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 March 31, 1997
[ ] 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 May 1, 1997: 179,319,865
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
ASSETS
March 31, December 31,
1997 1996
---- ----
(unaudited) (audited)
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1997 - $17,959.0; 1996 - $17,203.3).......................................................... $17,623.5 $17,307.1
Equity securities at fair value (cost: 1997 - $150.6; 1996 - $97.6)............................ 147.8 99.7
Mortgage loans................................................................................. 334.4 356.0
Credit-tenant loans............................................................................ 491.2 447.1
Policy loans................................................................................... 539.7 542.4
Other invested assets ......................................................................... 270.2 259.6
Short-term investments......................................................................... 310.9 281.6
Assets held in separate accounts............................................................... 334.0 337.6
--------- ---------
Total investments.......................................................................... 20,051.7 19,631.1
Accrued investment income......................................................................... 310.6 296.9
Cost of policies purchased........................................................................ 2,470.1 2,015.0
Cost of policies produced......................................................................... 657.6 544.3
Reinsurance receivables........................................................................... 537.7 504.2
Income tax assets................................................................................. 151.2 8.8
Goodwill (net of accumulated amortization: 1997 - $101.8; 1996 - $83.2)........................... 2,835.2 2,200.8
Property and equipment (net of accumulated depreciation: 1997 - $72.9; 1996 - $69.7) ............. 119.9 110.5
Securities segregated for future redemption of redeemable preferred stock of a subsidiary........ 46.4 45.6
Other assets...................................................................................... 296.8 255.5
--------- ---------
Total assets............................................................................... $27,477.2 $25,612.7
========= =========
(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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<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, continued
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
1997 1996
---- ----
(unaudited) (audited)
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products.................................................................. $14,814.8 $14,795.5
Traditional products......................................................................... 4,370.9 3,180.1
Claims payable and other policyholder funds.................................................. 1,108.3 1,056.3
Unearned premiums............................................................................ 347.8 272.4
Investment borrowings.......................................................................... 318.3 383.4
Other liabilities.............................................................................. 666.6 709.5
Liabilities related to separate accounts ...................................................... 334.0 337.6
Notes payable.................................................................................. 1,268.1 1,094.9
--------- ---------
Total liabilities........................................................................ 23,228.8 21,829.7
--------- ---------
Minority interest:
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts......................................................................... 900.0 600.0
Mandatorily redeemable preferred stock of subsidiary........................................... 72.6 97.0
Common stock of subsidiary..................................................................... .7 .7
Shareholders' equity:
Preferred stock................................................................................ 133.1 267.1
Common stock and additional paid-in capital (no par value, 500,000,000 shares
authorized, shares issued and outstanding: 1997 - 183,245,130;
1996 - 167,128,228).......................................................................... 2,427.9 2,029.6
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1997 - $(67.2); 1996 - $21.5).............................................................. (124.8) 39.8
Other investments (net of applicable deferred income taxes:
1997 - $(1.0); 1996 - $(.5))............................................................... (1.9) (.9)
Retained earnings.............................................................................. 840.8 749.7
--------- ---------
Total shareholders' equity............................................................... 3,275.1 3,085.3
--------- ---------
Total liabilities and shareholders' equity............................................... $27,477.2 $25,612.7
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
3
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<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in millions)
(unaudited)
Three months ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Insurance policy income:
Traditional products.................................................................... $ 566.2 $342.8
Interest sensitive products............................................................. 103.9 27.0
Net investment income..................................................................... 409.2 273.7
Net investment gains...................................................................... 5.1 5.9
Fee revenue and other income.............................................................. 14.6 12.0
Restructuring income...................................................................... - 30.4
-------- -------
Total revenues........................................................................ 1,099.0 691.8
-------- -------
Benefits and expenses:
Insurance policy benefits................................................................. 413.7 274.7
Change in future policy benefits.......................................................... 41.6 9.2
Interest expense on annuities and financial products...................................... 189.9 139.1
Interest expense on notes payable......................................................... 25.8 28.4
Interest expense on short-term investment borrowings...................................... 2.8 3.7
Amortization related to operations........................................................ 103.6 44.6
Amortization related to investment gains.................................................. 11.8 9.1
Other operating costs and expenses........................................................ 114.4 62.8
-------- -------
Total benefits and expenses........................................................... 903.6 571.6
-------- -------
Income before income taxes, minority interest and extraordinary charge ............... 195.4 120.2
Income tax expense........................................................................... 70.6 44.9
-------- -------
Income before minority interest and extraordinary charge ............................. 124.8 75.3
Minority interest:
Distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts......................................................... 8.7 -
Dividends on preferred stock of subsidiaries.............................................. 1.3 2.6
Equity in earnings of subsidiaries........................................................ - 9.0
-------- -------
Income before extraordinary charge ................................................... 114.8 63.7
Extraordinary charge on extinguishment of debt, net of taxes and minority interest........... 3.3 17.4
-------- -------
Net income............................................................................ 111.5 46.3
Less amounts applicable to preferred stock:
Charge related to induced conversions..................................................... 12.3 -
Preferred stock dividends................................................................. 2.3 8.1
-------- -------
Net income applicable to common stock................................................. $ 96.9 $ 38.2
======== =======
(continued on next page)
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
4
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<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS, continued
(Dollars in millions, except per share data)
(unaudited)
Three months ended
March 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding....................................................... 203,620,400 99,367,100
Income before extraordinary charge........................................................ $.51 $.59
Extraordinary charge...................................................................... .02 .17
----- -----
Net income.............................................................................. $.49 $.42
==== ====
Fully diluted:
Weighted average shares outstanding....................................................... 203,620,400 118,281,000
Income before extraordinary charge........................................................ $.51 $.54
Extraordinary charge...................................................................... .02 .15
---- ----
Net income.............................................................................. $.49 $.39
==== ====
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)
Three months ended
March 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Preferred stock:
Balance, beginning of period........................................................... $ 267.1 $ 283.5
Issuance of convertible preferred stock.............................................. - 267.1
Conversion of preferred stock into common shares..................................... (134.0) -
-------- --------
Balance, end of period................................................................. $ 133.1 $ 550.6
======== ========
Common stock and additional paid-in capital:
Balance, beginning of period........................................................... $2,029.6 $ 157.2
Amounts related to stock options and employee benefit plans.......................... 11.2 7.4
Tax benefit related to issuance of shares under employee benefit plans............... .5 15.3
Conversion of convertible debentures into common shares.............................. 142.1 -
Issuance of shares in merger with Capitol American Financial Corporation............. 115.7 -
Conversion of preferred stock into common shares..................................... 134.0 -
Cost of issuance of preferred stock.................................................. (3.3) (8.5)
Cost of shares acquired charged to common stock and additional paid-in capital....... - (3.1)
Other................................................................................ (1.9) -
-------- --------
Balance, end of period................................................................. $2,427.9 $ 168.3
======== ========
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of period......................................................... $ 39.8 $ 112.6
Change in unrealized appreciation (depreciation)................................... (164.6) (129.0)
-------- ---------
Balance, end of period............................................................... $ (124.8) $ (16.4)
======== =========
Other investments:
Balance, beginning of period......................................................... $ (.9) $ .1
Change in unrealized appreciation (depreciation)................................... (1.0) (.6)
-------- ---------
Balance, end of period............................................................... $ (1.9) $ (.5)
======== =========
Retained earnings:
Balance, beginning of period........................................................... $ 749.7 $ 558.3
Net income .......................................................................... 111.5 46.3
Cost of shares acquired charged to retained earnings................................. - (22.9)
Amounts applicable to preferred stock:
Charge related to induced conversion of convertible preferred stock................ (12.3) -
Dividends on preferred stock....................................................... (2.3) (8.1)
Dividends on common stock............................................................ (5.8) (.8)
--------- ---------
Balance, end of period................................................................. $ 840.8 $ 572.8
======== =========
Total shareholders' equity......................................................... $3,275.1 $1,274.8
======== ========
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)
Three months ended
March 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................................... $ 111.5 $ 46.3
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation............................................................... 118.6 56.0
Income taxes................................................................................ 58.3 1.0
Insurance liabilities....................................................................... (7.4) 21.3
Interest credited to insurance liabilities.................................................. 189.9 139.1
Fees charged to insurance liabilities....................................................... (103.7) (25.8)
Accrual and amortization of investment income............................................... (4.2) (23.8)
Deferral of cost of policies produced....................................................... (109.6) (68.0)
Restructuring income........................................................................ - (30.4)
Minority interest........................................................................... - 8.7
Extraordinary charge on extinguishment of debt.............................................. 5.1 26.7
Net investment gains........................................................................ (5.1) (5.9)
Other....................................................................................... (39.7) 20.0
--------- ---------
Net cash provided by operating activities............................................... 213.7 165.2
--------- ---------
Cash flows from investing activities:
Sales of investments.......................................................................... 3,487.7 1,532.8
Maturities and redemptions.................................................................... 127.8 165.0
Purchases of investments...................................................................... (3,592.0) (1,848.5)
Purchase of property and casualty insurance brokerage businesses.............................. - (12.0)
Purchase of mandatorily redeemable preferred stock of subsidiary.............................. (27.6) -
Repurchase of equity securities by Bankers Life Holding Corporation........................... - (27.7)
Acquisition of Capitol American Financial Corporation, net of cash held at date of merger..... (522.1) -
Other ........................................................................................ (27.6) (19.1)
--------- --------
Net cash used by investing activities .................................................. (553.8) (209.5)
--------- --------
Cash flows from financing activities:
Issuance of Company-obligated mandatorily redeemable preferred stock of subsidiary trusts..... 296.7 -
Issuance of shares related to stock options and employee benefit plans ...................... 9.8 .9
Issuance of convertible preferred stock....................................................... - 258.6
Issuance of notes payable..................................................................... 745.8 391.1
Payments on notes payable..................................................................... (548.7) (638.2)
Payments to repurchase equity securities of Conseco........................................... - (21.5)
Investment borrowings......................................................................... (65.1) (13.0)
Deposits to insurance liabilities............................................................. 456.8 381.2
Withdrawals from insurance liabilities........................................................ (504.9) (393.0)
Charge related to induced conversion of convertible preferred stock........................... (12.3) -
Dividends paid ............................................................................... (8.7) (5.9)
--------- --------
Net cash provided (used) by financing activities........................................ 369.4 (39.8)
--------- --------
Net increase (decrease) in short-term investments....................................... 29.3 (84.1)
Short-term investments, beginning of period...................................................... 281.6 189.9
--------- --------
Short-term investments, end of period............................................................ $ 310.9 $ 105.8
========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
7
<PAGE>
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 1996 Form 10-K of Conseco,
Inc. ("We", "Conseco" or the "Company").
BASIS OF PRESENTATION
Our unaudited consolidated financial statements as of and for the periods
ended March 31, 1997 and 1996, reflect all adjustments, consisting only of
normal recurring items, which are necessary to present fairly Conseco's
financial position and results of operations on a basis consistent with that of
our prior audited consolidated financial statements. We have reclassified
certain amounts from the prior period to conform to the 1997 presentation. We
have restated all share and per share amounts for the February 11, 1997, and
April 1, 1996 two-for-one stock splits.
In preparing financial statements in conformity with generally accepted
accounting principles ("GAAP"), 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. Conseco's ownership of Bankers Life Holding
Corporation ("BLH") was 88 percent at December 31, 1995, and increased to 90.5
percent at March 31, 1996, as a result of share repurchases by BLH. On December
31, 1996, we completed the purchase of BLH common shares we did not already own
in a transaction pursuant to which BLH merged with a wholly owned subsidiary of
Conseco (the "BLH Merger"). The accounts of BLH are consolidated with Conseco's
accounts for all periods in the accompanying consolidated financial statements.
The assets and liabilities of BLH included in Conseco's 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 made by Conseco
Capital Partners, L.P. is valued as of that acquisition date; (ii) the portion
of BLH's net assets acquired in 1993, 1995 and the first quarter of 1996 is
valued as of the dates of their purchase; and (iii) the portion of BLH's net
assets acquired in the BLH Merger is valued as of December 31, 1996.
