UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 [No Fee Required]
For the transition period from ____ to ____
Commission file number: 1-9250
Conseco, Inc.
Indiana No. 35-1468632
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State of Incorporation IRS Employer Identification No.
11825 N. Pennsylvania Street
Carmel, Indiana 46032 (317) 817-6100
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Address of principal executive offices Telephone
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, No Par Value New York Stock Exchange, Inc.
8-1/8% Senior Notes due 2003 New York Stock Exchange, Inc.
10-1/2% Senior Notes due 2004 New York Stock Exchange, Inc.
7% PRIDES Convertible Preferred Stock New York Stock Exchange, Inc.
9.16%Trust Originated Preferred Securities New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of common stock held by nonaffiliates (computed as
of March 14, 1997): $7,326,991,680
Shares of common stock outstanding as of March 14, 1997: 183,174,792
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
proxy statement for the annual meeting of shareholders to be held May 13, 1997
are incorporated by reference into Part III of this Report.
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PART I
ITEM 1. BUSINESS OF CONSECO.
Background
Conseco, Inc. is a financial services holding company. Conseco develops,
markets and administers annuity, individual health insurance and individual life
insurance products. As used in this report, the terms "Conseco" or the "Company"
refer to Conseco, Inc. and its consolidated subsidiaries, unless the context
requires otherwise. Conseco's operating strategy is to grow the insurance
business within its subsidiaries by focusing its resources on the development
and expansion of profitable products and strong distribution channels. Conseco
has supplemented such growth by acquiring companies that have profitable niche
products, strong distribution systems and progressive management teams who can
work with Conseco to implement Conseco's operating and growth strategies. Once a
company has been acquired, Conseco's operating strategy has been to consolidate
and streamline management and administrative functions, to realize superior
investment returns through active asset management, to eliminate unprofitable
products and distribution channels, and to expand and develop the profitable
distribution channels and products.
Since 1982, Conseco has acquired 15 insurance groups and related
businesses; 10 as wholly owned subsidiaries and five through its acquisition
partnerships. Conseco's first acquisition partnership, Conseco Capital Partners,
L.P. ("Partnership I"), was dissolved in 1993 after distributing to its partners
the securities of the companies it had acquired. Conseco Capital Partners II,
L.P. ("Partnership II"), Conseco's second acquisition partnership, was
liquidated in 1996 after Conseco purchased from the other partners all of the
common shares of American Life Holdings, Inc. ("ALH", formerly The Statesman
Group, Inc.) not already owned by Conseco. Conseco terminated its partnership
activity in 1996 because changes in the regulatory and rating agency environment
had made it difficult to structure leveraged acquisitions of life insurance
companies.
On August 31, 1995, the Company purchased all of the shares of common
stock of CCP Insurance, Inc. ("CCP") it did not previously own (representing 51
percent of CCP's outstanding shares). In the transaction, CCP was merged into
Conseco, with Conseco being the surviving corporation. The merger and the
related transactions are referred to herein as the "CCP Merger". As a result of
the CCP Merger, CCP's subsidiaries -- Great American Reserve Insurance Company
("Great American Reserve") and Beneficial Standard Life Insurance Company
("Beneficial Standard") -- became wholly owned subsidiaries of Conseco. The
accounts of CCP's subsidiaries are consolidated with Conseco's effective January
1, 1995.
On August 2, 1996, Conseco acquired (the "LPG Merger") Life Partners
Group, Inc. ("LPG"). LPG became a wholly owned subsidiary of Conseco. In the LPG
Merger, Conseco issued a total of 32.6 million shares of its common stock (or
common stock equivalents) with a value of $586.8 million. Conseco also assumed
LPG notes payable of $253.1 million. LPG's subsidiaries sell a diverse portfolio
of universal life insurance and, to a lesser extent, annuity products to
individuals.
On September 30, 1996, Conseco acquired the remaining 62 percent of the
common shares of ALH not already owned by Conseco or its affiliates for
approximately $165 million in cash. ALH is a provider of retirement savings
annuities. ALH has been included in Conseco's consolidated financial statements
since ALH's acquisition by Partnership II in September 1994.
On December 17, 1996, Conseco acquired (the "ATC Merger") American
Travellers Corporation ("ATC"). ATC was merged with and into Conseco, with
Conseco being the surviving corporation. In the ATC Merger, Conseco issued a
total of 21.0 million shares of its common stock (or common stock equivalents)
with a value of $630.9 million. In addition, Conseco assumed $102.8 million of
ATC's convertible subordinated debentures, which became convertible into 7.9
million shares of Conseco common stock with a value of $248.3 million. ATC is a
leading marketer and underwriter of long-term care insurance. ATC also markets
and underwrites other supplemental accident and health insurance policies, as
well as life insurance.
On December 23, 1996, Conseco acquired (the "THI Merger") Transport
Holdings Inc. ("THI"). THI was merged with and into Conseco, with Conseco being
the surviving corporation. In the THI Merger, Conseco issued a total of 4.9
million shares of its common stock (or common stock equivalents) with a value of
$121.7 million. In addition, pursuant to an exchange offer, all of THI's
Subordinated Convertible Notes were exchanged for 4.2 million shares of Conseco
common stock with a value of $106.2 million, plus a cash premium of $11.9
million. THI is principally engaged in the underwriting and distribution of
supplemental health insurance.
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On December 31, 1996, Conseco acquired (the "BLH Merger") the 9.6 percent
of the common shares of Bankers Life Holding Corporation ("BLH") not already
owned by Conseco or its affiliates. BLH was merged into a wholly owned
subsidiary of Conseco. In the BLH Merger, Conseco issued a total of 3.9 million
shares of Conseco common stock (or common stock equivalents) with a value of
$123.0 million. BLH is one of the nation's largest writers of individual health
insurance products, based on collected premiums. BLH also markets a variety of
annuity, life and group insurance products. BLH has been included in Conseco's
consolidated financial statements since November 1992, when BLH was acquired by
Partnership I.
Conseco owned the following life insurance companies at December 31,
1996:
- Bankers Life and Casualty Company ("Bankers Life"), Bankers Life
Insurance Company of Illinois and Certified Life Insurance Company,
formerly subsidiaries of BLH;
- Great American Reserve, Beneficial Standard and Jefferson National
Life Insurance Company of Texas, in which Conseco has had an ownership
interest since their acquisition by Partnership I in 1990 and 1991,
respectively, and which became wholly owned subsidiaries in August
1995;
- the subsidiaries of ALH, which are also subsidiaries of Conseco,
including American Life and Casualty Insurance Company ("ALC") and
Vulcan Life Insurance Company;
- the subsidiaries of LPG, which are now subsidiaries of Conseco,
including Philadelphia Life Insurance Company ("Philadelphia Life"),
Massachusetts General Life Insurance Company ("Massachusetts
General"), Lamar Life Insurance Company ("Lamar Life") and Wabash Life
Insurance Company;
- the former subsidiaries of ATC, which are now subsidiaries of Conseco,
including American Travellers Life Insurance Company ("American
Travellers"), United General Life Insurance Company ("United General")
and American Travellers Insurance Company of New York;
- the former subsidiaries of THI, which are now subsidiaries of Conseco,
including TLIC Life Insurance Company ("TLIC Life"), Transport Life
Insurance Company ("Transport Life") and Continental Life Insurance
Company ("Continental Life"); and
- Bankers National Life Insurance Company, National Fidelity Life
Insurance Company and Lincoln American Life Insurance Company, which
have profitable blocks of in-force business, although they are
currently not pursuing new sales.
On March 4, 1997, Conseco acquired (the "CAF Merger") Capitol American
Financial Corporation ("CAF"). CAF was merged with and became a wholly owned
subsidiary of Conseco. In the CAF Merger, each of the approximately 17.7 million
shares of CAF common stock and common stock equivalents were converted into the
right to receive $30.75 in cash plus 0.1647 of a share of Conseco common stock.
Conseco paid $545 million in cash and issued 2.9 million shares of Conseco
common stock with a value of approximately $115.7 million to acquire the CAF
common stock. In addition, Conseco assumed a note payable of CAF of $31.0
million. CAF, through its insurance subsidiaries, underwrites, markets and
distributes individual and group supplemental health and accident insurance.
CAF's principal insurance subsidiary is an Arizona-domiciled company, Capitol
American Life Insurance Company ("CALI"), which accounted for more than 97
percent of CAF's earned premiums over the last five years. 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. CAF had total assets of
$1.1 billion at December 31, 1996.
Western National Corporation ("WNC"), an NYSE-listed company, and its
wholly owned subsidiary, Western National Life Insurance Company, were wholly
owned subsidiaries until February 15, 1994, when WNC completed an initial public
offering ("IPO"). Conseco sold a 60 percent interest in WNC in connection with
the IPO and sold its remaining 40 percent interest in a separate transaction on
December 23, 1994.
Conseco was organized in 1979 as an Indiana corporation and commenced
operations in 1982. Its executive offices are located at 11825 N. Pennsylvania
Street, Carmel, Indiana 46032, and its telephone number is (317) 817-6100.
Pending Acquisition
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
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equivalents would be converted into the right to receive a fraction of a share
of Conseco common stock (rounded to the nearest ten- thousandth) 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
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 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 10 trading days
immediately preceding the second trading day prior to the date of the PFS
Merger. Based on a Conseco/PFS Share Price which exceeds $28.00 per share (such
price being exceeded on March 14, 1997), Conseco will issue 8.7 million shares
of Conseco common stock with a value of approximately $352.4 million to acquire
the PFS common stock. In addition, Conseco will assume PFS notes payable of
$27.8 million and the PFS 6 1/2% Convertible Subordinated Notes due 2003, which
will be convertible into an assumed 3.0 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 collected $794.2 million of life, annuity and health insurance premiums in
1996.
OPERATING SEGMENTS
Conseco conducts and manages its business through four segments,
reflecting the Company's major lines of insurance business and target markets:
(i) annuities; (ii) supplemental health insurance; (iii) life insurance; and
(iv) other.
Annuities
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. During 1996, this segment collected total
premiums of $1,542.4 million, down 7.1 percent from 1995. When all currently
consolidated companies are included for all periods, including periods prior to
their acquisition, this segment collected total premiums of $1,612.7 million,
down 8.7 percent from 1995.
The following describes the major products of this segment:
Single-premium deferred annuities. SPDAs accounted for $755.4 million, or
23 percent, of the Company's total collected premiums in 1996. An SPDA is a
savings vehicle in which the policyholder, or annuitant, makes a single-premium
payment to the insurance company; the insurer guarantees the principal and
accrues a stated rate of interest. After a number of years, as specified in the
annuity contract, the annuitant may elect to take the proceeds of the annuity
either in a single payment or in a series of payments for life, for a fixed
number of years, or for a combination thereof. Conseco's SPDAs typically have an
interest rate (the "crediting rate") that is guaranteed by the Company for the
first policy year, after which the Company has the discretionary ability to
change the crediting rate to any rate not below a guaranteed minimum rate, which
generally ranges from 3.0 percent to 5.5 percent. The initial crediting rate is
largely a function of: (i) the interest rate the Company can earn on invested
assets acquired with the new annuity fund deposits; and (ii) the rates offered
on similar products by the Company's competitors. For subsequent adjustments to
crediting rates, the Company takes into account the yield on its investment
portfolio, annuity surrender assumptions, competitive industry pricing and the
crediting rate history for particular groups of annuity policies with similar
characteristics. Since 1992, more than 80 percent of the Company's new annuity
sales have been "bonus" products. The initial crediting rate on these products
specifies a bonus crediting rate ranging from 1 percent to 8 percent of the
annuity deposit for the first policy year only. After the first year, the bonus
interest portion of the initial crediting rate is automatically discontinued and
the renewal crediting rate is established. Commissions to agents are generally
reduced by an amount comparable to the bonus interest to partially compensate
the Company for the higher initial crediting rate on these products. As of
December 31, 1996, crediting rates on the Company's outstanding SPDAs generally
ranged from 4.0 percent to 5.5 percent, excluding bonuses guaranteed for the
first year of the annuity contract. The average crediting rate including
interest bonuses was 5.2 percent and the average rate excluding bonuses was 5.0
percent.
The policyholder is typically permitted to withdraw all or part of the
premium paid plus the accumulated interest credited to his account (the
"accumulation value"), subject in virtually all cases to the assessment of a
surrender charge for withdrawals in excess of specified limits. Most of the
Company's SPDAs provide for penalty-free withdrawals of up to 10 percent of the
accumulation value each year, subject to limitations. Withdrawals in excess of
allowable penalty-free amounts are assessed a surrender charge during a penalty
period which generally ranges from five to 12 years after the date a policy was
issued. The surrender charge is initially 6 percent to 12 percent of the
accumulation value and generally decreases by approximately 1 to 2 percentage
points per year during the penalty period. Surrender charges are set at levels
to protect the Company from loss on early terminations and to reduce the
likelihood of policyholders terminating their policies during periods of
increasing interest rates. This practice lengthens the effective
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duration of policy liabilities and enables the Company to maintain profitability
on such policies. In September 1995, the Company began offering a deferred
annuity product with a "market value adjustment" feature. This feature is
designed to provide the Company with additional protection from early
terminations during a period of rising interest rates by reducing the surrender
value payable upon a full or partial surrender of the policy in excess of the
allowable penalty-free withdrawal amount. Conversely, during a period of
declining interest rates, the feature would increase the surrender value payable
to the policyholder. In 1996, the Company collected premiums of $257.7 million
from sales of SPDAs with this feature.
In response to consumers' desire for alternative investment products with
returns linked to those of common stocks, the Company introduced an
equity-linked SPDA in June 1996. This product accounted for $87.1 million of
SPDA premiums collected during 1996. The annuity's accumulation value is
credited with interest at an annual minimum guaranteed rate of 3 percent, but
the annuity provides for higher returns based on a percentage (the
"participation rate") of the change in the S&P 500 Index during each year of its
term. The Company has the discretionary ability to change the participation rate
(which is currently 100 percent), subject to a minimum of 50 percent. The
annuity provides for penalty-free withdrawals of up to 10 percent of the
accumulation value in each year after the first year of the annuity's term. Most
other withdrawals during the first eight years of the annuity's term are subject
to a 9 percent surrender charge. The Company purchases S&P 500 Index Options,
the values of which change as benefits accrue to these annuities as a result of
the equity-linked return feature.
