
Total liabilities........................................................................ 21,072.3 15,782.5
--------- ---------
Minority interest................................................................................. 147.8 403.3
--------- ---------
Shareholders' equity:
Preferred stock................................................................................ 267.1 283.5
Common stock and additional paid-in capital, no par value, 500,000,000 shares
authorized, shares issued and outstanding: 1996 - 66,967,921; 1995 - 40,515,914.............. 1,054.5 157.2
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $(27.0); 1995 - $66.8).............................................................. (46.7) 112.6
Other investments (net of applicable deferred income taxes: 1996 - $(.1); 1995 - $.1)........ (.3) .1
Retained earnings.............................................................................. 681.3 558.3
--------- ---------
Total shareholders' equity............................................................... 1,955.9 1,111.7
--------- ---------
Total liabilities and shareholders' equity............................................... $23,176.0 $17,297.5
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
3
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CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income......................................... $451.8 $373.1 $1,193.2 $1,103.3
Investment activity:
Net investment income......................................... 364.8 293.6 926.7 850.5
Net trading income (losses)................................... .8 (3.2) (6.5) 2.8
Net realized gains............................................ 6.1 3.3 16.3 77.8
Fee revenue..................................................... 9.6 8.0 29.7 23.6
Restructuring income............................................ - - 30.4 -
Other income.................................................... 1.2 1.9 8.8 8.1
------ ------ -------- --------
Total revenues.............................................. 834.3 676.7 2,198.6 2,066.1
------ ------ -------- --------
Benefits and expenses:
Insurance policy benefits....................................... 313.8 268.7 858.3 814.8
Change in future policy benefits................................ 3.9 15.2 15.9 28.4
Interest expense on annuities and financial products............ 184.7 150.3 474.4 432.8
Interest expense on notes payable............................... 30.4 31.5 84.6 83.9
Interest expense on investment borrowings....................... 6.5 5.7 15.1 19.2
Amortization related to operations.............................. 74.6 53.8 174.1 158.3
Amortization related to realized gains.......................... 3.3 1.2 15.6 44.6
Other operating costs and expenses............................. 85.6 66.7 207.6 198.2
------ ------ -------- --------
Total benefits and expenses................................. 702.8 593.1 1,845.6 1,780.2
------ ------ -------- --------
Income before income taxes, minority interest and
extraordinary charge...................................... 131.5 83.6 353.0 285.9
Income tax expense................................................. 49.8 21.1 134.1 34.3
------ ------ -------- --------
Income before minority interest and extraordinary charge.... 81.7 62.5 218.9 251.6
Minority interest.................................................. 2.4 19.0 25.8 83.8
------ ------ -------- --------
Income before extraordinary charge.......................... 79.3 43.5 193.1 167.8
Extraordinary charge on extinguishment of debt, net of taxes
and minority interest........................................... 1.2 - 18.6 -
------ ------ -------- ---------
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
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4
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CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS, continued
(Dollars in millions, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income............................................... 78.1 43.5 174.5 167.8
Less preferred stock dividends.................................... 5.5 4.6 22.7 13.8
----- ----- ------ ------
Net income applicable to common stock.................... $72.6 $38.9 $151.8 $154.0
===== ===== ====== ======
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding.......................... 71,586,000 42,798,000 57,945,000 43,034,000
Net income before extraordinary charge....................... $1.10 $.91 $3.16 $3.58
Extraordinary charge......................................... .02 - .32 -
----- ---- ----- -----
Net income............................................... $1.08 $.91 $2.84 $3.58
===== ==== ===== =====
Fully diluted:
Weighted average shares outstanding.......................... 79,030,000 51,726,000 67,370,000 52,056,000
Net income before extraordinary charge....................... $1.01 $.84 $2.87 $3.22
Extraordinary charge......................................... .02 - .28 -
----- ----- ----- -----
Net income............................................... $ .99 $.84 $2.59 $3.22
===== ==== ===== =====
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
5
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<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars in millions)
(unaudited)
Nine months ended
September 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning of period...................................................................... $ 283.5 $ 283.5
Issuance of convertible preferred stock......................................................... 267.1 -
Redemption of preferred shares for cash......................................................... (.3) -
Conversion of preferred shares into common stock................................................ (283.2) -
--------- ---------
Balance, end of period............................................................................ $ 267.1 $ 283.5
========= =========
Common stock and additional paid-in capital:
Balance, beginning of period...................................................................... $ 157.2 $ 165.8
Amounts related to stock options and employee benefit plans..................................... 21.4 3.8
Tax benefit related to issuance of shares under employee benefit plans.......................... 18.4 .2
Amounts related to merger with Life Partners Group, Inc......................................... 586.8 -
Conversion of preferred stock into common stock................................................. 283.2 -
Cost of issuance of convertible preferred stock................................................. (9.4) -
Cost of shares acquired charged to common stock and additional paid-in capital.................. (3.1) (15.0)
--------- ---------
Balance, end of period............................................................................ $1,054.5 $ 154.8
======== =========
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period.................................................................... $ 112.6 $ (137.7)
Change in unrealized appreciation (depreciation).............................................. (159.3) 198.0
--------- ----------
Balance, end of period.......................................................................... $ (46.7) $ 60.3
========= =========
Other investments:
Balance, beginning of period.................................................................... $ .1 $ (2.0)
Change in unrealized appreciation (depreciation).............................................. (.4) (1.6)
--------- ---------
Balance, end of period.......................................................................... $ (.3) $ (3.6)
========== =========
Retained earnings:
Balance, beginning of period...................................................................... $ 558.3 $ 437.4
Net income ..................................................................................... 174.5 167.8
Cost of shares acquired charged to retained earnings............................................ (22.9) (77.4)
Dividends on common stock....................................................................... (5.9) (3.3)
Dividends on preferred stock.................................................................... (22.7) (13.8)
--------- ---------
Balance, end of period............................................................................ $ 681.3 $ 510.7
========= =========
Total shareholders' equity.................................................................. $1,955.9 $1,005.7
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
6
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<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(unaudited)
Nine months ended
September 30,
--------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................................ $ 174.5 $ 167.8
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation................................................................... 190.7 209.6
Income taxes.................................................................................... (4.4) (66.4)
Insurance liabilities........................................................................... 58.7 (12.7)
Interest credited to insurance liabilities...................................................... 474.4 432.8
Fees charged to insurance liabilities........................................................... (158.9) (81.3)
Accrual and amortization of investment income................................................... (27.2) (78.5)
Deferral of cost of policies produced........................................................... (237.0) (215.1)
Restructuring income............................................................................ (30.4) -
Minority interest............................................................................... 17.3 69.7
Extraordinary charge on extinguishment of debt (before income tax).............................. 28.6 -
Realized (gains) and trading (income) losses.................................................... (9.8) (80.6)
Other........................................................................................... (34.2) (3.5)
--------- ---------
Net cash provided by operating activities................................................... 442.3 341.8
--------- ---------
Cash flows from investing activities:
Sales of investments.............................................................................. 4,954.0 3,427.4
Maturities and redemptions........................................................................ 521.0 319.8
Purchases of investments.......................................................................... (5,852.8) (4,351.7)
Purchase of Life Partners Group, Inc.............................................................. (9.5) -
Purchase of property and casualty insurance brokerage businesses.................................. (12.0) -
Purchase of additional shares of Bankers Life Holding Corporation................................. - (262.4)
Purchase of additional shares of American Life Holdings, Inc...................................... (165.0) -
Purchase of preferred stock of American Life Holdings, Inc........................................ (12.6) -
Purchase of additional shares of CCP Insurance, Inc............................................... - (281.8)
Repurchase of equity securities by CCP Insurance, Inc............................................. - (44.5)
Repurchase of equity securities by Bankers Life Holding Corporation............................... (27.7) (25.8)
Cash held by Life Partners Group, Inc. before consolidation....................................... 79.1 -
Cash held by CCP Insurance, Inc. before consolidation............................................. - 123.0
Other ............................................................................................ (56.5) (5.2)
--------- ---------
Net cash used by investing activities ...................................................... (582.0) (1,101.2)
--------- ---------
Cash flows from financing activities:
Issuance of shares related to stock options and employee benefit plans .......................... 16.3 .8
Issuance of convertible preferred stock........................................................... 257.7 -
Issuance of notes payable of Conseco.............................................................. 394.2 770.2
Issuance of debt of subsidiaries - not direct obligations of Conseco.............................. 459.1 -
Redemption of preferred shares.................................................................... (.3) -
Payments on notes payable of Conseco ............................................................ (471.6) (294.0)
Payments on notes payable of subsidiaries - not direct obligations of Conseco..................... (515.9) (31.0)
Payments to repurchase equity securities of Conseco............................................... (21.5) (92.4)
Investment borrowings............................................................................. 169.8 181.2
Deposits to insurance liabilities................................................................. 1,266.5 1,378.0
Withdrawals from insurance liabilities............................................................ (1,366.4) (1,223.7)
Dividends paid ................................................................................... (25.8) (19.6)
--------- ---------
Net cash provided by financing activities................................................... 162.1 669.5
--------- ---------
Net increase (decrease) in short-term investments........................................... 22.4 (89.9)
Short-term investments, beginning of period.......................................................... 189.9 295.4
--------- ---------
Short-term investments, end of period................................................................ $ 212.3 $ 205.5
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
7
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following notes should be read in conjunction with the notes to
consolidated financial statements included in the 1995 Form 10-K of Conseco,
Inc. Conseco, Inc. and its consolidated subsidiaries are collectively referred
to as ("We", "Conseco" or the "Company").
BASIS OF PRESENTATION
Our unaudited consolidated financial statements as of and for the periods
ended September 30, 1996 and 1995, reflect all adjustments (consisting only of
normal recurring items) 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 1996 presentation. We have restated all share and
per share amounts for the April 1, 1996 two-for-one stock split.
In preparing financial statements in conformity with generally accepted
accounting principles, we are required to make estimates and assumptions that
significantly affect various reported amounts. For example, we use significant
estimates and assumptions in calculating the cost of policies produced, the cost
of policies purchased, goodwill, insurance liabilities, liabilities related to
litigation, guaranty fund assessment accruals and deferred income taxes. If our
future experience differs materially from these estimates and assumptions, our
financial statements could be affected.
Consolidation issues. We acquired all of the common stock of CCP Insurance,
Inc. ("CCP") that we did not previously own in August 1995 (the "CCP Merger").
As a result, CCP's former subsidiaries are now wholly owned by Conseco. The
Company's consolidated financial statements reflect the operations of CCP on a
consolidated basis effective January 1, 1995. The consolidated statement of
operations for periods in 1995 prior to the acquisition has been restated to
reflect the operations of CCP on a consolidated basis. Such restatement has no
effect on the net income or shareholders' equity we report.
Conseco Capital Partners II, L.P. ("Partnership II") acquired American Life
Holdings, Inc. ("ALH") on September 29, 1994 (the "Acquisition"). In 1996, ALH
changed its name from American Life Group, Inc. (formerly The Statesman Group,
Inc. prior to its name change in 1995). As a result of the Acquisition,
Partnership II owned 80 percent of the outstanding shares of ALH's common stock.
Because Conseco Partnership Management, Inc., a wholly owned subsidiary of
Conseco, was the sole general partner of Partnership II, Conseco controlled
Partnership II and ALH, even though its ownership interest was less than 50
percent. Because of this control, Conseco's consolidated financial statements
are required to include the accounts of Partnership II and ALH. We accounted for
the Acquisition using the purchase method of accounting. Under purchase
accounting, we allocated the total purchase cost of ALH 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. 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 and Western National Corporation ("WNC"),
had a 27 percent ownership interest in ALH.
On September 30, 1996, we completed the acquisition of all of the common
shares of ALH we did not already own and Partnership II was terminated. See
"Acquisition of American Life Holdings, Inc."
On August 2, 1996, we completed the acquisition of Life Partners Group,
Inc. ("LPG") in a transaction pursuant to which LPG became a wholly owned
subsidiary of Conseco. Accordingly, LPG's accounts are consolidated with Conseco
for periods after July 1, 1996. See "Acquisition of Life Partners Group, Inc."
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
We classify fixed maturity securities into three categories: "actively
managed" and "trading account" (which we carry at estimated fair value) and
"held to maturity" (which we carry at amortized cost). We did not classify any
fixed maturity securities in the held to maturity or trading account categories
at December 31, 1995 or September 30, 1996.
8
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjustments to carry actively managed fixed maturity securities at fair
value have no effect on our earnings. We record the unrealized appreciation
(depreciation), net of tax and other adjustments, as adjustments to
shareholders' equity. The following table summarizes the effect of these
adjustments on several related balance sheet accounts at September 30, 1996.
<TABLE>
<CAPTION>
Effect of fair value
adjustment to
Balance actively managed
before fixed maturity Reported
adjustment securities amount
---------- ---------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities............................... $16,138.0 $(178.2) $15,959.8
Cost of policies purchased............................................... 1,769.6 77.5 1,847.1
Cost of policies produced................................................ 517.3 23.7 541.0
Income tax asset......................................................... 111.9 27.0 138.9
Minority interest........................................................ 151.1 (3.3) 147.8
Unrealized depreciation of fixed maturity securities..................... - (46.7) (46.7)
</TABLE>
ACQUISITION OF AMERICAN LIFE HOLDINGS, INC.
On September 30, 1996, we purchased all of the common shares of ALH we did
not previously own from Partnership II for $165.0 million in cash (the "ALH
Transaction"). We were required to use step-basis accounting when we acquired
the shares of ALH common stock in the ALH Transaction and for our previous
acquisitions. As a result, the assets and liabilities of ALH included in our
September 30, 1996, consolidated balance sheet represent the following
combination of values: (i) the portion of ALH's net assets acquired by Conseco
in the initial acquisition of ALH made by Partnership II and Conseco is valued
as of September 29, 1994; (ii) the portion of ALH's net assets acquired on
November 30, 1995 is valued as of that date; and (iii) the portion of ALH's net
assets acquired in the ALH Transaction is valued as of September 30, 1996.
The effect of the ALH Transaction on the consolidated balance sheet as of
September 30, was as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Cost of policies purchased......................... $110.0
Cost of policies produced.......................... (88.0)
Goodwill........................................... 52.8
Notes payable...................................... (13.8)
Minority interest.................................. 131.2
Other ............................................ (27.2)
------
Cash used to acquire ALH...................... $165.0
======
</TABLE>
The Partnership II agreement provided that an additional ownership interest
in ALH would be allocated to Conseco if returns to the limited partners were in
excess of prescribed targets. Upon termination of Partnership II, such targets
were exceeded and the additional ownership interest allocated to Conseco was
recognized as follows: (i) $10.2 million, which represents our increased
ownership interest in the previously reported net income of Partnership II, was
recorded as a reduction of amounts that would otherwise be charged to the
minority interest; and (ii) $11.1 million as restructuring income. Restructuring
income in the third quarter of 1996 was offset by restructuring expenses
incurred in conjunction with the consolidation of LPG's and ALH's operations
with Conseco's home office operations.
Effective September 30, 1996, we made an additional capital contribution to
ALH of $125.0 million (the "ALH Capital Contribution"), which was used by ALH to
retire the outstanding principal amount under its senior credit facility. We
recognized an extraordinary charge of $.3 million, net of taxes of $.1 million,
related to such early retirement.
9
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CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the third quarter of 1996, we also purchased all shares of ALH's
1994 Series Preferred Stock we did not previously own (the "ALH Preferred Stock
Purchase") for $12.6 million (the carrying value of such preferred stock).
The ALH Transaction, the ALH Capital Contribution, and the ALH Preferred
Stock Purchase were financed with: (i) $50.0 million of borrowings under our
Credit Agreement; (ii) $100.0 million proceeds from a new bridge loan facility;
(iii) $140.0 million of borrowings under BLH's revolving credit facility; and
(iv) available cash (see "Changes in Notes Payable"). After these transactions,
Conseco and its subsidiaries own all of the outstanding shares of ALH common
stock (including 40.8 percent owned by BLH).
ACQUISITION OF LIFE PARTNERS GROUP, INC.
Effective July 1, 1996, we completed the acquisition of LPG in a
transaction pursuant to which LPG became a wholly owned subsidiary of Conseco
(the "LPG Merger"). The LPG Merger was consummated pursuant to an Agreement and
Plan of Merger dated March 11, 1996. In the LPG Merger, each of the issued and
outstanding shares of LPG common stock was converted into .5833 of a share of
Conseco's common stock. We issued a total of 16.1 million shares of the Conseco
common stock (or equivalent shares) with a value of $586.8 million and incurred
$1.5 million of transaction costs. Prior to the LPG Merger, we had purchased .6
million shares of LPG common stock in the open market for $8.0 million. In
conjunction with the LPG Merger, we repaid the $148.7 million outstanding
principal amount plus accrued interest under LPG's bank credit facility with
borrowings under our Credit Agreement.
We accounted for the acquisition of LPG under the purchase method of
accounting. Under this method, we allocated the cost to acquire LPG to the
assets and liabilities acquired based on their fair values as of July 1, 1996,
and recorded the excess of the total purchase cost over the fair value of the
liabilities assumed as goodwill.
The effect of the LPG Merger on the consolidated balance sheet as of July
1, 1996, was as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Fixed maturities..................................... $ 3,335.4
Mortgage loans....................................... 99.6
Credit-tenant loans.................................. 86.8
Policy loans......................................... 232.1
Short-term investments............................... 79.1
Other investments.................................... 87.3
Accrued investment income............................ 56.0
Cost of policies purchased........................... 565.0
Goodwill............................................. 575.0
Income taxes......................................... 68.5
Reinsurance receivables.............................. 279.6
Insurance liabilities................................ (4,476.8)
Investment borrowings................................ (71.5)
Notes payable........................................ (123.8)
Other................................................ (47.3)
---------
Total cost to acquire LPG....................... $ 745.0
=========
</TABLE>
BANKERS LIFE HOLDING CORPORATION
On August 26, 1996, Conseco announced its intention to merge with BLH, in a
transaction under which Conseco will acquire the outstanding shares of BLH that
Conseco does not already own. In the intended merger, each of the 4.7 million
outstanding shares of BLH common stock not already owned by Conseco would be
converted into the right to receive $25 in Conseco common stock. BLH would be
merged into Conseco. Completion of the transaction, which is subject to review
by the Securities and Exchange Commission of the information to be submitted to
shareholders of BLH describing the terms of the merger and their appraisal
rights, is expected to occur by early 1997.
During the first three months of 1996, BLH repurchased 1.3 million shares
of its common stock at a cost of $27.7 million. As a result of such repurchases,
Conseco's ownership interest in BLH increased to 90.4 percent.
10
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We were required to use step-basis accounting for the acquisition of
additional shares of BLH common stock in 1996 and for previous acquisitions. As
a result, the assets and liabilities of BLH included in our accompanying
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 portions
of BLH's net assets acquired during 1995 and 1996 are valued as of the dates of
their purchase; and (iv) the portion of BLH's net assets owned by minority
interests is valued based on a combination of (i) and the historical bases of
the net assets acquired in the November 1992 acquisition.
The share repurchases by BLH in 1996 had the following effects on Conseco's
consolidated balance sheet accounts (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Cost of policies purchased.............................................................. $ 9.0
Cost of policies produced ............................................................. (5.0)
Goodwill................................................................................ 7.2
Insurance liabilities................................................................... (1.4)
Income taxes............................................................................ (1.1)
Other................................................................................... .3
Minority interest ...................................................................... 18.7
-----
Short-term investments used.................................................... $27.7
=====
</TABLE>
CHANGES IN NOTES PAYABLE
Notes payable of Conseco
In January 1996, we repaid $245.0 million principal amount of borrowings
under our $600 million Credit Agreement using proceeds from the sale of
convertible preferred stock (see "Changes in Preferred Stock"). As a result of
the prepayment and amendments to the Credit Agreement (including substantive
modification of the maturity date and interest rate terms), Conseco recognized
an extraordinary loss in the first quarter of 1996 of $9.3 million (net of
applicable taxes) representing the unamortized debt issuance costs related to
the prior agreement. The amended and restated Credit Agreement permits
borrowings up to $500.0 million on a revolving basis. Any borrowings are due in
April 2001 and bear interest at the Company's choice of: (i) the bank's base
rate; (ii) an Offshore Rate; or (iii) a rate determined based on a solicitation
of bids from the lenders. The actual weighted average interest rate was 6.2
percent at September 30, 1996. Offshore Rates are equal to the reserve adjusted
IBOR rate plus a margin of .50 percent to 1.125 percent, based on Conseco's debt
to total capitalization ratio and the credit rating of Conseco's senior notes
(the current margin of .75 percent decreased to .625 percent for borrowings
after October 15, 1996, as a result of the rating upgrade of Conseco's senior
notes). We pay a fee of .20 percent to .35 percent per annum (depending on the
credit rating of Conseco's senior notes) on the unused portion of the Credit
Agreement commitment. This fee decreased to .20 percent at September 30, 1996,
from .25 percent as a result of the rating upgrade on Conseco's senior notes.
The Credit Agreement provides for mandatory prepayments under certain
conditions, including the sale or disposition of significant assets other than
in the ordinary course of business and the issuance of debt or equity of Conseco
or its subsidiaries. We have pledged, among other things, the capital stock of
Conseco's subsidiaries as collateral for the Credit Agreement.
We borrowed $50 million under the Credit Agreement to finance a portion of
both the ALH Transaction and the ALH Capital Contribution. We also borrowed
$148.7 million to retire LPG's bank credit facilities existing at the
acquisition date. At September 30, 1996, the principal balance borrowed under
the Credit Agreement was $460 million.