Conseco Capital Partners II, L.P. ("Partnership II"), Conseco's second
investment partnership, acquired American Life Holdings, Inc. ("ALH") on
September 29, 1994. Because Conseco was the sole general partner of Partnership
II, Conseco controlled Partnership II and ALH even though our ownership interest
was less than 50 percent. Because of this control, Conseco's consolidated
financial statements were required to include the accounts of ALH. Immediately
after the acquisition of ALH, Conseco, through its direct investment and through
its equity interests in the investments made by BLH, CCP and WNC, had
approximately a 27 percent ownership interest in ALH. Conseco's ownership
interest in ALH increased to 36 percent in 1995.
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
Stock Purchase") and Partnership II was terminated. We were required to use
step-basis accounting when we acquired the shares of ALH common stock in the ALH
Stock Purchase and for our previous acquisitions. As a result, the assets and
liabilities of ALH included in Conseco's 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 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 Stock Purchase is valued as of September 30,
1996.
On August 2, 1996, we completed the acquisition (the "LPG Merger") of Life
Partners Group, Inc. ("LPG") and LPG became a wholly owned subsidiary of
Conseco. On December 17, 1996, we completed the acquisition (the "ATC Merger")
of American Travellers Corporation ("ATC") and ATC was merged with and into
Conseco, with Conseco being the surviving corporation. On December 23, 1996, we
completed the acquisition (the "THI Merger") of Transport Holdings Inc. ("THI")
and THI was merged with and into Conseco with Conseco being the surviving
corporation. On March 4, 1997, we completed the acquisition (the "CAF Merger")
of Capitol American Financial Corporation ("CAF") and CAF became a wholly owned
subsidiary of Conseco. The accounts of LPG are consolidated with Conseco
effective July 1, 1996; the accounts of ATC and THI are consolidated effective
December 31, 1996; and the accounts of CAF are consolidated effective January 1,
1997.
8
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITY SECURITIES
We classify fixed maturity securities into three categories: "actively
managed" (which are carried at estimated fair value), "trading account" (which
are carried at estimated fair value) and "held to maturity" (which are carried
at amortized cost). We did not classify any fixed maturity securities in the
held to maturity or trading categories at March 31, 1997.
Adjustments to carry actively managed fixed maturity securities at fair
value have no effect on our earnings. We record them, net of tax and other
adjustments, as an adjustment to shareholders' equity. The components of the
balance sheet caption "unrealized appreciation (depreciation) of fixed maturity
securities, net" in shareholders' equity at March 31, 1997 and December 31, 1996
are as follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
------------------------------------- -----------------------------------
Effect of Effect of
fair value Carrying fair value Carrying
Cost basis adjustments value Cost basis adjustments value
---------- ----------- ----- ---------- ----------- -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Actively managed fixed maturity
securities............................... $17,959.0 $(335.5) $17,623.5 $17,203.3 $103.8 $17,307.1
Other balance sheet items:
Cost of policies purchased............... 2,360.5 109.6 2,470.1 2,059.2 (44.2) 2,015.0
Cost of policies produced................ 623.7 33.9 657.6 542.6 1.7 544.3
Income tax assets........................ 84.0 67.2 151.2 30.3 (21.5) 8.8
------- ------
Unrealized appreciation (depreciation)
of fixed maturity securities, net..... $(124.8) $ 39.8
======= ======
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments is primarily limited
to S&P 500 Index Options. We buy these options in order to offset changes in
policyholder liabilities resulting from certain policy benefits tied to the S&P
500 Index. We buy these options at the time we issue the related annuity
contracts, with similar maturity dates and benefit features that fluctuate as
the value of the options change. Accordingly, changes in the value of the
options are offset by changes to policyholder liabilities; such changes are
reflected in the consolidated statement of operations. The credit risk
associated with these options is considered low because such options are
purchased from strong, creditworthy parties. Both the carrying value and fair
value of these contracts were $9.9 million at March 31, 1997. Such instruments
are classified as other invested assets.
ACQUISITION OF CAPITOL AMERICAN FINANCIAL CORPORATION
On March 4, 1997, we completed the CAF Merger. Each outstanding share of CAF
common stock was exchanged for the right to receive $30.75 in cash plus 0.1647
of a share of Conseco common stock. We paid $549.3 million (including
acquisition expenses of $10.7 million) in cash and issued 3.0 million shares of
Conseco common stock (including .1 million common equivalent shares issued in
exchange for CAF's outstanding options) with a value of approximately $115.7
million. We also assumed a note payable of CAF of $31.0 million, which was
repaid at the date of the CAF Merger.
CAF, through its insurance subsidiaries, underwrites, markets and
distributes individual and group supplemental health and accident insurance.
CAF's principal insurance subsidiary is Capitol American Life Insurance Company
("CALI"), an Arizona domiciled insurance company. CALI is licensed to sell its
products in 47 states, the District of Columbia, Puerto Rico and the U.S. Virgin
Islands, and markets its products through a sales force consisting of
independent agents, agent organizations and brokers.
We accounted for the CAF Merger under the purchase method of accounting
effective January 1, 1997. Under this method, we allocated the cost to acquire
CAF to the assets and liabilities acquired based on their fair values as of
January 1, 1997, and recorded the excess of the total purchase cost over the
fair value of the liabilities we assumed as goodwill.
9
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We allocated the total purchase cost to the assets and liabilities acquired
based on a preliminary determination of their fair values. We may adjust this
allocation when we make a final determination of such values. We don't expect
any adjustment to be material, however.
The following summarizes the effects of the CAF Merger on the consolidated
balance sheet and consolidated statement of cash flows as of the effective date
of the CAF Merger (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Fixed maturities.......................................................................... $825.1
Other investments......................................................................... 9.4
Accrued investment income................................................................. 8.6
Cost of policies purchased................................................................ 400.1
Goodwill.................................................................................. 371.4
Income taxes.............................................................................. (59.8)
Insurance liabilities..................................................................... (874.5)
Notes payable............................................................................. (31.0)
Common stock and additional paid-in capital............................................... (115.7)
Other .................................................................................... (11.5)
------
Cash used (net of $27.2 million cash held by CAF at date of the CAF Merger)......... $522.1
======
</TABLE>
CHANGES IN NOTES PAYABLE
Notes payable of the Company were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
Interest rate 1997 1996
------------- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Borrowings under revolving credit agreements......................... 5.98% (1) $ 780.0 $ 465.0
Senior notes due 2003................................................ 8.125% 170.0 170.0
Senior notes due 2004................................................ 10.5% 200.0 200.0
Subordinated notes due 2004.......................................... 11.25% 22.0 98.1
Convertible subordinated debentures due 2005......................... 6.5% 41.8 102.8
Other................................................................Various 44.5 45.2
-------- --------
Total principal amount.......................................... 1,258.3 1,081.1
Unamortized net premium.............................................. 9.8 13.8
-------- --------
Total........................................................... $1,268.1 $1,094.9
======== ========
<FN>
(1) Current weighted average rate at March 31, 1997.
</FN>
</TABLE>
First quarter 1997 changes in notes payable
In the first quarter of 1997, we repurchased $76.1 million par value of the
11.25 percent senior subordinated notes due 2004 for $87.7 million. We
recognized an extraordinary charge of $3.3 million (net of a $1.8 million tax
benefit) as a result of such repurchases.
During the first quarter of 1997, $61.0 million par value of convertible
subordinated debentures due 2005 were converted into 4.7 million shares of
Conseco common stock. Such convertible debentures were acquired in conjunction
with the ATC Merger. We paid $4.2 million to induce the holders to convert such
convertible subordinated debentures. The charge recognized as a result of the
inducement payment was not significant since such amount approximated amounts
reflected in the fair value of the debentures at the
10
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ATC Merger date. At March 31, 1997, the value of the remaining convertible
debentures in excess of the principal balance (the value attributable to the
conversion feature) of $58.9 million is included in other liabilities.
First quarter 1996 changes in notes payable
In January 1996, we repaid $245.0 million principal amount of borrowings
under a credit agreement using the proceeds of the sale of convertible preferred
stock. As a result of the prepayment and amendments to the credit agreement
(including substantive modifications of the maturity date and interest rate
terms), we recognized an extraordinary charge of $9.3 million (net of a $5.0
million tax benefit) representing the unamortized debt issuance costs related to
the prior agreement.
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. In
the first quarter of 1996, we recognized an extraordinary charge of $8.1 million
(net of a $4.3 million tax benefit) representing the unamortized debt issuance
costs related to the prior agreement.
CHANGES IN PREFERRED STOCK
During the first quarter of 1997, 2,192,000 shares of Preferred Redeemable
Increased Dividend Equity Securities Convertible Preferred Stock ("PRIDES") were
converted by holders of such shares into 7.5 million shares of common stock. We
paid $12.3 million to induce the holders to convert the PRIDES. Such payment is
reflected in the consolidated financial statements as a dividend paid to such
holders.
CHANGES IN COMMON STOCK
Changes in the number of shares of common stock outstanding for the first
three months of 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, December 31, 1996.................................................................. 167,128,228
Stock options exercised.................................................................. 890,615
Shares issued in conjunction with the CAF Merger......................................... 2,881,597
Common shares converted from convertible subordinated debentures......................... 4,728,223
Common shares converted from PRIDES...................................................... 7,496,982
Shares issued under employee benefit and compensation plans.............................. 119,485
-----------
Balance, March 31, 1997..................................................................... 183,245,130
===========
</TABLE>
CHANGES IN MINORITY INTEREST
Minority interest represents the interests of investors other than Conseco
in its subsidiaries. Minority interest at March 31, 1997, included: (i) $900.0
million par value of Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts; (ii) $72.6 million interest in the mandatorily
redeemable preferred stock of a subsidiary; and (iii) $.7 million interest in
the common stock of a subsidiary.
Effective March 31, 1997, Conseco Financing Trust III, a subsidiary of
Conseco, issued 300,000 Capital Securities at $1,000 per security. Each Capital
Security will pay cumulative cash distributions at the annual rate of 8.796
percent of the stated $1,000 liquidation amount per security payable
semi-annually commencing October 1, 1997. The Capital Securities are fully and
unconditionally guaranteed by us as to distributions and other payments. Conseco
Financing Trust III used the proceeds of the offering to acquire an equivalent
amount of 8.796% Subordinated Deferrable Interest Debentures due April 1, 2027
(the "Debentures") issued by us. We, in turn, used the net proceeds from the
issuance of the Debentures of approximately $296.7 million (after underwriting
and associated costs) to repay bank debt. The sole asset of Conseco Financing
Trust III is the debentures. We can cause the Capital Securities to be redeemed
at our option at a price equal to the greater of (i) the principal amount or
(ii) the sum of the present values of the principal amount and scheduled
interest payments from the redemption date to the maturity date. The Debentures
are subordinated to all of our senior indebtedness and mature on April 1, 2027.
11
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Changes in minority interest during the first three months of 1997 and 1996
are summarized below:
<TABLE>
<CAPTION>
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Minority interest, beginning of period......................................................... $697.7 $403.3
Changes in investments made by minority shareholders:
Issuance of Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts....................................................................... 300.0 -
Repurchase of mandatorily redeemable preferred stock of a subsidiary...................... (24.0) -
Repurchase by BLH of its common stock..................................................... - (18.7)
Minority interests' equity in the change in financial position of the
Company's subsidiaries:
Net income................................................................................ 10.0 11.6
Unrealized appreciation (depreciation) of securities ..................................... - (94.0)
Dividends................................................................................. (10.0) (2.9)
Amortization of value in excess of par of mandatorily redeemable preferred stock
of a subsidiary......................................................................... (.4) -
------ ------
Minority interest, end of period .............................................................. $973.3 $299.3
====== ======
</TABLE>
DIRECTOR, EXECUTIVE AND SENIOR OFFICER STOCK PURCHASE PLAN
The Director, Executive and Senior Officer Stock Purchase Plan is designed
to encourage direct, long-term ownership of Conseco stock by Board members,
executive officers and certain senior officers. Under the program, up to 8.0
million shares of Conseco common stock may be purchased in open market or
negotiated transactions with independent parties. At March 31, 1997, 4.0 million
shares had been purchased under the plan. Purchases are financed by personal
loans to the participants from a bank. Such loans are collateralized 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, we provide
loans to the participants for interest payments under the bank loans. At March
31, 1997, the bank loans guaranteed by Conseco totaled $83.4 million, the loans
provided by Conseco for interest totaled $3.2 million and the common stock that
collateralizes the loans had a fair value of $142.5 million.