Single-premium immediate annuities. SPIAs accounted for $111.2 million,
or 3.5 percent, of the Company's total collected premiums in 1996. SPIAs are
designed to provide a series of periodic payments for a fixed period of time or
for life, according to the policyholder's choice at the time of issue. Once the
payments begin, the amount, frequency and length of time for which they are
payable are fixed. SPIAs often are purchased by persons at or near retirement
age who desire a steady stream of payments over a future period of years. The
single premium is often the payout from a terminated annuity contract. The
implicit interest rate on SPIAs is based on market conditions when the policy is
issued. The implicit interest rate on the Company's outstanding SPIAs at
December 31, 1996, averaged 6.2 percent.
Flexible-premium deferred annuities. FPDAs accounted for $594.3 million ,
or 18 percent, of the Company's total collected premiums in 1996. FPDAs are
similar to SPDAs in many respects, except that FPDAs allow more than one premium
payment. FPDAs are marketed through professional independent producers.
The Company's FPDAs typically have a guaranteed crediting rate for the
first policy year that exceeds the minimum annual guaranteed rate of at least 3
percent. After the first year, the crediting rate may be changed at least
annually. The policyholder is permitted to withdraw all or part of the
accumulation value, less a surrender charge for withdrawals during an initial
penalty period of up to 15 years. The initial surrender charges range from 5
percent to 19 percent of the first-year premium and decline over the penalty
period. Interest rates credited on the Company's outstanding FPDAs at December
31, 1996, generally ranged from 4.5 percent to 5.5 percent, excluding bonuses
guaranteed for the first year of the annuity contract. The average crediting
rate including interest bonuses was 5.2 percent and the average rate excluding
bonuses was 5.0 percent.
Variable annuities. Variable annuities accounted for $81.5 million, or
2.5 percent, of the Company's total premiums collected in 1996. Variable
annuities, sold on a single- or flexible-premium basis, differ from fixed
annuities in that the original principal value may fluctuate, depending on the
performance of assets allocated pursuant to various investment options chosen by
the contract owner. Variable annuities offer contract owners a fixed interest
option or a variable rate of return based upon the specific investment
portfolios into which premiums may be directed.
Supplemental health
This segment includes Medicare supplement and long-term care insurance.
For periods prior to January 1, 1997, this segment consists solely of the
Medicare supplement and long-term care products distributed through a career
agency force. During 1996, this segment collected Medicare supplement premiums
of $630.9 million and long-term care premiums of $194.2 million, up 5.7 percent
and 22 percent, respectively, over 1995. When all currently consolidated
companies are included for all periods (including periods prior to their
acquisition), this segment collected Medicare supplement premiums of $651.6
million, long-term care premiums of $541.3 million and specified disease
premiums of $90.6 million, up 5.2 percent, up 37 percent and down 2.3 percent,
respectively, from premiums collected during 1995.
Beginning in 1997, this segment will include the specified disease
products of the former subsidiaries of THI and CAF and the long-term care
products of the former subsidiaries of ATC which are distributed through
professional independent producers. Upon completion of the PFS Merger, this
segment will also include various supplemental health products of PFS. These
products are also distributed through professional independent producers.
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The following describes the major products of this segment:
Medicare supplement. Medicare supplement products accounted for $630.9
million, or 20 percent, of the Company's total collected premiums in 1996.
Medicare is a two-part federal health insurance program for disabled persons and
senior citizens (age 65 and older). Part A of the program provides protection
against the costs of hospitalization and related hospital and skilled nursing
home care, subject to an initial deductible, related coinsurance amounts and
specified maximum benefit levels. The deductible and coinsurance amounts are
subject to change each year by the federal government. Part B of Medicare covers
doctors bills and a number of other medical costs not covered by Part A, subject
to deductible and coinsurance amounts for "approved" charges.
Medicare supplement policies provide coverage for many of the medical
expenses which the Medicare program does not cover, such as deductibles and
coinsurance costs (in which the insured and Medicare share the costs of medical
expenses) and specified losses which exceed the federal program's maximum
benefits. Conseco's Medicare supplement plans automatically adjust coverage to
reflect changes in Medicare benefits. In marketing these products, Conseco
concentrates on individuals who have recently become eligible for Medicare by
reaching the age of 65. Conseco offers a higher first-year commission for sales
to these policyholders and competitive premium pricing. Approximately one-half
of new sales of Medicare supplement policies are to individuals who are 65 years
old.
Long-term care. Long-term care products accounted for $194.2 million, or
6.0 percent, of the Company's total collected premiums in 1996. Long-term care
products provide coverage, within prescribed limits, for nursing home, home
healthcare, or a combination of both nursing home and home health care expenses.
The long-term care plans are sold primarily to retirees, and to a lesser degree,
to older self-employed individuals and others in middle-income levels.
Current nursing home care policies cover incurred and daily fixed-dollar
benefits available with an elimination period (which, similar to a deductible,
requires the insured to pay for a certain number of days of nursing home care
before the insurance coverage begins), subject to a maximum benefit. Home health
care policies cover the usual and customary charges after a deductible and are
subject to a daily or weekly maximum dollar amount, and an overall benefit
maximum. Conseco monitors the loss experience on its long-term care products
and, when necessary, applies for rate increases in the states in which it sells
such products.
Specified disease products. Beginning in 1997, the supplemental health
segment will include the specified disease products of THI and CAF, such as
cancer and heart/stroke insurance. These policies generally provide fixed or
limited benefits. Cancer insurance and heart/stroke products are guaranteed
renewable individual accident and health insurance policies. Payments under
cancer insurance policies are generally made directly to, or at the direction
of, the policyholder following diagnosis of, or treatment for, a covered type of
cancer. The benefits provided under the cancer insurance policies of THI and CAF
do not necessarily reflect the actual cost incurred by the insured as a result
of the illness; benefits are not reduced by any other medical insurance payments
made to or on behalf of the insured. Heart/stroke policies provide for payments
directly to the policyholder for treatment of a covered heart disease, heart
attack or stroke.
Life
This segment includes traditional, universal life and other life
insurance products. Beginning with the third quarter of 1996, the largest single
component of this segment is the universal life business of LPG. This segment's
products are currently sold through both career agents and professional
independent producers.
During 1996, this segment collected total premiums of $453.7 million, up
64 percent, over premiums collected during 1995. When all currently consolidated
companies are included for all periods, including periods prior to their
acquisition, this segment collected total premiums of $665.6 million, up 1.1
percent from 1995.
Interest-sensitive life products. These products include universal life
products that provide whole life insurance with adjustable rates of return
related to current interest rates. They accounted for $271.5 million, or 8.4
percent, of the Company's total collected premiums in 1996 and are marketed
primarily through professional independent producers. The principal differences
between universal life products and other interest-sensitive life insurance
products are policy provisions affecting the amount and timing of premium
payments. Universal life policyholders may vary the frequency and size of their
premium payments, although policy benefits may also fluctuate according to such
payments. Premium payments under other interest-sensitive policies may not be
varied by the policyholders and, as a result, are designed to reduce the
administrative costs typically associated with monitoring universal life premium
payments and policy benefits.
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Traditional life. These products accounted for $182.2 million , or 5.7
percent, of the Company's total collected premiums in 1996. Traditional life
policies, including whole life and term life products, are primarily marketed
through professional independent producers. Under whole life policies, the
policyholder generally pays a level premium over the policyholders' expected
lifetime. The annual premium in a whole life policy is generally higher than the
premium for comparable term insurance coverage in the early years of the
policy's life, but is generally lower than comparable term insurance coverage in
the later years of the policy's life. These policies, which continue to be
marketed by the Company on a limited basis, combine insurance protection with a
savings component that increases in amount gradually over the life of the
policy. The policyholder may borrow against the savings, generally at a rate of
interest lower than that available from other lending sources. The policyholder
may also choose to surrender the policy and receive the accumulated cash value
rather than continuing the insurance protection. Term life products offer pure
insurance protection for a specified period of time -- typically one, five, 10
or 20 years.
Other
This segment includes miscellaneous health products, including Bankers
Life's comprehensive and group products. Bankers Life markets its group
insurance products through a small field force of representatives and
independent insurance brokerage firms. In recent years, Bankers Life has not
emphasized group insurance sales, but does write new business when the potential
new contract carries a high likelihood of profitability and long-term
persistency. During 1996, this segment collected premiums of $389.2 million.
When all currently consolidated companies are included for all periods,
including periods prior to their acquisition, this segment collected premiums of
$420.6 million, down 21 percent from 1995.
This segment also includes fee revenue generated by Conseco's nonlife
subsidiaries, including the investment advisory fees earned by Conseco Capital
Management, Inc. ("CCM") and commissions earned for insurance product marketing
and distribution. Fee revenues from Conseco's consolidated subsidiaries are
excluded. Total fees earned from nonaffiliates during 1996 were $49.8 million,
up 14 percent over 1995.
MARKETING AND DISTRIBUTION
Conseco's insurance subsidiaries are collectively licensed to market the
Company's insurance products in all states and in the District of Columbia, and
certain protectorates of the United States. Sales to residents of the following
states accounted for at least 5 percent of the Company's 1996 collected
premiums: Illinois (10 percent), Florida (9.1 percent), California (8.7 percent)
, Texas (7.6 percent) and Michigan (6.6 percent).
Conseco believes that people generally purchase life, accident and health
insurance and annuity products only after being contacted and solicited by an
insurance agent. Accordingly, the success of the Company's distribution system
is dependent on its ability to attract and retain agents who are experienced and
highly motivated.
In order to encourage agents to place a high volume of life, accident and
health and annuity business with Conseco's subsidiaries, Conseco offers
commission rate bonuses and compensation awards which increase with the volume
of new business written. Conseco has formed a marketing subsidiary to coordinate
the marketing and distribution of its insurance companies and promote cross
selling of their products.
A description of the Company's primary distribution channels follows:
Career Agents. This agency force of approximately 2,800 agents working
from 200 branch offices, permits one-on-one contacts with potential
policyholders and promotes strong personal relationships with existing
policyholders. In 1996, career agents accounted for $1,263.0 million, or 39
percent, of the Company's total collected premiums. Most of these agents sell
only Conseco policies and typically visit the prospective policyholder's home to
conduct personalized "kitchen-table" sales presentations. After the sale of an
insurance policy, the agent serves as a contact person for policyholder
questions, claims assistance and additional insurance needs. The personalized
marketing and service efforts of the career field agents, supported by home
office persistency programs, have contributed to a persistency rate of
approximately 86 percent on Medicare supplement policies sold through this
channel. Although independent statistics are not available, the Company believes
its persistency rate is one of the highest among the major writers of such
policies.
Professional Independent Producers. This distribution channel consists of
a general agency and insurance brokerage distribution system comprised of
approximately 125,000 independent licensed agents doing business in all states.
In 1996, this channel accounted for $1,947.4 million, or 61 percent, of the
Company's total collected premiums.
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Professional independent producers are a diverse network of independent
agents, insurance brokers and marketing organizations. Marketing companies
typically recruit agents for Conseco by advertising the Company's products and
its commission structure through direct mail advertising, or through seminars
for insurance agents and brokers. These organizations bear most of the costs
incurred in marketing the Company's products. Conseco compensates the marketing
organizations by paying them a percentage of the commissions earned on new sales
generated by the agents recruited by such organizations. Certain of these
marketing organizations are specialty organizations that have a marketing
expertise or a distribution system relating to a particular product, such as
sales of flexible-premium annuities to educators.
A portion of the Company's business is distributed through a "Client
Company" marketing system, whereby agents and other insurance companies have
entered into agreements to market the Company's products through their
professional independent producer distribution systems. Under the agreements,
such groups assume up to 50 percent of the business each write (through agent
owned reinsurance companies or existing life insurance companies). Conseco
retains assets equal to the reserves of each Client Company and provides
substantially all administrative services for a fee. Of the Company's $3,210.4
million of collected premiums in 1996, 3.1 percent were collected by groups
participating in the Client Company program.
ADMINISTRATION
Conseco minimizes operating expenses by centralizing, standardizing and
more efficiently performing many functions common to most life insurance
companies. These functions include underwriting and policy administration,
accounting and financial reporting, marketing, regulatory compliance, actuarial
services and asset management.
The administration of the Company's individual health insurance products
involves higher volumes of claims, contacts with policyholders and operational
costs, compared to the administration of life insurance or annuity policies. In
1996, the Company processed more than 6.5 million individual health insurance
policyholder claims. Conseco has developed an efficient and highly automated
policyholder administration operation to minimize the costs of such large volume
processing and deliver a high level of service to its policyholders, with
special emphasis on the prompt payment of claims. In most cases, Conseco mails a
check within a week of receiving a claim from a policyholder. Conseco believes
that its promptness in processing policyholder claims is a major reason for its
strong reputation for service and the above-average persistency of its Medicare
supplement products.
INVESTMENTS
CCM, a registered investment adviser wholly owned by Conseco, manages the
investment portfolios of Conseco's subsidiaries. CCM had approximately $31.1
billion of assets (at fair value) under management at December 31, 1996, of
which $18.5 billion were assets of Conseco's subsidiaries and $12.6 billion were
assets of unaffiliated companies. CCM's investment philosophy is to maintain a
largely investment-grade fixed-income portfolio, provide adequate liquidity for
expected liability durations and other requirements and maximize total return
through active investment management.
Investment activities are an integral part of the Company's business;
investment income is a significant component of the Company's total revenues.