On the date of the LPG Merger, LPG's notes payable included $87.8 million
par value of senior subordinated notes due in 2002. In connection with the LPG
Merger, Conseco guaranteed LPG's obligations under such notes. Accordingly, such
notes were effectively converted into direct obligations of Conseco. The senior
subordinated notes bear interest at 12.75 percent payable semi-annually, are
unsecured and rank pari passu with other unsecured unsubordinated debt of
Conseco. The notes, which are publicly traded on the New York Stock Exchange,
are redeemable at Conseco's option at a redemption price of 103.643 percent
commencing July 15, 1997, and declining over the next twelve months to 100
percent.
11
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We borrowed $100.0 million under a new bridge loan facility effective
September 30, 1996. The proceeds were used to finance a portion of the ALH
Capital Contribution. Borrowings under the bridge loan bear interest at 5.865
percent and are due on December 31, 1996. We intend to repay the bridge loan
facility with either: (i) the proceeds from an offering of Trust Originated
Preferred Securities; or (ii) a new loan, for which we have received a bank's
commitment (see "Pending Acquisitions and Financing").
In connection with the ALH Transaction, Conseco guaranteed ALH's
obligations under the senior subordinated notes due in 2004. Accordingly, such
notes were effectively converted into direct obligations of Conseco. The notes
bear interest at 11.25 percent payable semi-annually, are unsecured and rank
pari passu with other unsecured and unsubordinated debt of Conseco. These notes,
which are publicly traded on the New York Stock Exchange, are redeemable at the
option of Conseco in whole or in part, at any time on and after September 15,
1999, at specified redemption prices.
In the first quarter of 1996, Conseco acquired certain property and
casualty insurance brokerage businesses for approximately $17.0 million. These
acquisitions were funded with $12.0 million in cash and promissory notes due in
five annual installments commencing in 1997.
Notes payable of BLH (not direct obligations of Conseco)
In March 1996, BLH completed a tender offer pursuant to which it
repurchased $148.3 million principal balance of its 13 percent senior
subordinated notes for $173.2 million. The repurchased notes had a carrying
value of $157.8 million. The repurchase was made using the proceeds from a
revolving credit facility entered into in February 1996. In conjunction with the
tender offer, holders of the senior subordinated notes consented to amendments
to the indenture for such notes which eliminated substantially all restrictive
covenants of the notes, including covenants which limited BLH's ability to pay
dividends, incur additional indebtedness, repurchase its common stock and make
certain investments. Conseco's share of the extraordinary charge (net of
applicable income tax and minority interest) of $8.1 million related to the
repurchase was reported in the first quarter of 1996. During the second quarter
of 1996, BLH repurchased $.1 million par value of its 13 percent senior
subordinated notes, with no material loss realized. At September 30, 1996,
senior subordinated notes with a par value of $31.6 million remain outstanding.
BLH can borrow up to $400 million under its revolving credit facility
(including a competitive bid facility in the aggregate principal amount of up to
$100 million). Any borrowings are due in 2001 and accrue interest at a rate of
LIBOR plus an applicable margin of 50 or 75 basis points, depending on BLH's
ratio of debt to consolidated net worth. The actual weighted average rate at
September 30, 1996, was 6.0 percent. In addition to the repurchase of the 13
percent senior subordinated notes, proceeds were used to repay BLH's $110
million principal balance due under the bridge loan facility. The revolving
credit agreement contains a number of covenants, including prohibitions or
limitations on indebtedness, liens, mergers, acquisitions, sales of assets
outside of the normal course of BLH's business and certain transactions with
affiliates.
BLH borrowed $140.0 million under the revolving credit facility to finance
a portion of the ALH Transaction. At September 30, 1996, the total principal
balance borrowed under the revolving credit facility was $388.0 million.
Notes payable of American Life Holdings, Inc. (not direct obligations of
Conseco)
During the first nine months ended September 30, 1996, $2.1 million
principal amount of ALH's 6-1/4% Convertible Debentures due 2003 was converted
and redeemed, leaving $13.0 million outstanding at September 30, 1996.
CHANGES IN PREFERRED STOCK
On January 23, 1996, Conseco completed the offering of 4.37 million shares
of Preferred Redeemable Increased Dividend Equity Securities, 7% Convertible
Preferred Stock ("PRIDES"). Proceeds from the offering of $257.7 million (after
underwriting and other associated costs) were used to repay notes payable of
Conseco (see "Changes in Notes Payable"). Each share of PRIDES pays quarterly
dividends at the annual rate of 7 percent of the $61.125 liquidation preference
per share (equivalent to an annual amount of $4.279 per share). On February 1,
2000, unless either previously redeemed by Conseco or converted at the option of
the holder, each share of PRIDES will mandatorily convert into two shares of
Conseco common stock, subject to adjustment in certain events. Shares of PRIDES
are not redeemable prior to February 1, 1999. From February 1, 1999 through
February 1, 2000, the Company may redeem any or all of the outstanding shares of
PRIDES. Upon such redemption, each holder will receive, in exchange for each
12
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
share of PRIDES, the number of shares of Conseco common stock equal to (i) the
sum of (a) $62.195, declining after February 1, 1999 to $61.125, and (b) accrued
and unpaid dividends divided by (ii) the market price of Conseco common stock at
such date. In no event will a holder receive less than 1.71 shares of Conseco
common stock.
During the first nine months of 1996, 300 shares of PRIDES were converted
by holders of such shares into 513 shares of Conseco common stock.
On September 26, 1996, Conseco exercised its right to redeem the
outstanding Series D Cumulative Convertible Preferred Stock (the "Series D
Call"). A total of 6,358 Series D shares were redeemed at $52.916 per share
including $.641 per share of accrued and unpaid dividends. Holders of the
remaining 5,381,437 Series D shares elected to convert their shares into
8,441,195 shares of Conseco common stock during the third quarter of 1996.
CHANGES IN COMMON STOCK
In March 1996, Conseco implemented an option exercise program under which
its chief executive officer and four of its executive vice presidents exercised
outstanding options to purchase approximately 1.6 million shares of the
Company's common stock. The options would otherwise have remained exercisable
until the years 2000 through 2002. As a result of the exercise, the Company
realized a tax deduction equal to the aggregate tax gain recognized by the
executives as a result of the exercise. The tax benefit of $15.1 million (net of
payroll taxes incurred of $.7 million) and the exercise proceeds of $5.2 million
are reflected as increases to additional paid-in capital. The Company withheld
shares to cover federal and state taxes owed by the executives as a result of
the exercise transaction. Net of withheld shares, the Company issued
approximately .8 million shares of common stock to the executives. The Company
also granted to the executive officers new options to purchase a total of .8
million shares at $32.44 per share (the market price per share on the grant
date) to replace the shares surrendered for taxes and the exercise price.
The $26.0 million cost of the .8 million shares repurchased by Conseco in
the transaction described above was allocated to shareholders' equity accounts
as follows: (i) $3.1 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) $22.9 million to retained earnings.
During the first nine months of 1996, we issued 589,884 shares of common
stock upon the exercise of stock options, in addition to the option exercise
program described above. Proceeds from the exercise of these options of $11.1
million and the related tax benefit of $3.3 million were added to common stock
and additional paid-in capital.
During the first nine months of 1996, we issued 133,699 shares of common
stock to employee benefit plans. We also added $5.1 million to common stock and
additional paid-in capital related to employee benefit plans.
On the date of the LPG Merger, we issued 16.1 million shares of Conseco
common stock in exchange for all of the outstanding shares of LPG common stock.
CHANGES IN MINORITY INTEREST
Changes during 1996 reflect: (i) the repurchases by BLH of 1.3 million
shares of its common stock described under "Bankers Life Holding Corporation";
(ii) the ALH Transaction; and (iii) the ALH Preferred Stock Purchase. Minority
interest at September 30, 1996, included: (i) $54.6 million interest in the
common stock of BLH; (ii) $92.5 million interest in the redeemable preferred
stock of a subsidiary of ALH; and (iii) $.7 million in the common stock of a
subsidiary of ALH.
13
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in minority interest during the first nine months of 1996 and 1995
are summarized below:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Minority interest, beginning of period......................................................... $ 403.3 $ 321.7
Consolidation of CCP, effective January 1, 1995............................................. - 191.2
Changes in investments made by minority shareholders:
ALH Transaction........................................................................... (131.2) -
ALH Preferred Stock Purchase.............................................................. (12.6) -
Preferred stock of a subsidiary of ALH held by LPG at the date of the LPG Merger.......... (6.5) -
Purchase of BLH common stock by Conseco................................................... - (144.1)
Repurchase by BLH of its common stock..................................................... (18.7) (17.2)
Repurchase by CCP of its common stock..................................................... - (44.6)
Purchase of CCP common stock by Conseco in the CCP Merger................................. - (241.7)
Conseco's additional ownership interests in BLH and ALH as a result of the CCP Merger..... - (53.8)
Minority interests' equity in the change in financial position of the
Company's subsidiaries:
Net income.............................................................................. 25.8 83.8
Unrealized appreciation (depreciation) of securities.................................... (103.8) 275.4
Dividends............................................................................... (8.5) (14.0)
------- -------
Minority interest, end of period .............................................................. $ 147.8 $ 356.7
======= =======
</TABLE>
PRO FORMA DATA
The pro forma data are presented as if the following transactions, which
have already occurred, had occurred on January 1, 1995: (i) the CCP Merger; (ii)
the acquisition of additional shares of BLH common stock in 1995; (iii) the
repurchase by BLH and CCP of their common stock; (iv) the issuance of the
PRIDES; (v) the repurchase by BLH of its subordinated notes and related
financing; (vi) the ALH financing transaction completed in the fourth quarter of
1995; (vii) the LPG Merger; (viii) the Series D Call; and (ix) the ALH
Transaction.
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
1996 1995
---- ----
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues....................................................................................... $2,521.4 $2,548.2
Income before extraordinary charge............................................................. 219.9 207.4
Income before extraordinary charge per common share:
Primary..................................................................................... $ 2.85 $ 2.75
Fully diluted............................................................................... 2.79 2.74
</TABLE>
DIRECTOR, EXECUTIVE AND SENIOR OFFICER STOCK PURCHASE PLAN
In April 1996, Conseco approved a Director, Executive and Senior Officer
Stock Purchase Plan to encourage direct, long-term ownership of Conseco stock by
Board members, executive officers and certain senior officers. Under the
program, up to 2 million shares of Conseco common stock could be purchased in
open market or negotiated transactions with independent parties. Participants
could elect to purchase up to 50 percent of their participation in the form of
Conseco PRIDES. Purchases were financed by personal loans to the participants
from a bank. Such loans were secured by the Conseco stock purchased. Conseco
guaranteed the loans, but has recourse to the participants if it incurs a loss
under the guarantee. In addition, Conseco has agreed to provide loans to the
participants for interest payments under the bank loans. Directors and officers
of Conseco have purchased all 2 million shares of Conseco common stock offered
under the Plan. At September 30, 1996, the bank loans guaranteed by Conseco
totaled $83.4 million and the loans provided by Conseco totaled $.9 million.
14
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENDING ACQUISITIONS AND FINANCING
American Travellers Corporation
Conseco has agreed to acquire American Travellers Corporation ("ATC"), a
provider of long-term care insurance, for approximately $793 million in Conseco
common stock. Under the definitive agreement dated August 25, 1996, between
Conseco and ATC, each of the 18.0 million issued and outstanding shares of ATC
common stock would be converted into the right to receive a fraction of a share
of Conseco common stock having a value between $32.00 and $35.03, depending on
the average closing price of Conseco shares in the 10 trading days immediately
preceding the second trading day prior to closing. Each $1,000 principal amount
of ATC's 6-1/2 Percent Convertible Subordinated Debentures would become
convertible into shares of Conseco common stock having a value between $2,110
and $2,310, depending on the same average price. The total value of Conseco
common stock to be issued in this transaction includes $575 million to acquire
ATC outstanding common shares and $218 million when the ATC debentures are
converted. Under the agreement, ATC would be merged into Conseco. Consummation
of the ATC transaction, which is subject to customary terms and conditions,
including approval by the stockholders of both ATC and Conseco and regulatory
approvals, is expected by the end of the fourth quarter of 1996.
Capitol American Financial Corporation
Conseco has agreed to acquire Capitol American Financial Corporation
("CAF"), a provider of cancer insurance and other supplemental health insurance
products, for approximately $650 million in cash and Conseco common stock. Under
the definitive agreement dated August 25, 1996, between Conseco and CAF, each of
the 17.8 million issued and outstanding shares of CAF common stock would be
converted into the right to receive $30.00 in cash and $6.50 of Conseco common
stock. The $680 million total value of the transaction includes $534 million in
cash, $116 million in Conseco stock and $30 million of CAF debt being assumed by
Conseco. Under the agreement, CAF would be merged into Conseco. Consummation of
the transaction, which is subject to customary terms and conditions, including
approval by the stockholders of CAF and regulatory approvals, is expected by the
end of the fourth quarter of 1996.
Transport Holdings Inc.
On September 26, 1996, Conseco announced an agreement under which Conseco
will acquire Transport Holdings Inc. ("THI"), a provider of cancer insurance and
other supplemental health insurance, for $70 per share in Conseco common stock.
In the merger, each of the issued and outstanding shares of THI Class A common
stock would be converted into the right to receive the number of shares of
Conseco common stock determined by dividing $70.00 by the average closing price
of Conseco common stock during the 10 trading days immediately preceding the
second trading day prior to closing (such number to be not more than 1.8301 nor
less than 1.4000). THI's outstanding convertible debt, stock options and
warrants, when converted or exercised, would receive the same ratio of Conseco
common shares. The total value of the transaction would be $311 million,
including: (i) $228 million to purchase THI's 3.2 million common shares and
equivalents; and (ii) $83 million to retire bank debt and preferred stock.
Consummation of the THI transaction, which is subject to customary terms and
conditions, including approval by THI shareholders and regulatory approvals, is
expected by the end of 1996. Under the merger agreement, THI would be merged
into Conseco, with Conseco being the surviving corporation.
Trust Originated Preferred Securities
On November 8, 1996, Conseco announced that Conseco Financing Trust I, a
subsidiary trust of Conseco, intends to offer 8 million Trust Originated
Preferred Securities, which have a liquidation amount of $25 per preferred
security. The preferred securities will be fully and unconditionally guaranteed
by Conseco.
Commitments for Senior Credit Facility
Conseco has received a commitment from a syndicate of banks, pursuant to
which the banks have agreed to provide Conseco with a $1.8 billion revolving
credit facility. Such credit facility would include two tranches: tranche A, a
$1.4 billion five year revolving credit facility; and tranche B, a $.4 billion
one year revolving credit facility.
15
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Proceeds from the credit facility would be used to consolidate Conseco's
current bank credit facilities, finance a portion of the cash required to
complete the pending acquisitions referred to above and for other general
corporate purposes.
16
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
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
1996 and 1995 are largely affected by the transactions described in the
accompanying notes to the consolidated financial statements and the notes to the
consolidated financial statements included in our 1995 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 primarily by operating life insurance companies
and providing services to affiliates and non-affiliates for fees. In the past,
we were also active in acquiring and restructuring life insurance companies in
partnership with other investors, but we announced in March 1996 that this
activity would cease with the termination of Partnership II.
In 1996, we changed the way we allocate certain expenses to our
subsidiaries. Accordingly, prior period segment results have been restated to
reflect the change. Such restatement had no effect on consolidated operating
earnings or net income.
17
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
The following table shows the sources of Conseco's net income (after taxes
and minority interest):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Life insurance operations:
Senior market operations:
Operating earnings ............................................... $26.0 $ 19.7 $ 79.4 $ 46.7
Net trading income (losses)....................................... .4 (.2) (.8) .9
Net realized gains................................................ .2 .5 .1 2.1
Extraordinary charge.............................................. - - (8.1) -
----- ------ ------- -------
Net income...................................................... 26.6 20.0 70.6 49.7
----- ------ ------- -------
Annuity operations:
Operating earnings ............................................... 24.1 10.5 56.1 23.7
Net trading income (losses)....................................... .1 (.4) (1.6) .8
Net realized gains................................................ .7 .6 .6 4.8
Extraordinary charge.............................................. (.3) - (.3) -
----- ------ ------- -------
Net income...................................................... 24.6 10.7 54.8 29.3
----- ------ ------- -------
LPG life insurance operations:
Operating earnings................................................ 19.4 - 19.4 -
Net trading losses................................................ (.2) - (.2) -
Net realized losses............................................... (1.1) - (1.1) -
Extraordinary charge.............................................. (.3) - (.3) -
----- ------ ------- -------
Net income...................................................... 17.8 - 17.8 -
----- ------ ------- -------
Other life insurance operations:
Operating earnings ............................................... 3.8 2.5 10.4 8.9
Net trading losses................................................ (.4) (.6) (1.0) (1.2)
Net realized losses............................................... - (.3) (.2) (1.1)
----- ------ ------- -------
Net income...................................................... 3.4 1.6 9.2 6.6
----- ------ ------- -------
Total from life insurance operations:
Operating earnings ................................................. 73.3 32.7 165.3 79.3
Net trading income (losses)......................................... (.1) (1.2) (3.6) .5
Net realized gains (losses)......................................... (.2) .8 (.6) 5.8
Extraordinary charge................................................ (.6) - (8.7) -
----- ------ ------- -------
Net income...................................................... 72.4 32.3 152.4 85.6
----- ------ ------- -------
Fee-based operations................................................... 11.9 11.0 32.4 33.7
----- ------ ------- -------
Restructuring activities............................................... - 8.4 17.7 74.9
----- ------ ------- -------
Interest and other:
Interest expense on notes payable................................... (12.8) (9.5) (33.4) (18.3)
Net operating revenue (expense) .................................... 7.2 2.9 17.5 (5.4)
Net trading losses.................................................. - (.8) (.6) (1.0)
Net realized losses................................................. - (.8) (1.6) (1.7)
Extraordinary charge................................................ (.6) - (9.9) -
----- ------ ------- -------
Net loss........................................................ (6.2) (8.2) (28.0) (26.4)
----- ------ ------- -------
Consolidated earnings:
Operating earnings ................................................. 79.6 37.1 181.8 89.3
Net trading losses.................................................. (.1) (2.0) (4.2) (.5)
Net realized gains (losses)......................................... (.2) - (2.2) 4.1
Restructuring income ............................................... - 8.4 17.7 74.9
Extraordinary charge................................................ (1.2) - (18.6) -
----- ------ ------- -------
Net income...................................................... $78.1 $ 43.5 $ 174.5 $ 167.8
===== ====== ======= =======
</TABLE>
18
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
The following table shows the sources of Conseco's fully diluted earnings
per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Life insurance operations:
Senior market operations:
Operating earnings ............................................... $ .34 $ .38 $1.18 $ .90
Net trading income (losses)....................................... - - (.01) .02
Net realized gains................................................ - .01 - .04
Extraordinary charge.............................................. - - (.12) -
----- ------ ------ -----
Net income...................................................... .34 .39 1.05 .96
----- ------ ------ -----
Annuity operations:
Operating earnings ............................................... .30 .20 .83 .45
Net trading income (losses)....................................... - (.01) (.02) .01
Net realized gains................................................ .01 .01 - .09
----- ------ ------ -----
Net income...................................................... .31 .20 .81 .55
----- ------ ------ -----
LPG life insurance operations:
Operating earnings................................................ .25 - .29 -
Net trading losses................................................ - - (.01) -
Net realized losses............................................... (.01) - (.01) -
Extraordinary charge.............................................. (.01) - (.01) -
------ ------ ------ -----
Net income...................................................... .23 - .26 -
------ ------ ------ -----
Other life insurance operations:
Operating earnings ............................................... .04 .05 .15 .17
Net trading losses................................................ - (.01) (.01) (.02)
Net realized losses............................................... - - - (.02)
------ ------ ------ -----
Net income...................................................... .04 .04 .14 .13
------ ------ ------ -----
Total from life insurance operations:
Operating earnings ................................................. .93 .63 2.45 1.52
Net trading income (losses)......................................... - (.02) (.05) .01
Net realized gains (losses)......................................... - .02 (.01) .11
Extraordinary charge................................................ (.01) - (.13) -
------ ------ ------ -----
Net income...................................................... .92 .63 2.26 1.64
------ ------ ------ -----
Fee-based operations................................................... .15 .22 .48 .65
------ ------ ------ -----
Restructuring activities............................................... - .16 .26 1.44
------ ------ ------ -----
Interest and other:
Interest expense on notes payable................................... (.16) (.18) (.49) (.35)
Net operating revenue (expense) .................................... .09 .05 .26 (.11)
Net trading losses.................................................. - (.02) (.01) (.02)
Net realized losses................................................. - (.02) (.02) (.03)
Extraordinary charge................................................ (.01) - (.15) -
------ ------ ------ -----
Net loss........................................................ (.08) (.17) (.41) (.51)
------ ------ ------ -----
Consolidated earnings:
Operating earnings ................................................. 1.01 .72 2.70 1.71
Net trading losses.................................................. - (.04) (.06) (.01)
Net realized gains (losses)......................................... - - (.03) .08
Restructuring income ............................................... - .16 .26 1.44
Extraordinary charge................................................ (.02) - (.28) -
------ ------ ------ -----
Net income...................................................... $ .99 $ .84 $ 2.59 $3.22
===== ====== ====== =====
</TABLE>
19
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Additional Discussion of Consolidated Statement of Operations for the First Nine
Months of 1996 Compared to the First Nine Months of 1995 and the Third Quarter
of 1996 Compared to the Third Quarter of 1995:
The following tables and narratives summarize amounts reported in the
consolidated statement of operations. Many of the changes from period to period
resulted from changes in Conseco's ownership in BLH and CCP.