CONSOLIDATED STATEMENT OF CASH FLOWS
The following non-cash items were not reflected in the consolidated
statement of cash flows in 1997: (i) the issuance of Conseco common stock valued
at $115.7 million in the CAF Merger; (ii) the issuance of Conseco common stock
to employee benefit plans of $1.4 million; (iii) the tax benefit of $.5 million
related to the issuance of Conseco common stock under employee benefit plans;
(iv) the conversion of $134.0 million of PRIDES into 2.2 million shares of
Conseco common stock; and (v) the conversion of $61.0 million par value of
convertible debentures into 4.7 million shares of Conseco common stock. The
following non-cash items were not reflected in the consolidated statement of
cash flows in 1996: (i) the issuance of Conseco common stock to employee benefit
plans of $1.3 million; and (ii) the tax benefit of $15.3 million related to the
issuance of Conseco common stock under employee benefit plans.
PRO FORMA DATA
The pro forma data are presented as if the following transactions had all
occurred on January 1, 1996: (1) the issuance of 4.37 million shares of Conseco
PRIDES 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; (3) the LPG Merger; (4) the call for redemption of
Conseco's Series D Convertible Preferred Stock completed September 26, 1996; (5)
the ALH Stock Purchase; (6) the issuance of $275.0 million of Company-obligated
mandatorily redeemable preferred securities of a subsidiary trust having a
distribution rate of 9.16 percent; (7) the issuance of $325.0 million of
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust having a distribution rate of 8.70 percent; (8) the ATC Merger; (9) the
THI Merger; (10) the BLH Merger; (11) the CAF Merger; and (12) the issuance of
$300.0 million of Company-obligated mandatorily redeemable preferred securities
of a subsidiary trust having a distribution rate of 8.796 percent.
12
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1997 1996
---- ----
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues.................................................................................. $1,099.0 $1,085.8
Income before extraordinary charge........................................................ 113.5 96.2
Income before extraordinary charge per common share:
Primary................................................................................ $.50 $.51
Fully diluted.......................................................................... .50 .48
</TABLE>
LIABILITIES RELATED TO TERMINATION AND RELOCATION OF EMPLOYEES OF ACQUIRED
COMPANIES
The Company intends to minimize the operating expenses of the companies
acquired during 1996 and 1997 by centralizing their operations with those of its
other companies. Accordingly, most employees of the acquired companies will
either be terminated or relocated. The following estimated liabilities related
to these terminations and relocations were included in the costs to acquire
these companies: $8.2 million, with respect to LPG; $3.3 million, with respect
to ALH; $5.2 million, with respect to ATC; $7.8 million, with respect to THI;
and $11.1 million with respect to CAF. Through March 31, 1997, the plans with
respect to LPG and ALH have been completed and the amounts established as a
liability for such plans, consisting primarily of employee severance benefits,
have been paid. There have been no significant adjustments to the estimated
liabilities established for the termination and relocation costs. If the
ultimate costs to complete these plans are less than the estimated liability,
the excess liability will be reflected as an adjustment to the liabilities
assumed (with a corresponding adjustment to goodwill). If the ultimate costs to
complete these plans are more than the estimated liability, an adjustment to the
liability will be made (with a corresponding adjustment to goodwill), if such
adjustment is determined within one year of the date of each of the mergers.
Thereafter, any additional amounts will be included in the determination of the
Company's net income.
PENDING MERGER
On December 15, 1996, Conseco and Pioneer Financial Services, Inc. ("PFS")
entered into an Agreement and Plan of Merger (the "PFS Merger Agreement")
pursuant to which PFS would become a wholly owned subsidiary of Conseco (the
"PFS Merger"). Under the PFS Merger Agreement, each of the approximately 16.9
million shares of PFS common stock and common stock equivalents would be
converted into the right to receive a fraction of a share of Conseco common
stock having a value between $25.00 and $28.00, calculated as follows: (i) if
the Conseco/PFS Share Price (as defined below) is greater than or equal to
$28.00 per share and less than or equal to $31.36 per share, .8928 of a share of
Conseco common stock; (ii) if the Conseco/PFS Share Price is less than $28.00
per share, the fraction (rounded to the nearest ten-thousandth) of a share of
Conseco common stock determined by dividing $25.00 by the Conseco/PFS Share
Price; or (iii) if the Conseco/PFS Share Price is greater than $31.36 per share,
the fraction (rounded to the nearest ten-thousandth) of a share of Conseco
common stock determined by dividing $28.00 by the Conseco/PFS Share Price. The
"Conseco/PFS Share Price" shall be equal to the average of the closing prices of
the Conseco common stock on the NYSE Composite Transactions Reporting System for
the ten trading days immediately preceding the second trading day prior to the
date of the PFS Merger. Assuming each PFS common and common equivalent share is
exchanged for the right to receive a fraction of a share of Conseco common stock
determined based on a Conseco/PFS Share Price that exceeds $28.00 per share
(such price being exceeded on May 13, 1997), Conseco will issue 8.5 million
shares of Conseco common stock with a value of approximately $353.8 million to
acquire the PFS common stock. In addition, Conseco will assume notes payable of
PFS of $26.4 million and the 6 1/2% Convertible Subordinated Notes due 2003 of
PFS, which will be convertible into an assumed 2.9 million shares of Conseco
common stock with a value of approximately $120.7 million.
PFS, through its insurance subsidiaries, underwrites life insurance,
annuities and health insurance in selected niche markets throughout the United
States. PFS had total assets of approximately $1.8 billion at December 31, 1996.
PFS's life, annuity and health insurance premiums collected were $751.3 million
in 1996.
13
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 changes the computational guidelines for earnings per share
information. We will adopt the provisions of SFAS 128 in our December 31, 1997,
consolidated financial statements. SFAS 128 will eliminate the presentation of
primary earnings per share and replace it with basic earnings per share. Basic
earnings per share differs from primary earnings per share because common stock
equivalents are not considered in computing basic earnings per share. Fully
diluted earnings per share will be replaced with diluted earnings per share.
Diluted earnings per share is similar to fully diluted earnings per share,
except in determining the number of dilutive shares outstanding for options and
warrants, the proceeds that would be received upon the conversion of all
dilutive options and warrants are assumed to be used to repurchase the Company's
common shares at the average market price of such stock during the period. For
fully diluted earnings per share, the higher of the average market price or
ending market price is used. If SFAS 128 had been in effect, we would have
reported the following earnings per share amounts for the three months ended
March 31, 1997 and 1996:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Basic earnings per share.................................................................. $.55 $.51
Diluted earnings per share................................................................ .49 .40
</TABLE>
SUBSEQUENT EVENTS
Share Repurchase Program
In April 1997, we commenced a new program to repurchase up to 5 million
Conseco common shares in open market or negotiated transactions. The timing and
terms of the purchases are to be determined based on market conditions and other
considerations. We repurchased 4.1 million shares under the program in April
1997 for $156.8 million.
Pending acquisition of Colonial Penn Life Insurance Company
On April 30, 1997, Conseco and Leucadia National Corporation ("Leucadia")
entered into an agreement under which we will acquire Leucadia's Colonial Penn
Life Insurance Company unit, a direct marketer of whole life insurance to senior
citizens, for $460 million in cash and notes. The transaction, which is subject
to customary terms and conditions, including regulatory approvals, is expected
to be completed in the third quarter of 1997. The Colonial Penn Life Insurance
Company unit had total assets of approximately $1.0 billion at March 31, 1997.
14
<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 the results
of operations and the significant changes in the balance sheet items. Changes in
1997 and 1996 balances in the consolidated financial statements are largely
affected by the LPG Merger, the ALH Stock Purchase, the ATC Merger, the THI
Merger, the BLH Merger, the CAF Merger and various financings described in the
notes to the consolidated financial statements included herein and the notes to
the consolidated financial statements included in our 1996 Form 10-K. This
discussion should be read in conjunction with both sets of consolidated
financial statements and notes.
RESULTS OF OPERATIONS
We conduct and manage our business through four segments, reflecting our
major lines of insurance business and target markets: (i) supplemental health
insurance; (ii) annuities; (iii) life insurance; and (iv) other.
Consolidated Results and Analysis
The following table and narrative summarize the consolidated results of our
operations:
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1997 1996
---- ----
(Dollars in millions,
except per share data)
<S> <C> <C>
Operating earnings........................................................................... $119.1 $ 48.4
Net investment losses, net of related costs, amortization and taxes.......................... (4.3) (2.4)
Restructuring income......................................................................... - 17.7
------ ------
Income before extraordinary charge.................................................... 114.8 63.7
Extraordinary charge......................................................................... 3.3 17.4
------ ------
Net income............................................................................ 111.5 46.3
Less amounts applicable to preferred stock:
Charge related to induced conversions..................................................... 12.3 -
Preferred stock dividends................................................................. 2.3 8.1
------ ------
Net income applicable to common stock................................................. $ 96.9 $ 38.2
====== ======
Per fully diluted common share:
Weighted average shares outstanding (in millions)......................................... 203,620 118,281
Operating earnings........................................................................ $ .59 $ .41
Net investment losses, net of related costs, amortization and taxes....................... (.02) (.02)
Restructuring income...................................................................... - .15
Charge related to induced conversion of preferred stock................................... (.06) -
------- -------
Income before extraordinary charge.................................................... .51 .54
Extraordinary charge...................................................................... .02 .15
------- -------
Net income............................................................................ $ .49 $ .39
===== =====
</TABLE>
15
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Our first quarter 1997 operating earnings were $119.1 million, or $.59 per
fully diluted share, up 146 percent and 44 percent, respectively, over the first
quarter of 1996. Operating earnings increased primarily as a result of the LPG
Merger (completed July 1996), the ALH Stock Purchase (September 1996), the ATC
Merger (December 1996), the THI Merger (December 1996), the BLH Merger (December
1996), and the CAF Merger (January 1997). The percentage increase in operating
earnings was greater than the percentage increase in operating earnings per
fully diluted share primarily because of the 72 percent increase in common
shares or equivalents outstanding in the 1997 period resulting from the LPG
Merger, the ATC Merger, the THI Merger and the CAF Merger.
Net income of $111.5 million in the first quarter of 1997, or $.49 per fully
diluted share, included: (i) net investment losses (net of related costs,
amortization and taxes) of $4.3 million, or 2 cents per fully diluted share;
(ii) an extraordinary charge of $3.3 million, or 2 cents per share, related to
the early retirement of debt; and (iii) a charge of 6 cents per share related to
the induced conversion of preferred stock (treated as a preferred stock
dividend). Net income of $46.3 million for the first quarter of 1996, or 39
cents per fully diluted share, included: (i) net investment losses (net of
related costs, amortization and taxes) of $2.4 million, or 2 cents per share;
(ii) restructuring income of $17.7 million, or 15 cents per share, primarily
arising from the sale of our investment in Noble Broadcast Group, Inc.; and
(iii) an extraordinary charge of $17.4 million, or 15 cents per share, related
to the early retirement of debt.
Total revenues include net investment gains of $5.1 million in the first
quarter of 1997 and $5.9 million in the first quarter of 1996. Excluding net
investment gains, total revenues were $1,093.9 million in the first quarter of
1997, up 59 percent from $685.9 million in the 1996 quarter. Total revenues in
the 1997 quarter include revenues of LPG, ATC, THI and CAF (such companies were
acquired in periods subsequent to the first quarter of 1996). Total revenues in
the 1996 quarter include restructuring income of $30.4 million primarily arising
from the sale of our investment in Noble Broadcast Group, Inc.