Profitability of many of the Company's products is significantly affected by
spreads between interest yields on investments and rates credited on insurance
liabilities. Although substantially all credited rates on SPDAs and FPDAs may be
changed annually, changes in crediting rates may not be sufficient to maintain
targeted investment spreads in all economic and market environments. In
addition, competition and other factors, including the impact of the level of
surrenders and withdrawals, may limit the Company's ability to adjust or to
maintain crediting rates at levels necessary to avoid narrowing of spreads under
certain market conditions. As of December 31, 1996, the average yield, computed
on the cost basis of the Company's investment portfolio, was 7.8 percent and the
average interest rate credited on the Company's interest sensitive products,
excluding interest bonuses guaranteed for the first year of the annuity contract
only, was 5.1 percent.
The Company seeks to balance the duration of its invested assets with the
expected duration of benefit payments arising from its insurance liabilities. At
December 31, 1996, the adjusted modified duration of fixed maturities and
short-term investments was approximately six years and the duration of the
Company's insurance liabilities was approximately seven years.
For information regarding the composition and diversification of the
investment portfolio of Conseco's subsidiaries, see "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations -
Investments" and note 3 to the consolidated financial statements.
8
<PAGE>
COMPETITION
Conseco's businesses operate in a highly competitive environment. The
life insurance industry consists of a large number of insurance companies, some
of which are larger and have greater financial resources, broader and more
diversified product lines and larger staffs than those of Conseco. An expanding
number of banks, securities brokerage firms and other financial intermediaries
also market insurance products or offer competing products, such as mutual fund
products, traditional bank investments and other investment and retirement
funding alternatives. Conseco also competes with many of these companies and
others in providing services for fees. In most areas, competition is based on a
number of factors, including pricing, service provided to distributors and
policyholders, and ratings. Conseco's subsidiaries must also compete with other
insurers to attract and retain the allegiance of agents.
Financial institutions, school districts, marketing companies, agents who
market insurance products and policyholders use the financial strength ratings
assigned to an insurer by independent rating agencies as one factor in
determining which insurer's products to market or purchase. The following table
summarizes the ratings of the Company's primary life insurance companies:
<TABLE>
<CAPTION>
Duffs & Phelps Standard &
A.M. Best Credit Rating Poor's
Company rating Company Corporation
- ------- ------ ------- -----------
<S> <C> <C> <C>
ALC............................................................. A - A -
American Travellers............................................. A - BBB +
Bankers Life.................................................... A AA - BBBq
Beneficial Standard............................................. A A + BBBq
Great American Reserve.......................................... A A + BBBq
Lamar Life...................................................... A A + BBBq
Massachusetts General........................................... A A + BBq
Philadelphia Life............................................... A A + Aq
Transport Life.................................................. A - BBBq
</TABLE>
A.M. Best Company ("A.M. Best") insurance company ratings for the
industry currently range from "A++ (Superior)" to "F (In Liquidation)".
Publications of A.M. Best indicate that the "A" and "A-" ratings are assigned to
those companies that, in A.M. Best's opinion, have demonstrated excellent
overall performance when compared to the standards established by A.M. Best and
have demonstrated a strong ability to meet their obligations to policyholders
over a long period of time. A.M. Best's rating procedure includes quantitative
and qualitative evaluations of a company's financial condition and operating
performance. Its quantitative evaluation is based on an analysis of a company's
financial performance in the areas of profitability, leverage/capitalization and
liquidity. A.M. Best's review also includes a qualitative evaluation of a
company's spread of risk, quality and appropriateness of the reinsurance
program, quality and diversification of assets, adequacy of policy or loss
reserves, management experience and objectives, market presence and
policyholders' confidence.
After the LPG Merger in August 1996, A.M. Best upgraded the ratings of
Bankers Life, Great American Reserve and Beneficial Standard to "A" (Excellent)
from "A-" (Excellent). In addition, A.M. Best affirmed the "A" (Excellent)
ratings of Philadelphia Life, Massachusetts General and Lamar Life and affirmed
the "A-" (Excellent) rating of ALC. Among the reasons A.M. Best cited for the
ratings upgrades and reaffirmations were the benefits Conseco will derive as a
result of the LPG Merger including: (i) improved unit costs arising from the
integration of administrative, financial, investment, marketing and underwriting
functions; (ii) expanded distribution capacity and increased cross-selling
opportunities; and (iii) a more diversifed product portfolio that should
generate more balanced and predictable revenue and earnings sources. A.M. Best
also views favorably the continuing improvement in Conseco's financial leverage
and Conseco's commitment to maintain debt/total capital at or below 35 percent.
Duff & Phelps' Credit Rating Company claims-paying ability ratings range
from "AAA (Highest claims-paying ability)" to "DD (Company is under an order of
liquidation)." An "AA-" rating represents "Very high claims paying ability."
Publications of Duff & Phelps indicate that the "A+" rating represents "High
claims-paying ability". A plus or minus sign attached to a Duff & Phelps claims
paying rating shows relative standing within a ratings category.
9
<PAGE>
Standard & Poor's Corporation ("Standard & Poor's") claims-paying ability
ratings range from "AAA (Superior)" to "R (Regulatory Action)". An "A" is
assigned by Standard & Poor's to those companies which, in its opinion, have a
secure claims-paying ability and whose financial capacity to meet policyholder
obligations is viewed on balance as sound, but their capacity to meet such
policyholder obligations is somewhat more susceptible to adverse changes in
economic or underwriting conditions than more highly rated insurers. A "BBB" is
assigned by Standard & Poor's to those companies which, in its opinion, have
adequate financial security, but their capacity to meet policyholder obligations
is susceptible to adverse economic and underwriting conditions. A "BB" is
assigned by Standard & Poor's to those companies which, in its opinion, have
adequate financial security, but their capacity to meet policyholder
obligations, particularly with respect to long-term or "long-tail" policies, is
vulnerable to adverse economic and underwriting conditions. According to
Standard & Poor's, a minus sign attached to a Standard & Poor's claims-paying
rating shows relative standing within a ratings category. A "q" subscript
indicates that the rating is based solely on quantitative analysis of publicly
available financial data.
Generally, rating agencies base their ratings upon information furnished
to them by the insurer and upon their own investigations, studies and
assumptions. A.M. Best's ratings, Duff & Phelps' claims-paying ratings and
Standard & Poor's claims-paying ratings are principally based upon factors of
concern to policyholders, agents and intermediaries and are not directed toward
the protection of investors. Given the competitive nature of the Company's
business and the increasing focus placed on the aforementioned ratings, the
Company manages its business with the objective of preserving existing ratings
and, where possible, achieving more favorable ratings. There can be no assurance
that any particular rating will continue for any given period of time, or that
it will not be changed or withdrawn entirely if, in the judgement of the rating
agency, circumstances so warrant. If the Company's ratings were downgraded from
their current levels, sales of its products and the persistency of its in-force
policies could be adversely affected in a material way.
In the individual health insurance business, insurance companies compete
primarily on the basis of marketing, service and price. The provisions of the
Omnibus Budget Reconciliation Act of 1984 and the work of the National
Association of Insurance Commissioners ("NAIC") (an association of state
regulators and their staffs) have resulted in standardized policy features for
Medicare supplement products. This increases the comparability of such policies
and may intensify competition based on factors other than product features. See
"Underwriting" and "Government Regulation." In addition to the products of other
insurance companies, the Company's health insurance products compete with health
maintenance organizations, preferred provider organizations, and other health
care-related institutions which provide medical benefits based on contractual
agreements.
The Company believes that its insurance companies are able to compete
effectively because: (i) they emphasize specialized distribution channels, where
the ability to respond rapidly to changing customer needs yields a competitive
edge; (ii) they are experienced in establishing and cultivating relationships
with the unique distribution networks and the independent marketing companies
operating in these specialized markets; (iii) they can offer competitive rates
as a result of their lower-than-average operating costs and higher-than-average
investment yields achieved by applying active investment portfolio management
techniques; and (iv) they have reliable policyholder administrative services,
supported by customized information technology systems.
UNDERWRITING
Under regulations promulgated by the NAIC and adopted as a result of the
Omnibus Budget Reconciliation Act of 1990, the Company is prohibited from
underwriting its Medicare supplement policies for certain first-time purchasers.
If a person applies for insurance within six months after becoming eligible by
reason of age, or disability in certain limited circumstances, the application
may not be rejected due to medical conditions. For other prospective Medicare
supplement policyholders, such as senior citizens who are transferring to
Conseco's products, the underwriting procedures are relatively limited, except
for policies providing prescription drug coverage.
Before issuing long-term care or comprehensive major medical products to
individuals and groups, Conseco generally applies detailed underwriting
procedures designed to assess and quantify the insurance risks. Conseco requires
medical examinations of applicants (including blood and urine tests, where
permitted) for certain health insurance products and for life insurance products
which exceed prescribed policy amounts. These requirements are graduated
according to the applicant's age and may vary by type of policy or product.
Conseco also relies on medical records and the potential policyholder's written
application.
Substantially all the life insurance policies issued by Conseco are
underwritten individually, although standardized underwriting procedures have
been adopted for certain low face-amount life insurance coverages. After initial
processing, insurance underwriters review each file and obtain the information
needed to make an underwriting decision (such as medical examinations, doctors'
statements and special medical tests). After collecting and reviewing the
information, the underwriter either: (i) approves the policy as applied for, or
with an extra premium charge because of unfavorable factors; or (ii) rejects the
application. Conseco underwrites group insurance policies based on the
characteristics of the group and its past claim experience. There is minimal
underwriting on SPDAs and FPDAs.
10
<PAGE>
REINSURANCE
Consistent with the general practice of the life insurance industry, the
Company's subsidiaries enter into both facultative and treaty agreements of
indemnity reinsurance with other insurance companies in order to reinsure
portions of the coverage provided by their insurance products. Indemnity
reinsurance agreements are intended to limit a life insurer's maximum loss on a
large or unusually hazardous risk or to diversify its risk. Indemnity
reinsurance does not discharge the original insurer's primary liability to the
insured. The Company's reinsured business is ceded to numerous reinsurers. The
Company believes the assuming companies are able to honor all contractual
commitments, based on the Company's periodic reviews of their financial
statements, insurance industry reports and reports filed with state insurance
departments.
As of December 31, 1996, the policy risk retention limit was $.8 million
or less on all of the policies of the Company's subsidiaries. Reinsurance ceded
by Conseco represented 23 percent of gross combined life insurance in force and
reinsurance assumed represented 4.6 percent of net combined life insurance in
force. At December 31,1996, the total ceded business inforce of $22.3 billion
included: (i) $5.5 billion ceded to Client Companies for which Conseco retains
assets equal to the reserves on the business ceded; (ii) $13.0 billion ceded to
insurance companies rated "A (Excellent)" or better by A.M. Best, and (iii) $2.9
billion ceded to American Equity Investment Life Insurance Company, which is not
rated because, according to A.M. Best, it did not have sufficient operating
history to evaluate its performance. The Company's principal reinsurers at
December 31, 1996 (which assume approximately 60 percent of the total ceded
business inforce, excluding business ceded to the Client Companies) were
American Equity Investment Life Insurance Company, Connecticut General Life
Insurance Company, Life Reassurance Corporation of America, Lincoln National
Life Insurance Company, Reliance Standard Life Insurance Company and Mercantile
and General Life Reassurance Company. No other single reinsurer assumes greater
than 5 percent of the total ceded business inforce.
EMPLOYEES
At December 31, 1996, Conseco had approximately 3,700 employees,
including: (i) 1,850 home office employees; (ii) 1,250 employees in the Chicago
office (primarily involved with the Company's supplemental health operations);
and (iii) 600 employees in branch offices (primarily supporting the Company's
career agency force). None of the Company's employees are covered by a
collective bargaining agreement. Conseco believes that it has excellent
relations with its employees.
GOVERNMENTAL REGULATION
General
Conseco's insurance subsidiaries are subject to regulation and
supervision by the states in which they transact business. State laws generally
establish supervisory agencies with broad regulatory authority, including the
power to: (i) grant and revoke business licenses; (ii) regulate and supervise
trade practices and market conduct; (iii) establish guaranty associations; (iv)
license agents; (v) approve policy forms; (vi) approve premium rates for some
lines of business; (vii) establish reserve requirements; (viii) prescribe the
form and content of required financial statements and reports; (ix) determine
the reasonableness and adequacy of statutory capital and surplus; and (x)
regulate the type and amount of permitted investments. The Company's insurance
subsidiaries are subject to periodic examinations by state regulatory
authorities. Management does not expect the results of any on-going examinations
to have a material effect on the financial condition of the Company.
Most states have also enacted regulations on the activities of insurance
holding company systems, including acquisitions, extraordinary dividends, the
terms of surplus debentures, the terms of affiliate transactions, and other
related matters. Currently, the Company and its insurance subsidiaries have
registered as holding company systems pursuant to such legislation in the
domiciliary states of the insurance subsidiaries (Alabama, California, Illinois,
Iowa, Kentucky, Massachusetts, Missouri, New York, Pennsylvania, Tennessee and
Texas) and they routinely report to other jurisdictions. Recently, a number of
state legislatures have considered or have enacted legislative proposals that
alter, and in many cases increase, the authority of state agencies to regulate
insurance companies and holding company systems. For further information on
state laws regulating the payment of dividends by insurance company
subsidiaries, see "Management's Discussion and Analysis of Consolidated
Financial Position and Results of Operations - Consolidated Financial Condition"
and note 13 to Conseco's consolidated financial statements.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. In addition,
legislation has been introduced from time to time in recent years which, if
enacted, could result in the federal government assuming a more direct role in
the regulation of the insurance industry.
11
<PAGE>
In December 1992, the NAIC adopted the Risk-Based Capital for Life and/or
Health Insurers Model Act (the "Model Act"). The Model Act provides a tool for
insurance regulators to determine the levels of capital and surplus an insurer
must maintain in relation to its insurance and investment risks and whether
there is a need for possible regulatory attention. The Model Act (or similar
legislation or regulation) has been adopted in states where the Company's
insurance subsidiaries are domiciled.
The Model Act provides for four levels of regulatory attention, varying
with the ratio of the company's total adjusted capital (defined as the total of
its statutory capital, surplus, asset valuation reserve and certain other
adjustments) to its risk-based capital ("RBC"). If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan to the regulatory
authority proposing corrective actions aimed at improving its capital position.