Life Insurance Operations:
Senior Market Operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................................. $317.8 $316.5 $ 961.8 $ 937.3
Investment activity:
Net investment income ............................................ 65.2 61.2 190.9 185.2
Net trading income (losses)....................................... .6 (.4) (1.4) 2.2
Net realized gains................................................ .7 1.1 5.9 12.0
Other income (loss)................................................. (.6) .6 - 3.3
Total revenues......................................................... 383.7 379.0 1,157.2 1,140.0
Benefits and expenses:
Insurance policy benefits and change in future policy benefits ..... 230.4 236.4 718.2 713.6
Interest expense on annuities and financial products................ 20.5 19.0 60.8 57.0
Interest expense on notes payable................................... 5.5 7.5 18.1 23.0
Interest expense on investment borrowings........................... 1.8 1.0 4.1 4.4
Amortization related to operations.................................. 34.4 31.4 90.0 92.4
Amortization related to realized gains.............................. .2 .1 5.6 6.7
Other operating costs and expenses ................................. 41.0 43.2 115.7 121.3
Income before taxes, minority interest and extraordinary charge........ 49.9 40.4 144.7 121.6
Income tax expense..................................................... 20.2 15.5 57.0 46.1
Income before minority interest and extraordinary charge............... 29.7 24.9 87.7 75.5
Minority interest...................................................... 3.1 4.9 9.0 25.8
Income before extraordinary charge..................................... 26.6 20.0 78.7 49.7
Extraordinary charge................................................... - - 8.1 -
Net income............................................................. 26.6 20.0 70.6 49.7
Summarized by component, all net of applicable expenses, taxes
and minority interest:
Operating earnings................................................ 26.0 19.7 79.4 46.7
Net trading income (losses)....................................... .4 (.2) (.8) .9
Net realized gains................................................ .2 .5 .1 2.1
Extraordinary charge.............................................. - - (8.1) -
Net income........................................................ 26.6 20.0 70.6 49.7
</TABLE>
General. Senior market operations consist of the activities of BLH. During
the first half of 1995, Conseco acquired 12.8 million common shares of BLH at a
cost of $262.4 million. During the 12 months ended March 31, 1996, BLH acquired
3.5 million shares of its common stock at a cost of $69.8 million. These
transactions increased Conseco's average ownership interest in BLH to 69.7
percent and 90.4 percent for the first nine months of 1995 and 1996,
respectively. All activities of BLH are included in Conseco's financial
statements on a consolidated basis. Conseco's minority interest adjustment,
however, removes the portion of BLH's net income applicable to other owners.
20
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
At September 30, 1996, the BLH shares owned by Conseco had a net carrying
value of $959.6 million, a fair value of $1,088.6 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, which were largely offset by the
anticipated decrease in comprehensive major medical product premiums resulting
from prior steps taken to improve the profitability of this product.
Net investment income in the third quarter of 1996 increased 6.5 percent
over 1995, to $65.2 million. Average invested assets (amortized cost basis)
increased to $3.5 billion in the third quarter of 1996, from $3.3 billion in
1995, while the yield earned on average invested assets increased to 7.4 percent
from 7.2 percent. Net investment income in the first nine months of 1996
increased 3.1 percent over 1995, to $190.9 million. Average invested assets
(amortized cost basis) increased to $3.5 billion in the first nine months of
1996 from $3.4 billion in 1995 while the yield earned on average invested assets
declined to 7.3 percent from 7.4 percent. Invested assets grew primarily as a
result of operations.
Net realized gains and net trading income (losses) often fluctuate from
period to period. BLH sold $1.9 billion of investments (principally fixed
maturity investments) in the first nine months of 1996, compared to $.7 billion
in 1995, which sales resulted in net realized gains of $5.9 million and trading
losses of $1.4 million in 1996, compared to net realized gains of $18.0 million
and trading income of $2.2 million in 1995. Net realized gains during the first
nine months of 1995 also reflected realized losses of $2.2 million on the
writedown of certain exchange-rate linked securities as a result of foreign
currency fluctuations and a $3.8 million writedown of a corporate security as a
result of changes in conditions which caused BLH to conclude that a decline in
the fair value of the security was other than temporary. There were no such
writedowns in the first nine months of 1996.
Selling securities at a gain and reinvesting the proceeds at a lower yield
may, absent other management action, tend to decrease future investment yields.
However, the following factors would mitigate the adverse effect of such
decreases on net income: (i) BLH recognizes additional amortization of the cost
of policies purchased and the cost of policies produced in the same period as
the gain in order to reflect reduced future yields, thereby reducing such
amortization in future periods (see amortization related to realized gains
below); (ii) BLH can reduce interest rates credited to some products, thereby
diminishing the effect of the yield decrease on the investment spread; and (iii)
the investment portfolio grows as a result of reinvesting the realized gains.
Insurance policy benefits and change in future policy benefits in the third
quarter of 1996 decreased 2.5 percent from 1995, to $230.4 million. In the first
nine months of 1996, this account increased .6 percent over 1995, to $718.2
million. Such changes reflect the increased amount of business in force on which
benefits are incurred and the improved loss experience in the Medicare
supplement line during 1996.
Interest expense on annuities and financial products in the third quarter
of 1996 increased 7.9 percent over 1995, to $20.5 million. In the first nine
months of 1996, this account increased 6.7 percent over 1995, to $60.8 million.
Such increase reflects the increase in annuity liabilities resulting from
increased annuity deposits. The weighted average crediting rate for BLH's
annuity liabilities, excluding interest bonuses guaranteed for the first year of
the annuity contract, was 5.5 percent at September 30, 1996 and 1995.
Interest expense on notes payable in the third quarter of 1996 decreased 27
percent from 1995, to $5.5 million. In the first nine months of 1996, this
account decreased 21 percent from 1995, to $18.1 million. Such decrease reflects
the reduction in interest expense resulting from the repurchase of $148.3
million principal balance of BLH's 13 percent senior subordinated notes in March
1996 using the proceeds from BLH's revolving credit facility. The weighted
average interest rate on borrowings under the revolving credit facility was 6.0
percent for the first nine months of 1996.
Interest expense on investment borrowings did not fluctuate materially in
the 1996 and 1995 nine month periods. BLH's average investment borrowings were
$102.7 million and $106.3 million during the first nine months of 1996 and 1995,
respectively, and interest rates paid on such borrowings during these periods
were comparable.
21
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Amortization related to operations (consisting of amortization of the cost
of policies purchased, the cost of policies produced and goodwill) in the third
quarter of 1996 increased 9.6 percent over 1995, to $34.4 million, and in the
first nine months of 1996 decreased 2.6 percent from 1995, to $90.0 million.
Amortization related to operations in 1996 reflects the use of the step-basis
method of purchase accounting to account for the additional purchases of BLH
common stock. Such method results in different amortization assumptions and
bases for the cost of policies purchased and goodwill acquired in each
acquisition.
Cost of policies produced represents the cost of producing new business
(primarily commissions and certain costs of policy issuance and underwriting)
which varies with and is primarily related to the production of new business.
Costs deferred may represent amounts paid in the period new business is written
(such as underwriting costs and first year commissions) or in periods after the
business is written (such as commissions paid in subsequent years in excess of
ultimate commissions paid).
Cost of policies purchased represents the portion of Conseco's cost to
acquire BLH that is attributable to the right to receive cash flows from
insurance contracts in force at the acquisition dates. We expensed some costs
incurred subsequent to our purchases on policies issued prior to such dates,
which otherwise would have been deferred had it not been for our purchases
(because they vary with and are primarily related to the production of the
acquired interests in policies). Such costs are primarily comprised of certain
commissions paid in excess of ultimate commissions which totaled approximately
$5.3 million and have been expensed as operating expense in the nine months
ended September 30, 1996. However, such amounts were considered in determining
the cost of policies purchased and its amortization.
Amortization related to realized gains fluctuates as a result of the change
in realized gains discussed above.
Other operating costs and expenses in the third quarter of 1996 decreased
5.1 percent from 1995, to $41.0 million, and in the first nine months of 1996
decreased 4.6 percent from 1995, to $115.7 million. Such decrease was primarily
due to the expensing of commissions on policies issued prior to the 1995 and
1996 acquisitions of Conseco's ownership interest (see amortization related to
operations). Prior to these acquisitions, such commissions described above were
capitalized as costs of policies produced.
Income tax expense in the 1996 periods increased primarily due to the
increase in pretax income. The effective tax rates of 39 percent for 1996 and 38
percent for 1995 exceeded the statutory corporate income tax rate (35 percent)
primarily because goodwill amortization is not deductible for federal income tax
purposes.
Minority interest decreased due to the increase in Conseco's ownership
interest in BLH.
Extraordinary charge in 1996 represents the loss recognized on the early
extinguishment of $148.3 million principal balance of BLH's 13 percent senior
subordinated notes.
22
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Annuity Operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................................. $ 36.0 $ 43.9 $109.4 $128.0
Investment activity:
Net investment income............................................. 202.7 210.8 603.1 608.6
Net trading income (losses)....................................... 1.1 (.7) (2.3) 3.8
Net realized gains................................................ 6.8 5.7 14.3 72.7
Total revenues......................................................... 247.7 261.2 728.3 818.0
Benefits and expenses:
Insurance policy benefits and change in future policy benefits...... 21.2 30.2 61.2 82.4
Interest expense on annuities and financial products................ 120.7 126.1 358.8 361.8
Interest expense on notes payable................................... 10.4 11.1 31.6 39.0
Interest expense on investment borrowings........................... 4.2 4.6 10.2 14.7
Amortization related to operations ................................. 25.8 21.0 66.8 62.0
Amortization related to realized gains.............................. 2.9 3.0 9.5 40.4
Other operating costs and expenses.................................. 26.9 26.3 75.5 73.5
Income before taxes and minority interest.............................. 35.6 38.9 114.7 144.2
Income tax expense .................................................... 9.6 14.1 41.5 56.9
Income before minority interest........................................ 26.0 24.8 73.2 87.3
Minority interest...................................................... 1.1 14.1 18.1 58.0
Extraordinary charge................................................... .3 - .3 -
Net income............................................................. 24.6 10.7 54.8 29.3
Summarized by component, all net of applicable expenses, taxes,
and minority interest:
Operating earnings................................................ 24.1 10.5 56.1 23.7
Net trading income (losses)....................................... .1 (.4) (1.6) .8
Net realized gains................................................ .7 .6 .6 4.8
Extraordinary charge.............................................. (.3) - (.3) -
Net income ....................................................... 24.6 10.7 54.8 29.3
</TABLE>
General. The annuity operations include earnings from the former CCP
subsidiaries, Beneficial Standard Life Insurance Company and Great American
Reserve Insurance Company, and ALH. After the CCP Merger in August 1995, the CCP
subsidiaries became wholly owned subsidiaries of Conseco. Conseco's consolidated
statement of operations reflects a 49 percent ownership interest of the CCP
companies for the first six months of 1995, a 66 percent ownership interest for
the third quarter of 1995 and 100 percent ownership for the 1996 periods.
Conseco's consolidated statement of operations reflects a 25 percent ownership
interest in ALH in the first quarter of 1995, a 26 percent ownership interest in
the second quarter of 1995, a 30 percent ownership interest in the third quarter
of 1995, a 36 percent ownership interest in the first six months of 1996 and a
38 percent ownership interest in the third quarter of 1996. The minority
interest adjustment removes from Conseco's net income the portion applicable to
other owners.
Insurance policy income, which consists of premiums received on traditional
life insurance products and policy fund and surrender charges assessed against
investment type products, decreased 15 percent to $109.4 million in 1996 and
decreased 18 percent to $36.0 million in the third quarter of 1996 as a result
of a reduction in premiums on policies with mortality or morbidity risks
partially offset by an increase in surrender charges earned on annuity policy
withdrawals. Such charges were $23.8 million in the first nine months of 1996
compared to $18.6 million in 1995; and were $8.0 million in the third quarter of
1996 compared to $6.3 million in 1995. Annuity policy withdrawals were $292.5
million in the third quarter of 1996 compared to $249.5 million in 1995. Such
withdrawals were $877.8 million in the first nine months of 1996 compared to
$820.0 million in 1995.
Net investment income includes both income earned on the general invested
assets of the annuity operations and separate account assets related to variable
annuities. Investment income earned on separate account assets is offset by a
corresponding charge to interest expense on annuities and financial products.
Excluding investment income on separate accounts, net investment income in the
third quarter of 1996 decreased 4.5 percent from 1995, to $194.8 million and in
the first nine months of 1996 decreased 2.3
23
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
percent from 1995, to $583.9 million. Average invested assets, excluding
separate accounts, increased to $9.7 billion in the third quarter of 1996, from
$9.4 billion in the third quarter of 1995, while the yield earned on invested
assets declined to 8.1 percent from 8.7 percent. Average invested assets
(amortized cost basis) increased to $9.7 billion in the first nine months of
1996 from $9.5 billion in 1995, while the yield earned on average invested
assets decreased to 8.1 percent from 8.6 percent. Cash flows received during
1995 and the first nine months of 1996 (including cash flows from the sales of
investments) were invested in lower-yielding securities due to a general decline
in interest rates.
Net investment income on separate account assets in the third quarter of
1996 increased to $7.9 million from $6.8 million in 1995 and in the first nine
months of 1996 increased to $19.2 million from $10.8 million in 1995.
Net realized gains often fluctuate from period to period. The annuity
operations sold $2.7 million of actively managed fixed maturities in the first
nine months of 1996 compared to $2.6 billion in 1995, which sales resulted in
net realized gains of $14.3 million and trading losses of $2.3 million in the
1996 period compared to net realized gains of $81.1 million and $3.8 million of
trading income in the 1995 period. Net realized gains during the first nine
months of 1995 also reflected realized losses of $.2 million on the writedown of
an exchange-rate linked security as a result of foreign currency fluctuations
and an $8.2 million writedown of a corporate security as a result of conditions
which caused annuity operations to conclude that a decline in the fair value of
the security was other than temporary.
Additional amortization of the cost of policies purchased and the cost of
policies produced is recognized in the same period as realized gains in order to
reflect reduced future yields, thereby reducing such amortization in future
periods (see amortization related to realized gains (losses) below).
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality or morbidity features. The decrease in 1996
corresponds with the decrease in the in-force block of such policies and the
reinsuring of group life insurance business of ALH to an unaffiliated company at
the end of 1995.
Interest expense on annuities and financial products in the third quarter
of 1996 decreased 4.3 percent from 1995, to $120.7 million, and in the first
nine months for 1996 decreased .8 percent from 1995, to $358.8 million. Such
decreases reflect: (i) lower crediting rates and (ii) the expensing in 1995 of
first-year interest rate bonuses of approximately $5.9 million on policies
issued prior to ALH's acquisition date as a result of the application of
purchase accounting. Prior to the acquisition of ALH, such interest rate bonuses
were capitalized as a cost of policies produced. The decreases described above
were partially offset by increases to the variable annuity liabilities and the
related investment income from separate account assets as described above under
net investment income. The weighted average crediting rates for annuity
liabilities (other than separate accounts where the credited amount is based on
investment income from the segregated investments and excluding interest bonuses
guaranteed for the first year of the annuity contract) were 5.1 percent and 5.4
percent at September 30, 1996 and 1995, respectively.
Interest expense on notes payable in the third quarter of 1996 decreased
6.3 percent from 1995, to $10.4 million, and in the first nine months of 1996
decreased 19 percent from 1995, to $31.6 million. Such decrease reflects: (i)
scheduled and unscheduled reductions in outstanding indebtedness of the annuity
operations and lower interest rates on such borrowings; and (ii) the changes in
the debt of the annuity operations resulting from the CCP Merger. In the first
nine months of 1996, interest expense includes $10.2 million related to CCP debt
due to another subsidiary of Conseco. Such interest expense is reflected as
investment income in the "Interest and Other" segment and is eliminated in
consolidation. In the first nine months of 1995, interest expense includes $14.0
million interest related to $200 million of 10.5 percent senior notes issued by
CCP in December 1994. After the CCP Merger, these notes became a direct
obligation of Conseco and the related interest expense is recorded in the
"Interest and Other" segment.
Interest expense on investment borrowings decreased during the 1996 periods
primarily due to a decrease in investment borrowing activities. Average
investment borrowings of the annuity operations were $254.2 million and $325.5
million during the first nine months of 1996 and 1995, respectively.
24
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Amortization related to operations in the third quarter of 1996 increased
23 percent over 1995, to $25.8 million and in the first nine months of 1996
increased 7.7 percent over 1995, to $66.8 million. Amortization related to
operations in 1996 reflects the use of the step-basis method of purchase
accounting for the additional purchase of CCP common stock. In addition, the
higher amortization reflects the increase in the amount of business in-force
issued.
Amortization related to realized gains (losses) fluctuates as a result of
the change in realized gains discussed above.
Income tax expense decreased in the third quarter of 1996 primarily due to
the release of $2.2 million of deferred income taxes previously accrued on
income related to ALH. Such deferred tax is no longer required because the ALH
transaction was completed without incurring this tax.
Extraordinary charge in the 1996 period represents the loss recognized on
the repayment of the $125.0 million principal amount outstanding under the
senior credit facility of ALH.
Minority interest in the 1996 period is reduced by $10.2 million as a
result of provisions of the Partnership II Agreement, which provide for an
additional ownership interest in ALH to be allocated to the general partner
(Conseco) when returns to the limited partners exceed prescribed targets (see
"Acquisition of American Life Holdings, Inc." in the notes to the consolidated
financial statements). The $10.2 million reduction represents Conseco's
increased ownership interest in the previously reported net income of ALH as a
result of the termination of Partnership II. Minority interest in both 1996 and
1995 include: (i) dividends on preferred stock of a subsidiary of ALH; (ii)
dividends on preferred stock of ALH issued to finance a portion of the
Acquisition; and (iii) the portion of earnings applicable to ALH minority common
shareholders. CCP's minority interest was eliminated after the CCP Merger.
25
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
LPG Life Insurance Operations:
<TABLE>
<CAPTION>
As included
in Conseco's
consolidated
financial Prior to acquisition
statements (prior basis)
---------- --------------------
Three months Three months Six months Nine months
ended ended ended ended
September 30, September 30, June 30, September 30,
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income.................................... $ 81.9 $ 78.8 $155.8 $215.7
Investment activity:
Net investment income ................................... 77.0 72.4 148.3 211.4
Net trading losses....................................... (.3) - - -
Net realized gains (losses).............................. (1.7) 11.9 2.3 14.3
Total revenues................................................ 157.7 164.1 309.0 444.3
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits.......................................... 55.7 43.3 83.0 134.4
Interest expense on annuities and financial products....... 38.3 37.1 75.1 101.0
Interest expense on notes payable.......................... 6.8 9.7 11.8 21.7
Interest expense on investment borrowings.................. .2 2.1 2.1 6.1
Amortization related to operations......................... 8.8 28.5 65.6 68.7
Amortization related to realized gains (losses)............ - (.2) .1 (.7)
Other operating costs and expenses......................... 17.8 20.4 35.9 72.3
Income before taxes and minority interest..................... 30.1 23.2 27.5 40.8
Income tax expense............................................ 12.0 8.4 11.6 14.7
Income before minority interest............................... 18.1 14.8 15.9 26.1
Extraordinary charge.......................................... .3 - - -
Net income.................................................... 17.8 14.8 15.9 26.1
Summarized by component, all net of applicable expenses
and taxes:
Operating earnings ...................................... 19.4 6.9 14.5 16.3
Net trading losses....................................... (.2) - - -
Net realized gains (losses).............................. (1.1) 7.9 1.4 9.8
Extraordinary charge..................................... (.3) - - -
Net income .............................................. 17.8 14.8 15.9 26.1
</TABLE>
General. LPG life insurance operations include earnings from LPG and its
four principal life insurance subsidiaries. After the LPG Merger, LPG is a
wholly owned subsidiary of Conseco. Conseco accounted for the LPG Merger as a
purchase. As a result, financial data for periods subsequent to July 1, 1996,
reflect purchase accounting and, accordingly, data for the periods prior to the
LPG Merger may not be comparable with data for the third quarter of 1996.
Significant accounting adjustments recorded as a result of the adoption of the
new basis are described in the notes to the consolidated financial statements.
Operating data for the nine months ended September 30, 1996, are presented
in two periods: the six months ended June 30, 1996, (the period prior to the
adoption of a new basis of accounting) and the three months ended September 30,
1996.
26
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Insurance policy income consists of premiums received on traditional life
insurance products, mortality charges and administrative fees earned on
universal life insurance products and policy fund and surrender charges assessed
against investment-type products. In the third quarter of 1996, this account
increased 3.9 percent from 1995, to $81.9 million, and in the first nine months
of 1996 increased 10 percent from 1995, to $237.7 million. Such increases
reflect the growth in the universal life in-force block of business.
Net investment income in the third quarter of 1996 increased 6.4 percent
from 1995, to $77.0 million. Average invested assets (amortized cost basis) were
$3.9 billion in the third quarter of both 1996 and 1995 while the yield earned
on average invested assets increased to 7.9 percent in 1996 from 6.9 percent in
1995. Such amounts reflect the effect of purchase accounting to record the LPG
Merger.
Interest expense on annuities and financial products in the third quarter
of 1996 increased 3.2 percent from 1995, to $38.3 million. The increase in the
1996 period reflects growth in the in-force block of annuities through
operations.
Interest expense on notes payable decreased 30 percent to $6.8 million in
the third quarter of 1996 primarily due to the repayment in the third quarter of
1996, of $148.7 million principal amount outstanding under LPG's bank credit
facility.
Interest expense on investment borrowings fluctuates based on investment
borrowing activities.
Amortization related to operations in the third quarter of 1996 reflects
the effect of purchase accounting to record the LPG Merger. Amortization related
to operations in 1996 consists of amortization of goodwill, the cost of policies
purchased for business in force at July 1, 1996, and the cost of policies
produced subsequent to July 1, 1996.