16
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
First Quarter of 1997 Compared to First Quarter of 1996:
The following tables and narratives summarize the results of our operations
by business segment.
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Income before income taxes, minority interest and extraordinary charge:
Supplemental health:
Operating income ......................................................................... $ 84.3 $ 30.1
Net investment losses, net of related costs and amortization ............................. (2.3) (.3)
------ ------
Income before income taxes, minority interest and extraordinary charge................ 82.0 29.8
------ ------
Annuities:
Operating income ......................................................................... 65.4 60.9
Net investment losses, net of related costs and amortization ............................. (.7) (.5)
------ ------
Income before income taxes, minority interest and extraordinary charge................ 64.7 60.4
------ ------
Life insurance:
Operating income.......................................................................... 58.0 18.5
Net investment losses, net of related costs and amortization.............................. (3.4) (.4)
------ ------
Income before income taxes, minority interest and extraordinary charge................ 54.6 18.1
------ ------
Other:
Operating income.......................................................................... 24.2 13.4
Net investment losses, net of related costs and amortization.............................. (.3) (2.0)
------ ------
Income before income taxes, minority interest and extraordinary charge................ 23.9 11.4
------ ------
Interest and other corporate expenses....................................................... (29.8) (29.9)
------ ------
Restructuring income........................................................................ - 30.4
------ ------
Consolidated earnings:
Operating income.......................................................................... 202.1 93.0
Net investment losses, net of related costs and amortization ............................. (6.7) (3.2)
Restructuring activities.................................................................. - 30.4
------ ------
Income before income taxes, minority interest and extraordinary charge................ 195.4 120.2
Income tax expense............................................................................. 70.6 44.9
------ ------
Income before minority interest and extraordinary charge.............................. 124.8 75.3
Minority interest in consolidated subsidiaries:
Distributions on Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts...................................................................... 8.7 -
Dividends on preferred stock of subsidiaries................................................ 1.3 2.6
Equity in earnings of subsidiaries.......................................................... - 9.0
------ ------
Income before extraordinary charge.................................................... 114.8 63.7
Extraordinary charge on extinguishment of debt, net of taxes and minority interest............. 3.3 17.4
------ ------
Net income............................................................................ $111.5 $ 46.3
====== ======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Supplemental health:
Three months ended
March 31,
-------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Premiums collected:
Medicare supplement (first year)............................................................ $ 20.2 $ 19.4
Medicare supplement (renewal)............................................................... 147.3 143.9
------ ------
Subtotal - Medicare supplement.......................................................... 167.5 163.3
------ ------
Long-term care (first year)................................................................. 35.0 12.4
Long-term care (renewal).................................................................... 119.1 33.3
------ ------
Subtotal - long-term care............................................................... 154.1 45.7
------ ------
Specified disease (first year).............................................................. 13.6 -
Specified disease (renewal)................................................................. 83.0 -
------ ------
Subtotal - specified disease............................................................ 96.6 -
------ ------
Total supplemental health premiums collected............................................ $418.2 $209.0
====== ======
Insurance policy income........................................................................ $411.4 $198.7
Net investment income.......................................................................... 56.9 16.2
------ ------
Total revenues (a)...................................................................... 468.3 214.9
------ ------
Insurance policy benefits and change in future policy benefits................................. 265.9 139.3
Amortization related to operations............................................................. 48.4 17.5
Interest expense on investment borrowings...................................................... .4 .2
Other operating costs and expenses............................................................. 69.3 27.8
------ ------
Total benefits and expenses (a)......................................................... 384.0 184.8
------ ------
Operating income before income taxes, minority interest and extraordinary charge........ 84.3 30.1
Net investment losses, net of related costs and amortization................................... (2.3) (.3)
------ ------
Income before income taxes, minority interest and extraordinary charge.................. $ 82.0 $ 29.8
====== ======
Loss ratios:
Medicare supplement products................................................................ 69.7% 71.7%
Long-term care products..................................................................... 63.6 64.4
Specified disease products.................................................................. 58.5 -
- --------------------
<FN>
(a) Revenues exclude net investment gains; benefits and expenses exclude
amortization related to net investment gains.
</FN>
</TABLE>
General: This segment includes Medicare supplement and long-term care
insurance products, primarily sold to senior citizens. Through December 31,
1996, the supplemental health operations consist solely of BLH's Medicare
supplement and long-term care products, distributed through a career agency
force. Beginning in 1997, this segment includes the specified disease products
of THI and CAF and the long-term care products of ATC; these products are
distributed through professional independent producers. After the completion of
the PFS Merger, the segment will also include various supplemental health
products of PFS, which are also distributed through professional independent
producers. The profitability of this segment largely depends on the overall
level of sales, persistency of inforce business, claim experience and expense
control.
18
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Premiums collected by this segment in 1997 were $418.2 million, compared to
$209.0 million in 1996 due to the previously discussed recent acquisitions.
Medicare supplement policies accounted for 78 percent of this segment's
collected premiums in the first quarter of 1996 and 40 percent in the first
quarter of 1997. The change in mix of premiums collected reflects the long-term
care and specified disease premiums collected by THI, ATC and CAF. Collected
premiums on Medicare supplement policies increased 2.6 percent in 1997, to
$167.5 million. Such increase primarily reflects a larger base of premiums due
to rate increases. The number of new Medicare supplement policies sold in the
first quarters of 1997 and 1996 totaled 11,692 and 13,421, respectively, and
annualized new business premiums were $11.6 million and $12.9 million,
respectively. Medicare supplement premiums collected in 1997 by the recently
acquired companies were not significant. New policy sales have been affected by
steps taken to improve profitability by increasing premium rates and changing
the commission structure and underwriting criteria for these policies and by
increased competition from alternative providers, including HMOs.
Premiums collected on long-term care policies in 1997 were $154.1 million
compared to $45.7 million in 1996. Annualized new business premiums in the first
quarters of 1997 and 1996 were $103.2 million and $9.9 million, respectively.
Long-term care premiums collected by the recently acquired companies were $100.3
million in 1997 which accounts for the majority of the increase. In addition,
the increase in long-term care premiums collected reflects new product
introductions, the competitiveness of our products, the success of agent
cross-selling activities, increased consumer awareness and demand, and improved
persistency on a larger base of renewal premiums.
Premiums collected on specified disease policies were $96.6 million in 1997.
Such premiums were a result of the previously discussed recent acquisitions.
Insurance policy income is comprised of premiums earned on the segment's
policies, and has increased consistent with the explanations provided above for
premiums collected.
Net investment income in 1997 was $56.9 million compared to $16.2 million in
1996. Such investment income fluctuates when changes occur in: (i) the amount of
average invested assets supporting insurance liabilities; and (ii) the yield
earned on invested assets. During 1997, the segment's average invested assets
increased to approximately $3,020 million from approximately $860 million in
1996, and the annualized net yield on invested assets remained unchanged at 7.5
percent. Invested assets grew as a result of the recent acquisitions.
Insurance policy benefits and change in future policy benefits increased in
1997 as a result of the life insurance business in force acquired in the recent
acquisitions. In 1997, the ratio of policy benefits to insurance policy income
for the Medicare supplement policies fell by 2.0 percentage points, to 69.7
percent, reflecting the premium rate increases implemented in 1997 and 1996.
The ratio of policy benefits to insurance policy income for long-term care
policies did not fluctuate materially in 1997 and 1996.
Amortization related to operations includes amortization of: (i) the cost of
policies produced; (ii) the cost of policies purchased; and (iii) goodwill
related to this segment's business. The amount of amortization was primarily
affected by the increase in balances subject to amortization as a result of the
recent acquisitions.
The cost of policies produced represents the cost of producing new business.
This cost 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).
Other operating costs and expenses increased to $69.3 million in 1997 as a
result of the costs incurred to run the recently acquired companies.
Net investment losses, net of related costs and amortization often fluctuate
from period to period. Net investment gains (losses) affect the timing of the
amortization of costs of policies purchased and the cost of policies produced.
As a result of net investment losses from the sales of fixed maturity
investments, related amortization of cost of policies purchased and cost of
policies produced increased by $.1 million in 1997. There was no such
amortization as a result of net investment gains in the first quarter of 1996.
19
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Annuities:
Three months ended
March 31,
-------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Premiums collected:
Single-premium immediate annuities.......................................................... $ 43.1 $ 48.0
Single-premium deferred annuities........................................................... 171.2 190.1
------ ------
Subtotal - single-premium annuities..................................................... 214.3 238.1
------ ------
Flexible-premium deferred annuities (first year)............................................ 106.2 116.3
Flexible-premium deferred annuities (renewal)............................................... 25.3 22.3
------ ------
Subtotal - flexible-premium deferred annuities.......................................... 131.5 138.6
------ ------
Variable annuities (first year)............................................................. 16.5 6.7
Variable annuities (renewal)................................................................ 10.8 11.3
------ ------
Subtotal - variable annuities........................................................... 27.3 18.0
------ ------
Total annuity premiums collected...................................................... $373.1 $394.7
====== ======
Insurance policy income........................................................................ $ 18.8 $ 21.0
Net investment income:
General account invested assets............................................................. 235.1 207.2
Separate account assets..................................................................... 14.1 3.9
------ ------
Total revenues (a).................................................................... 268.0 232.1
------ ------
Insurance policy benefits and change in future policy benefits................................. 13.8 20.1
Interest expense on:
All annuity products, except variable annuities............................................. 138.8 122.5
Variable annuity products................................................................... 14.1 3.9
Amortization related to operations............................................................. 26.8 12.8
Interest expense on investment borrowings...................................................... 1.7 2.8
Other operating costs and expenses............................................................. 7.4 9.1
------ ------
Total benefits and expenses (a)....................................................... 202.6 171.2
------ ------
Operating income before income taxes, minority interest and extraordinary charge...... 65.4 60.9
Net investment losses, net of related costs and amortization................................... (.7) (.5)
------ ------
Income before income taxes, minority interest and extraordinary charge................ $ 64.7 $ 60.4
====== ======
Weighted average gross interest spread on annuity products (b)................................. 2.9% 3.0%
=== ===
- --------------------
<FN>
(a) Revenues exclude net investment losses; benefits and expenses exclude
amortization related to net investment losses.
(b) Excludes variable annuity products where the credited amount is based on
investment income from segregated investments.
</FN>
</TABLE>
20
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
General: This segment includes single-premium deferred annuities ("SPDAs"),
flexible-premium deferred annuities ("FPDAs"), single-premium immediate
annuities ("SPIAs") and variable annuities sold through both career agents and
professional independent producers. The profitability of this segment largely
depends on the investment spread earned (i.e., the excess of investment earnings
over interest credited on annuity deposits), persistency of inforce business,
and expense control. In addition, comparability between periods is affected by:
(i) the LPG Merger, effective July 1, 1996; (ii) the ALH Stock Purchase,
effective September 30, 1996; and (iii) to a lesser extent, the BLH Merger.
Premiums collected by this segment in 1997 were $373.1 million, down 5.5
percent from 1996. Increased competition from products such as mutual funds,
traditional bank investments, variable annuities and other investment and
retirement funding alternatives was a significant factor in the decrease. The
decrease was partially offset by premiums collected by the companies we recently
acquired; such premiums totaled $32.5 million.
SPDA collected premiums decreased 9.9 percent to $171.2 million, in 1997.
The demand for SPDA products offered by all insurance companies decreased during
1996, when relatively low interest rates made other investment products more
attractive. We introduced an equity-linked SPDA in June 1996 to appeal to
consumers' desire for alternative investment products with returns linked to
equities. The accumulation value of these annuities is credited with interest at
an annual minimum guaranteed rate of 3 percent, but the annuities provide for
higher returns based on a percentage of the change in the S&P 500 Index during
each year of their term. We purchase S&P 500 Index Options, the values of which
change as the benefits accrue to these annuities as a result of the equity-
linked return feature. Total collected premiums for this product were $58.9
million in 1997.
FPDA collected premiums decreased 5.1 percent to $131.5 million, in 1997.