If a company's total adjusted capital is less than 75 percent but greater than
or equal to 50 percent of its RBC (the "Regulatory Action Level") , the
regulatory authority will perform a special examination of the company and issue
an order specifying corrective actions that must be followed. If a company's
total adjusted capital is less than 50 percent but greater than or equal to 35
percent of its RBC (the "Authorized Control Level"), the regulatory authority
may take any action it deems necessary, including placing the company under
regulatory control. If a company's total adjusted capital is less than 35
percent of its RBC (the "Mandatory Control Level") the regulatory authority must
place the company under its control. At December 31, 1996, the total adjusted
capital for each of Conseco's principal insurance subsidiaries was approximately
equal to or greater than twice the respective Company Action Levels.
The Texas Insurance Department has adopted its own RBC requirements, the
stated purpose of which is to require a minimum level of capital and surplus to
absorb the financial, underwriting, and investment risks assumed by an insurer.
Texas' RBC requirements differ from those adopted by the NAIC in two principal
respects: (i) they use different elements to determine minimum RBC levels in
their calculation formulas; and (ii) they do not stipulate "Action Levels" (like
those adopted by the NAIC) where corrective actions are required. However, the
Commissioner of the Texas Insurance Department does have the power to take
similar corrective actions if a company does not maintain the required minimum
level of capital and surplus. Under the Texas Regulations, an insurer has met
RBC requirements if its admitted assets exceed its liabilities by at least 3
percent. Bankers National, Great American Reserve, United General, TLIC Life,
Transport Life and Continental Life are domiciled in Texas and must comply with
Texas RBC requirements. At December 31, 1996, the admitted assets of these
companies exceeded liabilities by more than twice the required 3 percent level.
Most states have either enacted legislation or adopted administrative
regulations which affect the acquisition of control of insurance companies as
well as transactions between insurance companies and persons controlling them.
The nature and extent of such legislation and regulations vary from state to
state. Most states, however, require administrative approval of: (i) the
acquisition of 10 percent or more of the outstanding shares of an insurance
company incorporated in the state; or (ii) the acquisition of 10 percent or more
of the outstanding stock of an insurance holding company whose insurance
subsidiary is incorporated in the state. The acquisition of 10 percent of such
shares is generally deemed to be the acquisition of control for the purpose of
the holding company statutes. These regulations require the acquirer to file
detailed information concerning the acquiring parties and the plan of
acquisition, and to obtain administrative approval prior to the acquisition. In
many states, however, an insurance authority may determine that control does not
exist, even in circumstances in which a person owns or controls 10 percent or a
greater amount of securities.
On the basis of statutory statements filed with state regulators
annually, the NAIC calculates twelve financial ratios to assist state regulators
in monitoring the financial condition of insurance companies. A "usual range" of
results for each ratio is used as a benchmark. In the past, variances in certain
ratios of the Company's insurance subsidiaries have resulted in inquiries from
insurance departments to which the Company has responded. Such inquiries did not
lead to any restrictions affecting the Company's operations.
Under the solvency or guaranty laws of most states in which they do
business, Conseco's insurance subsidiaries may be required to pay guaranty fund
assessments (up to certain prescribed limits). Guaranty funds are established by
various states to fund policyholder losses or the liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength.
In certain instances, the assessments may be offset against future premium
taxes. The Company believes that the liability established at December 31, 1996,
is sufficient to provide for assessments related to known insolvencies. This
reserve is based upon management's current expectation of the availability of
this right of offset and state guaranty fund assessment bases. However, changes
in the basis whereby assessments are charged to individual companies or changes
to the availability of the right to offset assessments against premium tax
payments could materially affect the Company's results. The Company's insurance
subsidiaries statutory financial statements for the year ended December 31,
1996, include $11.3 million of expenses as a result of such assessments.
12
<PAGE>
Health Care
Most states mandate minimum benefit standards and loss ratios for
accident and health insurance policies. The Company is generally required to
maintain, with respect to its individual long term care policies, minimum
anticipated loss ratios over the entire period of coverage of not less than 60
percent. With respect to its Medicare supplement policies, the Company is
generally required to attain and maintain an actual loss ratio, after three
years, of not less than 65 percent. The Company provides, to the insurance
departments of all states in which it conducts business, annual calculations
that demonstrate compliance with required minimum loss ratios for both long term
care and Medicare supplement insurance. These calculations are prepared
utilizing statutory lapse and interest rate assumptions. In the event the
Company has failed to maintain minimum mandated loss ratios, it could be
required to provide retrospective refunds and/or prospective rate reductions.
The Company believes that it currently complies with all applicable mandated
minimum loss ratios.
NAIC model regulations, adopted by all states, created 10 standard
Medicare supplement plans (Plans A through J). Plan A provides the least
extensive coverage, while Plan J provides the most extensive coverage. Under
NAIC regulations, Medicare insurers must offer Plan A, but may offer any of the
other plans at their option. Conseco currently offers nine of the model plans.
Conseco has declined to offer Plan J, due in part to its high benefit levels and
consequently high costs to the consumer.
Numerous proposals to reform the current health care system have been
introduced in Congress and the state legislatures. Proposals have included,
among other things, modifications to the existing employer-based insurance
system, a quasi-regulated system of "managed competition" among health plans,
and a single-payer, public program. Changes in health care policy could
significantly affect Conseco's business. Federal comprehensive major medical or
long-term care programs, if proposed and implemented, could partially or fully
replace some of Conseco's current products, for example.
A number of states have passed or are considering legislation that would
limit the differentials in rates that insurers could charge for health care
coverages between new business and renewal business for similar demographic
groups. State legislation has also been adopted or is being considered that
would make health insurance available to all small groups by requiring coverage
of all employees and their dependents, by limiting the applicability of
pre-existing conditions exclusions, by requiring insurers to offer a basic plan
exempt from certain benefits as well as a standard plan, or by establishing a
mechanism to spread the risk of high risk employees to all small group insurers.
The NAIC recently adopted model long-term care policy language providing
nonforfeiture benefits and has proposed a rate stabilization standard for
long-term care policies. Various bills proposed in the U.S. Congress would
provide for the implementation of certain minimum consumer protection standards
for inclusion in all long-term care policies, including guaranteed renewability,
protection against inflation and limitations on waiting periods for pre-existing
conditions. Other recently adopted legislation permits premiums paid for
long-term care insurance to be treated as tax-deductible medical expenses.
The Company cannot predict with certainty the effect that any proposals,
if adopted, or legislative developments could have on its business and
operations.
FEDERAL INCOME TAXATION
The annuity and life insurance products marketed and issued by Conseco's
subsidiaries generally provide the policyholder with an income tax advantage, as
compared to other saving investments such as certificates of deposit and bonds,
in that income taxation on the increase in value of the product is deferred
until it is received by the policyholder. With other savings investments, the
increase in value is taxed as earned. Annuity benefits, and life insurance
benefits which accrue prior to the death of the policyholder, are generally not
taxable until paid. Life insurance death benefits are generally exempt from
income tax. Also, benefits received on immediate annuities (other than
structured settlements) are recognized as taxable income ratably, as opposed to
the methods used for some other investments which tend to accelerate taxable
income into earlier years. The tax advantage for annuities and life insurance is
provided in the Internal Revenue Code (the "Code"), and is generally followed in
all states and other United States taxing jurisdictions. Accordingly, the tax
advantage is subject to change by Congress and by the legislatures of the
respective taxing jurisdictions.
13
<PAGE>
Conseco's insurance company subsidiaries are taxed under the life
insurance company provisions of the Code. Provisions in the Code require a
portion of the expenses incurred in selling insurance products to be deducted
over a period of years, as opposed to immediate deduction in the year incurred.
This provision increases the tax for statutory accounting purposes, which
reduces statutory surplus and, accordingly, decreases the amount of cash
dividends that may be paid by the life insurance subsidiaries. As of December
31, 1996, the cumulative taxes paid as a result of this provision were $175.2
million.
The Company had tax loss carryforwards at December 31, 1996, of
approximately $441.1 million, portions of which begin expiring in 1999. However,
the amount of such loss that may be offset against current taxable income is
subject to the following limitations: (i) losses may be offset against income of
other corporate entities only if such entities are included in the same
consolidated tax return (insurance companies are currently not eligible for
inclusion in Conseco's consolidated tax return until five years after they are
acquired); (ii) losses incurred in non-life companies (which comprise most of
the loss carryforwards) may offset only a portion of income from life companies
in the same consolidated tax return; and (iii) some loss carryforwards may not
be used to offset taxable income of entities acquired after the loss was
incurred. The Company, however, believes it will be able to utilize all current
loss carryforwards before they expire.
ITEM 2. PROPERTIES.
The Company's principal operations are located on a 170-acre corporate
campus in Carmel, Indiana, immediately north of Indianapolis. These facilities
contain approximately 525,000 square feet of space in eight buildings which
contain Conseco's executive offices and certain administrative operations of its
subsidiaries. These facilities include sufficient capacity for future growth.
Conseco's supplemental health products are primarily administered from a
single facility of 300,000 square feet in downtown Chicago leased under
agreement with a remaining life of 11 years. Conseco also leases approximately
130,000 square feet of warehouse space in a second Chicago facility with a
remaining life of six years. Conseco leases 210 sales offices totaling
approximately 363,000 square feet. All of the sales office leases are short-term
in length, with remaining lease terms ranging from one to five years.
ITEM 3. LEGAL PROCEEDINGS.
Conseco and its subsidiaries are involved in lawsuits primarily related
to their operations. Most of these lawsuits involve claims under insurance
policies or other contracts of the Company. Even though Conseco may be
contesting the validity or extent of its liability in response to such lawsuits,
the Company has established reserves in its consolidated financial statements
for its estimated potential liability and cost of defense. Accordingly, none of
the lawsuits currently pending, either individually or in the aggregate, is
expected to have a material adverse effect on the Company's consolidated
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 26, 1996, Conseco held a special meeting of shareholders to
approve and adopt an Agreement and Plan of Merger dated as of August 25, 1996
between Conseco and American Travellers Corporation. Shareholders cast
52,395,561 votes for and 77,148 votes against the ATC Merger, and there were
345,620 abstentions.
14
<PAGE>
OPTIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
Officer Positions with Conseco, principal
name and age (a) Since occupation and business experience (b)
---------------- ----- --------------------------------------
<S> <C> <C>
Stephen C. Hilbert, 51......... 1979 Since 1979, Chairman of the Board and Chief Executive Officer and, since
1988, President of Conseco.
Ngaire E. Cuneo, 46 ........... 1992 Since 1992, Executive Vice President, Corporate Development and, since
1994, Director of Conseco; from 1986 to 1992, Senior Vice President and
Corporate Officer of General Electric Capital Corporation.
Rollin M. Dick, 65............. 1986 Since 1986, Executive Vice President, Chief Financial Officer and Director of
Conseco.
Donald F. Gongaware, 61........ 1985 Since 1985, Executive Vice President and Director of Conseco; since 1989,
Chief Operations Officer of Conseco; and, since 1996, President of Conseco
Marketing, LLC.
Lawrence W. Inlow, 46.......... 1986 Since 1986, Executive Vice President and General Counsel of Conseco.
- -------------------
<FN>
(a) The executive officers serve as such at the discretion of the Board of
Directors and are elected at the annual meeting of the Board.
(b) Business experience is given for at least the last five years.
</FN>
</TABLE>
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The common stock of Conseco (trading symbol "CNC") has been listed for
trading on the New York Stock Exchange (the "NYSE") since 1986. The following
table sets forth the quarterly dividends paid per share and the ranges of high
and low sales prices per share on the NYSE for the last two fiscal years, based
upon information supplied by the NYSE. All applicable per share data have been
adjusted for the two-for-one stock splits distributed April 1, 1996, and
February 11, 1997.
<TABLE>
<CAPTION>
Period Market price
------ ------------ Dividend
High Low paid
---- --- ----
<S> <C> <C> <C>
1995:
First Quarter...................................... $12-5/32 $ 8-1/8 $.03125
Second Quarter..................................... 11-21/32 9-25/32 .03125
Third Quarter...................................... 13-5/16 11-3/8 .005
Fourth Quarter..................................... 15-25/32 12-23/32 .005
1996:
First Quarter...................................... $18-5/32 $14-15/16 $.005
Second Quarter..................................... 20-3/8 17-3/8 .01
Third Quarter...................................... 24-11/16 17-5/8 .01
Fourth Quarter..................................... 33-1/8 24-7/16 .03125
</TABLE>
As of March 14, 1997, there were approximately 72,000 holders of the
outstanding shares of common stock, including individual participants in
securities position listings.
DIVIDENDS
Cash dividends are paid quarterly, at an amount determined by Conseco's
Board of Directors. The Company's general policy is to retain most of its
earnings. Retained earnings have been used: (i) to finance the growth and
development of the Company's business through acquisitions or otherwise; (ii) to
pay preferred stock dividends; (iii) to pay distributions on the
Company-obligated mandatorily redeemable preferred stock of subsidiary trusts;
and (iv) to repurchase common stock on those occasions when the Company has
determined that its shares were undervalued in the market and that the use of
funds for stock repurchases would not interfere with other cash needs.
Conseco has paid all cumulative dividends on its preferred stock and
distributions on its Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts when due. The Company is prohibited from paying
common stock dividends if such payments are not current.
Conseco's ability to pay dividends depends primarily on the receipt of
cash dividends and other cash payments from its subsidiaries. The principal
operating subsidiaries of Conseco are life insurance companies organized under
state laws and subject to regulation by state insurance departments. These laws
and regulations limit the ability of insurance subsidiaries to make cash
dividends, loans or advances to a holding company such as Conseco. However,
these laws generally permit the payment, without prior approval, of annual
dividends which in the aggregate do not exceed the greater of (or in a few
states, the lesser of): (i) the subsidiary's prior year net gain from
operations; or (ii) 10 percent of surplus attributable to policyholders at the
prior year-end, both computed on the statutory basis of accounting prescribed
for insurance companies. Certain Conseco notes payable require the Company to
maintain financial ratios which could also limit its ability to pay dividends.