Income tax expense in the third quarter of 1996 increased 44 percent from
1995, to $12.0 million, primarily due to the increase in pretax income. The
effective tax rates of 40 percent for 1996 and 36 percent for 1995 exceeded the
statutory corporate tax rate (35 percent) primarily because goodwill
amortization cannot be deducted for federal income tax purposes.
27
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Other Life Insurance Operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income............................................. $12.1 $12.7 $36.1 $38.0
Investment activity:
Net investment income............................................. 18.0 19.1 53.3 53.7
Net trading losses................................................ (.6) (.8) (1.5) (1.6)
Net realized gains (losses)....................................... .3 (2.3) .2 (4.4)
Total revenues......................................................... 29.8 28.7 88.1 85.8
Benefits and expenses:
Insurance policy benefits and change in future policy benefits...... 14.5 17.5 43.2 47.3
Interest expense on annuities and financial products................ 5.2 5.2 16.5 14.0
Amortization related to operations.................................. 1.2 1.3 3.6 3.7
Amortization related to realized gains (losses)..................... .2 (1.8) .5 (2.5)
Other operating costs and expenses.................................. 3.0 3.8 9.4 12.1
Income before taxes ................................................... 5.5 2.7 15.0 11.7
Income tax expense .................................................... 2.1 1.1 5.8 5.1
Net income............................................................. 3.4 1.6 9.2 6.6
Summarized by component, all net of applicable expenses and taxes:
Operating earnings ............................................... 3.8 2.5 10.4 8.9
Net trading losses................................................ (.4) (.6) (1.0) (1.2)
Net realized losses............................................... - (.3) (.2) (1.1)
Net income ....................................................... 3.4 1.6 9.2 6.6
</TABLE>
General. Other life insurance operations include Conseco's other wholly
owned life insurance companies, Bankers National Life Insurance Company,
National Fidelity Life Insurance Company and Lincoln American Life Insurance
Company.
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 and average invested assets of this segment did not
change materially in 1996. Net investment income in 1996 reflects: (i) a
decrease in income from other invested assets, offset by (ii) an increase in
investment income related to separate account activities (which was $9.3 million
and $6.6 million in the first nine months of 1996 and 1995, respectively, and is
offset by a corresponding charge to interest expense on annuities and financial
products).
Net realized gains (losses) often fluctuate from period to period. The
other life insurance operations sold $76.5 million and $40.0 million of fixed
maturity investments in the third quarter of 1996 and 1995, respectively, and
$213.2 million and $74.2 million in the first nine months of 1996 and 1995,
respectively. Net realized losses in the 1995 periods included a $1.5 million
writedown of corporate securities as a result of conditions which caused the
Company to conclude that a decline in the fair value of the securities was other
than temporary.
Insurance policy benefits and change in future policy benefits relate
solely to policies with mortality and morbidity features. These benefits
decreased in 1996 as a result of improved mortality experience.
Interest expense on annuities and financial products increased in 1996
primarily as a result of increased charges related to investment income from
separate accounts (see net investment income), offset by a reduction in credited
rates. The average rate credited on all insurance liabilities (other than
separate accounts where the credited amount is based on investment income from
the segregated investments) was approximately 6.8 percent and 7.0 percent at
September 30, 1996 and 1995, respectively.
28
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Fee-Based Operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Investment management............................................... $ 11.3 $ 11.2 $ 33.2 $ 33.9
Commissions......................................................... 6.3 3.7 19.2 9.4
Administrative services, net of directly related expenses........... 15.0 11.9 34.4 35.7
Total revenues......................................................... 32.6 26.8 86.8 79.0
Less intercompany eliminations......................................... (23.0) (18.8) (57.1) (55.4)
Revenues reported...................................................... 9.6 8.0 29.7 23.6
Net income attributable to:
Investment management............................................... 4.2 5.1 12.8 15.6
Commissions......................................................... (1.2) (.9) (2.0) (2.3)
Administrative services............................................. 8.9 6.8 21.6 20.4
Net income............................................................. 11.9 11.0 32.4 33.7
</TABLE>
Conseco's fee revenues include: (i) fees for investment management and
mortgage origination and servicing; (ii) commissions earned for insurance and
investment product marketing and distribution; and (iii) administrative fees for
policy administration, data processing, product marketing and executive
management services. Fees earned from services provided to consolidated entities
are eliminated. Commission revenues increased in 1996 primarily due to the
acquisition of certain property and casualty insurance brokerage businesses.
29
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Restructuring Activities:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Incentive earnings.................................................. $11.1 $ - $11.1 $ -
Gain on sale of investment in Noble Broadcast Group, Inc............ - - 30.4 -
Non-recurring restructuring charges................................. (11.1) - (12.5) -
Income tax expense (benefit)........................................ - (8.4) 12.2 (74.9)
Minority interest................................................... - - .5 -
Net income.......................................................... - 8.4 17.7 74.9
</TABLE>
The Partnership II Agreement provided that Conseco's ownership interest in
ALH would increase if returns to the limited partners were in excess of
prescribed targets. The termination of Partnership II caused such targets to be
exceeded, resulting in incentive earnings of $11.1 million (see "Acquisition of
American Life Holdings, Inc." in the notes to the consolidated financial
statements).
Restructuring income in the first nine months of 1996 also included a gain
from the sale of Conseco's investment in Noble Broadcast Group, Inc. ("Noble").
Such gain represents an annualized pre-tax return of approximately 230 percent.
Conseco acquired an interest in Noble (a private company which owned and
operated radio stations) in 1995 in return for providing Noble with $37 million
of subordinated debt financing. Income tax expense was reduced by $8.4 million
in the third quarter of 1995, and 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 CCP and BLH, respectively.
Non-recurring restructuring expenses were incurred primarily in conjunction
with the consolidation of LPG's and ALH's operations with Conseco's home office
operations.
Interest and Other:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Net investment income.................................................. $11.8 $ 3.4 $20.3 $ 6.7
Total revenues......................................................... 11.8 .9 21.2 2.6
Interest expense on notes payable...................................... 19.7 14.6 51.4 28.1
Other expenses......................................................... .1 2.0 2.4 18.8
Income tax benefit..................................................... 2.5 7.5 14.5 17.9
Loss before extraordinary charge....................................... 5.5 8.2 18.1 26.4
Extraordinary charge on extinguishment of debt ........................ (.6) - (9.9) -
Net loss ............................................................. 6.2 8.2 28.0 26.4
</TABLE>
The "Interest and Other" segment primarily includes investment income
earned on the investments of the holding companies and financing costs for debt
on which Conseco is directly liable.
Net investment income increased in the 1996 periods as a result of interest
on a surplus debenture receivable from a former CCP subsidiary which is
eliminated in consolidation.
Interest expense on notes payable increased in the first nine months of
1996 as a result of: (i) borrowings under the Credit Agreement used to finance
the CCP Merger and the purchase of additional shares of BLH; (ii) interest
expense on the $200 million 10.5 percent senior notes issued by CCP, which
became a direct obligation of Conseco at the CCP Merger date; (iii) borrowings
under the Credit Agreement and the new bridge loan used to finance a portion of
the ALH Transaction and the ALH Capital Contribution; and (iv) borrowings under
the Credit Agreement used to repay amounts borrowed under LPG's former bank
credit facility.
30
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SALES
In accordance with generally accepted accounting principles, the insurance
policy income shown on our consolidated statement of operations consists of
premiums we receive on policies which have life contingencies or morbidity
features. For annuity and universal life contracts without such features,
accounting rules dictate that premiums collected are not reported as revenues,
but rather as deposits to insurance liabilities. We recognize revenues for these
products over time in the form of investment income and surrender or other
charges.
Total premium collections by the companies in which Conseco has ownership
interests were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Senior market operations............................................... $378.6 $357.7 $1,136.5 $1,143.7
Annuity operations..................................................... 322.5 304.6 1,028.7 1,204.3
LPG life insurance operations.......................................... 149.3 144.0 453.6 410.4
Other life insurance operations........................................ 16.5 19.3 54.0 59.2
------ ------ -------- --------
Total premium collections.................................... $866.9 $825.6 $2,672.8 $2,817.6
====== ====== ======== ========
</TABLE>
Premiums collected by senior market operations for the third quarter of
1996 were $378.6 million, of which $64.8 million were recorded as deposits to
policy liability accounts. This compares to $357.7 million collected and $58.6
million recorded as deposits to policy liability accounts in the third quarter
of 1995. Premiums collected by BLH for the first nine months of 1996 were
$1,136.5 million, of which $175.9 million were recorded as deposits to policy
liability accounts. This compares to $1,143.7 million collected and $215.4
million recorded as deposits to policy liability accounts in the first nine
months of 1995. Collected premiums by type were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Individual health:
Medicare supplement............................................... $150.3 $135.3 $ 463.0 $ 441.2
Long-term care ................................................... 49.3 39.7 142.2 116.9
Other............................................................. 18.9 21.8 59.1 71.9
------ ------ -------- --------
Total individual health....................................... 218.5 196.8 664.3 630.0
Annuities........................................................... 60.4 57.6 169.0 208.2
Individual life..................................................... 24.8 23.2 73.3 71.5
Group and other..................................................... 74.9 80.1 229.9 234.0
------ ------ -------- --------
Total......................................................... $378.6 $357.7 $1,136.5 $1,143.7
====== ====== ======== ========
</TABLE>
Medicare supplement premiums increased 11 percent in the third quarter of
1996 and increased 4.9 percent in the first nine months of 1996 compared to the
same periods in 1995. Such premiums accounted for 41 percent of total collected
premiums in 1996, compared to 39 percent in 1995. The number of new Medicare
supplement policies sold in the first nine months of 1996 totaled 33,777, down
30 percent compared to the first nine months of 1995. Annualized new business
premiums from such new sales totaled $32.8 million in the first nine months of
1996, compared to $43.4 million in the first nine months of 1995. The decline in
new Medicare supplement premiums reflects continued price competition and
efforts by BLH's agents to conserve existing policies.
31
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Long-term care premiums increased 24 percent in the third quarter of 1996
and 22 percent in the first nine months of 1996, compared to the same periods in
1995. Such premiums accounted for 13 percent of total collected premiums in
1996, compared to 10 percent in 1995. The continued growth in this product line
reflects new product introductions, the competitiveness of BLH's products, the
success of agent cross-selling activities, increased consumer awareness and
demand and improved persistency on a larger basis of renewal premiums.
Annualized premiums from new sales were $32.1 million in the first nine months
of 1996, up 9.2 percent over the same period in 1995.
Annuity premiums increased 4.9 percent in the third quarter of 1996 and
decreased 19 percent in the first nine months of 1996 compared to the same
periods in 1995. Annuity sales throughout the industry have been negatively
affected during the past several quarters by relatively lower interest rates,
which have increased the attractiveness of competing products.
Collected premiums for other individual health policies decreased 13
percent in the third quarter of 1996 and decreased 18 percent in the first nine
months of 1996, compared to the same periods in 1995. The decrease, which was
anticipated, follows steps taken previously to improve the profitability of the
comprehensive major medical product included in this category.
Premiums collected by the annuity operations in the first nine months of
1996 were $1,028.7 million, of which $931.2 million were recorded as deposits to
insurance liability accounts. This compares to $1,204.3 million collected and
$1,129.1 million recorded as deposits to insurance liability accounts in the
first nine months of 1995. Total premiums collected through professional
independent producers were $819.6 million in the first nine months of 1996, a 16
percent decrease, and comprised 80 percent of collected premiums. Total premiums
collected through educator market specialists were $207.6 million in the first
nine months of 1996, an 8.7 percent decrease, and comprised 20 percent of
collected premiums. Total premiums collected through other distribution channels
were $1.5 million in the first nine months of 1996, compared to $2.1 million in
1995.
Premiums collected by LPG life insurance operations in the first nine
months of 1996 were $453.6 million, of which $394.4 million were recorded as
deposits to policy liability accounts. This compares to $410.4 million collected
and $347.7 million recorded as deposits to policy liability accounts in the
first nine months of 1995. Premiums collected by LPG in the third quarter of
1996 were $149.3 million, of which $129.3 million were recorded as deposits to
policy liability accounts. This compares to $144.0 million collected and $121.1
million recorded as deposits to liability accounts in the third quarter of 1995.
Collected premiums by type were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Universal life....................................... $ 86.8 $ 87.5 $262.5 $240.8
Individual whole and term life....................... 10.4 10.6 35.8 33.9
Accident and health.................................. 5.7 8.2 14.4 17.7
Annuities............................................ 46.4 37.7 140.9 118.0
------ ------ ------- ------
Total............................................ $149.3 $144.0 $453.6 $410.4
====== ====== ====== ======
</TABLE>
Premiums collected by other life insurance operations decreased 15 percent
to $16.5 million in the third quarter of 1996 and decreased 8.8 percent to $54.0
million in the first nine months of 1996 compared to the same periods in 1995.
Conseco's other wholly owned subsidiaries were not actively marketing new
products during the reported periods.
LIQUIDITY AND CAPITAL RESOURCES
Changes in the consolidated balance sheet between December 31, 1995, and
September 30, 1996, reflect growth through operations, changes in the fair value
of actively managed fixed maturity securities and the capital and financing
transactions described in the notes to the consolidated financial statements.
32
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"),
Conseco records its actively managed fixed maturity investments at estimated
fair value. At September 30, 1996, the amortized cost of such investments was
decreased by $178.2 million as a result of the SFAS 115 adjustment, compared to
an increase of $608.2 million at December 31, 1995. The change in unrealized
appreciation (depreciation) resulted from an increasing interest rate
environment in the first nine months of 1996, which generally caused the fair
value of fixed maturities to decrease.
Minority interest decreased as a result of: (i) adjustments as a result of
SFAS 115; (ii) BLH's purchases of its outstanding common stock; (iii) dividends
paid to the minority interest; (iv) the ALH Transaction; and (v) the ALH
Preferred Stock Purchase; offset by (vi) the income attributable to minority
interest. Changes to minority interest are further described in the notes to the
consolidated financial statements.
The increase in shareholders' equity in the first nine months of 1996
resulted primarily from: (i) the issuance of the PRIDES; (ii) the common stock
issued to complete the LPG Merger; (iii) the exercise of stock options; and (iv)
the increase in retained earnings attributable to the Company's operations;
partially offset by (v) the change in unrealized appreciation (depreciation) to
reflect the decrease in the estimated fair value of Conseco's actively managed
fixed maturity securities and (vi) stock repurchases.
Dividends declared on common stock for the nine months ended September 30,
1996, were $.1025 per share. On August 8, 1996, the Company's Board of Directors
increased the quarterly cash dividend to be paid on October 1, 1996 from 2 cents
per share to 6-1/4 cents per share.
The following table summarizes book value per common share and certain
financial ratios as of and for the nine months ended September 30, 1996, and the
year ended December 31, 1995:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
Book value per common share:
As reported........................................................................ $25.22 $20.44
Excluding unrealized appreciation (depreciation) (a)............................... 25.92 17.66
Pro forma (a), (b)................................................................. 26.90
Ratio of earnings to fixed charges:
As reported........................................................................ 1.61X 1.57X
Excluding interest on annuities and financial products............................. 4.32X 3.80X
Ratio of earnings to fixed charges and preferred dividends:
As reported........................................................................ 1.48X 1.50X
Excluding interest on annuities and financial products............................. 2.97X 3.06X
Ratio of statutory earnings to cash interest (c)...................................... 4.11X 3.79X
Ratio of debt for which Conseco is directly liable to total capital of Conseco
only:
As reported........................................................................ .36X .44X
Excluding unrealized appreciation (depreciation) (a)............................... .36X .47X
Ratio of debt for which Conseco is directly liable and debt of BLH to total
capital of Conseco and BLH:
As reported...................................................................... .43X .50X
Excluding unrealized appreciation (depreciation) (a)............................. .42X .52X
Ratio of total debt to total capital:
As reported........................................................................ .43X .49X
Excluding unrealized appreciation (depreciation) (a)............................... .43X .53X
33
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
<FN>
(a) Excludes the effect of reporting fixed maturity securities at fair value.
(b) Pro forma book value per share at September 30, 1996, is presented as if
the PRIDES were converted into Conseco common stock as of that date.
(c) Statutory earnings represent gain from operations before interest (except
interest on annuities and financial products) and income tax of the
consolidated life insurance subsidiaries as reported for statutory
accounting purposes plus income before interest and income tax of all
non-life companies. Cash interest includes interest, except interest on
annuities and financial products, of Conseco and the consolidated
subsidiaries and BLH that is required to be paid in cash.
</FN>
</TABLE>
INVESTMENTS
At September 30, 1996, the amortized cost and estimated fair value of fixed
maturity securities (all of which were actively managed) were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations of United
States government corporations and agencies.................... $ 279.3 $ 2.6 $ 3.1 $ 278.8
Obligations of states and political subdivisions and foreign
government obligations.......................................... 219.2 2.5 3.5 218.2
Public utility securities.......................................... 2,237.6 19.8 62.4 2,195.0
Other corporate securities......................................... 8,489.1 66.3 158.7 8,396.7
Mortgage-backed securities......................................... 4,912.8 29.1 70.8 4,871.1
--------- -------- ------- ---------
Total fixed maturity securities .......................... $16,138.0 $120.3 $298.5 $15,959.8
========= ====== ====== =========
</TABLE>
The following table sets forth the investment ratings of fixed maturity
securities at September 30, 1996 (designated categories include securities with
"+" or "-" rating modifiers). The category assigned is the highest rating by a
nationally recognized statistical rating organization, or as to $541.9 million
fair value of fixed maturities not rated by such firms, the rating assigned by
the National Association of Insurance Commissioners ("NAIC"). For purposes of
the table, NAIC Class 1 securities are included in the "A" rating; Class 2,
"BBB"; Class 3, "BB" and Classes 4 to 6, "B and below."
<TABLE>
<CAPTION>
Percent of
Investment ------------------------------------
rating Fixed maturities Total investments
------- ---------------- -----------------
<S> <C> <C>
AAA................................... 35% 30%
AA.................................... 10 9
A..................................... 25 22
BBB................................... 25 22
--- --
Investment grade............... 95 83
--- --
BB.................................... 3 3
B and below........................... 2 2
--- ---
Below investment grade......... 5 5
--- ---
Total fixed maturities......... 100% 88%
=== ==
</TABLE>
34
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
At September 30, 1996, our below investment grade fixed maturity securities
had an amortized cost of $910.4 million and an estimated fair value of $886.5
million.
During the first nine months of 1995, we recorded writedowns of fixed
maturity securities of $15.9 million as a result of changes in conditions which
caused us to conclude that a decline in fair value of the investments was other
than temporary. There were no such writedowns in 1996. At September 30, 1996,
fixed maturity securities in default as to the payment of principal or interest
had an aggregate amortized cost of $7.2 million and a fair value of $7.6
million.
Sales of invested assets (primarily fixed maturity securities) during the
first nine months of 1996 generated proceeds of $5.0 billion, net realized gains
of $16.3 million and net trading losses of $6.5 million. Sales of invested
assets during the first nine months of 1995 generated proceeds of $3.4 billion,
net realized gains of $93.7 million and net trading income of $2.8 million.
At September 30, 1996, fixed maturity investments included $4.9 billion (or
31 percent of all fixed maturity securities) of mortgage-backed securities, of
which $2.6 billion were collateralized mortgage obligations ("CMOs") and $2.3
billion 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 retirement of principal on a pro rata basis, such as occurs on
pass-through securities through regular monthly principal payments.
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 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 on the
securities backed by these loans, increase when prevailing interest rates
decline 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. Mortgage-backed
securities purchased at a premium to par that prepay faster than expected will
incur a reduction in yield. When interest rates decline, the proceeds from
prepayments are likely to be reinvested at lower rates than the Company was
earning on the prepaid securities. As interest rates rise, prepayments decrease
(because fewer underlying mortgages are refinanced). When this occurs, the
average maturity and duration of the mortgage-backed securities increase. This
lowers the yield on mortgage-backed securities purchased at a discount, since
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 the annual
amortization of the premium.
35
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities including CMOs at September 30, 1996,
summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent ............................................................... $1,713.1 $1,642.5 $1,611.7
7 percent - 8 percent............................................................ 2,418.6 2,339.8 2,328.6
8 percent - 9 percent............................................................ 566.5 557.9 557.7
9 percent and above.............................................................. 369.7 372.6 373.1
-------- -------- --------
Total mortgage-backed securities.................................... $5,067.9 $4,912.8 $4,871.1
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at September 30, 1996, summarized by type of security, were as
follows (dollars in millions):
<TABLE>
<CAPTION>
Estimated fair value
--------------------
Percent
Amortized of fixed
Type cost Amount maturities
- ---- ---- ------ ----------
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes................... $3,435.2 $3,401.4 22%
Support classes.................................................................. 205.9 211.0 2
Accrual (Z tranche) bonds........................................................ 48.8 49.4 -
Planned amortization classes and accretion directed bonds........................ 858.0 844.6 5
Subordinated classes ............................................................ 364.9 364.7 2
--------- -------- ---
$4,912.8 $4,871.1 31%
======== ======== ==
</TABLE>
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs have historically provided the best
liquidity in the mortgage-backed securities market and the best
price/performance ratio when interest rates are volatile. This type of security
is also frequently used as collateral in the dollar roll market. Sequential
classes pay in a strict sequence; all principal payments received by the CMO are
paid to the sequential tranches in order of priority. Targeted amortization
classes provide a modest amount of prepayment protection when prepayments on the
underlying collateral increase from the levels assumed at pricing; they thus
offer slightly better call protection than sequential classes or pass-throughs.