FPDAs are similar to SPDAs in many respects, except FPDAs allow more than one
premium payment.
SPIA collected premiums decreased 10 percent, to $43.1 million in 1997. Such
decrease was primarily the result of decreases in SPIAs purchased from the
proceeds from redeemed annuity contracts.
Variable annuity collected premiums increased 52 percent to $27.3 million,
in 1997. Variable annuities offer contract holders a rate of return based upon
the specific investment portfolios into which premiums may be directed. The
popularity of such annuities has increased recently as a result of the desire of
investors to invest in common stocks. In addition, in 1996 we began to offer
more investment options for variable annuity deposits and expanded its marketing
efforts, which resulted in increased collected premiums. Profits on variable
annuities are derived from the fees charged to contract holders, rather than
from the investment spread.
Insurance policy income includes: (i) premiums received on annuity policies
that incorporate significant mortality features; (ii) cost of insurance and
expenses charged to annuity policies; and (iii) surrender charges earned on
annuity policy withdrawals. In accordance with GAAP, premiums on annuity
contracts without mortality features are not reported as revenues, but rather
are reported as deposits to insurance liabilities. Insurance policy income
decreased in 1997 primarily because of a decrease in premiums on policies with
mortality features partially offset by increased surrender charges (changes in
cost of insurance and expenses charged to annuity policies were not
significant). Surrender charges were $13.0 million in 1997 and $7.8 million in
1996. Annuity policy withdrawals were $381.6 million in 1997, compared with
$311.0 million in 1996. The increase in policy withdrawals and surrender charges
generally corresponds to the aging and the growth of our annuity business in
force. In addition, policyholders are using the systematic withdrawal features
available in several of our annuity policies, and more policyholders are
surrendering in order to invest in alternative investments. Total withdrawals
and surrenders were approximately 3 percent of insurance liabilities related to
surrenderable policies in 1997 and 1996.
Net investment income on general account invested assets (excluding income
on separate account assets related to variable annuities) increased 13 percent
in 1997, to $235.1 million as a result of an increase in general account
invested assets acquired in conjunction with the recent acquisitions. The
annualized yield earned on average invested assets declined to 7.8 percent in
1997 from 8.0 percent in 1996. Cash flows received during 1997 and 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 is offset by a
corresponding charge to interest credited on variable annuity products. Such
income fluctuates in relationship to total separate account assets and the
return earned on such assets.
Insurance policy benefits and change in future policy benefits relate solely
to annuity policies that incorporate significant mortality features. The
decrease is due to a reduction in premium revenues on such policies.
21
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Interest expense on all annuity products, except variable annuities
increased 13 percent in 1997, primarily due to a larger block of annuity
business inforce in 1997, partially offset by a reduction in crediting rates.
The weighted average crediting rates for these annuity liabilities were 4.9
percent in 1997 and 5.0 percent in 1996. The block of annuity business increased
primarily as a result of the recent acquisitions.
Interest expense on variable annuity products is equal to the net investment
income on separate account assets.
Amortization related to operations increased 109 percent in 1997. Such
increases reflect a larger balance subject to amortization as a result of the
recent acquisitions.
Interest expense on investment borrowings is primarily affected by changes
in investment borrowing activities.
Other operating costs and expenses decreased 19 percent in 1997. Such
decrease is primarily attributable to the decreased costs incurred as a result
of consolidating ALH's operations in Des Moines, Iowa, with those of our other
subsidiaries in the fourth quarter of 1996.
Net investment losses, net of related costs and amortization often fluctuate
from period to period. Selling securities at a gain and reinvesting the proceeds
at lower yields may, absent other management action, tend to decrease future
investment yields. The Company believes, however, that the following factors
mitigate the adverse effect of such decreases on net income: (i) we recognized
additional amortization of cost of policies purchased and cost of policies
produced in order to reflect reduced future yields (thereby reducing such
amortization in future periods); (ii) we 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 investment gains. As a result of the sales of fixed maturity
investments, the related amortization of the cost of policies produced and the
cost of policies purchased increased $7.3 million in 1997 and increased $8.2
million in 1996.
22
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Life insurance:
Three months ended
March 31,
-------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Premiums collected:
Universal life (first year)................................................................. $ 24.7 $ 3.4
Universal life (renewal).................................................................... 87.5 21.7
------ ------
Subtotal - universal life............................................................... 112.2 25.1
------ ------
Traditional life (first year)............................................................... 3.8 2.2
Traditional life (renewal).................................................................. 44.5 38.6
------ ------
Subtotal - traditional life............................................................. 48.3 40.8
------ ------
Total life premiums collected........................................................... $160.5 $ 65.9
====== ======
Insurance policy income........................................................................ $137.2 $ 58.4
Net investment income.......................................................................... 97.7 42.5
------ ------
Total revenues (a)...................................................................... 234.9 100.9
------ ------
Insurance policy benefits and change in future policy benefits................................. 95.1 47.7
Interest expense on annuities and financial products........................................... 37.0 12.7
Amortization related to operations............................................................. 23.7 8.7
Interest expense on investment borrowings...................................................... .7 .6
Other operating costs and expenses............................................................. 20.4 12.7
------ ------
Total benefits and expenses (a)......................................................... 176.9 82.4
------ ------
Operating income before income taxes, minority interest and extraordinary charge........ 58.0 18.5
Net investment losses, net of related costs and amortization................................... (3.4) (.4)
------ ------
Income before income taxes, minority interest and extraordinary charge.................. $ 54.6 $ 18.1
====== ======
- --------------------
<FN>
(a) Revenues exclude net investment losses; benefits and expenses exclude
amortization related to net investment losses.
</FN>
</TABLE>
General: This segment includes traditional life and universal life products
sold through both career agents and professional independent producers. The
segment's operations were significantly affected by the LPG Merger effective
July 1, 1996. The profitability of this segment largely depends on the
investment spread earned for universal life and other investment products,
persistency of inforce business, claim experience and expense control.
Premiums collected by this segment in 1997 were $160.5 million, compared to
$65.9 million in 1996. Such increases reflect the previously discussed
acquisition transactions.
Universal life product collected premiums increased to $112.2 million, in
1997. Such premiums collected in 1997 include $89.6 million collected by LPG.
23
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Traditional life product collected premiums increased 18 percent to $48.3
million, in 1997. Such premiums collected in 1997 include $8.2 million collected
by LPG. We do not currently emphasize new product sales of traditional life
products, although such inforce business continues to be profitable.
Insurance policy income includes: (i) premiums received on traditional life
products; (ii) the mortality charges and administrative fees earned on universal
life insurance; and (iii) surrender charges on terminated universal life
insurance policies. In accordance with GAAP, premiums on universal life products
are accounted for as deposits to insurance liabilities. Revenues are earned over
time in the form of investment income on policyholder account balances,
surrender charges and mortality and other charges deducted from the
policyholders' account balances. Insurance policy income included: (i) premiums
earned on traditional life products of $46.9 million in 1997 and $39.6 million
in 1996; (ii) mortality charges and administrative fees of $86.1 million in 1997
and $18.1 million in 1996; and (iii) surrender charges of $4.2 million in 1997
and $.7 million in 1996.
Insurance policy income has increased primarily as a result of the
previously discussed acquisition transactions.
Net investment income in 1997 was $97.7 million compared to $42.5 million in
1996. Such investment income fluctuates with changes in: (i) the amount of
average invested assets supporting insurance liabilities; and (ii) the yield
earned on invested assets. The segment's average invested assets increased 136
percent to approximately $4,960 million in 1997, and the net yield on invested
assets decreased by .2 percentage points, to 7.9 percent. Invested assets
primarily grew as a result of the growth in insurance liabilities from the
previously discussed acquisition transactions.
Insurance policy benefits and change in future policy benefits increased in
1997 as a result of the larger amount of business inforce on which benefits are
incurred as a result of the previously discussed acquisition transactions. There
were no material fluctuations in claim experience during the periods.
Interest expense on financial products in 1997 was $37.0 million compared to
$12.7 million in 1996. Such expense fluctuates with changes in: (i) the amount
of insurance liabilities for universal life products; and (ii) the interest rate
credited to such products. Such average liabilities increased 192 percent to
$2,890 million in 1997. The interest rate credited was 5.1 percent in both 1997
and 1996. Insurance liabilities for universal life products increased primarily
as a result of the previously discussed acquisition transactions.
Amortization related to operations in 1997 was $23.7 million compared to
$8.7 million in 1996. Such increase reflects a larger balance subject to
amortization as a result of the previously discussed acquisition transactions.
Interest expense on investment borrowings is affected by changes in
investment borrowing activities.
Other operating costs and expenses in 1997 were $20.4 million compared to
$12.7 million in 1996. Such increase is consistent with the increase in the
total insurance liabilities related to this segment's business.
Net investment losses, net of related costs and amortization often fluctuate
from period to period. Net investment gains (losses) affect the timing of the
amortization of costs of policies purchased and the cost of policies produced.
As a result of net investment gains (losses) from the sales of fixed maturity
investments, related amortization of cost of policies purchased and cost of
policies produced increased $4.4 million in 1997 and increased $.9 million in
1996.
24
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Other:
Three months ended
March 31,
-------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Premiums collected:
Group accident and health................................................................... $ 66.5 $ 62.6
Individual accident and health.............................................................. 40.1 38.3
------ ------
Total other premiums collected.......................................................... $106.6 $100.9
====== ======
Insurance policy income........................................................................ $102.7 $ 91.7
Net investment income.......................................................................... 5.4 3.9
Fee revenue and other income................................................................... 14.6 12.0
------ ------
Total revenues (a)...................................................................... 122.7 107.6
------ ------
Insurance policy benefits and changes in future policy benefits................................ 80.5 76.8
Amortization related to operations............................................................. 4.7 5.6
Interest expense on investment borrowings...................................................... - .1
Other operating costs and expenses............................................................. 13.3 11.7
------ ------
Total benefits and expenses (a)......................................................... 98.5 94.2
------ ------
Operating income before income taxes, minority interest and extraordinary charge........ 24.2 13.4
Net investment losses, net of related costs and amortization................................... (.3) (2.0)
------ ------
Income before income taxes, minority interest and extraordinary charge.................. $ 23.9 $ 11.4
====== ======
- --------------------
<FN>
(a) Revenues exclude net investment losses; benefits and expenses exclude
amortization related to net investment losses.
</FN>
</TABLE>
General: The other segment includes miscellaneous individual and group
health insurance premiums related to products that we are not currently
emphasizing, although the inforce business continues to be profitable. The
profitability of this business largely depends on the overall persistency of the
business inforce, claim experience and expense control.
The segment also includes the fee revenue generated by our non-life
subsidiaries, including the investment advisory fees earned by CCM and
commissions earned for insurance and investment product marketing and
distribution. Such amounts exclude the fees for services provided to our
consolidated subsidiaries. The profitability of the fee-based business depends
on the total fees generated and expense control.
Premiums collected by this segment in 1997 were $106.6 million, up 5.6
percent from 1996. Such premiums collected in 1997 include $11.6 million
collected by LPG and THI. Excluding premiums collected by the recently acquired
companies, this segment's premiums collected decreased 5.8 percent in 1997. Over
the last several years, a number of steps were taken to improve the
profitability of the other health business, including product, price,
underwriting and agent compensation revisions. These steps have had the effect
of reducing premiums collected.
Group accident and health premiums increased 6.2 percent in 1997. Such
fluctuations reflect new policies and rate increases, net of premium decreases
from policy lapses.
Individual accident and health premiums increased 4.7 percent in 1997. Such
premiums collected in 1997 include $11.1 million collected by LPG and THI.
Excluding premiums collected by the recently acquired companies, the individual
accident and health premiums decreased 24 percent in 1997. Such decrease is
attributable to policy lapses in response to rate increases.
25
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Insurance policy income is comprised of premiums earned on the segment's
policies, and has fluctuated consistent with the explanations provided above for
premiums collected.
Net investment income increased 38 percent in 1997. Such investment income
fluctuated primarily in relationship to the amount of average invested assets
supporting this segment's insurance liabilities.