See "Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Liquidity and Capital Resources."
16
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (a).
Years ended December 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Amounts in millions, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income..................................... $1,654.2 $1,465.0 $1,285.6 $1,293.8 $378.7
Net investment income....................................... 1,302.5 1,142.6 385.7 896.2 888.6
Net investment gains (losses) .............................. 30.4 188.9 (30.5) 242.6 160.2
Total revenues.............................................. 3,067.3 2,855.3 1,862.0 2,636.0 1,523.9
Interest expense on notes payable........................... 108.1 119.4 59.3 58.0 46.2
Total benefits and expenses................................. 2,573.7 2,436.8 1,537.6 2,025.8 1,193.9
Income before income taxes, minority interest and
extraordinary charge...................................... 493.6 418.5 324.4 610.2 330.0
Extraordinary charge on extinguishment of debt, net of tax.. 26.5 2.1 4.0 11.9 5.3
Net income.................................................. 252.4 220.4 150.4 297.0 169.5
Preferred dividends......................................... 27.4 18.4 18.6 20.6 5.5
Net income applicable to common stock....................... 225.0 202.0 131.8 276.4 164.0
PER SHARE DATA (b)
Net income, primary......................................... $1.91 $ 2.35 $ 1.25 $ 2.36 $ 1.36
Net income, fully diluted................................... 1.77 2.11 1.22 2.19 1.35
Dividends declared per common share......................... .083 .046 .125 .075 .021
Book value per common share outstanding..................... 16.86 10.22 5.22 8.45 5.46
Shares outstanding at year-end.............................. 167.1 81.0 88.7 101.2 99.6
Average fully diluted shares outstanding.................... 142.5 104.5 123.4 134.0 118.4
BALANCE SHEET DATA - PERIOD END
Total assets................................................ $25,612.7 $17,297.5 $10,811.9 $13,749.3 $11,772.7
Notes payable for which Conseco is directly liable.......... 1,094.9 871.4 191.8 413.0 163.2
Notes payable of affiliates, not direct
obligations of Conseco................................... - 584.7 611.1 290.3 392.0
Total liabilities........................................... 21,829.7 15,782.5 9,743.2 12,382.9 11,154.4
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.............. 600.0 - - - -
Preferred stock........................................... 97.0 110.7 130.1 - -
Common stock.............................................. .7 292.6 191.6 223.8 24.0
Shareholders' equity ....................................... 3,085.3 1,111.7 747.0 1,142.6 594.3
OTHER FINANCIAL DATA (b) (c)
Premiums collected (d)...................................... $3,210.4 $3,106.4 $1,879.1 $2,140.1 $1,464.9
Operating earnings (e)...................................... 267.7 131.3 151.7 162.0 114.8
Operating earnings per fully diluted common share (e)....... 1.89 1.26 1.23 1.19 .90
Shareholders' equity excluding unrealized appreciation
(depreciation) of fixed maturity securities (f)........... 3,045.5 999.1 884.7 1,055.2 560.3
Book value per common share outstanding, excluding
unrealized appreciation (depreciation) of fixed
maturity securities (f)................................... 16.62 8.83 6.77 7.58 5.12
</TABLE>
(a) Comparison of selected consolidated financial data in the table above is
significantly affected by: (i) the acquisitions consummated by Partnership I
and Partnership II; (ii) the sale of WNC; (iii) the transactions affecting
Conseco's ownership interest in BLH and CCP; (iv) the LPG Merger; (v) the
ATC Merger; and (vi) the THI Merger. For periods beginning with their
acquisitions by Partnership I and ending June 30, 1992, Partnership I and
its subsidiaries were consolidated with the financial statements of Conseco.
Following the completion of the initial public offering by CCP in July 1992,
Conseco did not have unilateral control to direct all of CCP's activities
and, therefore, did not consolidate the financial statements of CCP with the
financial statements of Conseco. As a result of the purchase by Conseco of
all the shares of common stock of CCP it did not already own on August 31,
1995 (the "CCP Merger"), the financial statements of CCP's subsidiaries are
consolidated with the
17
<PAGE>
financial statements of Conseco, effective January 1, 1995. Conseco has
included BLH in its financial statements since November 1, 1992. Through
December 31, 1993, the financial statements of WNC were consolidated with
the financial statements of Conseco. Following the completion of the initial
public offering of WNC in early 1994 (and subsequent disposition of
Conseco's remaining equity interest in WNC), the financial statements of WNC
were no longer consolidated with the financial statements of Conseco. As of
September 29, 1994, Conseco began to include in its financial statements the
newly acquired Partnership II subsidiary, ALH. On September 30, 1996,
Conseco acquired all of the common stock of ALH which Conseco did not
already own from Partnership II. As of July 1, 1996, Conseco began to
include in its financial statements its newly acquired subsidiary, LPG.
Effective December 31, 1996, Conseco began to include in its balance sheet
the subsidiaries acquired in the ATC Merger and the THI Merger. Such
business combinations are described in the notes to the consolidated
financial statements.
(b) All share and per-share amounts have been restated to reflect the
two-for-one stock splits paid on April 1, 1996 and February 11, 1997.
(c) Amounts under this heading are included to assist the reader in analyzing
the Company's financial position and results of operations. Such amounts are
not intended to, and do not, represent insurance policy income, net income,
net income per share, shareholders' equity or book value per share prepared
in accordance with generally accepted accounting principles ("GAAP").
(d) Includes premiums received from universal life and products without
mortality or morbidity risk. Such premiums are not reported as revenues
under GAAP and were $1,811.5 million in 1996; $1,757.4 million in 1995;
$634.6 million in 1994; $891.9 million in 1993; and $1,131.8 million in
1992.
(e) Represents income before extraordinary charge, excluding net investment
gains (losses) (less that portion of change in future policy benefits,
amortization of cost of policies purchased and cost of policies produced and
income taxes relating to such gains) and restructuring activities (net of
income taxes).
(f) Excludes the effects of reporting fixed maturities at fair value and
recording the unrealized gain or loss on such securities as a component of
shareholders' equity, net of tax and other adjustments. Such adjustments,
which the Company began to do in 1992, are in accordance with Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"), as described in note 1 to the
consolidated financial statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis reviews the consolidated financial
condition of Conseco at December 31, 1996 and 1995, the consolidated results of
operations for the three years ended December 31, 1996, and, where appropriate,
factors that may affect future financial performance. This discussion should be
read in conjunction with the accompanying consolidated financial statements,
notes thereto and selected financial data.
The Company cautions readers regarding certain forward-looking statements
contained in the following discussion and elsewhere in this report and in any
other statements made by, or on behalf of, the Company, whether or not in future
filings with the Securities and Exchange Commission ("SEC"). Forward-looking
statements are statements not based on historical information. They relate to
future operations, strategies, financial results or other developments. In
particular, statements using verbs such as "expect," "anticipate," "believe" or
similar words generally involve forward-looking statements. Forward-looking
statements include statements that represent the Company's beliefs concerning
future or projected levels of sales of the Company's products, investment
spreads or yields, or the earnings or profitability of the Company's activities.
Forward-looking statements are based upon estimates and assumptions that
are subject to significant business, economic and competitive uncertainties,
many of which are beyond the Company's control and are subject to change. These
uncertainties can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates. Some of these events may be related to
the insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation. Others may relate to Conseco
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio, and other factors. Investors are also directed
to consider other risks and uncertainties discussed in documents filed with the
SEC. Conseco disclaims any obligation to update forward-looking information.
18
<PAGE>
Consolidated Results and Analysis
Conseco's 1996 operating earnings were $267.7 million, or $1.89 per fully
diluted share, up 104 percent and 50 percent, respectively, over 1995. Operating
earnings increased as a result of the LPG Merger, the ALH Stock Purchase, the
full-year effect of the CCP Merger, the effect of increased ownership of BLH as
a result of purchases of BLH common stock during 1995 and 1996, and profit
improvements in each of the Company's segments. Operating earnings for 1996 were
not affected by the ATC Merger, the THI Merger or the BLH Merger, all of which
were recorded as of December 31, 1996. The percentage increase in operating
earnings was greater than the increase in operating earnings per fully diluted
share primarily because of the additional common shares or equivalents
outstanding in 1996 resulting from: (i) the LPG Merger; and (ii) the Company's
January 1996 offering of PRIDES, which are mandatorily convertible into shares
of Conseco common stock.
Conseco's 1995 operating earnings were $131.3 million, or $1.26 per fully
diluted share, down 13 percent and up 2 percent, respectively, from 1994.
Operating earnings decreased primarily because capital was used to repurchase
shares of common stock during 1994 and 1995 (Conseco repurchased 21.6 million of
its shares at a cost of $267 million from March 31, 1994 to February 1, 1995).
This decrease was partially offset by increased earnings from the CCP Merger and
the increased ownership of BLH as a result of purchases of BLH common stock
during 1995. Operating earnings per fully diluted share increased despite the
decline in operating earnings because of the smaller number of weighted average
common shares outstanding in 1995.
Net income of $252.4 million in 1996, or $1.77 per fully diluted share,
included: (i) net investment losses (net of related costs, amortization and
taxes) of $6.2 million, or 5 cents per fully diluted share; (ii) restructuring
income totaling $17.4 million, or 12 cents per share, primarily arising from the
sale of Conseco's investment in Noble Broadcast Group, Inc.; and (iii) an
extraordinary charge of $26.5 million, or 19 cents per share, related to early
retirement of debt. Net income of $220.4 million in 1995, or $2.11 per fully
diluted share, included: (i) net investment gains (net of related costs,
amortization and taxes) of $4.1 million, or 4 cents per share; (ii)
restructuring income of $87.1 million, or 83 cents per share, primarily arising
from the release of deferred income taxes previously accrued on income related
to CCP and BLH (such deferred tax was no longer required when Conseco reached 80
percent ownership of these companies) and the sale of Conseco's investment in
Eagle Credit (a finance subsidiary of Harley-Davidson); and (iii) an
extraordinary charge of $2.1 million, or 2 cents per share, related to early
retirement of debt. Net income of $150.4 million in 1994, or $1.22 per fully
diluted share, included: (i) net investment losses (net of related costs,
amortization and taxes) of $20.5 million, or 17 cents per share; (ii)
restructuring income of $23.2 million, or 19 cents per share, resulting from the
sale of WNC, net of expenses incurred in conjunction with a terminated merger;
and (iii) an extraordinary charge of $4.0 million, or 3 cents per share, related
to early retirement of debt.
Total revenues include net investment gains (losses) of $30.4 million in
1996, $188.9 million in 1995 and ($30.5) million in 1994. Excluding net
investment gains (losses), total revenues were $3.0 billion in 1996, up 11
percent from $2.7 billion in 1995. Total revenues in 1996 include: (i) LPG
revenues after July 1, 1996, the effective date of the LPG Merger; and (ii)
restructuring income of $30.4 million, primarily arising from the sale of
Conseco's investment in Noble Broadcast Group, Inc. Total revenues excluding net
investment gains (losses) were up 42 percent in 1995, from $1.9 billion in 1994.
Total revenues in 1995 include: (i) a full year of revenues from ALH, which was
acquired on September 29, 1994; (ii) a full year of the revenues of CCP's
subsidiaries, which Conseco began to consolidate effective January 1, 1995; and
(iii) restructuring income of $15.2 million. Total revenues in 1994 include
restructuring income of $80.8 million and equity in earnings of WNC and CCP of
$64.9 million.
19
<PAGE>
Results of Operations by Segment for the Three Years ended December 31,
1996:
The following tables and narratives summarize the Company's results of
operations by business segment.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Income before income taxes, minority interest and extraordinary charge:
Annuities:
Operating income .......................................................... $ 255.0 $ 244.1 $ 67.1
Net investment gains (losses), net of related costs and amortization ...... (.7) 72.0 (7.3)
------- ------- -------
Income before income taxes, minority interest and extraordinary charge 254.3 316.1 59.8
------- ------- -------
Supplemental health:
Operating income........................................................... 136.7 96.1 107.8
Net investment gains, net of related costs and amortization................ .2 1.1 -
------- ------- -------
Income before income taxes, minority interest and extraordinary charge 136.9 97.2 107.8
------- ------- -------
Life insurance:
Operating income........................................................... 131.2 81.9 52.2
Net investment losses, net of related costs and amortization............... (1.9) (4.8) (13.1)
------- ------- -------
Income before income taxes, minority interest and extraordinary charge 129.3 77.1 39.1
------- ------- -------
Other:
Operating income........................................................... 58.3 59.4 100.6
Net investment losses, net of related costs and amortization............... (3.2) (6.0) (4.8)
------- ------- -------
Income before income taxes, minority interest and extraordinary charge 55.1 53.4 95.8
------- ------- -------
Interest and other corporate expenses........................................ (112.4) (140.5) (88.0)
------- ------- -------
Equity in earnings of CCP and WNC............................................ - - 64.9
------- ------- -------
Restructuring income......................................................... 30.4 15.2 45.0
------- ------- -------
Consolidated earnings:
Operating income........................................................... 468.8 341.0 239.7
Net investment gains (losses), net of related costs and amortization ...... (5.6) 62.3 (25.2)
Equity in earnings of CCP and WNC.......................................... - - 64.9
Restructuring activities................................................... 30.4 15.2 45.0
------- ------- -------
Income before income taxes, minority interest and extraordinary charge 493.6 418.5 324.4
Income tax expense.............................................................. 179.8 87.0 111.0
------- ------- -------
Income before minority interest and extraordinary charge............... 313.8 331.5 213.4
Minority interest in consolidated subsidiaries:
Distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts............................................ 3.6 - -
Dividends on preferred stock................................................. 8.9 11.9 3.3
Equity in earnings........................................................... 22.4 97.1 55.7
------- ------- -------
Income before extraordinary charge..................................... 278.9 222.5 154.4
Extraordinary charge on extinguishment of debt, net of taxes and
minority interest............................................................ 26.5 2.1 4.0
------- ------- -------
Net income............................................................. $ 252.4 $ 220.4 $150.4
======= ======= ======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Annuities:
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Single-premium immediate annuities........................... $ 111.2 $ 145.0 $ 10.5
Single-premium deferred annuities............................ 755.4 1,004.5 444.5
-------- -------- -------
Subtotal - single-premium annuities...................... 866.6 1,149.5 455.0
-------- -------- -------
Flexible-premium deferred annuities (first-year)............. 500.5 386.8 103.9
Flexible-premium deferred annuities (renewal)................ 93.8 65.9 12.9
-------- -------- -------
Subtotal - flexible-premium deferred annuities........... 594.3 452.7 116.8
-------- -------- -------
Variable annuities (first-year).............................. 37.9 17.2 -
Variable annuities (renewal)................................. 43.6 40.1 -
-------- -------- -------
Subtotal - variable annuities............................ 81.5 57.3 -
-------- -------- -------
Total annuity premiums collected....................... $1,542.4 $1,659.5 $ 571.8
======== ======== =======
Insurance policy income......................................... $ 77.6 $ 68.4 $ 31.0
Net investment income:
General account invested assets.............................. 891.2 851.2 220.4
Separate account assets...................................... 48.4 28.7 2.6
-------- -------- -------
Total revenues (a)..................................... 1,017.2 948.3 254.0
-------- -------- -------
Insurance policy benefits and change in future policy benefits.. 67.3 61.6 45.5
Interest expense on:
All annuity products, except variable annuities.............. 523.2 505.1 116.8
Variable annuity products.................................... 48.4 28.7 2.6
Amortization related to operations.............................. 76.9 64.8 11.1
Interest expense on investment borrowings....................... 14.3 16.9 4.4
Other operating costs and expenses.............................. 32.1 27.1 6.5
-------- -------- -------
Total benefits and expenses (a)........................ 762.2 704.2 186.9
-------- -------- -------
Operating income before income taxes, minority
interest and extraordinary charge.................... 255.0 244.1 67.1
Net investment gains (losses), net of related costs and
amortization................................................. (.7) 72.0 (7.3)
-------- -------- -------
Income before income taxes, minority interest
and extraordinary charge............................. $ 254.3 $ 316.1 $ 59.8
======== ======== =======
Weighted average gross interest spread on annuity products (b).. 2.9% 3.0% 2.8%
=== === ===
</TABLE>
(a) Revenues exclude net investment gains (losses); benefits and expenses
exclude amortization related to net investment gains (losses).