Planned amortization and targeted amortization classes are protected from
prepayment risk; this risk is absorbed by support classes. As such, support
classes are usually extremely sensitive to prepayments. Most of the support
classes we own are higher- average-life instruments whose duration generally
will not lengthen if interest rates rise further and will tend to shorten if
interest rates decline. Since the par value of these bonds is in excess of
amortized cost, higher prepayments will have the effect of increasing income.
Accrual bonds are CMOs structured such that the payment of coupon interest
is deferred until principal payments begin. 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 like
zero coupon bonds until cash payments begin. Cash payments typically do not
commence until earlier classes in the CMO structure have been retired, the
timing of which can be significantly influenced by the prepayment experience of
the underlying mortgage loan collateral. 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 are other CMOs, pass-through securities or coupon bonds.
Planned amortization classes and accretion-directed bonds are some of the
most stable and liquid instruments in the mortgage-backed securities market.
Planned amortization class bonds adhere to a fixed schedule of principal
payments, provided that the underlying mortgage collateral prepays within an
expected range. Changes in prepayment rates are first absorbed by support
classes,
36
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
which insulate the planned amortization classes from the consequences of both
faster prepayments (average life shortening) and slower prepayments (average
life extension).
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to lend credit enhancement to the senior
securities and as such, both prepayment and credit risk associated with this
class are generally higher than that of the senior securities. The credit risk
of subordinated classes is derived from the negative leverage of owning a small
percentage of the underlying mortgage loan collateral while bearing a majority
of the risk of loss due to homeowners' defaults.
At September 30, 1996, the balance of mortgage loans was comprised of 89
percent commercial loans, 9 percent residential and 2 percent residual interests
in collateralized mortgage obligations. Less than 1 percent of mortgage loans
were noncurrent (loans which are two or more scheduled payments past due) at
September 30, 1996. At September 30, 1996, our loan loss reserve was $4.3
million.
Investment borrowings averaged approximately $371.6 million during the
first nine months of 1996, compared to approximately $460 million during the
same period of 1995. Such borrowings were collateralized by investment
securities with fair values approximately equal to the loan value. The weighted
average interest rate on such borrowings was 5.4 percent and 5.6 percent during
the first nine months of 1996 and 1995, respectively.
STATUTORY INFORMATION
Our insurance subsidiaries are required to follow statutory accounting
practices ("SAP") prescribed or permitted by state insurance regulators. SAP
differs in many respects from generally accepted accounting principles ("GAAP").
After appropriate eliminations of intercompany accounts, the Company's life
insurance subsidiaries reported the following amounts to regulatory agencies at
September 30, 1996 (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Statutory capital and surplus ............................. $1,021.3
Asset valuation reserve ("AVR")............................ 214.7
Interest maintenance reserve ("IMR")....................... 258.5
Portion of surplus debenture carried as a liability ....... 87.8
--------
Total................................................... $1,582.3
========
</TABLE>
At September 30, 1996, the ratio of such consolidated statutory account
balances to consolidated statutory liabilities (excluding AVR, IMR, the portion
of surplus debentures carried as a liability, liabilities from separate account
business and short-term collateralized borrowings) was 9.4 percent, compared to
a ratio of 10.2 percent at December 31, 1995. Decreases to such accounts due to
payments made by the life insurance subsidiaries to non-life parent companies in
1996 (including dividend payments of $72.4 million and surplus debenture
payments of $62.8 million) were largely offset by statutory earnings of such
life insurance subsidiaries. The inclusion of LPG's insurance subsidiaries after
the date of the LPG Merger was the primary reason for the decrease in such
ratio.
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 $400.0 million at September 30, 1996, 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 provided the surplus of BLI exceeds, after
such payment, approximately $128.0 million. BLI's surplus at September 30, 1996,
was $339.3 million. During the first nine months of 1996, BLI made a scheduled
principal payment on the surplus debenture of $30.0 million plus accrued
interest. All dividend payments by BLI are subject to prior written approval of
the DOI. During the first nine months of 1996, BLI paid extraordinary dividends
of $35.0 million to BLH.
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 and Casualty Company ("BLC"). BLC may, upon prior
notice to the DOI, pay dividends in any twelve-month period up to the greater
of: (i) statutory income from operations for the prior year; or (ii) 10 percent
37
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
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 greater than twice its total RBC
at September 30, 1996. Dividends in excess of maximum amounts prescribed by the
state statutes may not be paid without DOI approval. BLC paid regular dividends
to BLI of $59.6 million during the first nine months of 1996. During the
remainder of 1996, BLC may pay additional dividends up to $26.4 million without
regulatory approval.
During the first nine months of 1996, the wholly owned life insurance
subsidiaries paid $37.4 million of ordinary dividends and made a scheduled
principal payment on a surplus debenture of $29.0 million to Conseco. During the
remainder of 1996, the wholly owned insurance subsidiaries may pay additional
dividends up to $60.5 million without the permission of state regulatory
authorities.
At the date of the LPG Merger, the capital of Wabash Life Insurance Company
(a life insurance subsidiary of LPG and the parent of LPG's other life insurance
subsidiaries, "Wabash") included two surplus debentures with an unpaid principal
balance of $257.9 million. Wabash made scheduled principal payments of $3.8
million plus accrued interest on the surplus debentures during the three months
ended September 30, 1996.
Statutory regulations restrict the amount of capital and surplus of life
insurance subsidiaries that may be transferred to the parent in the form of
dividends, loans or advances. Payments to LPG by Wabash of principal and
interest on the surplus debentures may be made by Wabash from its available
funds only when the Kentucky Department of Insurance is satisfied that the
financial condition of Wabash warrants that action. Additionally, under the
terms of the surplus debentures, payments of principal and interest may be made
only to the extent the statutory capital and surplus of Wabash exceeds 25
percent of statutory liabilities exclusive of the surplus debentures. Wabash's
statutory surplus at September 30, 1996, was $191.7 million, which exceeded the
minimum required capital and surplus by $101.9 million.
The surplus of ALH's primary life insurance subsidiary, American Life and
Casualty Insurance Company ("American Life and Casualty"), includes a surplus
note with a balance of $50.0 million at September 30, 1996. The payment of
dividends and other distributions, including surplus note payments, by American
Life and Casualty to ALH is subject to regulation by the Iowa Insurance
Division. Currently, American Life and Casualty may pay dividends or make other
distributions without the prior approval of the Iowa Insurance Division, unless
such payments, together with all other such payments within the preceding 12
months, exceed the greater of (i) American Life and Casualty's net gain from
operations (excluding net realized capital gains or losses) for the preceding
calendar year or (ii) 10 percent of its statutory surplus at the preceding
December 31. For 1996, up to $31.0 million can be distributed as dividends and
surplus note payments by American Life and Casualty (of which $9.8 million had
been distributed through September 30, 1996). Dividends and surplus note
payments may be made only out of earned surplus, and all surplus note payments
are subject to prior approval by the Iowa Insurance Division. At September 30,
1996, American Life and Casualty had earned surplus of $113.2 million.
38
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
10.8.13 Form of Promissory Note payable to the Registrant relating
to the Registrant's Director, Executive and Senior Officer
Stock Purchase Plan.
10.39 $100,000,000 Promissory Note of Conseco, Inc. dated
September 30, 1996 ("Bridge Facility") was filed as Exhibit
10.1 to the Registration Statement on Form S-3 (No.
333-14991) and is incorporated herein by reference.
10.40 Waiver of NationsBank, N.A. (South), dated November 6, 1996,
under the Bridge Facility was filed as Exhibit 10.2 to the
Registration Statement on Form S-3 (No. 333-14991) and is
incorporated herein by reference.
10.41 Waiver of the banks, dated November 6, 1996, under the
Conseco, Inc. $500 million Senior Credit Facility was filed
as Exhibit 10.3 to the Registration Statement on Form S-3
(No. 333-14991) and is incorporated herein by reference.
10.42 Commitment Letter dated September 13, 1996, by and among
Conseco, Inc., NationsBank, N.A. and NationsBank Capital
Markets, Inc. was filed as Exhibit 10.4 to the Registration
Statement on Form S-3 (No. 333-14991) and is incorporated
herein by reference.
11.1 Computation of Earnings Per Share - Primary.
11.2 Computation of Earnings Per Share - Fully Diluted.
12.1 Computation of Ratio of Earnings to Fixed Charges.
27.0 Financial Data Schedule.
99.1 Pro Forma Consolidated Statement of Operations of Conseco,
Inc. and Subsidiaries for transactions that have already
occurred.
99.2 Pro Forma Consolidated Financial Statements of Conseco, Inc.
and Subsidiaries.
b) Reports on Form 8-K.
A report on Form 8-K dated August 2, 1996, was filed with the
Commission to report under Item 2, the acquisition of Life Partners
Group, Inc.
A report on Form 8-K dated August 25,1996, was filed with the
Commission to report under Item 5, the following events: (i) the
signing of a definitive merger agreement with American Travellers
Corporation; (ii) the signing of a definitive merger agreement with
Capitol American Financial Corporation; (iii) the intention to
acquire the common stock of American Life Holdings, Inc. not already
owned by Conseco; (iv) the intention to acquire the common stock of
Bankers Life Holding Corporation not already owned; and (v) the call
for redemption of all of Conseco's outstanding Series D Cumulative
Convertible Preferred Stock.
A report on Form 8-K dated September 25, 1996, was filed with the
Commission to report under Item 5, the following events: (i) the
signing of a merger agreement with Transport Holdings Inc.; (ii) the
redemption of Conseco's Series D Cumulative Convertible Preferred
Stock; and (iii) the completion of the acquisition of all of the
common shares of American Life Holdings, Inc. not already owned by
Conseco.
39
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSECO, INC.
Dated: November 13, 1996 By: /s/ ROLLIN M. DICK
------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
40
EXPLANATORY NOTE
In connection with the Conseco, Inc. Director, Executive and Senior
Officer Stock Purchase Plan (the "Plan"), Conseco, Inc. agreed to lend to
participants in the Plan an amount equal to the interest payable by participants
under bank loans made to each participant (less dividends paid on the shares of
stock purchased under the Plan). The form of Promissory Note executed by each
participant is attached. As of October 1, 1996, the aggregate amount of the
loans made by Conseco to Plan participants was $905,947.28, and the amounts of
the loans made to directors and executive officers (or their affiliates) of the
Registrant were as follows: Stephen C. Hilbert, $298,060; Ngaire E. Cuneo,
$45,168; Rollin M. Dick, $180,643; Donald F. Gongaware, $90,321; Lawrence W.
Inlow, $90,951; David R. Decatur, $9,431; James D. Massey, $23,262; and Dennis
E. Murray, Sr., $103,869.
G:\LEGAL\RRD\MISCELLA\10QEX108.13
<PAGE>
PROMISSORY NOTE
$1~ Dated: June 28, 1996
Carmel, Indiana
For value received, the undersigned, 2~ ("Maker"), promises to pay to
the order of Conseco Services, LLC, an Indiana limited liability company (the
"Holder"), or its assigns, at such place as the holder hereof may from time to
time designate in writing, in lawful money of the United States which shall be
legal tender in payment of all debts and dues public and private at the time of
payment, the principal sum of 3~ ($1~) or, if less, the aggregate unpaid
principal amount of all advances made by Conseco Services, LLC to or on behalf
of the undersigned to pay interest under the Credit Agreement referred to below.
The undersigned also promises to pay interest on the unpaid balance of the
Promissory Note (the "Note") at the rate and times hereinafter provided.
Interest on the principal balance hereof from time to time remaining
unpaid prior to maturity shall accrue at the variable rate per annum equal to
the lowest interest rate per annum being paid by Conseco, Inc. under its most
senior borrowing, calculated on the basis of a 360-day year counting the actual
number of days elapsed. However, after the Maturity Date (as hereinafter
defined) or while there exists an Event of Default (as hereinafter defined),
interest shall accrue at such rate plus three percent (3.0%) per annum. All
unpaid principal and interest shall be due and payable on the same date as the
principal amounts are due and payable by the undersigned for any loan under that
certain Credit Agreement,
G:\LEGAL\PROMNOTE\CNCSTOCK.DOC
<PAGE>
dated as of May 13, 1996, among the undersigned and Bank of America National
Trust and Savings Association. Prepayments of principal and interest must be
made in an amount equal to the amount of any dividends received on the common
and preferred stock purchased by the undersigned under the Conseco, Inc.
Director, Executive and Senior Officer Stock Purchase Plan and within three (3)
days of the receipt of such dividends.
Maker may prepay this Note in full at any time or in part from time to
time without premium or penalty.
The occurrence of one or more of the following events shall constitute
an event of default ("Event of Default") under this Note: (a) default is made in
the payment of any installment hereof, either principal or interest, or in the
payment of any other sum due hereunder, on the day when the same shall be due
and payable hereunder and such default in payment continues for ten (10) days;
(b) any proceeding shall be commenced or any petition shall be filed seeking
relief with respect to Maker under any bankruptcy, insolvency or similar law;
(c) a receiver, trustee, custodian, sequestrator or similar official shall be
appointed with respect to Maker or for a substantial part of its property; or
(d) the dissolution or termination of existence, or business failure of Maker.
Upon the occurrence of an Event of Default hereunder, the Holder hereof may, at
its option, declare the entire unpaid principal of and accrued interest on this
Note immediately due and payable, without notice, demand or presentment, all of
which are hereby waived, and the Holder may offset against this Note any sum
G:\LEGAL\PROMNOTE\CNCSTOCK.DOC
<PAGE>
or sums owed by the Holder hereof to Maker. Upon the occurrence of an Event of
Default under Section (b), (c) or (d) above, the entire unpaid principal of and
accrued interest on this Note shall become immediately due and payable, without
notice, demand or presentment, all of which are hereby waived. The Holder may
offset against this Note any sum or sums owed by the Holder hereof to Maker
including any amounts Holder may owe Maker as an employee, and Maker hereby
authorizes Holder to withhold any such amounts from any payroll deposit or
paycheck payable to Maker.
Maker agrees to pay immediately upon demand all reasonable costs and
expenses of the Holder, including reasonable attorneys' fees, (i) if, after an
Event of Default, this Note is placed in the hands of an attorney or attorneys
for collection, or (ii) if the Holder attempts to have any stay or injunction
prohibiting the enforcement or collection of the Note lifted by any bankruptcy
or other court, and any subsequent proceedings or appeals from any order or
judgment entered in any such proceeding.
The maker and any endorsers of this note jointly and severally waive
presentment for payment, notice of protest, dishonor and demand, protest, and
diligence in bringing suit.
This Note shall be construed according to and governed by the laws of
the State of Indiana.
Executed in Carmel, Indiana.
2~
G:\LEGAL\PROMNOTE\CNCSTOCK.DOC
<TABLE>
<CAPTION>
EXHIBIT 11.1
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding, beginning of period.......................... 41,866,624 40,422,498 40,515,914 44,369,700
Weighted average shares issued (acquired) during the period:
New shares issued............................................. 16,090,989 - 5,363,663 -
Treasury stock acquired....................................... (7,992) - (589,950) (3,685,028)
Exercise of stock options..................................... 156,387 25,660 1,281,506 83,634
Preferred stock conversions................................... 1,802,132 - 860,631 -
Common equivalent shares related to:
Stock options at average market price ...................... 3,093,340 1,439,812 2,585,119 1,396,478
Employee stock plans ....................................... 1,111,842 910,436 1,057,862 869,864
PRIDES...................................................... 7,472,187 - 6,870,504 -
---------- ---------- ---------- ----------
Weighted average primary shares outstanding...................... 71,585,509 42,798,406 57,945,249 43,034,648
========== ========== ========== ==========
Net income for primary earnings per share:
Net income as reported....................................... $78,078,000 $43,530,000 $174,487,000 $167,821,000
Less Series D preferred stock dividends..................... (790,000) (4,607,000) (9,807,000) (13,820,000)
----------- ----------- ------------ ------------
Net income for primary earnings per share........................ $77,288,000 $38,923,000 $164,680,000 $154,001,000
=========== =========== ============ ============
Net income per primary common share.............................. $1.08 $.91 $2.84 $3.58
===== ==== ===== =====
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11.2
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average primary shares outstanding.................... 71,585,509 42,798,406 57,945,249 43,034,648
Incremental common equivalent shares:
Related to options and employee stock plans based
on market price at the end of the period.................. 796,958 33,800 1,392,285 127,544
Related to Series D convertible preferred stock............. 6,647,844 8,893,530 8,032,461 8,893,530
----------- ----------- ----------- -----------
Weighted average fully diluted shares outstanding............. 79,030,311 51,725,736 67,369,995 52,055,722
========== ========== ========== ==========
Net income for fully diluted earnings per share................ $78,078,000 $43,530,000 $174,487,000 $167,821,000
=========== =========== ============ ============
Net income per fully diluted common share...................... $.99 $.84 $2.59 $3.22
==== ==== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-Q FOR CONSECO,
INC. DATED SEPTEMBER 30, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 15,959,800
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 104,200
<MORTGAGE> 766,300 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 18,080,000
<CASH> 0
<RECOVER-REINSURE> 400,600
<DEFERRED-ACQUISITION> 2,388,100 <F2>
<TOTAL-ASSETS> 23,176,000
<POLICY-LOSSES> 17,247,800
<UNEARNED-PREMIUMS> 204,300
<POLICY-OTHER> 305,700
<POLICY-HOLDER-FUNDS> 392,900
<NOTES-PAYABLE> 1,600,100 <F3>
0
267,100
<COMMON> 1,054,500
<OTHER-SE> 634,300 <F4>
<TOTAL-LIABILITY-AND-EQUITY> 23,176,000
1,193,200
<INVESTMENT-INCOME> 926,700
<INVESTMENT-GAINS> 9,800 <F5>
<OTHER-INCOME> 68,900 <F6>
<BENEFITS> 1,348,600 <F7>
<UNDERWRITING-AMORTIZATION> 161,700 <F8>
<UNDERWRITING-OTHER> 207,600
<INCOME-PRETAX> 353,000
<INCOME-TAX> 134,100
<INCOME-CONTINUING> 218,900
<DISCONTINUED> 0
<EXTRAORDINARY> (18,600)
<CHANGES> 0
<NET-INCOME> 174,500
<EPS-PRIMARY> 2.84
<EPS-DILUTED> 2.59
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $372,500 of mortgage loans and $393,800 of credit-tenant loans.
<F2> Includes $541,000 of cost of policies produced and $1,847,100 of cost of policies
purchased.
<F3> Includes (i) notes payable of Conseco of $1,169,000 and (ii) notes payable of
Bankers Life Holding Corporation of $418,100 and American Life Holdings, Inc.
of $13,000 which are not direct obligations of Conseco.
<F4> Includes retained earnings of $681,300, offset by net unrealized depreciation
of securities of $47,000.
<F5> Includes net realized gains of $16,300 and net trading losses of $6,500.
<F6> Includes fee revenue of $29,700, restructuring income of $30,400 and other
income of $8,800.
<F7> Includes insurance policy benefits of $858,300, change in future policy
benefits of $15,900 and interest expense on annuities and financial products
of $474,400.
<F8> Includes amortization of cost of policies purchased of $94,300, amortization of
cost of policies produced of $51,800 and amortization related to realized gains
of $15,600.
</FN>
</TABLE>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The unaudited pro forma consolidated statement of operations of Conseco,
Inc. ("Conseco") for the nine months ended September 30, 1996, presents the
consolidated operating results for Conseco as if the following transactions,
which have already occurred, had occurred on January 1, 1995: (1) the issuance
of 4.37 million shares of Preferred Redeemable Increased Dividend Equity
Securities Convertible Preferred Stock ("PRIDES") of Conseco in January 1996;
(2) the BLH tender offer for and repurchase of its 13 percent senior
subordinated notes due 2002 and related financing transactions completed in
March 1996 (the "BLH Tender Offer"); (3) the acquisition of Life Partners Group,
Inc. ("LPG") (the "LPG Merger"); (4) the call for redemption of Conseco's Series
D Convertible Preferred Stock (the "Series D Call") completed on September 26,
1996; and (5) the acquisition of all of the outstanding common stock of American
Life Holdings, Inc. ("ALH"), not previously owned by Conseco, and related
transactions (the "ALH Transaction") completed on September 30, 1996.
The pro forma consolidated statement of operations is based on the
historical financial statements of Conseco and LPG and should be read in
conjunction with their historical financial statements and notes included in
Conseco's Form 10-Q for the quarterly period ended September 30, 1996. The pro
forma data are not necessarily indicative of the results of operations or
financial condition of Conseco had these transactions occurred on January 1,
1995, nor the results of future operations. Conseco anticipates cost savings and
additional benefits as a result of the transactions included in the pro forma
financial statements. Such benefits and any other changes that might have
resulted from managements' changes have not been included as adjustments to the
pro forma consolidated financial statements. Certain amounts from the prior
periods have been reclassified to conform to the current presentation.
The unaudited pro forma consolidated statement of operations reflects cost
allocations for the LPG Merger and the ALH Transaction using estimated values of
the assets and liabilities of LPG and ALH as of the assumed acquisition date
based on appraisals and other studies, which are not yet complete. Accordingly,
the final allocations will be different than the amounts included in the
accompanying pro forma consolidated financial statements. Although the final
allocations will differ, the pro forma consolidated statement of operations
reflects management's best estimate based on currently available information as
if the LPG Merger and the ALH Transaction had occurred on the assumed date of
acquisition.