Fee revenue and other income include: (i) fees for investment management and
mortgage origination and servicing; and (ii) commissions earned for insurance
and investment product marketing and distribution. Such amounts exclude the fees
for services provided to our consolidated subsidiaries. Fee revenue and other
income in 1997 were $14.6 million, up 22 percent from 1996, primarily as a
result of an increase in fees for investment management.
Insurance policy benefits and change in future policy benefits fluctuate in
relationship to the amount of segment business inforce and the incidence of
claims. In 1997, the ratio of policy benefits to insurance policy income fell by
6 percentage points, to 78 percent, reflecting the premium rate increases
implemented in 1996.
Other operating costs and expenses fluctuated primarily as a result of
expenses of recently acquired companies partially offset by decreases in the
expenses of our subsidiaries providing fee-based services.
Other components of income before income taxes, minority interest and
extraordinary charge:
In addition to the income of the four operating segments, income before
income taxes, minority interest and extraordinary charge is affected by: (i)
interest and other corporate expenses; and (ii) income from restructuring
activities.
Interest and other corporate expenses were $29.8 million in 1997 and $29.9
million in 1996. Interest expense is the largest component of these expenses.
Interest expense was $25.8 million in 1997 and $28.4 million in 1996. Such
expense fluctuates in relationship to the average debt outstanding during each
period and the interest rate thereon.
Restructuring income in 1996 primarily arose from the sale of our investment
in Noble Broadcast Group, Inc.
SALES
In accordance with GAAP, insurance policy income shown in our consolidated
statement of operations consists of premiums received for policies that have
life contingencies or morbidity features. For annuity and universal life
contracts without such features, premiums collected are not reported as
revenues, but rather are reported as deposits to insurance liabilities. Revenues
for these products are recognized over time in the form of investment income and
surrender or other charges.
26
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Total premiums collected by our business segments were as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1997 1996
---- ----
(Dollars in millions)
<S> <C> <C>
Supplemental health..................................................................... $ 418.2 $209.0
Annuities............................................................................... 373.1 394.7
Life insurance.......................................................................... 160.5 65.9
Other................................................................................... 106.6 100.9
-------- -------
Total premiums collected......................................................... $1,058.4 $770.5
======== ======
</TABLE>
Fluctuations in premiums collected are discussed above under "Results of
Operations - First Quarter of 1997 Compared to First Quarter of 1996." Our
recent acquisitions will have a significant effect on future premiums collected.
LIQUIDITY AND CAPITAL RESOURCES
Changes in the consolidated balance sheet between December 31, 1996, and
March 31, 1997, reflect growth through operations, changes in the fair value of
actively managed fixed maturity securities and the following capital and
financing transactions described in the notes to the consolidated financial
statements: (i) the CAF Merger; (ii) the issuance of $300 million of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts; (iii) the repurchase of senior subordinated notes with a par value of
$76.1 million; (iv) the conversion of convertible debentures acquired in the ATC
Merger into Conseco common stock; (v) the conversion of PRIDES into Conseco
common stock; and (vi) the repurchase of mandatorily redeemable preferred stock
of a subsidiary.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"),
we record our actively managed fixed maturity investments at estimated fair
value. At March 31, 1997, the amortized cost of such investments was decreased
by $335.5 million as a result of the SFAS 115 adjustment, compared to an
increase of $103.8 million at December 31, 1996. The change in unrealized
appreciation (depreciation) resulted from an increasing interest rate
environment which generally caused the fair value of fixed maturities to
decrease.
Minority interest increased as a result of the issuance of $300.0 million of
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts, partially offset by purchases of mandatorily redeemable preferred stock
of a subsidiary with a par value of $25.9 million.
The increase in shareholders' equity in the first quarter of 1997 resulted
from: (i) Conseco common stock issued in the CAF Merger with a value of $115.7
million; (ii) net income of $111.5 million; (iii) the conversion of convertible
debentures into Conseco common stock with a value of $142.1 million; and (iv)
amounts related to stock options and employee benefit plans (including the tax
benefit thereon) of $11.7 million. These increases were partially offset by the
decrease in net unrealized depreciation of $165.6 million and dividends.
Dividends declared on common stock for the three months ended March 31,
1997, were 3.125 cents per share.
27
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
The following table summarizes certain financial ratios as of and for the
three months ended March 31, 1997, and the year ended December 31, 1996:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Book value per common share:
As reported........................................................................ $17.15 $16.86
Excluding unrealized appreciation (depreciation) (a)............................... 17.83 16.62
Ratio of earnings to fixed charges:
As reported........................................................................ 1.89X 1.61X
Excluding interest on annuities and financial products (b)......................... 7.36X 4.55X
Ratio of earnings to fixed charges, preferred dividends and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts:
As reported...................................................................... 1.74X 1.49X
Excluding interest on annuities and financial products (b)....................... 4.54X 3.06X
Ratio of adjusted statutory earnings to cash interest (c):
As reported........................................................................ 1.59X 1.50X
Excluding interest on annuities and financial products (b)......................... 5.88X 4.56X
Ratio of adjusted statutory earnings to cash interest and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts (d):
As reported...................................................................... 1.50X 1.49X
Excluding interest on annuities and financial products (b)....................... 3.90X 4.34X
Ratio of total debt to total capital:
As reported........................................................................ .23X .22X
Excluding unrealized appreciation (depreciation) (a)............................... .22X .23X
Ratio of debt and Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts to total capital (e):
As reported...................................................................... .39X .35X
Excluding unrealized appreciation (depreciation)................................. .38X .35X
<FN>
(a) Excludes the effect of reporting fixed maturity securities at fair value.
(b) These ratios are included to assist the reader in analyzing the impact of
interest on annuities and financial products (which is not generally
required to be paid in cash in the period it is recognized). Such ratios
are not intended to, and do not represent the following ratios prepared in
accordance with GAAP: the ratio of earnings to fixed charges; the ratio of
earnings to fixed charges, preferred dividends and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts; the ratio of adjusted statutory earnings to cash interest; or the
ratio of adjusted statutory earnings to cash interest and distributions on
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
(c) Statutory earnings represent: (i) gain from operations of our consolidated
life insurance companies before interest (including, for purposes of the
"as reported" ratio, interest on annuities and financial products) and
income taxes as reported for statutory accounting purposes; plus (ii)
income before interest and income taxes of all non-life companies. Cash
interest includes interest (including, for purposes of the "as reported"
ratio, interest on annuities and financial products) of Conseco and its
consolidated subsidiaries.
28
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
(d) Statutory earnings represent: (i) gain from operations of our consolidated
life insurance companies before interest (including, for purposes of the
"as reported" ratio, interest on annuities and financial products) and
income taxes as reported for statutory accounting purposes; plus (ii)
income before interest and income taxes of all non-life companies. Cash
interest includes interest (including, for purposes of the "as reported"
ratio, interest on annuities and financial products) of Conseco and its
consolidated subsidiaries. Distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts include such
distributions before income taxes of Conseco and its consolidated
subsidiaries.
(e) Represents the ratio of debt and the Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts to the sum of
shareholders' equity, notes payable, minority interest and the
Company-obligated mandatorily redeemable preferred securities of subsidiary
trusts.
</FN>
</TABLE>
INVESTMENTS
At March 31, 1997, 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..................................... $ 449.4 $ 1.7 $ 13.2 $ 437.9
Obligations of states and political subdivisions
and foreign government obligations............................ 252.2 1.0 5.9 247.3
Public utility securities......................................... 2,167.5 11.6 68.5 2,110.6
Other corporate securities........................................ 9,596.8 49.8 233.6 9,413.0
Mortgage-backed securities........................................ 5,493.1 24.7 103.1 5,414.7
--------- ----- ------ ---------
Total fixed maturity securities ............................ $17,959.0 $88.8 $424.3 $17,623.5
========= ===== ====== =========
</TABLE>
The following table sets forth the investment ratings of fixed maturity
securities at March 31, 1997 (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 $607.5 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................................... 34% 30%
AA.................................... 10 9
A..................................... 26 23
BBB................................... 25 22
--- ---
Investment grade............... 95 84
--- ---
BB.................................... 3 3
B and below........................... 2 1
--- ---
Below investment grade......... 5 4
--- ---
Total fixed maturities......... 100% 88%
=== ===
</TABLE>
At March 31, 1997, our below investment grade fixed maturity securities had
an amortized cost of $894.3 million and an estimated fair value of $895.4
million.
29
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
During the first quarter of 1997, we recorded $1.2 million in writedowns of
fixed maturity securities 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 during the first quarter of 1996. At
March 31, 1997, fixed maturity securities in default as to the payment of
principal or interest had an aggregate amortized cost of $2.5 million and a fair
value of $.9 million.
Sales of invested assets (primarily fixed maturity securities) during the
first quarter of 1997 generated proceeds of $3.5 billion, and net investment
gains of $6.4 million. Sales of invested assets during the first quarter of 1996
generated proceeds of $1.5 billion, and net investment gains of $7.0 million.
Net investment gains in 1997 and 1996 also included $.1 million and $1.1
million, respectively, of writedowns related to mortgage loans.
At March 31, 1997, fixed maturity investments included $5.4 billion of
mortgage-backed securities (or 31 percent of all fixed maturity securities). The
yield characteristics of mortgage-backed securities differ from those of
traditional fixed-income securities. Interest and principal payments occur more
frequently, often monthly. Mortgage-backed securities are subject to risks
associated with variable prepayments. Prepayment rates are influenced by a
number of factors which cannot be predicted with certainty, including the
relative sensitivity of the underlying mortgages backing the assets to changes
in interest rates; a variety of economic, geographic and other factors; and the
repayment priority of the securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the securities
backed by these loans, increase when the level of prevailing interest rates
declines significantly relative to 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.
These securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When interest rates decline, the proceeds from the
prepayment of mortgage-backed securities are likely to be reinvested at lower
rates than we were earning on the prepaid securities. When interest rates
increase, prepayments on mortgage-backed securities decrease as fewer underlying
mortgages are refinanced. When this occurs, the average maturity and duration of
the mortgage-backed securities increase, which decreases the yield on
mortgage-backed securities purchased at a discount because the discount is
realized as income at a slower rate and increases the yield on those purchased
at a premium as a result of a decrease in the annual amortization of the
premium.
The following table sets forth the par value, amortized cost and estimated
fair value of mortgage-backed securities, summarized by interest rates on the
underlying collateral at March 31, 1997:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent .................................................................. $1,682.7 $1,618.9 $1,576.5
7 percent - 8 percent............................................................... 2,870.9 2,778.6 2,747.3
8 percent - 9 percent............................................................... 661.0 658.7 654.6
9 percent and above................................................................. 428.9 436.9 436.3
-------- -------- --------
Total mortgage-backed securities......................................... $5,643.5 $5,493.1 $5,414.7
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities at
March 31, 1997, 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............ $3,819.3 $3,765.6 22%
Planned amortization classes and accretion directed bonds................. 1,072.7 1,047.2 6
Support classes........................................................... 153.6 153.8 1
Accrual (Z tranche) bonds................................................. 52.1 52.1 -
Subordinated classes ..................................................... 395.4 396.0 2
-------- -------- --
$5,493.1 $5,414.7 31%
======== ======== ==
</TABLE>
30
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Pass-throughs and sequential and targeted amortization classes have similar
prepayment variability. Pass-throughs historically provide the best liquidity in
the mortgage-backed securities market and provide the best price/performance
ratio in a highly volatile interest rate environment. 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 collateralized
mortgage obligations ("CMOs") 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 those
assumed at pricing. Thus, they offer slightly better call protection than
sequential classes or pass-throughs.
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 as long as the underlying mortgage collateral experiences prepayments
within an expected range. Changes in prepayment rates are first absorbed by
support classes. This insulates the planned amortization classes from the
consequences of faster prepayments (average life shortening) and slower
prepayments (average life extension).