(b) Excludes variable annuity products where the credited amount is based on
investment income from segregated investments.
General: This segment includes SPDAs, FPDAs, SPIAs and variable annuities
sold through both career agents and professional independent producers. For
periods prior to September 30, 1994, this segment consists solely of the annuity
operations of: (i) BLH, whose products are primarily marketed to seniors; and
(ii) various Conseco subsidiaries whose products are not currently being
actively marketed. The segment's operations were significantly affected by: (i)
the acquisition of ALH by Partnership II on September 30, 1994; (ii) the
consolidation of the CCP subsidiaries effective January 1, 1995, as a result of
the CCP Merger; and (iii) the LPG Merger,
21
<PAGE>
effective July 1, 1996. 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.
Premiums collected by this segment in 1996 were $1,542.4 million, down
7.1 percent from 1995. 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.
Premiums collected in 1995 were $1,659.5 million, up 190 percent over 1994, due
to the acquisition transactions described above under "General."
SPDA collected premiums decreased 25 percent to $755.4 million, in 1996.
The demand for SPDA products offered by all insurance companies decreased during
1996, when relatively low interest rates made other investment products more
attractive. The Company 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. The Company purchases 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
$87.1 million in 1996.
FPDA collected premiums increased 31 percent to $594.3 million, in 1996.
FPDA premiums collected by LPG after the LPG Merger accounted for $30.4 million
of such premiums collected during 1996. FPDAs are similar to SPDAs in many
respects, except FPDAs allow more than one premium payment.
Variable annuity collected premiums increased 42 percent to $81.5
million, in 1996. 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 Conseco
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
increased in 1996 primarily because of increased surrender charges (changes in
premiums and other policy charges were not significant). Surrender charges were
$41.2 million in 1996 and $28.6 million in 1995. Annuity policy withdrawals were
$1.7 billion in 1996, compared with $1.5 billion in 1995. The increase in policy
withdrawals and surrender charges generally corresponds to the aging and the
growth of the Company's annuity business in force. In addition, policyholders
are using the systematic withdrawal features available in several of the
Company's annuity policies, and more policyholders are surrendering in order to
invest in alternative investments. Total withdrawals and surrenders were 16
percent of insurance liabilities related to surrenderable policies in 1996 and
1995.
Insurance policy income increased in 1995 over 1994, primarily as a
result of the acquisition transactions described above under "General."
Net investment income on general account invested assets (excluding
income on separate account assets related to variable annuities) increased 4.7
percent in 1996, to $891.2 million, and increased 286 percent in 1995, to $851.2
million. The yield earned on average invested assets declined to 7.9 percent in
1996 from 8.4 percent in 1995. Cash flows received during 1995 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
increase corresponds to the increase in the in-force block of such policies.
Interest expense on all annuity products, except variable annuities
increased 3.6 percent in 1996, primarily due to a larger block of annuity
business inforce in 1996, partially offset by a reduction in crediting rates.
The weighted average crediting rates for these annuity liabilities were 5.0
percent in 1996 and 5.3 percent in 1995. The increase in interest expense on
annuities in 1995 was primarily the result of the acquisition transactions
described above under "General."
22
<PAGE>
Interest expense on variable annuity products is equal to the net
investment income on separate account assets.
Amortization related to operations increased 19 percent in 1996 and 484
percent in 1995. Such increases reflect a larger balance subject to amortization
as a result of the acquisition transactions described above under "General."
Interest expense on investment borrowings is affected by changes in
investment borrowing activities during the last three years and the higher
interest rates paid on such borrowings during 1996 and 1995.
Other operating costs and expenses increased 18 percent in 1996 and 317
percent in 1995. Such increases correspond to the increases in the total
business inforce primarily related to acquisition transactions described above
under "General."
Net investment gains (losses), net of related costs and amortization
often fluctuate from period to period. In 1995, this segment's level of sales of
securities (principally fixed maturities) in a recently acquired subsidiary
increased to accomplish planned changes in that subsidiary's fixed maturity
investment portfolio in order to reduce its duration and exposure to more
volatile CMO investments. Net investment gains (net of related costs and
amortization) were $72.0 million in 1995.
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) the Company 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) the Company can reduce interest rates credited to some
products, thereby diminishing the effect of the yield decrease on the investment
spread; and (iii) the investment portfolio grows as a result of reinvesting the
realized gains. As a result of the sales of fixed maturity investments, the
amortization of the cost of policies produced and the cost of policies purchased
increased $30.9 million in 1996, increased $114.8 million in 1995 and decreased
$3.0 million in 1994.
23
<PAGE>
<TABLE>
<CAPTION>
Supplemental health:
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Medicare supplement (first year)............................. $ 74.3 $ 81.2 $ 99.1
Medicare supplement (renewal)................................ 556.6 515.8 492.7
------ ------ ------
Subtotal - Medicare supplement........................... 630.9 597.0 591.8
------ ------ ------
Long-term care (first year).................................. 51.9 44.3 32.4
Long-term care (renewal)..................................... 142.3 114.5 99.5
------ ------ ------
Subtotal - long-term care................................ 194.2 158.8 131.9
------ ------ ------
Total supplemental health premiums collected............. $825.1 $755.8 $723.7
====== ====== ======
Insurance policy income......................................... $805.9 $757.0 $716.7
Net investment income........................................... 66.6 67.0 59.0
------ ------ ------
Total revenues (a)......................................... 872.5 824.0 775.7
------ ------ ------
Insurance policy benefits and change in future policy benefits.. 531.7 525.5 471.9
Amortization related to operations.............................. 87.8 81.7 82.7
Interest expense on investment borrowings....................... 1.1 1.4 1.2
Other operating costs and expenses.............................. 115.2 119.3 112.1
------ ------ ------
Total benefits and expenses (a)............................ 735.8 727.9 667.9
------ ------ ------
Operating income before income taxes,
minority interest and extraordinary
charge................................................... 136.7 96.1 107.8
Net investment gains, net of related costs and amortization..... .2 1.1 -
------ ------ ------
Income before income taxes, minority
interest and extraordinary charge...................... $136.9 $97.2 $107.8
====== ===== ======
Loss ratios:
Medicare supplement products................................. 68.2% 71.7% 66.3%
Long-term care products...................................... 58.7 60.5 63.5
</TABLE>
(a) Revenues exclude net investment gains; benefits and expenses exclude
amortization related to net investment gains.
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 Bankers Life's
Medicare supplement and long-term care products, distributed through a career
agency force. Beginning in 1997, this segment will include 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.
Premiums collected by this segment in 1996 were $825.1 million, up 9.2
percent over 1995. Premiums collected in 1995 were $755.8 million, up 4.4
percent over 1994.
24
<PAGE>
Medicare supplement policies have accounted for more than 75 percent of
this segment's collected premiums in each of the last three years. Collected
premiums on Medicare supplement policies increased 5.7 percent in 1996, to
$630.9 million, and increased .9 percent in 1995, to $597.0 million. Such
increases primarily reflect a larger base of premiums due to rate increases. The
number of new Medicare supplement policies sold in 1996, 1995 and 1994 were
43,800, 62,800 and 89,700, respectively, and annualized new business premiums
were $43.2 million, $56.3 million and $76.3 million, respectively. 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 increased 22 percent in
1996, to $194.2 million, and 20 percent in 1995, to $158.8 million. Annualized
new business premiums in 1996, 1995 and 1994 were $44.8 million, $40.9 million
and $27.9 million, respectively. The continued growth in this product line
reflects new product introductions, the competitiveness of the Company's
products, the success of agent cross-selling activities, increased consumer
awareness and demand, and improved persistency on a larger base of renewal
premiums.
Insurance policy income is comprised of premiums earned on the segment's
policies, and has increased over the last three years consistent with the
explanations provided above for premiums collected.
Net investment income did not change materially in 1996 and increased 14
percent in 1995. 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 1996, the segment's average invested
assets increased approximately 5.0 percent, to $880 million, and the net yield
on invested assets decreased by .4 percentage points, to 7.6 percent. During
1995, the segment's average invested assets increased approximately 4.0 percent,
to $840 million, and the net yield on invested assets increased by .7 percentage
points, to 8.0 percent. Invested assets grew as a result of the growth in
insurance liabilities related to Medicare supplement and long-term care
business.
Insurance policy benefits and change in future policy benefits increased
in 1996 as a result of the larger amount of business in force on which benefits
are incurred, net of the lower incidence of claims. This account increased in
1995 as a result of the larger amount of business in force and a higher
incidence of Medicare supplement claims. In 1996, the ratio of policy benefits
to insurance policy income for the Medicare supplement policies fell by 3.5
percentage points, to 68.2 percent, reflecting the premium rate increases
implemented in 1995 and 1996. In 1995, the ratio of policy benefits to insurance
policy income for Medicare supplement policies increased by 5.4 percentage
points to 71.7 percent, reflecting a higher incidence of claims incurred during
that year.
Changes in the ratio of policy benefits to insurance policy income for
long-term care policies reflect fluctuations in claim experience and reserve
development.
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: (i) the increase in the amount of business in force on which
amortization is recognized; and (ii) the effects of Conseco's purchases of
additional shares of BLH common stock in September 1993 and in 1995 and 1996.
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).
Conseco's purchase of BLH is described in the notes to the consolidated
financial statements. The cost of policies purchased represents the portion of
Conseco's cost to acquire BLH that is attributable to the right to receive cash
flows from insurance contracts in force at the acquisition dates. Some costs
incurred after the purchases on policies issued prior to such dates, which
otherwise would have been deferred had it not been for the purchases (because
they vary with and are primarily related to the acquired interests in the
policies), were expensed. Such costs consist primarily of certain commissions
paid in excess of ultimate commissions that have been expensed as operating
expense. Such amounts, however, were considered in determining the amount and
amortization of cost of policies purchased. The amortization of goodwill
increased in 1996 and 1995 as a result of additional goodwill related to
Conseco's purchases of additional shares of BLH common stock. Such increased
amortization partially offset the effect of the aforementioned expenses on the
amortization of cost of policies purchased.
Interest expense on investment borrowings was affected by changes in
investment borrowing activities during the last three years and the higher
interest rates paid on such borrowings during 1996 and 1995.
25
<PAGE>
Other operating costs and expenses were affected by costs incurred
subsequent to Conseco's purchases of additional shares of BLH common stock (on
September 30, 1993 and in 1995 and 1996) on policies issued prior to such dates,
which otherwise would have been deferred had it not been for the purchases as
described above under amortization related to operations.
Net investment gains, net of related costs and amortization often
fluctuate from period to period. Net investment gains affect the timing of the
amortization of costs of policies purchased and the cost of policies produced.
As a result of net investment gains from the sales of fixed maturity
investments, amortization of cost of policies purchased and cost of policies
produced increased by $.6 million in 1996, $2.3 million in 1995 and $.2 million
in 1994.