1
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
adjustments LPG Pro forma
reflecting historical adjustments
various Conseco at reflecting Conseco
Conseco other pro forma June 30, the LPG pro forma
as reported transactions subtotal 1996 Merger subtotals(a)
----------- ------------ --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,193.2 $ - $1,193.2 $155.8 $ - $1,349.0
Investment activity:
Net investment income 926.7 926.7 148.3 7.4 (6) 1,083.8
(.2)(7)
2.2 (8)
(.6)(9)
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 16.3 16.3 2.3 1.9 (6) 20.5
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 8.8 8.8 2.6 11.4
-------- ------- -------- -------- ------- --------
Total revenues 2,198.6 2,198.6 309.0 10.7 2,518.3
-------- ------- -------- -------- ------- --------
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 874.2 874.2 83.0 957.2
Interest expense on annuities and financial
products 474.4 474.4 75.1 549.5
Interest expense on notes payable 84.6 (1.2)(1) 81.8 11.8 (.6)(9) 92.6
(1.6)(2) (.4)(10)
Interest expense on investment borrowings 15.1 15.1 2.1 17.2
Amortization related to operations 174.1 174.1 65.6 (2.4)(11) 242.9
5.6 (12)
Amortization related to realized gains 15.6 15.6 0.1 1.8 (13) 17.5
Acquisition and merger expenses - 7.9 (7.9)(14) -
Other operating costs and expenses 207.6 207.6 35.9 243.5
-------- ------- -------- -------- ------- --------
Total benefits and expenses 1,845.6 (2.8) 1,842.8 281.5 (3.9) 2,120.4
-------- ------- -------- -------- ------- --------
Income before income taxes, minority
interest and extraordinary charge 353.0 2.8 355.8 27.5 14.6 397.9
Income tax expense 134.1 1.0 (3) 135.1 11.6 5.5 (15) 152.2
-------- ------- -------- -------- ------- --------
Income before minority interest
and extraordinary charge 218.9 1.8 220.7 15.9 9.1 245.7
Less minority interest 25.8 .1 (4) 25.9 25.9
-------- ------- -------- -------- ------- --------
Income before extraordinary charge $ 193.1 $ 1.7 $ 194.8 $ 15.9 $ 9.1 $ 219.8
======== ======= ======== ======== ======= ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 57.9 .6 (5) 58.5 10.7 (16) 69.2
======== ======= ======== ======= ========
Income before extraordinary charge $3.16 $3.16 $3.03
======== ======== ========
Fully diluted:
Weighted average shares outstanding 67.4 .6 (5) 68.0 10.7 (16) 78.7
======== ======= ======== ======= ========
Income before extraordinary charge $2.87 $2.86 $2.79
======== ======== ========
<FN>
(a) Amounts are carried forward to page 3.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma
Conseco adjustments Conseco adjustments Conseco
pro forma reflecting the pro forma reflecting the pro forma
subtotals(a) Series D Call subtotals ALH Transaction totals
--------- ------------ ----------- --------------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,349.0 $1,349.0 $ - $1,349.0
Investment activity:
Net investment income 1,083.8 1,083.8 0.9 (19) 1,084.4
(0.3)(20)
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 20.5 20.5 2.5 (19) 23.0
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 11.4
-------- -------- ----- --------
Total revenues 2,518.3 2,518.3 3.1 2,521.4
-------- -------- ----- --------
Benefits and expenses:
Insurance policy benefits and
change in future policy benefits 957.2 957.2 957.2
Interest expense on annuities and
financial products 549.5 549.5 549.5
Interest expense on notes payable 92.6 92.6 8.7 (20) 100.7
(.6)(21)
Interest expense on investment
borrowings 17.2 17.2 17.2
Amortization related to operations 242.9 242.9 (17.3)(19) 242.9
1.1 (19)
16.2 (19)
Amortization related to realized gains 17.5 17.5 4.8 (19) 22.3
Acquisition and merger expenses - -
Other operating costs and expenses 243.5 243.5 243.5
-------- -------- ------ --------
Total benefits and expenses 2,120.4 2,120.4 12.9 2,133.3
-------- -------- ------ --------
Income before income taxes,
minority interest and
extraordinary charge 397.9 397.9 (9.8) 388.1
Income tax expense 152.2 152.2 (1.3)(22) 147.9
(3.0)(22)
-------- -------- ------ --------
Income before minority interest
and extraordinary charge 245.7 245.7 (5.5) 240.2
Less minority interest 25.9 25.9 (5.6)(23) 20.3
-------- -------- ------ --------
Income before extraordinary
charge $ 219.8 $ 219.8 $ .1 $ 219.9
======== ======== ====== ========
Earnings per common share and common
equivalent share:
Primary:
Weighted average shares outstanding 69.2 8.0 (17) 77.2 77.2
===== ==== ===== =====
Income before extraordinary charge $3.03 $2.85 (18) $2.85
===== ===== =====
Fully diluted:
Weighted average shares outstanding 78.7 78.7 78.7
===== ===== =====
Income before extraordinary charge $2.79 $2.79 $2.79
===== ===== =====
<FN>
(a) Amounts have been carried forward from page 2.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
3
</TABLE>
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
Various Other Transactions
(1) On January 23, 1996, Conseco completed the offering of 4.37 million
shares of PRIDES. Proceeds from the offering of approximately $258
million (after underwriting and other associated costs) were used to
repay amounts outstanding under a senior credit facility (the
"Conseco Credit Facility").
Each share of PRIDES will pay dividends at the annual rate of 7
percent of the $61.125 liquidation preference per share (equivalent
to an annual amount of $4.279 per share), payable quarterly. On
February 1, 2000, unless either previously redeemed by Conseco or
converted at the option of the holder, each share of PRIDES will
mandatorily convert into two shares of Conseco common stock, subject
to adjustment in certain events. Shares of PRIDES are not redeemable
prior to February 1, 1999. During the period February 1, 1999 through
February 1, 2000, Conseco may redeem any or all of the outstanding
shares of PRIDES. Upon such redemption, each holder will receive, in
exchange for each share of PRIDES, the number of shares of Conseco
common stock equal to (A) the sum of (i) $62.195, declining after
February 1, 1999 to $61.125, and (ii) accrued and unpaid dividends
divided by (B) the market price of Conseco common stock at such date,
but in no event less than 1.71 shares of Conseco common stock. The
following summarizes the sources and uses of funds related to this
transaction (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Gross proceeds from issuance of PRIDES................................................... $267.1
Underwriting and other transaction expenses (charged to paid-in capital)................. (9.2)
----
Net proceeds..................................................................... 257.9
Uses of funds:
Principal repaid on Conseco Credit Facility.............................................. (245.0)
Payment of accrued interest.............................................................. (2.6)
----
Funds available.................................................................. $ 10.3
======
</TABLE>
Interest expense is adjusted to reflect the repayment of a portion of
the Conseco Credit Facility using a portion of the proceeds from the
issuance of the PRIDES.
(2) In March 1996, BLH completed a tender offer pursuant to which it
repurchased $148.3 million principal amount of its 13 percent senior
subordinated notes for $173.2 million. The repurchase was made using
the proceeds from a revolving credit facility of BLH (the "BLH Credit
Facility") entered into in February 1996. Maximum principal amounts
which can be borrowed under the agreement total $400 million
(including a competitive bid facility in the aggregate principal
amount of up to $100 million). Amounts borrowed under the new
facility are due in 2001 and accrue interest at a rate of LIBOR plus
an applicable margin of between 50 and 75 basis points, depending on
BLH's ratio of consolidated net worth. Additional proceeds were
borrowed under the BLH Credit Facility to repay the existing $110
million principal balance due under the bridge loan facility and for
other corporate purposes. The following summarizes the sources and
uses of funds related to the tender offer and related financing
transactions:
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Amounts borrowed under the BLH Credit Facility................................ $310.0
======
Uses of funds:
Related to 13 percent senior subordinated notes:
Principal tendered......................................................... $148.3
Premium paid in tender offer............................................... 24.8
Payment of accrued interest................................................ 6.6
Related to bridge loan facility:
Principal repaid .......................................................... 110.0
Payment of accrued interest................................................ .5
Debt issuance costs........................................................... 3.7
Other corporate purposes, including repayment
of amounts borrowed to purchase BLH common stock........................... 16.1
-------
Total uses........................................................ $310.0
======
</TABLE>
4
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Interest expense is adjusted to reflect reduced interest expense on
the $148.3 million principal balance of BLH's senior subordinated
notes which were tendered, offset by interest expense on amounts
borrowed under the BLH revolving credit facility.
(3) All pro forma adjustments to operations are tax affected based on the
appropriate rate for the specific item.
(4) The minority interests' share of the pro forma adjustments is
recognized.
(5) Primary and fully diluted weighted average shares outstanding are
adjusted to reflect the issuance of the PRIDES.
LPG Merger
The acquisition of LPG will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire LPG will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the LPG Merger, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. In the LPG Merger, each outstanding share of LPG common
stock was converted into .5833 shares of Conseco common stock. A total of 16.1
million shares of Conseco common stock (or equivalent shares) with a value of
$586.8 million were issued to complete the LPG Merger.
Adjustments to the pro forma consolidated statement of operations to give
effect to the LPG Merger as of January 1, 1995, are summarized below:
(6) Net investment income and net realized gains of LPG are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities and mortgage loans to their estimated
fair value.
(7) Net investment income is reduced for the lost interest income on cash
used to pay expenses incurred to complete the LPG Merger.
(8) After the LPG Merger, a subsidiary of Conseco will provide investment
advisory services to LPG. Investment advisory fees incurred by LPG
prior to the LPG Merger are eliminated. LPG's pro forma net
investment income is not reduced to reflect the advisory fees to be
paid under agreements with the subsidiary of Conseco since, in
accordance with generally accepted accounting principles, such
intercompany fees are eliminated in consolidation and the subsidiary
of Conseco will provide such services without incurring additional
costs.
(9) Net investment income and interest expense on notes payable are
adjusted to reflect the following items which will be eliminated in
consolidation after the LPG Merger: (i) actively managed fixed
maturity securities of Conseco include $6.3 million of LPG notes; and
(ii) actively managed fixed maturity securities of LPG include $25.1
million of Conseco notes and $4.5 million of notes of a subsidiary of
Conseco.
(10) Interest expense on notes payable of LPG is adjusted as a result of
restating notes payable of LPG to their estimated fair value and the
anticipated repayment of LPG's bank debt, using additional borrowings
from Conseco's credit facility (the "Conseco Credit Agreement").
(11) Amortization of the cost of policies produced, the historical cost of
policies purchased and deferred revenues for policies sold by LPG
prior to January 1, 1995, are replaced with the amortization of the
cost of policies purchased (amortized in relation to estimated
profits on the policies purchased with interest equal to the contract
rates primarily ranging from 4.0 percent to 7.0 percent).
(12) LPG's historical amortization of goodwill is eliminated and replaced
with the amortization of goodwill recognized in the LPG Merger. Such
amortization is recognized over a 40-year period on a straight-line
basis.
(13) Anticipated returns, including realized gains and losses, from the
investment of policyholder balances are considered in determining the
amortization of the cost of policies purchased. Amortization of the
cost of policies purchased is adjusted to reflect amortization
related to the pro forma net realized gains of LPG during 1996.
5
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(14) Acquisition and merger expenses are reduced to eliminate the merger
costs incurred by LPG during the six months ended June 30, 1996, in
connection with the LPG Merger.
(15) Reflects the tax adjustments for all applicable pro forma adjustments
at the appropriate rate for the specific item.
(16) Common shares outstanding are increased to reflect the shares issued
in the LPG Merger.
Transactions related to the Series D Call
On August 27, 1996, Conseco called for redemption all outstanding shares of
the Series D preferred stock at a redemption price plus accrued dividends of
$52.916. At June 30, 1996, Conseco had approximately 5.7 million shares of
Series D preferred stock outstanding with a carrying value of $269.4 million.
Each Series D share is convertible at any time into shares of Conseco's common
stock at a conversion price of $31.875 per common share (equivalent to 1.56860
shares of Conseco's common stock for each share of Series D preferred stock
outstanding). The Series D preferred stock was redeemable at Conseco's option at
any time subsequent to January 22, 1996, at a price of $52.275 per share (such
price declines to $50 per share over the period through January 15, 2003).
Dividends on the Series D preferred stock were paid quarterly at an annual rate
of 6.5 percent. All outstanding shares of the Series D preferred stock were
converted into common stock other than preferred shares with a carrying value of
$.3 million which were redeemed in cash.
Adjustments to give effect to the Series D Call are summarized below:
(17) Primary weighted average shares outstanding are adjusted to reflect
the issuance of common stock that each share of Series D preferred
stock was converted into based on the stock's conversion provisions
(1.56860 shares of Conseco's common stock for each share of Series D
preferred stock converted). Such issuance had no effect on fully
diluted average shares outstanding or fully diluted earnings per
share since the Series D preferred stock was considered to have been
converted for fully diluted calculations.
(18) Primary earnings per share are adjusted to reflect the elimination of
the Series D preferred stock dividend and the increase in the Conseco
common shares outstanding.
Transactions relating to the ALH Transaction
On September 30, 1996, Conseco acquired all of the common stock of ALH, not
previously owned by Conseco or its affiliates, for a purchase price of
approximately $165 million. ALH's former shareholders, other than Conseco,
received $23.00 per common share. In addition, Conseco purchased all outstanding
payment-in-kind preferred stock of ALH, not owned by Conseco. These transactions
were financed using available cash and additional borrowings under the Conseco
Credit Facility and the BLH Credit Facility. Hereinafter ALH refers to ALH or
the former subsidiaries of ALH.
The sources and uses of the financing to complete the ALH Transaction are
summarized below (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Available cash................................................................. $ 12.6
Conseco Credit Facility........................................................ 25.0
BLH Credit Facility............................................................ 140.0
-------
Total sources............................................................... $177.6
======
Uses of funds:
Purchase of all outstanding common stock of ALH, not owned by Conseco*......... $165.0
Purchase of all outstanding payment-in-kind preferred stock of ALH,
not owned by Conseco........................................................ 12.6
------
Total uses.................................................................. $177.6
======
</TABLE>
6
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
--------------------
*Excludes approximately 1.2 million shares of ALH common stock which were
distributed to Conseco, the general partner of Conseco Capital Partners II, L.P
("Partnership II"), based on the returns earned by the limited partners on the
ALH investment as defined by Partnership II's Partnership Agreement.
The pro forma adjustments are applied to the historical consolidated
financial statements of Conseco using the step acquisition method of accounting.
Under this method, the total purchase cost of the common stock of ALH, not
already owned by Conseco, is allocated to the assets and liabilities acquired
based on their relative fair values as of the date of acquisition, with any
excess of the total purchase cost over the fair value of the assets acquired
less the fair value of the liabilities assumed recorded as goodwill. The values
of the assets and liabilities of ALH included in Conseco's pro forma
consolidated financial statements represent the combination of the following
values: (1) the portion of ALH's net assets acquired by Conseco in the initial
acquisition made by Partnership II is valued as of its acquisition date,
September 29, 1994; (2) the portion acquired in the fourth quarter of 1995, is
valued as of its assumed acquisition date; and (3) the portion of ALH's net
assets acquired in the ALH Transaction is valued as of the assumed date of
acquisition.
Adjustments to give effect to the ALH Transaction are summarized below:
(19) As described above, the ALH Transaction is accounted for as a step
acquisition. The accounts of ALH are adjusted to reflect the step
acquisition method of accounting as if the ALH Transaction was
completed on the assumed dates of acquisition.
(20) Net investment income and interest expense are adjusted to reflect
the sources of the financing to complete the ALH Transaction (net
investment income is reduced for the lost investment income on cash
used in the ALH Transaction and interest expense is increased to
reflect the additional borrowings under the Conseco Credit Facility
and the BLH Credit Facility).
A change in interest rates of .5 percent on the additional borrowings
under the Conseco Credit Facility and the BLH Credit Facility used to
complete the ALH Transaction would result in: (1) an increase (or
decrease) in pro forma interest expense of $.6 million for the nine
months ended September 30, 1996, and (2) a decrease (or increase) in
pro forma net income of $.4 million for the same period.
(21) Interest expense is adjusted to reflect the fair value of ALH's
subordinated debentures.
(22) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item. In addition, tax expense is adjusted to
reflect the reduction in tax expense as a result of Conseco's
increased ownership of ALH.
(23) Minority interest is reduced to eliminate the income attributable to
the former shareholders of ALH and the preferred dividends on the
payment-in-kind preferred stock of ALH, not owned by Conseco.
7
S:\ACCTING\SECRPT\10Q-3-96.CNC\EXH99.1A
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CONSECO, INC.
The unaudited pro forma consolidated statement of operations of Conseco,
Inc. ("Conseco") for the nine months ended September 30, 1996, presents the
consolidated operating results for Conseco as if the following planned
transactions had occurred on January 1, 1995: (1) the issuance of $200.0 million
of trust originated preferred securities having an assumed distribution rate of
9.25 percent (the "Offering"); (2) the issuance of an additional $150.0 million
of trust originated preferred securities having an assumed distribution rate of
9.25 percent (the "Additional Offering"); (3) the merger (the "ATC Merger") of
American Travellers Corporation ("ATC") with and into Conseco; (4) the
acquisition of all of the outstanding common stock of Bankers Life Holding
Corporation ("BLH") not previously owned by Conseco and related transactions
(the "BLH Transaction"); (5) the merger (the "CAF Merger") of a subsidiary of
Conseco with and into Capitol American Financial Corporation ("CAF"); and (6)
the merger (the "THI Merger") of Transport Holdings Inc. ("THI") with and into
Conseco.
The pro forma consolidated statement of operations data for Conseco for the
nine months ended September 30, 1996, set forth in the unaudited pro forma
consolidated statement of operations under the column "Pro forma Conseco before
the Offering" reflect the prior application of certain pro forma adjustments for
the following transactions, all of which have already occurred, as if such
transactions had occurred on January 1, 1995: (1) the call for redemption of
Conseco's Series D Convertible Preferred Stock (the "Series D Call") completed
September 26, 1996; (2) the acquisition of all of the outstanding common stock
of ALH, not previously owned by Conseco or its affiliates, and related
transactions (the "ALH Transaction") completed September 30, 1996; (3) the
acquisition and merger of Life Partners Group, Inc. ("LPG") completed effective
June 30, 1996 (the "LPG Merger"); (4) the issuance of 4.37 million shares of
Conseco PRIDES in January 1996; and (5) the BLH tender offer for and repurchase
of its 13 percent senior subordinated notes due 2002 and related financing
transactions completed in March 1996 (the "BLH Tender Offer"). Such pro forma
adjustments are set forth in Exhibit 99.1 included in Conseco's Form 10-Q for
the quarterly period ended September 30, 1996.
The unaudited pro forma consolidated balance sheet as of September 30,
1996, gives effect to the following planned transactions as if each had occurred
on September 30, 1996: (1) the Offering; (2) the Additional Offering; (3) the
ATC Merger; (4) the BLH Transaction; (5) the CAF Merger; and (6) the THI Merger.
The pro forma consolidated financial statements are based on the historical
financial statements of Conseco, LPG, ATC, CAF and THI and should be read in
conjunction with these financial statements and the notes thereto. The pro forma
data are not necessarily indicative of the results of operations or financial
condition of Conseco had these transactions occurred on January 1, 1995, nor the
results of future operations. Conseco anticipates cost savings and additional
benefits as a result of certain of the transactions contemplated in the pro
forma financial statements. Such benefits and any other changes that might have
resulted from management of the combined companies have not been included as
adjustments to the pro forma consolidated financial statements. Certain amounts
from the prior periods have been reclassified to conform to the current
presentation.
The unaudited pro forma consolidated financial statements reflect cost
allocations for the LPG Merger, the ALH Transaction, the ATC Merger, the BLH
Transaction, the CAF Merger and the THI Merger using estimated values of the
assets and liabilities of LPG, ATC, ALH, BLH, CAF and THI as of the assumed
merger dates based on appraisals and other studies, which are not yet complete.
Accordingly, the final allocations will be different than the amounts included
in the accompanying pro forma consolidated financial statements. Although the
final allocations will differ, the pro forma consolidated financial statements
reflect management's best estimate based on currently available information as
if the LPG Merger, the ALH Transaction, the ATC Merger, the BLH Transaction, the
CAF Merger and the THI Merger had occurred on the assumed merger dates.