Support classes absorb the prepayment risk from which planned amortization
and targeted amortization classes are protected. As such, they are usually
extremely sensitive to prepayments. Most of our support classes are higher
average life instruments that generally will not lengthen if interest rates rise
further and will have a tendency to shorten if interest rates decline. However,
since these bonds have costs below their par values, higher prepayments will
have the effect of increasing yields.
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, which can
be significantly influenced by the prepayment experience of the underlying
mortgage loan collateral in the CMO structure. Because of the zero coupon
element of these securities and the potential uncertainty as to the timing of
cash payments, their market values and yields are more sensitive to changing
interest rates than are other CMOs, pass-through securities and coupon bonds.
Subordinated CMO classes have both prepayment and credit risk. The
subordinated classes are used to enhance the credit quality of the senior
securities and as such, rating agencies require that this support not
deteriorate due to the prepayment of the subordinated 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 homeowner defaults.
At March 31, 1997, the balance of mortgage loans was comprised of 95 percent
commercial loans, 2 percent residual interests in collateralized mortgage
obligations and 3 percent residential loans. Less than 1 percent of mortgage
loans were noncurrent (loans which are two or more scheduled payments past due)
at March 31, 1997. During the three months ended March 31, 1997 and 1996, the
Company wrote down $.1 million and $1.1 million of mortgage loans, respectively.
At March 31, 1997, the loan loss reserve was $2.4 million.
Investment borrowings averaged approximately $244.8 million during the first
quarter of 1997, compared to approximately $282.8 million during the same period
of 1996 and were collateralized by investment securities with fair values
approximately equal to the loan value. The weighted average interest rate on
such borrowings was 4.6 percent and 5.3 percent during the first quarters of
1997 and 1996, respectively.
31
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
STATUTORY INFORMATION
Statutory accounting practices prescribed or permitted for our insurance
subsidiaries by regulatory authorities differ from generally accepted accounting
principles. Our life insurance subsidiaries reported the following amounts to
regulatory agencies at March 31, 1997, after appropriate eliminations of
intercompany accounts among such subsidiaries (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Statutory capital and surplus ............................. $1,245.8
Asset valuation reserve.................................... 240.8
Interest maintenance reserve............................... 297.9
Portion of surplus debenture carried as a liability ....... 74.1
--------
Total................................................... $1,858.6
========
</TABLE>
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 9.8 percent at both March 31, 1997,
and December 31, 1996.
Combined statutory net income of our life insurance subsidiaries (after
appropriate eliminations of intercompany amounts among such subsidiaries) was
$59.5 million in the first quarter of 1997 and $41.5 million in the first
quarter of 1996.
The statutory capital and surplus of the insurance subsidiaries include
surplus debentures of the parent holding companies totaling $837.5 million.
Payments of interest and principal on such debentures are generally subject to
the approval of the insurance department of the subsidiary's state of domicile.
During the first quarter of 1997, our life insurance subsidiaries made scheduled
principal payments on surplus debentures of $42.9 million.
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Net assets of our life insurance
subsidiaries, determined in accordance with GAAP, aggregated approximately $6.8
billion at December 31, 1996. During the first quarter of 1997, our life
insurance subsidiaries paid ordinary dividends of $68.6 million to the parent
holding companies. During the remainder of 1997, the life insurance subsidiaries
may pay additional dividends of $91.9 million without the permission of state
regulatory authorities.
32
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
On January 24, 1997, in connection with the conversion of approximately
$14.6 million principal amount of the 6.5 percent convertible subordinated
debentures due 2005 which were assumed in the ATC Merger, Conseco issued 560,807
shares of registered Conseco common stock and an additional 19,378 shares of
Conseco common stock which were not registered under the Securities Act of 1933.
The 19,378 shares were exempt from registration under Section 3(a)(9) of the
Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits.
11.1 Computation of Earnings Per Share - Primary.
11.2 Computation of Earnings Per Share - Fully Diluted.
27.0 Financial Data Schedule.
99.1 Pro Forma Consolidated Financial Statements of Conseco, Inc.
and Subsidiaries
b) Reports on Form 8-K.
None.
33
<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: May 13, 1997 By: /s/ ROLLIN M. DICK
-------------------
Rollin M. Dick,
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
34
<TABLE>
<CAPTION>
EXHIBIT 11.1
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
(unaudited)
Three months
ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Shares outstanding, beginning of period........................................... 167,128,228 81,031,828
Weighted average shares issued (acquired) during the period:
Shares issued in conjunction with merger........................................ 2,881,597 -
Shares issued under employee benefit and compensation plans..................... 82,578 -
Exercise of stock options....................................................... 692,985 684,852
Shares issued upon conversion of preferred stock................................ 3,907,985 664
Shares issued upon conversion of convertible debentures......................... 2,976,443 -
Treasury stock acquired......................................................... - (299,760)
Common equivalent shares related to:
Stock options at average market price ........................................ 11,464,201 4,623,872
Employee stock plans ......................................................... 2,078,179 1,993,452
PRIDES........................................................................ 7,447,050 11,332,228
Convertible debentures........................................................ 4,961,128 -
------------ ----------
Weighted average primary shares outstanding....................................... 203,620,374 99,367,136
============ ==========
Net income for primary earnings per share:
Net income as reported.......................................................... $111,489,117 $46,348,000
Less amounts applicable to preferred stock:
Charge related to induced conversions...................................... (12,290,191) -
Preferred stock dividends.................................................. - (4,606,000)
------------ -----------
Net income for primary earnings per share......................................... $ 99,198,926 $41,742,000
============ ===========
Net income per primary common share............................................... $.49 $.42
==== ====
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11.2
CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
(unaudited)
Three months
ended
March 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Weighted average primary shares outstanding........................................... 203,620,374 99,367,136
Incremental common equivalent shares:
Related to options and employee stock plans ..................................... - 1,127,464
Related to convertible preferred stock........................................... - 17,786,396
----------- ------------
Weighted average fully diluted shares outstanding.................................... 203,620,374 118,280,996
=========== ============
Net income for fully diluted earnings per share....................................... $99,198,926 $46,348,000
=========== ===========
Net income per fully diluted common share............................................. $.49 $.39
==== ====
</TABLE>
Note: For the quarter ended March 31, 1997, the closing market price of a
share of Conseco common stock was lower than the average market price
during the quarter. Accordingly, there were no additional incremental
common equivalent shares for the purpose of calculating fully diluted
earnings per share.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-Q FOR CONSECO,
INC. DATED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 17,623,500
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 147,800
<MORTGAGE> 825,600 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 20,501,700
<CASH> 0
<RECOVER-REINSURE> 537,700
<DEFERRED-ACQUISITION> 3,127,700 <F2>
<TOTAL-ASSETS> 24,477,200
<POLICY-LOSSES> 19,185,500
<UNEARNED-PREMIUMS> 347,800
<POLICY-OTHER> 787,000
<POLICY-HOLDER-FUNDS> 321,500
<NOTES-PAYABLE> 1,268,100
972,600
133,100
<COMMON> 2,427,900
<OTHER-SE> 714,100 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 27,477,200
670,100
<INVESTMENT-INCOME> 409,200
<INVESTMENT-GAINS> 5,100
<OTHER-INCOME> 14,600
<BENEFITS> 645,200 <F4>
<UNDERWRITING-AMORTIZATION> 97,600 <F5>
<UNDERWRITING-OTHER> 114,400
<INCOME-PRETAX> 195,400
<INCOME-TAX> 70,600
<INCOME-CONTINUING> 124,800
<DISCONTINUED> 0
<EXTRAORDINARY> (3,300)
<CHANGES> 0
<NET-INCOME> 111,500
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $491,200 of credit-tenant loans.
<F2> Includes $2,470,100 of cost of policies purchased.
<F3> Includes retained earnings of $840,800, and net unrealized depreciation
of securities of $126,700.
<F4> Includes insurance policy benefits of $413,700, change in future policy
benefits of $41,600 and interest expense on annuities and financial products
of $189,900.
<F5> Includes amortization of cost of policies purchased of $60,000 and cost
of policies produced of $24,900 and amortization related to investment gains of
$11,800.
</FN>
</TABLE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF CONSECO, INC.
The unaudited pro forma consolidated statement of operations data for
Conseco, Inc. ("Conseco") for the three months ended March 31, 1997, reflects
certain pro forma adjustments for the following transactions, as if such
transactions had occurred on January 1, 1996: (i) the issuance of $300.0 million
of Capital Securities having a distribution rate of 8.796 percent (the "Capital
Securities Offering") completed effective March 31, 1997; and (ii) the
acquisition (the "PFS Merger") of Pioneer Financial Services, Inc. ("PFS").
The unaudited pro forma consolidated balance sheet of Conseco as of
March 31, 1997, gives effect to the PFS Merger as if it had occurred on March
31, 1997.
The pro forma consolidated financial statements are based on the historical
financial statements of Conseco and PFS and are qualified in their entirety by,
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, 1996, 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 PFS Merger using estimated values of the assets and
liabilities of PFS 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 PFS Merger had occurred on the assumed
merger dates. Management does not expect any adjustments to the allocations to
be material.
1
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the three months ended March 31, 1997
(Dollars in millions)
(unaudited)
Pro forma
adjustments
relating to Pro forma
the Capital Conseco
Conseco Securities before the
as reported Offering PFS Merger (a)
----------- ---------- -------------
<S> <C> <C> <C>
Revenues:
Insurance policy income $ 670.1 $ - $ 670.1
Net investment income 409.2 409.2
Net investment gains 5.1 5.1
Fee revenue and other income 14.6 14.6
-------- ------- --------
Total revenues 1,099.0 - 1,099.0
-------- ------- --------
Benefits and expenses:
Insurance policy benefits and change
in future policy benefits 455.3 455.3
Interest expense on annuities and financial
products 189.9 189.9
Interest expense on notes payable 25.8 (4.6)(1) 21.2
Interest expense on short-term investment
borrowings 2.8 2.8
Amortization related to operations 103.6 103.6
Amortization related to investment gains 11.8 11.8
Other operating costs and expenses 114.4 114.4
-------- ------- --------
Total benefits and expenses 903.6 (4.6) 899.0
-------- ------- --------
Income before income taxes, minority
interest and extraordinary charge 195.4 4.6 200.0
Income tax expense 70.6 1.6 (2) 72.2
-------- ------- --------
Income before minority interest
and extraordinary charge 124.8 3.0 127.8
Minority interest:
Distributions on Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts 8.7 4.3 (3) 13.0
Dividends on preferred stock of subsidiary 1.3 1.3
-------- ------- --------
Income before extraordinary charge $ 114.8 $ (1.3) $ 113.5
======== ======= ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 203.6 203.6
======== ========
Income before extraordinary charge $ .51 $ .50
======== ========
Fully diluted:
Weighted average shares outstanding 203.6 203.6
======== ========
Income before extraordinary charge $ .51 $ .50
======== ========
<FN>
(a) Amounts are carried forward to page 3.