26
<PAGE>
<TABLE>
<CAPTION>
Life insurance:
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Universal life (first year)....................................... $ 68.0 $ 14.5 $ 11.0
Universal life (renewal).......................................... 203.5 86.6 44.7
------ ------ ------
Subtotal - universal life..................................... 271.5 101.1 55.7
------ ------ ------
Traditional life (first year)..................................... 16.5 11.7 8.5
Traditional life (renewal)........................................ 165.7 163.4 119.1
------ ------ ------
Subtotal - traditional life................................... 182.2 175.1 127.6
------ ------ ------
Total life premiums collected............................. $453.7 $276.2 $183.3
====== ====== ======
Insurance policy income.............................................. $393.6 $254.1 $168.1
Net investment income................................................ 280.8 177.9 90.4
------ ------ ------
Total revenues (a)........................................ 674.4 432.0 258.5
------ ------ ------
Insurance policy benefits and change in future policy benefits....... 300.4 208.0 140.0
Interest expense on annuities and financial products................. 97.0 51.6 15.4
Amortization related to operations................................... 48.1 33.5 20.3
Interest expense on investment borrowings............................ 6.3 3.5 1.8
Other operating costs and expenses................................... 91.4 53.5 28.8
------ ------ ------
Total benefits and expenses (a)........................... 543.2 350.1 206.3
------ ------ ------
Operating income before income taxes,
minority interest and extraordinary
charge................................................. 131.2 81.9 52.2
Net investment losses, net of related costs
and amortization.................................................. (1.9) (4.8) (13.1)
------ ------ ------
Income before income taxes, minority
interest and extraordinary charge...................... $129.3 $ 77.1 $ 39.1
====== ======= ======
</TABLE>
(a) Revenues exclude net investment losses; benefits and expenses exclude
amortization related to net investment losses.
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: (i) the acquisition of
ALH by Partnership II on September 30, 1994; (ii) the consolidation of the CCP
subsidiaries effective January 1, 1995, as a result of the CCP Merger; and (iii)
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 1996 were $453.7 million, up 64
percent over 1995. Premiums collected in 1995 were $276.2 million, up 51 percent
over 1994. Such increases reflect the acquisition transactions described above
under "General."
Universal life product collected premiums increased 169 percent to $271.5
million, in 1996, and increased 82 percent to $101.1 million, in 1995. Such
premiums collected in 1996 include $177.0 million collected by LPG after the LPG
Merger. Such premiums collected in 1995 include $30.7 million collected by CCP
after its consolidation and $19.8 million collected by ALH. As a result of the
LPG Merger, Conseco expects that universal life product premiums will account
for an increasing percentage of this segment's collected premiums.
27
<PAGE>
Traditional life product collected premiums increased 4.1 percent to
$182.2 million, in 1996, and increased 37 percent to $175.1 million, in 1995.
Such premiums collected in 1996 include $19.3 million collected by LPG after the
LPG Merger. Such premiums collected in 1995 include $26.7 million collected by
CCP after its consolidation, and $24.9 million collected by ALH. Conseco does
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
received on traditional life products of $174.1 million in 1996 and $175.3
million in 1995; (ii) mortality charges and administrative fees of $211.2
million in 1996 and $73.8 million in 1995; and (iii) surrender charges of $8.3
million in 1996 and $5.0 million in 1995.
Insurance policy income has increased over the last three years primarily
as a result of the acquisition transactions described above under "General."
Net investment income increased 58 percent in 1996 and 97 percent in
1995. 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. During 1996, the segment's average invested assets
increased 66 percent, to $3,540 million, and the net yield on invested assets
decreased by .5 percentage points, to 7.9 percent. During 1995, the segment's
average invested assets increased 85 percent, to $2,130 million, and the net
yield on invested assets increased by .5 percentage points, to 8.4 percent.
Invested assets primarily grew as a result of the growth in insurance
liabilities from the acquisition transactions described above under "General."
Insurance policy benefits and change in future policy benefits increased
in 1996 and 1995 as a result of the larger amount of business inforce on which
benefits are incurred as a result of the acquisition transactions described
above under "General." There were no material fluctuations in claim experience
during the periods.
Interest expense on financial products increased 88 percent in 1996 and
235 percent in 1995. 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. During 1996, such average liabilities increased 98
percent, to $1,960 million and the rate credited decreased .2 percentage points
to 5.0 percent. During 1995, such average liabilities increased 230 percent, to
$990 million and the rate credited increased .2 percentage points to 5.2
percent. Universal life product liabilities increased primarily as a result of
the acquisition transactions described above under "General."
Amortization related to operations increased 44 percent in 1996 and 65
percent in 1995. Such increases reflect a larger balance subject to amortization
as a result of the acquisition transactions described above under "General."
Interest expense on investment borrowings is affected by changes in
investment borrowing activities during the last three years and the higher
interest rates paid on such borrowings during 1996 and 1995.
Other operating costs and expenses increased 71 percent in 1996 and 86
percent in 1995. Such increases correspond to the increases 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, amortization of cost of policies purchased and cost of
policies produced increased $4.4 million in 1996, increased $9.3 million in 1995
and decreased $2.6 million in 1994.
28
<PAGE>
<TABLE>
<CAPTION>
Other:
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Premiums collected:
Group accident and health......................................... $250.6 $252.6 $248.3
Individual accident and health.................................... 138.6 162.3 152.0
------ ------ ------
Total other premiums collected................................ $389.2 $414.9 $400.3
====== ====== ======
Insurance policy income.............................................. $377.1 $385.5 $369.8
Net investment income................................................ 15.5 17.8 13.3
Fee revenue and other income......................................... 49.8 43.6 75.5
------ ------ ------
Total revenues (a)............................................ 442.4 446.9 458.6
------ ------ ------
Insurance policy benefits and changes in future policy benefits...... 295.6 312.4 300.5
Amortization related to operations................................... 27.2 23.6 19.2
Interest expense on investment borrowings............................ .3 .4 .3
Other operating costs and expenses................................... 61.0 51.1 38.0
------ ------ ------
Total benefits and expenses (a)............................... 384.1 387.5 358.0
------ ------ ------
Operating income before income taxes,
minority interest and extraordinary
charge...................................................... 58.3 59.4 100.6
Net investment losses, net of related costs and amortization......... (3.2) (6.0) (4.8)
------ ------ ------
Income before income taxes, minority
interest and extraordinary charge........................... $ 55.1 $ 53.4 $ 95.8
====== ====== ======
</TABLE>
(a) Revenues exclude net investment losses; benefits and expenses exclude
amortization related to net investment losses.
General: The other segment includes miscellaneous individual and group
health insurance premiums related to products that are not currently being
emphasized by Conseco, 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 Conseco's non-life
subsidiaries, including the investment advisory fees earned by CCM and
commissions earned for insurance product marketing and distribution. Such
amounts exclude the fees for services provided to Conseco's consolidated
subsidiaries. The profitability of the fee-based business depends on the total
fees generated and expense control.
Premiums collected by this segment in 1996 were $389.2 million, down 6.2
percent from 1995. Premiums collected in 1995 were $414.9 million, up 3.6
percent from 1994. Premiums collected in 1995 included $35.1 million of premiums
collected by subsidiaries acquired in 1995 and in the fourth quarter of 1994.
Over the last three 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 decreased .8 percent in 1996 and
increased 1.7 percent in 1995. Such fluctuations reflect premium increases as a
result of rate increases, net of premium decreases from policy lapses.
Individual accident and health premiums decreased 15 percent in 1996 and
increased 6.8 percent in 1995. Such fluctuations reflect rate increases, policy
lapses and the effect of the various acquisition transactions that occurred in
1996, 1995 and 1994. Such premiums collected in 1996 include $9.8 million
collected by LPG after the LPG Merger. Such premiums collected in 1995 include
$31.5 million collected by CCP after its consolidation and $3.6 million
collected by ALH.
Insurance policy income is comprised of premiums earned on the segment's
policies, and has fluctuated over the last three years consistent with the
explanations provided above for premiums collected.
29
<PAGE>
Net investment income decreased 13 percent in 1996 and increased 34
percent in 1995. 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 Conseco's consolidated subsidiaries.
Fee revenue and other income in 1996 were $49.8 million, up 14 percent from
1995, primarily as a result of the acquisition of certain property and casualty
insurance brokerage businesses. Fee revenue and other income in 1995 were $43.6
million, down 42 percent from 1994, primarily as a result of: (i) the exclusion
of fees for services provided to CCP in 1995 after its consolidation with
Conseco on January 1, 1995; (ii) a reduction in rates charged to certain clients
for investment management services; and (iii) a decrease in commissions
generated from marketing agreements with certain banks.
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 1996, the ratio of policy benefits to insurance policy income fell by
3 percentage points, to 78 percent, reflecting the premium rate increases
implemented in 1995 and 1996. The ratio of policy benefits to insurance policy
income was 81 percent in both 1995 and 1994.
Amortization related to operations increased 15 percent in 1996 and 22
percent in 1995. The amount was primarily affected by: (i) Conseco's purchases
of additional shares of BLH common stock in 1995 and 1996; and (ii) the
consolidation of the CCP subsidiaries effective January 1, 1995, as a result of
the CCP Merger.
Interest expense on investment borrowings was affected by changes in
investment borrowing activities during the last three years.
Other operating costs and expenses have fluctuated during the last three
years, primarily as a result of fluctuations in the expenses of Conseco's
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; (ii) income from restructuring
activities; and (iii) in 1994, equity in earnings of CCP and WNC.
Interest and other corporate expenses were $112.4 million in 1996, $140.5
million in 1995 and $88.0 million in 1994. Fluctuations are primarily due to the
interest expense component of these expenses. Interest expense was $108.1
million in 1996, $119.4 million in 1995 and $59.3 million in 1994. Such expense
fluctuates in relationship to the average debt outstanding during each period.
Restructuring income includes the gains Conseco has realized upon the
sale of: (i) portions of acquired companies; and (ii) certain venture capital
investments. Such income was $30.4 million in 1996, $15.2 million in 1995 and
$45.0 million in 1994. The 1996 income primarily arose from the sale of
Conseco's investment in Noble Broadcast Group, Inc. The 1995 income primarily
arose from the sale of Conseco's investment in Eagle Credit (a finance
subsidiary of Harley-Davidson). The 1994 income arose from the sale of Conseco's
ownership of WNC, net of expenses incurred in conjunction with a terminated
merger.
Equity in earnings of CCP and WNC was $64.9 million in 1994. Such amount
relates solely to 1994 because Conseco: (i) began to consolidate the operations
of CCP on January 1, 1995, as a result of the CCP Merger; and (ii) Conseco sold
its remaining interest in WNC on December 23, 1994. After January 1, 1995, the
operations of CCP are included in the operating segments of Conseco.
SALES
In accordance with GAAP, insurance policy income shown in Conseco's
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.
30
<PAGE>
Total premiums collected by Conseco's business segments during the last
three years were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Annuities........................................................................... $1,542.4 $1,659.5 $ 571.8
Supplemental health................................................................. 825.1 755.8 723.7
Life insurance...................................................................... 453.7 276.2 183.3
Other............................................................................... 389.2 414.9 400.3
-------- -------- --------
Total premiums collected..................................................... $3,210.4 $3,106.4 $1,879.1
======== ======== ========
</TABLE>
Fluctuations in premiums collected are discussed above under "Results of
Operations by Segment for the Three Years Ended December 31, 1996." Conseco's
recent acquisitions will have a significant effect on future premiums collected.
See "Outlook" below for a discussion of recent acquisitions.
INVESTMENTS
The Company's investment strategy is to: (i) maintain a predominately
investment grade fixed income portfolio; (ii) provide adequate liquidity to meet
the cash flow requirements of policyholders and other obligations; and (iii)
maximize current income and total investment return through active investment
management. Consistent with this strategy, investments in fixed maturity
securities, mortgage loans, credit-tenant loans, policy loans and short-term
investments comprised 96 percent of the Company's $19.6 billion investment
portfolio at December 31, 1996. The remainder of the invested assets were equity
securities and other investments.
Conseco's insurance subsidiaries are regulated by insurance statutes
and regulations as to the type of investments that they are permitted to make
and the amount of funds that may be used for any one type of investment. In
light of these statutes and regulations and the Company's business and
investment strategy, Conseco generally seeks to invest in United States
government and government agency securities and corporate securities rated
investment grade by established nationally recognized rating organizations or,
if not rated, in securities of comparable investment quality.
The following table summarizes investment yields earned over the past
three years, including ALH and LPG from their acquisition dates, and CCP upon
its consolidation (effective January 1, 1995).
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Weighted average invested assets
(excluding investment in unconsolidated subsidiaries):
As reported ................................................................. $16,356.3 $13,769.3 $4,707.2
Excluding unrealized appreciation (depreciation) (a)......................... 16,278.8 13,690.6 4,899.0
Net investment income............................................................... 1,302.5 1,142.6 385.7
Yields earned:
As reported.................................................................. 8.0% 8.3% 8.2%
Excluding unrealized appreciation (depreciation) (a) ........................ 8.0% 8.3% 7.9%
</TABLE>
(a) Excludes the effect of reporting fixed maturities at fair value as
described in note 1 to the consolidated financial statements.
Although investment income is a significant component of total revenues,
the profitability of Conseco's annuity business is determined primarily by
spreads between interest rates earned and rates credited on annuity contracts.
At December 31, 1996, the average yield, computed on the cost basis of the
Company's investment portfolio, was 7.8 percent and the average interest rate
credited on the Company's total liability portfolio was 5.1 percent, excluding
interest bonuses guaranteed only for the first year of the contract.
31
<PAGE>
Actively Managed Fixed Maturities
Conseco's actively managed fixed maturity portfolio at December 31, 1996,
was comprised primarily of debt securities of the United States government,
public utilities and other corporations and mortgage-backed securities.
Mortgage-backed securities included collateralized mortgage obligations ("CMOs")
and mortgage-backed pass-through securities.
At December 31, 1996, the Company's fixed maturity portfolio had net
unrealized gains of $103.8 million (equal to approximately .6 percent of the
portfolio's carrying value), consisting of $261.7 million of unrealized gains
and $157.9 million of unrealized losses. Estimated fair values for fixed
maturity investments were determined based on: (i) estimates from nationally
recognized pricing services (85 percent of the portfolio); (ii) broker-dealer
market makers (13 percent of the portfolio); and (iii) internally developed
methods (2 percent of the portfolio).
As discussed in the notes to the consolidated financial statements, when
Conseco adjusts carrying values of actively managed fixed maturity securities
for changes in fair value, the Company also adjusts the cost of policies
purchased, cost of policies produced and insurance liabilities. These
adjustments are made in order to reflect the change in amortization that would
be needed if those fixed maturity investments had actually been sold at their
fair values and the proceeds reinvested at current interest rates.