1
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma Pro forma
Pro forma adjustments adjustments
Conseco relating Pro forma relating to Pro forma
before the to the for the Additional Conseco
Offering Offering Offering Offering subtotal(a)
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,349.0 $ - $1,349.0 $ - $1,349.0
Investment activity:
Net investment income 1,084.4 1,084.4 1,084.4
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 23.0 23.0 23.0
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 11.4
-------- ------- -------- -------- --------
Total revenues 2,521.4 2,521.4 2,521.4
-------- ------- -------- -------- --------
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits 957.2 957.2 957.2
Interest expense on annuities and financial
products 549.5 549.5 549.5
Interest expense on notes payable 100.7 (9.2)(1) 91.5 (6.9)(6) 84.6
Interest expense on investment borrowings 17.2 17.2 17.2
Amortization related to operations 242.9 242.9 242.9
Amortization related to realized gains 22.3 22.3 22.3
Other operating costs and expenses 243.5 243.5 243.5
-------- ------- -------- -------- --------
Total benefits and expenses 2,133.3 (9.2) 2,124.1 (6.9) 2,117.2
-------- ------- -------- -------- --------
Income before income taxes, minority
interest and extraordinary charge 388.1 9.2 397.3 6.9 404.2
Income tax expense 147.9 3.2 (2) 151.1 2.4 (7) 153.5
-------- ------- -------- ------- --------
Income before minority interest
and extraordinary charge 240.2 6.0 246.2 4.5 250.7
Minority interest in consolidated subsidiaries:
Dividends on Company - obligated mandatorily
redeemable preferred securities of subsidiary
trusts - 9.0 (3) 9.0 6.8 (8) 15.8
Dividends on preferred stock 6.4 6.4 6.4
Equity in earnings 13.9 13.9 13.9
-------- ------- -------- -------- --------
Income before extraordinary charge $ 219.9 $ (3.0) $ 216.9 $ (2.3) $ 214.6
======== ======= ======== ======== ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 77.2 77.2 77.2
======== ======== =====
Income before extraordinary charge $2.85 $2.81 $2.78
======== ======== =====
Fully diluted:
Weighted average shares outstanding 78.7 78.7 78.7
======== ======= =====
Income before extraordinary charge $2.79 $2.76 $2.73
======== ======= =====
<FN>
(a) Amounts are carried forward to page 3.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma Pro forma
adjustments adjustments
Pro forma relating Pro forma relating to Pro forma
Conseco ATC to the Conseco the BLH Conseco
subtotal(a) historical ATC Merger subtotal Transaction subtotal(b)
--------- ------------ ---------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,349.0 $ 283.3 $ - $1,632.3 $ - $1,632.3
Investment activity:
Net investment income 1,084.4 33.2 1.1 (11) 1,118.7 1,118.7
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 23.0 1.3 2.3 (11) 26.6 (.2)(26) 26.4
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 11.4
--------- -------- -------- -------- ------ --------
Total revenues 2,521.4 317.8 3.4 2,842.6 (.2) 2,842.4
--------- -------- -------- -------- ------ --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 957.2 192.2 1,149.4 (1.5)(26) 1,147.9
Interest expense
on annuities and
financial products 549.5 549.5 549.5
Interest expense on
notes payable 84.6 5.8 1.5 (12) 88.2 88.2
(3.7)(13)
Interest expense on
investment borrowings 17.2 17.2 17.2
Amortization related
to operations 242.9 16.4 (14) (16.4)(14) 273.6 .4 (26) 274.0
19.9 (14)
10.8 (15)
Amortization related
to realized gains 22.3 22.3 (.1)(26) 22.2
Other operating
costs and expenses 243.5 64.4 307.9 1.6 (26) 309.5
--------- -------- -------- ------- ------- --------
Total benefits
and expenses 2,117.2 278.8 12.1 2,408.1 .4 2,408.5
--------- -------- -------- ------- ------- --------
Income before income
taxes, minority interest
and extraordinary
charge 404.2 39.0 (8.7) 434.5 (.6) 433.9
Income tax expense 153.5 13.0 (16) .7 (16) 167.2 (.1)(27) 167.1
--------- --------- -------- ------- ------- --------
Income before
minority interest
and extraordinary
charge 250.7 26.0 (9.4) 267.3 (.5) 266.8
Minority interest in consolidated
subsidiaries:
Dividends on Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 15.8 15.8 15.8
Dividends on preferred stock 6.4 6.4 6.4
Equity in earnings 13.9 13.9 (13.9) -
-------- --------- -------- ------- ------- --------
Income before
extraordinary
charge $ 214.6 $ 26.0 $ (9.4) $ 231.2 $ 13.4 $ 244.6
======== ======== ======== ======= ======= ========
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 77.2 13.1 (17) 90.3 2.6 (29) 92.9
==== ====== ==== ===== ====
Income before
extraordinary charge $2.78 $2.56 $2.63
===== ===== =====
Fully diluted:
Weighted average shares
outstanding 78.7 18.1 (17) 96.8 2.6 (29) 99.4
==== ====== ==== ===== ====
Income before
extraordinary charge $2.73 $2.42 $2.49
===== ===== =====
<FN>
(a) Amounts have been carried forward from page 2.
(b) Amounts are carried forward to page 4.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the six months ended September 30, 1996
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
Pro forma Pro forma for the
adjustments adjustments Offering
Pro forma relating to Pro forma relating to and other
Conseco CAF the CAF Conseco THI to the planned
subtotal(a) historical Merger subtotal historical THI Merger transactions
--------- ------------ ------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Insurance policy income $1,632.3 $ 219.9 $ - $1,852.2 $ 82.4 $ $1,934.6
Investment activity:
Net investment income 1,118.7 41.7 (2.6)(32) 1,157.8 29.6 (5.0)(51) 1,182.4
Net trading losses (6.5) (6.5) (6.5)
Net realized gains 26.4 .3 (.3)(32) 26.4 .3 (.3)(51) 26.4
Fee revenue 29.7 29.7 29.7
Restructuring income 30.4 30.4 30.4
Other income 11.4 11.4 1.4 12.8
-------- --------- ------- -------- ------- ------ --------
Total revenues 2,842.4 261.9 (2.9) 3,101.4 113.7 (5.3) 3,209.8
-------- --------- ------- -------- ------- ------ --------
Benefits and expenses:
Insurance policy benefits
and change in future
policy benefits 1,147.9 124.4 (2.3)(33) 1,270.0 54.1 1,324.1
Interest expense
on annuities and
financial products 549.5 549.5 549.5
Interest expense on
notes payable 88.2 1.6 (1.6)(34) 116.1 6.8 (6.8)(52) 117.0
27.9 (35) .9 (52)
Interest expense on
investment borrowings 17.2 17.2 17.2
Amortization related
to operations 274.0 17.5 (17.5)(36) 301.4 6.2 (6.2)(53) 311.7
23.0 (36) 10.3 (53)
4.4 (37)
Amortization related
to realized gains 22.2 22.2 22.2
Other operating
costs and expenses 309.5 58.7 368.2 24.4 392.6
-------- --------- -------- -------- ------- ------ --------
Total benefits
and expenses 2,408.5 202.2 33.9 2,644.6 91.5 (1.8) 2,734.3
-------- --------- -------- -------- ------- ------ --------
Income before income
taxes, minority
interest and
extraordinary charge 433.9 59.7 (36.8) 456.8 22.2 (3.5) 475.5
Income tax expense 167.1 20.9 (11.4)(38) 176.6 7.8 (1.2)(54) 183.2
------- --------- ------- -------- ------- ------ --------
Income before minority
interest and
extraordinary charge 266.8 38.8 (25.4) 280.2 14.4 (2.3) 292.3
Minority interest in consolidated
subsidaires:
Dividends on Company - obligated
mandatorily redeemable
preferred securities of
subsidiary trusts 15.8 15.8 15.8
Dividends on preferred stock 6.4 6.4 6.4
Equity in earnings - - -
------- -------- ------- -------- ------ ------ --------
Income before
extraordinary charge $ 244.6 $ 38.8 $ (25.4) $ 258.0 $ 14.4 $(2.3) $ 270.1
======= ======== ======= ======== ======= ===== ========
Earnings per common share and
common equivalent share:
Primary:
Weighted average
shares outstanding 92.9 2.4 (39) 95.3 4.7 (55) 100.0
==== ==== ===== ==== =====
Income before
extraordinary charge $2.63 $2.71 $2.70
===== ===== =====
Fully diluted:
Weighted average shares
outstanding 99.4 2.4 (39) 101.8 4.7 (55) 106.5
==== ==== ===== ==== =====
Income before
extraordinary charge $2.49 $2.57 $2.57
===== ===== =====
<FN>
(a) Amounts have been carried forward from page 3.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma adjustments
adjustments Pro forma relating to Pro forma
Conseco relating to for the Additional Conseco
as reported the Offering Offering Offering subtotal(a)
------------ ----------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed maturity
securities at fair value $15,959.8 $ - $15,959.8 $ - $15,959.8
Held-to-maturity fixed maturity
securities - - -
Equity securities at fair value 104.2 104.2 104.2
Mortgage loans 372.5 372.5 372.5
Credit-tenant loans 393.8 393.8 393.8
Policy loans 526.0 526.0 526.0
Other invested assets 211.0 211.0 211.0
Short-term investments 212.3 189.3 (4) 212.3 141.9 (9) 212.3
(189.3)(4) (141.9)(9)
Assets held in separate accounts 300.4 300.4 300.4
--------- ------ --------- --------- ---------
Total investments 18,080.0 - 18,080.0 - 18,080.0
Accrued investment income 276.7 276.7 276.7
Cost of policies purchased 1,847.1 1,847.1 1,847.1
Cost of policies produced 541.0 541.0 541.0
Reinsurance receivables 400.6 400.6 400.6
Income taxes 138.9 138.9 138.9
Goodwill 1,524.7 1,524.7 1,524.7
Property and equipment 105.9 105.9 105.9
Securities segregated for future redemption
of redeemable preferred stock of a
subsidiary 45.0 45.0 45.0
Other assets 216.1 216.1 216.1
--------- ------ --------- --------- ---------
Total assets $23,176.0 $ - $23,176.0 $ - $23,176.0
========= ====== ========= ========= =========
<FN>
(a) Amounts are carried forward to page 6.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma
adjustments adjustments
Pro forma relating Pro forma relating to Pro forma
Conseco ATC to the Conseco the BLH Conseco
subtotal(a) historical ATC Merger subtotal Transaction subtotal(b)
--------- ------------ ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed
maturity securities
at fair value $15,959.8 $ 689.7 $ - $16,649.5 $ - $16,649.5
Held-to-maturity
fixed maturity
securities - -
Equity securities at
fair value 104.2 104.2 104.2
Mortgage loans 372.5 .4 372.9 372.9
Credit-tenant loans 393.8 393.8 393.8
Policy loans 526.0 526.0 526.0
Other invested assets 211.0 211.0 211.0
Short-term investments 212.3 12.2 (30.4)(18) 224.5 224.5
30.4 (19)
Assets held in separate
accounts 300.4 300.4 300.4
-------- -------- --------- --------- ---------- ----------
Total investments 18,080.0 702.3 - 18,782.3 - 18,782.3
Accrued investment income 276.7 7.7 284.4 284.4
Cost of policies purchased 1,847.1 11.3 268.8 (20) 2,115.9 65.9 (26) 2,181.8
(11.3)(20)
Cost of policies produced 541.0 168.7 (168.7)(21) 541.0 (50.7)(26) 490.3
Reinsurance receivables 400.6 400.6 400.6
Income taxes 138.9 (27.1)(22) 85.6 (5.3)(27) 80.3
(26.2)(22)
Goodwill 1,524.7 563.2 (23) 2,087.9 57.3 (26) 2,145.2
Property and equipment 105.9 3.9 109.8 109.8
Securities segregated for
future redemption of
redeemable preferred
stock of a
subsidiary 45.0 45.0 45.0
Other assets 216.1 13.7 229.8 229.8
--------- -------- --------- --------- ---------- ---------
Total assets $23,176.0 $ 907.6 $ 598.7 $24,682.3 $ 67.2 $24,749.5
========= ======== ========= ========= ========= =========
<FN>
(a) Amounts have been carried forward from page 5.
(b) Amounts are carried forward to page 7.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma Pro forma for the
adjustments adjustments Offering
Pro forma relating Pro forma relating to and other
Conseco CAF to the Conseco THI the THI planned
subtotal(a) historical CAF Merger subtotal historical Merger transactions
--------- ------------ ----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed
maturity securities
at fair value $16,649.5 $ 308.5 $ 358.3 (40) $17,410.5 $ 483.0 $ (83.9)(57) $17,809.6
94.2 (41)
Held-to-maturity
fixed maturity
securities - 358.3 (358.3)(40) - -
Equity securities at
fair value 104.2 10.2 114.4 1.1 115.5
Mortgage loans 372.9 372.9 8.3 381.2
Credit-tenant loans 393.8 393.8 393.8
Policy loans 526.0 526.0 16.9 542.9
Other invested assets 211.0 211.0 6.5 217.5
Short-term investments 224.5 29.4 (534.0)(42) 253.9 34.6 83.9 (57) 288.5
(26.0)(42) 18.5 (58)
(29.0)(42) (18.5)(58)
589.0 (43) (58.3)(58)
(25.6)(58)
Assets held in separate
accounts 300.4 300.4 300.4
-------- -------- ------- --------- ------- -------- ---------
Total investments 18,782.3 706.4 94.2 19,582.9 550.4 (83.9) 20,049.4
Accrued investment income 284.4 6.9 291.3 5.7 297.0
Cost of policies purchased 2,181.8 492.2 (44) 2,674.0 10.8 112.8 (59) 2,786.8
(10.8)(59)
Cost of policies produced 490.3 271.3 (271.3)(45) 490.3 28.4 (28.4)(60) 490.3
Reinsurance receivables 400.6 400.6 328.6 (260.0)(62) 469.2
Income taxes 80.3 (79.3)(46) - -
(1.0)(46)
Goodwill 2,145.2 223.7 (47) 2,368.9 2,368.9
Property and equipment 109.8 4.4 114.2 .7 114.9
Securities segregated for
future redemption of
redeemable preferred
stock of a
subsidiary 45.0 45.0 45.0
Other assets 229.8 28.9 258.7 17.3 276.0
--------- -------- ------- --------- -------- -------- ---------
Total assets $24,749.5 $1,017.9 $ 458.5 $26,225.9 $ 941.9 $(270.3) $26,897.5
========= ======== ======= ========= ======== ======= =========
<FN>
(a) Amounts have been carried forward from page 6.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma Pro forma
adjustments adjustments adjustments
relating Pro forma relating to Pro forma relating Pro forma
Conseco to the for the Additional Conseco ATC to the Conseco
as reported Offering Offering Offering subtotal Historical ATC Merger subtotal(a)
--------- ---------- -------- --------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $18,150.7 $ - $18,150.7 $ - $18,150.7 $ 586.3 $ - $18,737.0
Income tax liabilities - - - 26.2 (26.2)(22) -
Investment borrowings 539.4 539.4 539.4 539.4
Other liabilities 482.0 482.0 482.0 10.9 11.3 (24) 504.2
Liabilities related
to separate accounts 300.1 300.1 300.1 300.1
Notes payable of Conseco 1,169.0 (189.3) 979.7 (141.9)(9) 837.8 102.9 30.4 (19) 1,106.8
135.7 (24)
Notes payable of
Bankers Life Holding
Corporation, not
direct obligations
of Conseco 418.1 418.1 418.1 418.1
Notes payable of American
Life Holdings, Inc., not
direct obligations of
Conseco 13.0 13.0 13.0 13.0
-------- ------ --------- ------- --------- ------ ------- --------
Total liabilities 21,072.3 (189.3) 20,883.0 (141.9) 20,741.1 726.3 151.2 21,618.6
-------- ------ --------- ------- --------- ------ ------- --------
Minority interest in consolidated
subsidiaries:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts - 200.0 (5) 200.0 150.0 (10) 350.0 350.0
Preferred stock 92.5 92.5 92.5 92.5
Common stock 55.3 55.3 55.3 55.3
-------- ------ --------- ------- --------- ------ ------- ---------
Shareholders' equity:
Preferred stock 267.1 267.1 267.1 267.1
Common stock and additional
paid-in capital 1,054.5 (10.7)(5) 1,043.8 (8.1)(10) 1,035.7 64.4 (64.4)(25) 1,664.5
628.8 (25)
Unrealized appreciation
(depreciation) of securities (47.0) (47.0) (47.0) (10.3) 10.3 (25) (47.0)
Retained earnings 681.3 681.3 681.3 127.2 (127.2)(25) 681.3
------- ------ --------- ------- --------- ------ ------- ---------
Total shareholders' equity 1,955.9 (10.7) 1,945.2 (8.1) 1,937.1 181.3 447.5 2,565.9
------- ------ --------- ------- --------- ------ ------- ---------
Total liabilities and
shareholders' equity $23,176.0 $ - $23,176.0 $ - $23,176.0 $907.6 $ 598.7 $24,682.3
========= ====== ========= ====== ========= ====== ======= =========
<FN>
(a) Amounts are carried forward to page 9.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma Pro forma
adjustments adjustments
Pro forma relating Pro forma relating to Pro forma
Conseco to the BLH Conseco CAF the CAF Conseco
subtotal(a) Transaction subtotal Historical Merger subtotal(b)
--------- ----------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $18,737.0 $ - $18,737.0 $ 611.4 $ 88.4 (48) $19,436.8
Income tax liabilities - - 52.2 (1.0)(46) 51.2
Investment borrowings 539.4 539.4 539.4
Other liabilities 504.2 504.2 20.7 524.9
Liabilities related
to separate accounts 300.1 300.1 300.1
Notes payable of Conseco 1,106.8 418.1 (30) 1,524.9 29.0 (29.0)(49) 2,113.9
589.0 (43)
Notes payable of
Bankers Life Holding
Corporation, not
direct obligations
of Conseco 418.1 (418.1)(30) - -
Notes payable of American
Life Holdings, Inc., not
direct obligations of
Conseco 13.0 13.0 13.0
-------- ------ --------- -------- -------- ----------
Total liabilities 21,618.6 - 21,618.6 713.3 647.4 22,979.3
-------- ------ --------- -------- -------- ----------
Minority interest in consolidated
subsidiaries:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts 350.0 350.0 350.0
Preferred stock 92.5 92.5 92.5
Common stock 55.3 (55.3)(28) - -
-------- ------ --------- -------- -------- ----------
Shareholders' equity:
Preferred stock 267.1 267.1 267.1
Common stock and additional
paid-in capital 1,664.5 122.5 (31) 1,787.0 35.5 (35.5)(50) 1,902.7
115.7 (50)
Unrealized appreciation
(depreciation) of securities (47.0) (47.0) (1.8) 1.8 (50) (47.0)
Retained earnings 681.3 681.3 270.9 (270.9)(50) 681.3
------- ------ --------- -------- -------- ----------
Total shareholders' equity 2,565.9 122.5 2,688.4 304.6 (188.9) 2,804.1
------- ------ --------- -------- -------- ----------
Total liabilities and
shareholders' equity $24,682.3 $ 67.2 $24,749.5 $1,017.9 $ 458.5 $26,225.9
========= ====== ========= ======== ======== =========
<FN>
(a) Amounts have been carried forward from page 8.
(b) Amounts are carried forward to page 10.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1996
(Dollars in millions)
(unaudited)
Pro forma
Pro forma for the
adjustments Offering
Pro forma relating to and other
Conseco THI the THI planned
subtotal(a) historical Merger transactions
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $19,436.8 $ 623.4 $ (260.0)(62) $19,800.2
Income tax liabilities 51.2 17.5 25.8 (61) 94.5
Investment borrowings 539.4 539.4
Other liabilities 524.9 18.5 543.4
Liabilities related to separate accounts 300.1 300.1
Notes payable of Conseco 2,113.9 108.3 (58.3)(63) 2,132.4
(50.0)(63)
18.5 (63)
Notes payable of Bankers Life Holding
Corporation, not direct obligations of Conseco - -
Notes payable of American
Life Holdings, Inc., not
direct obligations of Conseco 13.0 13.0
--------- ------- -------- ---------
Total liabilities 22,979.3 767.7 (324.0) 23,423.0
--------- ------- -------- ---------
Minority interest in consolidated subsidiaries:
Company - obligated mandatorily redeemable preferred
securities of subsidiary trusts 350.0 350.0
Preferred stock 92.5 92.5
Common stock - -
--------- ------- -------- ---------
Shareholders' equity:
Preferred stock 267.1 22.8 (22.8)(64) 267.1
Common stock and additional paid-in capital 1,902.7 169.7 (169.7)(64) 2,130.6
121.7 (64)
106.2 (64)
Unrealized appreciation (depreciation) of securities (47.0) 4.7 (4.7)(64) (47.0)
Retained earnings 681.3 (23.0) 23.0 (64) 681.3
--------- ------- -------- ---------
Total shareholders' equity 2,804.1 174.2 53.7 3,032.0
--------- ------- -------- ---------
Total liabilities and shareholders' equity $26,225.9 $ 941.9 $ (270.3) $26,897.5
========= ======= ======== =========
<FN>
(a) Amounts have been carried forward from page 9.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
10
</TABLE>
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE OFFERING
Conseco Financing Trust I (the "Trust"), a wholly owned subsidiary of
Conseco, intends to issue preferred securities (the "Preferred Securities")
having an aggregate liquidation amount of $200 million and an assumed
distribution rate of 9.25 percent. The Trust will use the proceeds from the sale
of such securities to purchase subordinated debentures of Conseco in an
aggregate principal amount equivalent to the aggregate liquidation amount of the
Preferred Securities that are issued. The subordinated debentures are assumed to
bear interest at a rate of 9.25 percent. Conseco will use the proceeds to reduce
borrowings under its bank credit facilities.
(1) Interest expense is reduced to reflect the repayment of $189.3
million aggregate principal amount of borrowings under Conseco's bank
credit facilities.
A change in interest rates of .5 percent on the borrowings under
Conseco's bank credit facilities to be repaid from the Offering would
result in: (1) a decrease (or increase) in pro forma interest expense
of $.7 million for the nine months ended September 30, 1996; and (2)
an increase (or decrease) in pro forma net income of $.5 million for
the same period.
(2) The pro forma adjustment is tax affected, based on Conseco's
effective tax rate of 35 percent.
(3) Minority interest is adjusted to reflect the dividends (net of the
related tax benefit) on the Preferred Securities.
(4) Notes payable are reduced to reflect the repayment of $189.3 million
aggregate principal amount of borrowings under Conseco's bank credit
facilities using the net proceeds from the Preferred Securities.
(5) The Company's minority interest in consolidated subsidiaries is
increased by the aggregate liquidation amount of the Preferred
Securities. Issuance and other transaction costs related to the
Preferred Securities are charged to paid-in capital.
OTHER PLANNED TRANSACTIONS
Transactions relating to the Additional Offering
In addition to the Preferred Securities offered above, a subsidiary trust
of Conseco intends to issue an additional $150 million of trust originated
preferred securities having an assumed distribution rate of 9.25 percent. The
subsidiary will use the proceeds from the sale of such securities to purchase
Conseco subordinated debentures with an aggregate principal amount equivalent to
the aggregate liquidation amount of the trust originated preferred securities
that are issued. The subordinated debentures of Conseco are assumed to bear
interest at a rate of 9.25 percent. Conseco will use the proceeds to reduce
borrowings under its bank credit facilities.
(6) Interest expense is reduced to reflect the repayment of $141.9
million aggregate principal amount of borrowings under Conseco's bank
credit facilities.