</FN>
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
for the three months ended March 31, 1997
(Amounts in millions, except per share amounts)
(unaudited)
Pro forma
Pro forma adjustments
Conseco relating Pro forma
before the PFS to the Conseco
PFS Merger (a) historical PFS Merger totals
-------------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Insurance policy income $ 670.1 $213.9 $ - $ 884.0
Net investment income 409.2 21.8 .6 (4) 431.6
Net investment gains (losses) 5.1 (.8) 4.3
Fee revenue and other income 14.6 4.9 19.5
-------- ------ ------ --------
Total revenues 1,099.0 239.8 .6 1,339.4
-------- ----- ------ --------
Benefits and expenses:
Insurance policy benefits and change in future
policy benefits 455.3 148.6 603.9
Interest expense on annuities and financial
products 189.9 8.6 198.5
Interest expense on notes payable 21.2 1.9 .1 (5) 22.1
(1.1)(6)
Interest expense on short-term investment
borrowings 2.8 2.8
Amortization related to operations 103.6 19.0 (18.5)(7) 123.0
17.9 (7)
(.5)(8)
1.5 (8)
Amortization related to investment gains 11.8 11.8
Other operating costs and expenses 114.4 52.8 167.2
-------- ------ ------ --------
Total benefits and expenses 899.0 230.9 (.6) 1,129.3
-------- ------ ------ --------
Income before income taxes, minority
interest and extraordinary charge 200.0 8.9 1.2 210.1
Income tax expense 72.2 3.0 .8 (9) 76.0
-------- ------- ------ --------
Income before minority interest
and extraordinary charge 127.8 5.9 .4 134.1
Minority interest:
Distributions on Company - obligated mandatorily
redeemable preferred securities of subsidiary
trusts 13.0 13.0
Dividends on preferred stock of subsidiary 1.3 1.3
-------- ------ ------ --------
Income before extraordinary charge $ 113.5 $ 5.9 $ .4 $ 119.8
======== ======= ====== ========
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding 203.6 8.5 (10) 212.1
===== === =====
Income before extraordinary charge $ .50 $ .51
===== =====
Fully diluted:
Weighted average shares outstanding 203.6 11.4 (10) 215.0
===== ==== =====
Income before extraordinary charge $ .50 $ .50
====== =====
<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.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1997
(Dollars in millions)
(unaudited)
Pro forma
adjustments
relating Pro forma
Conseco PFS to the PFS Conseco
historical historical Merger totals
----------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Assets
Investments:
Actively managed fixed maturity
securities at fair value $17,623.5 $747.2 $ 260.2 (11) $18,626.7
(4.2)(12)
Held-to-maturity fixed maturity
securities - 260.2 (260.2)(11) -
Equity securities at fair value 147.8 30.9 178.7
Mortgage loans 334.4 9.8 344.2
Credit-tenant loans 491.2 491.2
Policy loans 539.7 83.9 623.6
Other invested assets 270.2 15.0 285.2
Short-term investments 310.9 44.2 (41.4)(13) 355.1
41.4 (14)
Assets held in separate accounts 334.0 334.0
--------- ------ ------- ---------
Total investments 20,051.7 1,191.2 (4.2) 21,238.7
Accrued investment income 310.6 16.4 327.0
Cost of policies purchased 2,470.1 40.2 (40.2)(15) 2,791.9
321.8 (15)
Cost of policies produced 657.6 237.5 (237.5)(16) 657.6
Reinsurance receivables 537.7 207.6 745.3
Income tax assets 151.2 7.4 (17) 141.1
(17.5)(17)
Goodwill 2,835.2 12.0 (12.0)(18) 3,074.5
239.3 (18)
Property and equipment 119.9 30.8 150.7
Securities segregated for future redemption
of redeemable preferred stock of a
subsidiary 46.4 46.4
Other assets 296.8 66.9 363.7
--------- -------- ------- ---------
Total assets $27,477.2 $1,802.6 $ 257.1 $29,536.9
========= ======== ======= =========
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1997
(Dollars in millions)
(unaudited)
Pro forma
adjustments
relating Pro forma
Conseco PFS to the Conseco
historical historical PFS Merger totals
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Liabilities:
Insurance liabilities $20,641.8 $1,359.4 $ - $22,001.2
Income tax liabilities - 17.5 (17.5)(17) -
Investment borrowings 318.3 318.3
Amounts due to reinsurers - 58.1 58.1
Other liabilities 666.6 65.3 49.5 (19) 827.3
34.5 (21)
11.4 (21)
Liabilities related
to separate accounts 334.0 334.0
Notes payable 1,268.1 112.7 (26.4)(20) 1,395.8
41.4 (14)
-------- ------- ------- ---------
Total liabilities 23,228.8 1,613.0 92.9 24,934.7
-------- -------- ------- ---------
Minority interest:
Company - obligated mandatorily
redeemable preferred securities
of subsidiary trusts 900.0 900.0
Mandatorily redeemable preferred
stock of subsidiary 72.6 72.6
Common stock of subsidiary .7 .7
-------- ------ ------ ---------
Shareholders' equity:
Preferred stock 133.1 133.1
Common stock and additional
paid-in capital 2,427.9 94.7 (94.7)(22) 2,781.7
353.8 (22)
Unrealized appreciation
(depreciation) of securities (126.7) (4.6) 4.6 (22) (126.7)
Retained earnings 840.8 99.5 (99.5)(22) 840.8
------- ------- ------- --------
Total shareholders' equity 3,275.1 189.6 164.2 3,628.9
------- -------- ------- --------
Total liabilities and
shareholders' equity $27,477.2 $1,802.6 $257.1 $29,536.9
========= ======== ====== =========
The accompanying notes are an integral part of the pro forma consolidated financial statements.
</TABLE>
5
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
TRANSACTIONS RELATING TO THE CAPITAL SECURITIES OFFERING
Effective March 31, 1997, a subsidiary trust of Conseco issued Capital
Securities having an aggregate liquidation amount of $300 million and a
distribution rate of 8.796 percent. The subsidiary used the proceeds from the
sale of such securities to purchase subordinated deferrable interest debentures
of Conseco in an aggregate principal amount equivalent to the aggregate
liquidation amount of the Capital Securities that were issued. The subordinated
deferrable interest debentures bear interest at a rate of 8.796 percent. Conseco
used the proceeds from the sale of the subordinated deferrable interest
debentures to reduce its notes payable.
(1) Interest expense is reduced to reflect the repayment of $296.7
million aggregate principal amount of Conseco's notes payable.
(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 distribution (net of
the related tax benefit) on the Capital Securities.
6
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
TRANSACTIONS RELATING TO THE PFS MERGER
The PFS Merger will be accounted for under the purchase method of
accounting. Under this method, the total cost to acquire will be allocated to
the assets and liabilities acquired based on their fair values as of the date of
the PFS 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. The PFS Merger will not qualify to be accounted for under the
pooling of interests method in accordance with APB No. 16 because an affiliate
of PFS sold a portion of his PFS common stock after the PFS Merger was
announced. In the PFS Merger, each outstanding share of PFS common stock is
assumed to be exchanged for a fraction of a share of Conseco common stock to be
determined based on an average price of Conseco common stock prior to its
closing (it is assumed Conseco's share price will be $41.79 (based on such
average price as of May 13, 1997), resulting in an exchange ratio of .6701
shares valued at $28.00). Conseco will issue an assumed 8.5 million shares of
Conseco common stock with a value of approximately $353.8 million to acquire the
PFS common stock. In addition, Conseco will assume: (i) notes payable of PFS of
$26.4 million; and (ii) PFS's 6.5% Convertible Subordinated Notes due 2003 (the
"PFS Convertible Notes"), which will be convertible into an assumed 2.9 million
shares of Conseco common stock with a value of approximately $120.7 million. In
addition, Conseco is expected to incur costs related to the PFS Merger
(including contract termination, relocation, legal, accounting and other costs)
of approximately $49.5 million.
The cost to acquire PFS is allocated as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Book value of assets acquired based on the assumed date of the
PFS Merger (March 31, 1997).................................................... $189.6
PFS Convertible Notes assumed by Conseco at the
assumed date of the PFS Merger................................................. 86.2
Notes payable assumed by Conseco at the assumed date of the PFS Merger.............. 26.4
Increase (decrease) in PFS's net asset value to reflect estimated fair value and
asset reclassifications at the assumed date of the PFS Merger:
Actively managed fixed maturity securities.................................. 256.0
Held-to-maturity fixed maturity securities.................................. (260.2)
Cost of policies purchased (related to the PFS Merger)...................... 321.8
Cost of policies produced and cost of policies purchased (historical)....... (277.7)
Goodwill (related to the PFS Merger)........................................ 233.1
Goodwill (historical)....................................................... (5.8)
Income taxes................................................................ 7.4
Other liabilities........................................................... (60.9)
------
Total estimated fair value adjustments................................. 213.7
------
Total cost to acquire PFS (including notes payable assumed by Conseco). $515.9
======
</TABLE>
Adjustments to the pro forma consolidated statement of operations to give
effect to the PFS Merger as of January 1, 1996, are summarized below.
(4) Net investment income of PFS is adjusted to include the effect of
adjustments to restate the amortized cost basis of fixed maturity
securities to their estimated fair value.
(5) Interest expense is increased to reflect the increase in borrowings
under Conseco's bank credit facilities used to complete the PFS Merger
and the issuance of the PFS Convertible Notes in March 1996; partially
offset by the repayment of $26.4 million of notes payable of PFS by
Conseco at the assumed date of the PFS Merger.
(6) Interest expense is reduced to reflect the amortization of the
liability established at the assumed date of the PFS Merger
representing the present value of the interest payable on the PFS
Convertible Notes to April 6, 1999 (the earliest call date), less
the present value of the dividends that would be paid on the Conseco
common stock that such notes would be convertible into during the
same period.
7
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7) Amortization of the cost of policies produced and the cost of policies
purchased prior to the PFS 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).
(8) Amortization of goodwill prior to the PFS Merger is eliminated and
replaced with amortization of goodwill acquired in the PFS Merger
which is recognized over a 40-year period on a straight-line basis.
(9) Reflects the tax adjustment for the pro forma adjustments at the
appropriate rate for the specific item.
(10) Common shares outstanding are increased to reflect the Conseco shares
issued in the PFS Merger. Fully diluted shares also include Conseco
shares which will be issued when the PFS Convertible Notes are
converted.
Adjustments to the pro forma consolidated balance sheet to give effect to
the PFS Merger as of March 31, 1997, are summarized below.
(11) After the PFS Merger, all held-to-maturity securities are classified
as actively managed fixed maturity securities consistent with the
intention of the new management.
(12) PFS's fixed maturity securities are restated to estimated fair value.
(13) Cash is reduced for payments made to complete the PFS Merger.
(14) Short-term investments and notes payable of Conseco are increased for
additional borrowings by Conseco to complete the PFS Merger.
(15) PFS's historical cost of policies purchased is eliminated and replaced
with the cost of policies purchased recognized in the PFS Merger.
Cost of policies purchased reflects the estimated fair value of PFS's
business in force and represents the portion of the cost to acquire
PFS 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 March 31, 2002, are as follows (dollars in millions):
<TABLE>
<CAPTION>
Year ending Beginning Gross Accretion Net Ending
March 31, balance amortization of interest amortization balance
------------- ------- ------------ ----------- ------------- -------
<S> <C> <C> <C> <C> <C>
1998 $321.8 $66.3 $17.7 $48.6 $273.2
1999 273.2 59.4 15.1 44.3 228.9
2000 228.9 50.3 12.6 37.7 191.2
2001 191.2 39.1 10.6 28.5 162.7
2002 162.7 30.2 9.0 21.2 141.5
</TABLE>
8
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(16) PFS's cost of policies produced is eliminated since such amounts are
reflected in the determination of the cost of policies purchased.
(17) All of the applicable pro forma balance sheet adjustments are tax
affected at the appropriate rate. In addition, deferred tax
liabilities of PFS are netted against deferred tax assets of Conseco.
(18) PFS's historical goodwill is eliminated and replaced with the goodwill
recognized in the PFS Merger.
(19) A liability is established for various expenses incurred and
liabilities assumed in conjunction with the PFS Merger including: (i)
liabilities assumed related to unfavorable contracts and leases; (ii)
direct acquisition costs; (iii) involuntary termination costs; and
(iv) relocation costs.
(20) Notes payable are reduced to reflect the repayment of notes payable
of PFS by Conseco at the assumed date of the PFS Merger.
(21) Other liabilities are increased to reflect the additional value
attributable to the conversion feature of the PFS Convertible Notes
at the date of the PFS Merger. Such fair value represents the value of
the Conseco common stock which the PFS Convertible Notes will be
convertible into after the PFS Merger. It is assumed that the holders
of such notes do not convert into Conseco common stock at the time of
the PFS Merger.
In addition, a liability is established representing the present
value of the interest payable on such notes to April 6, 1999 (the
earliest call date), less the present value of the dividends that
would be paid on the Conseco common stock that such notes would be
convertible into during the same period.
(22) The prior shareholders' equity of PFS is eliminated in conjunction
with the PFS Merger. Common stock and additional paid-in capital is
increased by the value of the Conseco common stock issued in the
PFS Merger.
9