A change in interest rates of .5 percent on the borrowings under
Conseco's bank credit facilities to be repaid from the Additional
Offering would result in: (1) a decrease (or increase) in pro forma
interest expense of $.5 million for the nine months ended September
30, 1996; and (2) an increase (or decrease) in pro forma net income
of $.3 million for the same period.
(7) The pro forma adjustment is tax affected, based on Conseco's
effective tax rate of 35 percent.
(8) Minority interest is adjusted to reflect the dividends (net of the
related tax benefit) on the trust originated preferred securities.
(9) Notes payable are reduced to reflect the repayment of $141.9 million
aggregate principal amount of borrowings under Conseco's bank credit
facilities using the net proceeds from the trust originated preferred
securities.
(10) The Company's minority interest in consolidated subsidiaries is
increased by the aggregate liquidation amount of the trust originated
preferred securities. Issuance and other transaction costs related to
the trust originated preferred securities are charged to paid-in
capital.
11
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Transactions relating to the ATC Merger
The ATC Merger will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire ATC will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the ATC Merger, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. Conseco believes the ATC Merger will not qualify to be
accounted for under the pooling of interests method in accordance with APB No.
16 because an affiliate of ATC intends to sell a portion of the Conseco common
stock it receives in the ATC Merger shortly after the consummation of the ATC
Merger. In the ATC Merger, each outstanding share of ATC common stock is assumed
to be exchanged for a fraction of a share of Conseco's common stock to be
determined based on an average price of Conseco's common stock prior to its
closing (it is assumed Conseco's share price will be $48.00, resulting in an
exchange ratio of .7298 shares valued at $35.03). Conseco will issue an assumed
13.1 million shares of Conseco common stock with a value of approximately $628.8
million to acquire ATC's common stock. In addition, Conseco will assume the ATC
convertible subordinated debentures, which will be convertible into an assumed
5.0 million shares of Conseco common stock with a value of approximately $238.6
million. In addition, Conseco is expected to incur costs related to the ATC
Merger (including contract termination, relocation, legal, accounting and other
costs) of approximately $30.4 million.
The cost to acquire ATC is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
ATC Merger (September 30, 1996) ................................................... $181.3
Convertible subordinated debentures assumed by Conseco at the
assumed date of the ATC Merger..................................................... 102.9
Increase (decrease) in ATC's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the ATC Merger:
Cost of policies purchased (related to the ATC Merger).......................... 268.8
Cost of policies produced and cost of policies purchased (historical)........... (180.0)
Goodwill (related to the ATC Merger)............................................ 563.2
Income taxes.................................................................... (27.1)
Other liabilities............................................................... (11.3)
------
Total estimated fair value adjustments..................................... 613.6
-------
Total cost to acquire ATC.......................................................... $897.8
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the ATC Merger as of January 1, 1995, are summarized below.
(11) Net investment income and net realized gains of ATC are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities to their estimated fair value.
(12) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to complete the ATC
Merger.
A change in interest rates of .5 percent on the additional borrowings
under Conseco's bank credit facilities used to complete the ATC
Merger would result in: (1) an increase (or decrease) in pro forma
interest expense of $.1 million for the nine months ended September
30, 1996; and (2) a decrease (or increase) in pro forma net income of
$.1 million for the same period.
(13) Interest expense is reduced to reflect the amortization of the
liability established at the assumed date of the ATC Merger
representing the present value of the interest payable on ATC's
convertible subordinated debentures to October 1, 1998 (the earliest
call date), less the present value of the dividends that would be
paid on Conseco's common stock that such debentures would be
convertible into during the same period.
12
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(14) Amortization of the cost of policies produced and the cost of
policies purchased prior to the ATC Merger is replaced with the
amortization of the cost of policies purchased (amortized in relation
to estimated premiums on the policies purchased with interest equal
to the liability rate which averages 5.5 percent).
(15) Amortization of goodwill acquired in the ATC Merger is recognized
over a 40-year period on a straight-line basis.
(16) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(17) Common shares outstanding are increased to reflect the Conseco shares
issued in the ATC Merger. Fully diluted shares also include Conseco
shares which will be issued when ATC's convertible subordinated
debentures are converted.
Adjustments to the pro forma consolidated balance sheet to give effect to
the ATC Merger as of September 30, 1996, are summarized below.
(18) Cash is reduced for payments made to complete the ATC Merger.
(19) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the ATC Merger.
(20) ATC's historical cost of policies purchased is eliminated and
replaced with the cost of policies purchased recognized in the ATC
Merger. Cost of policies purchased reflects the estimated fair value
of ATC's business in force and represents the portion of the cost to
acquire ATC that is allocated to the value of the right to receive
future cash flows from the acquired policies.
The 18 percent discount rate used to determine such value is the rate
of return required by Conseco to invest in the business being
acquired. In determining such rate of return, the following factors
are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
- Cost of capital available to fund the acquisition.
- The perceived likelihood of changes in insurance regulations and
tax laws.
- Complexity of the acquired company.
- Prices paid (i.e., discount rates used in determining
valuations) on similar blocks of business sold recently.
The value allocated to the cost of policies purchased is based on a
preliminary valuation; accordingly, this allocation may be adjusted
upon final determination of such value. Expected gross amortization
of such value using current assumptions and accretion of interest
based on an interest rate equal to the liability rate (such rate
averages 5.5 percent) for each of the years in the five-year period
ending September 30, 2001, are as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
September 30, balance amortization of interest amortization balance
------------- ------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 $268.8 $35.4 $14.2 $21.2 $247.6
1998 247.6 32.3 12.9 19.4 228.2
1999 228.2 29.6 12.0 17.6 210.6
2000 210.6 27.3 10.9 16.4 194.2
2001 194.2 25.2 10.1 15.1 179.1
</TABLE>
(21) ATC's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
13
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(22) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. Deferred tax liabilities of ATC are
netted against deferred tax assets of Conseco.
(23) Goodwill acquired in the ATC Merger is recognized.
(24) Notes payable are increased to reflect the fair value of ATC's
convertible subordinated debentures at the date of the ATC Merger.
Such fair value represents the value of the Conseco common stock
which ATC's convertible subordinated debentures will be convertible
into after the ATC Merger. It is assumed that the holders of such
debentures do not convert into Conseco common stock at the time of
the ATC Merger.
In addition, a liability is established representing the present
value of the interest payable on such debentures to October 1, 1998
(the earliest call date), less the present value of the dividends
that would be paid on the Conseco common stock that such debentures
would be convertible into during the same period.
(25) The prior shareholders' equity of ATC is eliminated in conjunction
with the ATC Merger. Common stock and additional paid-in capital is
increased by the value of the Conseco common stock issued in the ATC
Merger.
Transactions relating to the BLH Transaction
Conseco has proposed to acquire all of the common stock of BLH, not owned
by Conseco. In the BLH Transaction, each share of BLH common stock would be
converted into the right to receive a fraction of a share of Conseco common
stock to be determined based on the average price of Conseco's common stock
prior to closing (it is assumed that such price per share of Conseco common
stock will be $48.00, resulting in an exchange ratio of .5208 shares valued at
$25.00). Conseco will issue an assumed 2.6 million shares of Conseco common
stock with a value of approximately $122.5 million.
The pro forma adjustments are applied to the historical consolidated
financial statements of Conseco using the step acquisition method of accounting.
Under this method, the total purchase cost of the common stock of BLH, not
already owned by Conseco, is allocated to the assets and liabilities acquired
based on their relative fair values as of the date of acquisition, with any
excess of the total purchase cost over the fair value of the assets acquired
less the fair value of the liabilities assumed recorded as goodwill. The values
of the assets and liabilities of BLH included in Conseco's pro forma
consolidated financial statements represent the combination of the following
values: (1) the portion of BLH's net assets acquired by Conseco in the initial
acquisition made by Conseco Capital Partners, L.P. on October 31, 1992, is
valued as of that acquisition date; (2) the portion of BLH's net assets acquired
by Conseco on September 30, 1993, is valued as of that acquisition date; (3) the
portion of BLH's net assets acquired during 1995 and the first quarter of 1996
is valued as of its assumed date of acquisition; and (4) the portion of BLH's
net assets acquired in the BLH Transaction is valued at the assumed dates of
acquisition.
Adjustments to give effect to the BLH Transaction are summarized below:
(26) As described above, the BLH Transaction is accounted for as a step
acquisition. The accounts of BLH are adjusted to reflect the step
basis method of accounting as if the BLH Transaction was completed on
the assumed dates of acquisition.
(27) All pro forma adjustments are tax affected based on the appropriate
rate for the specific item.
(28) Minority interest is reduced to eliminate the ownership interest of
the former shareholders of BLH.
(29) Common shares outstanding are increased to reflect the shares of
Conseco common stock issued in the acquisition of additional shares
of BLH common stock.
(30) Notes payable of BLH are reclassified as notes payable of Conseco,
since BLH would be merged into Conseco.
(31) Common stock and additional paid-in capital is increased by the value
of Conseco common stock issued in the acquisition of additional
shares of BLH common stock.
14
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Transactions relating to the CAF Merger
The CAF Merger will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire CAF will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the CAF Merger, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. In the CAF Merger, each outstanding share of CAF common
stock is assumed to be exchanged for $30 in cash and the right to receive a
fraction of a share of Conseco common stock to be determined based on the
average price of Conseco common stock prior to its closing (it is assumed that
such average price per share of Conseco common stock will be $48.00, resulting
in an exchange ratio of .1354). Conseco will pay approximately $534 million in
cash and issue an assumed 2.4 million shares of Conseco common stock with a
value of approximately $115.7 million to acquire the CAF common stock. In
addition, Conseco is expected to assume a note payable of CAF of $29.0 million
and incur costs related to the CAF Merger (including contract termination,
relocation, legal, accounting and other costs) of approximately $26 million.
The cost to acquire CAF is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
CAF Merger (September 30, 1996) ................................................... $304.6
Notes payable of CAF assumed by Conseco at the assumed date
of the CAF Merger.................................................................. 29.0
Increase (decrease) in CAF's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the CAF Merger:
Actively managed fixed maturity securities...................................... 452.5
Held-to-maturity fixed maturity securities...................................... (358.3)
Cost of policies purchased (related to the CAF Merger).......................... 492.2
Cost of policies produced....................................................... (271.3)
Goodwill (related to the CAF Merger)............................................ 223.7
Insurance liabilities .......................................................... (88.4)
Income taxes.................................................................... (79.3)
------
Total estimated fair value adjustments..................................... 371.1
-------
Total cost to acquire CAF.......................................................... $704.7
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the CAF Merger as of January 1, 1995, are summarized below.
(32) Net investment income and net realized gains of CAF are adjusted to
include the effect of adjustments to restate the amortized cost basis
of fixed maturity securities to their estimated fair value.
(33) Change in policy benefits is reduced to reflect the purchase
accounting adjustment made at the assumed date of the CAF Merger.
Such adjustment reflects the lower discount rate used to discount
amounts of expected future benefit payments to correspond to the
adjustments to restate the amortized cost of fixed maturity
investments to their estimated fair value.
(34) Interest expense is reduced to reflect the repayment of notes payable
of CAF by Conseco at the assumed date of the CAF Merger.
(35) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to complete the CAF
Merger.
A change in interest rates of .5 percent on the additional borrowings
under Conseco's bank credit facilities used to complete the CAF
Merger would result in: (1) an increase (or decrease) in pro forma
interest expense of $2.2 million for the nine months ended September
30, 1996; and (2) a decrease (or increase) in pro forma net income of
$1.4 million for the same period.
15
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(36) Amortization of the cost of policies produced for policies sold by
CAF prior to January 1, 1995, is replaced with the amortization of
the cost of policies purchased (amortized in relation to estimated
premiums on the policies purchased with interest equal to the
liability rate which averages 5.5 percent).
(37) Amortization of goodwill acquired in the CAF Merger is recognized
over a 40-year period on a straight-line basis.
(38) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(39) Common shares outstanding are increased to reflect the shares issued
in the CAF Merger.
Adjustments to the pro forma consolidated balance sheet to give effect to
the CAF Merger as of September 30, 1996, are summarized below.
(40) After the CAF Merger, all held-to-maturity securities are classified
as actively managed fixed maturity securities consistent with the
intention of the new management.
(41) CAF's fixed maturity securities are restated to estimated fair value.
(42) Cash is reduced for payments made to complete the CAF Merger.
(43) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the CAF Merger.
(44) Cost of policies purchased reflects the estimated fair value of CAF's
business in force and represents the portion of the cost to acquire
CAF that is allocated to the value of the right to receive future
cash flows from the acquired policies.
The 18 percent discount rate used to determine such value is the rate
of return required by Conseco to invest in the business being
acquired. In determining such rate of return, the following factors
are considered:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining the expected cash flows.
- Cost of capital available to fund the acquisition.
- The perceived likelihood of changes in insurance regulations and
tax laws.
- Complexity of the acquired company.
- Prices paid (i.e., discount rates used in determining
valuations) on similar blocks of business sold recently.
The value allocated to the cost of policies purchased is based on a
preliminary valuation; accordingly, this allocation may be adjusted
upon final determination of such value. Expected gross amortization
of such value using current assumptions and accretion of interest
based on an interest rate equal to the liability rate (such rate
averages 5.5 percent) for each of the years in the five-year period
ending September 30, 2001, are as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
September 30, balance amortization of interest amortization balance
-------------- ------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 $492.2 $60.4 $27.1 $33.3 $458.9
1998 458.9 55.2 25.2 30.0 428.9
1999 428.9 52.2 23.6 28.6 400.3
2000 400.3 49.5 22.1 27.4 372.9
2001 372.9 46.9 20.5 26.4 346.5
</TABLE>
(45) CAF's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
(46) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. In addition, deferred tax
liabilities of CAF are netted against deferred tax assets of Conseco.
16
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(47) Goodwill acquired in the CAF Merger is recognized.
(48) Additional insurance liabilities are recognized to reflect the lower
discount rates used to determine the present value of future
obligations, consistent with the lower yields to be earned on
invested assets as a result of recognizing the fair value of fixed
maturity securities.
(49) Notes payable are reduced to reflect the repayment of notes payable
of CAF by Conseco at the assumed date of the CAF Merger.
(50) The prior shareholders' equity of CAF is eliminated in conjunction
with the CAF Merger. Common stock and additional paid-in capital is
increased by the value of Conseco common stock issued in the CAF
Merger.
Transactions relating to the THI Merger
The THI Merger will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire THI will be allocated
to the assets and liabilities acquired based on their fair values as of the date
of the THI Merger, with any excess of the total purchase cost over the fair
value of the assets acquired less the fair value of the liabilities assumed
recorded as goodwill. Conseco believes the THI Merger will not qualify to be
accounted for under the pooling of interests method in accordance with APB No.
16 because THI was a subsidiary of another corporation within two years of the
contemplated transaction. In the THI Merger, each outstanding share of THI
common stock (or its equivalent) is assumed to be exchanged for a fraction of a
share of Conseco common stock to be determined based on the price of Conseco
common stock prior to its closing (it is assumed such average price per share of
Conseco common stock will be $48.00, resulting in an exchange ratio of 1.4583
shares valued at $70.00). Conseco will issue an assumed 2.5 million shares of
Conseco common stock with a value of approximately $121.7 million to acquire the
THI common stock (or equivalents). Pursuant to an offer by Conseco (the
"Exchange Offer"), it is assumed all of THI's convertible subordinated notes
(the "THI Convertibles Notes") will be exchanged for shares of Conseco common
stock based on the price of Conseco common stock prior to the THI Merger (such
fully converted value being the same as the THI Convertible Notes) plus a cash
premium. Using the same assumption that each share of THI will be convertible
into 1.4583 shares of Conseco common stock with a value of $70.00, in aggregate,
the THI Convertible Notes will be convertible into 2.2 million shares of Conseco
common stock with a value of approximately $106.2 million. In addition, Conseco
will pay a premium of approximately $10.0 million in conjunction with the
Exchange Offer. Conseco estimates that it will incur costs related to the THI
Merger (including contract termination, relocation, legal, accounting and other
costs) of approximately $8.5 million.
The cost to acquire THI is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on assumed date of the
THI Merger (September 30, 1996) ................................................... $174.2
THI Convertible Notes converted to Conseco common stock................................. 50.0
Less book value of THI preferred stock.................................................. (22.8)
Increase (decrease) in THI's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the THI Merger:
Cost of policies purchased (related to the THI Merger).......................... 112.8
Cost of policies produced and cost of policies purchased (historical)........... (39.2)
Income taxes.................................................................... (25.8)
Premium paid in conjunction with the Exchange Offer............................. (10.0)
Premium incurred to retire THI preferred stock.................................. (2.8)
------
Total estimated fair value adjustments..................................... 35.0
------
Total cost to acquire THI.......................................................... $236.4
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the THI Merger as of January 1, 1995, are summarized below.
17
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(51) Net investment income and net realized gains of THI are adjusted
to include the effect of adjustments to restate the amortized
cost basis of fixed maturity securities to their estimated fair
value and the effect of the assumed sale of $83.9 million fixed
maturity investments, with the proceeds used to repay $58.3
million of bank debt and redeem preferred stock with a
redemption value of $25.6 million.
(52) Interest expense is reduced to reflect the repayment of bank
debt of $58.3 million and the conversion of the THI Convertible
Notes into Conseco common stock pursuant to the Exchange Offer.
Interest expense is increased to reflect borrowings by Conseco
to: (i) pay the estimated cost of the THI Merger; and (ii) pay
the $10.0 million premium in conjunction with the Exchange
Offer.
(53) Amortization of the cost of policies produced and the cost of
policies purchased prior to the THI Merger is replaced with the
amortization of the cost of policies purchased (amortized in
relation to estimated premiums on the policies purchased with
interest equal to the liability rate which averages 5.5
percent).
(54) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(55) Common shares outstanding are increased to reflect the Conseco
shares issued in the THI Merger and the conversion of the THI
Convertible Notes in conjunction with the Exchange Offer.
(56) Effective October 1, 1995, THI sold its long term care business
to ATC. An adjustment is made to remove the loss on the sale of
the long term care business. However, the revenues, benefits and
expenses related to this business prior to its sale are not
eliminated, since the business is retained within the Conseco
consolidated group after the ATC Merger (and previous pro forma
adjustments for the ATC Merger did not include adjustments
related to THI's long term care business prior to its purchase
by ATC). In addition, expenses related to THI's spin-off from
its parent are eliminated. Such costs include certain legal,
accounting, actuarial and advisory fees.
Adjustments to the pro forma consolidated balance sheet to give effect to
the THI Merger as of September 30, 1996, are summarized below.
(57) Actively managed fixed maturity securities with a carrying value
of $83.9 million are assumed to be sold at the date of the THI
Merger.
(58) Short-term investments are reduced for: (i) payments made to
complete the THI Merger; (ii) the repayment of bank debt with a
balance of $58.3 million; (iii) the redemption of preferred
stock with a redemption value of $25.6 million; and (iv) the
payment of the $10.0 million premium in conjunction with the
Exchange Offer. Short-term investments are increased by
additional borrowings by Conseco of $18.5 million to complete
the THI Merger and related transactions.
(59) THI's historical cost of policies purchased is eliminated and
replaced with the cost of policies purchased recognized in the
THI Merger. Cost of policies purchased reflects the estimated
fair value of THI's business in force and represents the portion
of the cost to acquire THI that is allocated to the value of the
right to receive future cash flows from the acquired policies.
The 18 percent discount rate used to determine such value is the
rate of return required by Conseco to invest in the business
being acquired. In determining such rate of return, the
following factors are considered:
- The magnitude of the risks associated with each of the
actuarial assumptions used in determining the expected cash
flows.
- Cost of capital available to fund the acquisition.
- The perceived likelihood of changes in insurance regulations
and tax laws.
- Complexity of the acquired company.
- Prices paid (i.e., discount rates used in determining
valuations) on similar blocks of business sold recently.
18
<PAGE>
CONSECO AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The value allocated to the cost of policies purchased is based
on a preliminary valuation; accordingly, this allocation may be
adjusted upon final determination of such value. Expected gross
amortization of such value using current assumptions and
accretion of interest based on an interest rate equal to the
liability rate (such rate averages 5.5 percent) for each of the
years in the five-year period ending September 30, 2001, are as
follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
September 30, balance amortization of interest amortization balance
------------- -------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1997 $112.8 $19.2 $6.3 $12.9 $99.9
1998 99.9 15.9 5.6 10.3 89.6
1999 89.6 14.5 5.0 9.5 80.1
2000 80.1 13.3 4.4 8.9 71.2
2001 71.2 12.8 4.0 8.8 62.4
</TABLE>
(60) THI's cost of policies produced is eliminated since such amounts
are reflected in the determination of the cost of policies
purchased.
(61) All of the applicable pro forma balance sheet adjustments are
tax affected at the appropriate rate. Deferred tax assets are
netted against deferred tax liabilities.
(62) Reinsurance receivables and insurance liabilities related to
business of THI ceded to ATC are eliminated in consolidation.
(63) Notes payable are decreased to reflect: (i) the repayment of
bank debt of $58.3 million; and (ii) the conversion of the THI
Convertible Notes into Conseco common stock in conjunction with
the Exchange Offer. In addition, notes payable are increased to
reflect additional borrowings by Conseco used to complete the
THI Merger and related transactions.
(64) The prior shareholders' equity of THI is eliminated in
conjunction with the THI Merger. Common stock and additional
paid-in capital is increased by the value of Conseco common
stock issued in the THI Merger. The value of the THI Convertible
Notes represents the value of the Conseco common stock which
will be issued in conjunction with the Exchange Offer. Preferred
stock of THI is eliminated to reflect its redemption.
S:\ACCTING\SECRPT\10Q-3-96.CNC\EXH99.2A
19