At December 31, 1996, approximately 4.5 percent of Conseco's invested
assets and 5.1 percent of fixed maturity investments were rated below investment
grade by nationally recognized statistical rating organizations (or, if not
rated by such firms, with ratings below Class 2 assigned by the NAIC). Conseco
plans to maintain approximately the present level of below investment grade
fixed maturities. These securities generally have greater risks than other
corporate debt investments, including risk of loss upon default by the borrower,
and are often unsecured and subordinated to other creditors. Below investment
grade issuers usually have high levels of indebtedness and are more sensitive to
adverse economic conditions, such as recession or increasing interest rates,
than are investment grade issuers. The Company is aware of these risks and
monitors its below investment grade securities closely. At December 31, 1996,
the Company's below investment grade fixed maturity investments had an amortized
cost of $871.6 million and an estimated fair value of $879.1 million.
Conseco periodically evaluates the creditworthiness of each issuer whose
securities it holds. Special attention is paid to those securities whose market
values have declined materially for reasons other than changes in interest rates
or other general market conditions. The Company considers available information
to evaluate the realizable value of the investment, the specific condition of
the issuer, and the issuer's ability to comply with the material terms of the
security. Information reviewed may include the recent operational results and
financial position of the issuer, information about its industry, recent press
releases and other information. Conseco employs a staff of experienced
securities analysts in a variety of specialty areas. Among other
responsibilities, this staff compiles and reviews such evidence. If evidence
does not exist to support a realizable value equal to or greater than the
carrying value of the investment and such decline in market value is determined
to be other than temporary, Conseco reduces the carrying amount to its net
realizable value, which becomes the new cost basis; the amount of the reduction
is reported as a realized loss. Conseco recognizes any recovery of such
reductions in the cost basis of an investment only upon the sale, repayment or
other disposition of the investment. Conseco recorded writedowns of fixed
maturity investments and other invested assets totaling $8.9 million in 1996,
primarily as a result of: (i) changes in the financial condition of a private
company in which the Company had an indirect equity investment; and (ii) changes
in the value of the underlying collateral associated with certain notes. These
changes caused the Company to conclude that the decline in fair value of such
investments was other than temporary. The Company's investment portfolio is
subject to the risks of further declines in realizable value. The Company,
however, attempts to mitigate this risk through the diversification and active
management of its portfolio.
As of December 31, 1996, fixed maturity investments in substantive
default (i.e., in default due to nonpayment of interest or principal) had an
amortized cost of $.4 million and had no carrying value. The Company had no
fixed maturity investments in technical (but not substantive) default (i.e., in
default, but not as to the payment of interest or principal). There were no
other fixed maturity investments about which management had serious doubts as to
the ability of the issuer to comply on a timely basis with the material terms of
the instruments.
The Company's policy is to discontinue the accrual of interest and
eliminate all previous interest accruals for defaulted securities, if it is
determined that such amounts will not be ultimately realized in full. Investment
income forgone due to defaulted securities was $3.8 million in 1996, $1.6
million in 1995 and $3.9 million in 1994.
At December 31, 1996, fixed maturity investments included $5.5 billion of
mortgage-backed securities (32 percent of the fixed maturity security
portfolio). 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 that 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.
32
<PAGE>
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.
Those securities purchased at a premium that prepay faster than expected will
incur a reduction in yield. When interest rates decline, the proceeds from the
prepayment of mortgage-backed securities are likely to be reinvested at lower
rates than the Company was earning on the prepaid securities. 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 annual amortization of the premium.
CMOs are securities backed by pools of pass-through securities and/or
mortgages that are segregated into sections or "tranches" that provide for
sequential retirement of principal, rather than the pro rata share of principal
return that occurs through regular monthly principal payments on pass-through
securities.
All mortgage-backed securities are subject to risks associated with
variable prepayments. As a result, these securities may have a different actual
maturity than planned at the time of purchase. When securities having a cost
greater than par are backed by mortgages that prepay faster than expected,
Conseco records a charge to investment income. When securities having a cost
less than par prepay faster than expected, Conseco records investment income.
The degree to which a mortgage-backed security is susceptible to income
fluctuations is influenced by: (i) the difference between its cost and par; (ii)
the relative sensitivity of the underlying mortgages backing the security to
prepayment in a changing interest rate environment; and (iii) the repayment
priority of the security in the overall securitization structure. The Company
seeks to limit the extent of these risks by: (i) purchasing securities that are
backed by collateral with lower prepayment sensitivity (such as mortgages priced
at a discount to par value and mortgages that are extremely seasoned); (ii)
avoiding securities whose values are heavily influenced by changes in
prepayments (such as interest-only and principal-only securities); and (iii)
investing in securities structured to reduce prepayment risk (such as planned
amortization class ("PAC") and targeted amortization class ("TAC") CMOs). PAC
and TAC instruments represented approximately 22 percent of the Company's
mortgage-backed securities at December 31, 1996. The call- adjusted modified
duration of the Company's mortgage-backed securities at December 31, 1996, was
5.9 years.
The following table sets forth the par value, amortized cost and
estimated fair value of mortgage-backed securities including CMOs at December
31, 1996, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent ......................................................... $1,808.2 $1,738.8 $1,731.9
7 percent - 8 percent...................................................... 2,753.8 2,659.1 2,684.9
8 percent - 9 percent...................................................... 667.3 663.3 669.7
9 percent and above........................................................ 421.3 427.2 428.7
-------- -------- --------
Total mortgage-backed securities............................... $5,650.6 $5,488.4 $5,515.2
======== ======== ========
</TABLE>
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows:
<TABLE>
<CAPTION>
Estimated fair value
-------------------------
% of
Amortized fixed
Type cost Amount maturities
- ---- ---- ------ ----------
(Dollars in millions)
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes............ $3,885.4 $3,903.2 23%
Planned amortization classes and accretion directed bonds.................. 1,023.2 1,022.1 6
Support classes............................................................ 157.9 163.0 1
Accrual (Z tranche) bonds.................................................. 52.9 54.3 -
Subordinated classes....................................................... 369.0 372.6 2
---------- ---------- ---
$5,488.4 $5,515.2 32%
======== ======== ==
</TABLE>
33
<PAGE>
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 CMO are paid to the sequential tranches in order of priority.
Targeted amortization classes provide a modest amount of prepayment protection
when prepayments on the underlying collateral increase from those assumed at
pricing. Thus, they offer slightly better call protection than sequential
classes and 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 a certain range. Changes in prepayment rates are first absorbed by
support classes. This insulates the planned amortization classes from the
consequences of both 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 the Company's 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 much the same as zero coupon bonds until cash payments begin.
Cash payments typically do not commence until earlier classes in the CMO
structure have been retired, which can be significantly influenced by the
prepayment experience of the underlying mortgage loan collateral in the CMO
structure. Because of the zero coupon element of these securities and the
potential uncertainty as to the timing of cash payments, their market values and
yields are more sensitive to changing interest rates than 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.
If the Company determines that it will dispose of an investment held in
the actively managed fixed maturity category, Conseco will either sell the
security or transfer it to the trading account at its fair value and recognize
the gain or loss immediately. There were no such transfers in 1996. During 1996,
the Company sold actively managed fixed maturity securities with an $8.2 billion
book value, resulting in $126.8 million of net investment gains and $52.5
million of net investment losses (both before related expenses, amortization and
taxes). Such securities were sold in response to changes in the investment
environment which created opportunities to enhance the total return of the
investment portfolio without adversely affecting the quality of the portfolio or
the matching of expected maturities of assets and liabilities. The realization
of gains and losses affects the timing of the amortization of the cost of
policies produced and the cost of policies purchased, as explained in note 11 to
the consolidated financial statements.
During 1996, fixed maturity investments with par values totaling $267.8
million were redeemed prior to their scheduled maturity dates. As a result of
such redemptions, Conseco recognized approximately $5.6 million of additional
investment income.
Other Investments
Credit-tenant loans are loans on commercial properties where the lease of
the principal tenant is assigned to the lender. The principal tenant, or any
guarantor of such tenant's obligations, must have a credit rating at the time of
origination of the loan of at least BBB- or its equivalent. The underwriting
guidelines consider such factors as: (i) the lease term of the property; (ii)
the mortgagee's management ability, including business experience, property
management capabilities and financial soundness; and (iii) such economic,
demographic or other factors that may affect the income generated by the
property or its value. The underwriting guidelines also generally require a
loan-to-value ratio of 75 percent or less. Credit-tenant loans are carried at
amortized cost and totaled $447.1 million at December 31, 1996, or 2.3 percent
of total invested assets. The total estimated fair value of credit-tenant loans
was $446.3 million at December 31, 1996.
At December 31, 1996, Conseco held mortgage loan investments with a
carrying value of $356.0 million (or 1.8 percent of total invested assets) and a
fair value of $356.1 million. Substantially all of the mortgage loan investments
were commercial loans. Approximately 2 percent of the Company's mortgage loan
balance consisted of investments in junior and residual interests of CMOs. These
instruments entitle the Company to the excess cash flows arising from the
difference between: (i) the cash flows required to make principal and interest
payments on the related senior interests in the CMOs; and (ii) the actual cash
flows received on the mortgage loan
34
<PAGE>
assets included in the CMO portfolios. If prepayments vary from projections on
the mortgage loan assets included in such CMO portfolios, the total cash flows
to the Company from such junior and residual interests could change from
projected cash flows, resulting in a gain or loss.
Non-current mortgage loans were insignificant at December 31, 1996. The
Company had $.4 million in realized losses on mortgage loans for the year ended
December 31, 1996. At December 31, 1996, the Company had a loan loss reserve of
$2.4 million. Approximately 30 percent of the mortgage loans were on properties
located in California, 12 percent in Texas and 6 percent in Mississippi. No
other state comprised greater than 5 percent of the mortgage loan balance.
At December 31, 1996, the Company held no trading account securities.
Trading account securities are investments that are purchased with the intent to
be traded prior to their maturity, or are believed likely to be disposed of in
the foreseeable future as a result of market or issuer developments. Trading
account securities are carried at estimated fair value, with the changes in fair
value reflected in the statement of operations.
Other invested assets include certain non-traditional investments,
including investments in venture capital funds, limited partnerships, mineral
rights and promissory notes.
Short-term investments totaled $281.6 million, or 1.4 percent of invested
assets at December 31, 1996, and consisted primarily of commercial paper and
repurchase agreements relating to government securities.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. Reverse repurchase agreements involve a
sale of securities and an agreement to repurchase the same securities at a later
date at an agreed upon price. Dollar rolls are similar to reverse repurchase
agreements except that the repurchase involves securities that are only
substantially the same as the securities sold. The Company enhances its
investment yield by investing the proceeds from the sales in short-term
securities pending the contractual repurchase of the securities at discounted
prices in the forward market. The Company is able to engage in such transactions
due to the market demand for mortgage-backed securities to form CMOs. Such
investment borrowings averaged $424.7 million during 1996 and were
collateralized by investment securities with fair values approximately equal to
the loan value. The weighted average interest rate on short-term collateralized
borrowings was 5.2 percent in 1996. The primary risk associated with short-term
collateralized borrowings is that the counterparty will be unable to perform
under the terms of the contract. The Company's exposure is limited to the excess
of the net replacement cost of the securities over the value of the short-term
investments (which was not material at December 31, 1996). The Company believes
that the counterparties to its reverse repurchase and dollar roll agreements are
financially responsible and that the counterparty risk is minimal.
CONSOLIDATED FINANCIAL CONDITION
Changes in the consolidated balance sheet of 1996 compared to 1995
Conseco's consolidated balance sheet at December 31, 1996, compared to
1995 was materially affected by the following acquisition transactions which
occurred during 1996: (i) the LPG Merger; (ii) the ALH Stock Purchase; (iii) the
ATC Merger; (iv) the THI Merger; and (v) the BLH Merger.
35
<PAGE>
The total capital of Conseco at December 31, 1996 and 1995, was as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Notes payable of Conseco........................................... $1,094.9 $ 871.4
Notes payable of affiliates, not direct obligations of Conseco..... - 584.7
-------- --------
Total notes payable......................................... 1,094.9 1,456.1
-------- --------
Minority interest:
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts............................. 600.0 -
Preferred stock................................................ 97.0 110.7
Common stock................................................... .7 292.6
Shareholders' equity:
Preferred stock................................................ 267.1 283.5
Common stock and additional paid-in capital.................... 2,029.6 157.2
Unrealized appreciation of securities.......................... 38.9 112.7
Retained earnings.............................................. 749.7 558.3
-------- --------
Total shareholders' equity.................................. 3,085.3 1,111.7
-------- --------
Total capital of Conseco.................................... $4,877.9 $2,971.1
======== ========
</TABLE>
Notes payable decreased during 1996 as a result of the repayment of debt
using the proceeds from the issuance of Preferred Redeemable Increased Dividend
Equity Securities, 7% Convertible Preferred Stock ("PRIDES") and the
Company-obligated mandatorily redeemable preferred securities. Such repayments
included the repayment of debt acquired with LPG and THI.
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts totaling $600.0 million were issued during 1996. In accordance
with GAAP, such securities are not considered shareholders' equity of Conseco,
but are classified as minority interest.
Minority interest, excluding the Company-obligated mandatorily redeemable
preferred securities, at December 31, 1996, included: (i) $97.0 million of
redeemable preferred stock of a subsidiary of ALH; and (ii) $.7 million interest
in the common stock of a subsidiary of ALH. At December 31, 1995, minority
interest also included the interests of the non-Conseco shareholders in ALH and
BLH. Conseco acquired such ownership interests from the minority interest in the
ALH Stock Purchase and the BLH Merger.
Shareholders' equity increased by $2.0 billion in 1996, to $3.1 billion.
Significant components of the increase included: (i) the issuance of shares of
common stock with a value of $1.6 billion related to the LPG Merger, the ATC
Merger, the THI Merger and the BLH Merger; (ii) the issuance of PRIDES with a
value of $267.1 million; (iii) net income of $252.4 million; and (iv) amounts
related to stock options and employee benefit plans (including the tax benefit
related to issuance of shares under employee benefit plans) totaling $45.4
million. These increases were partially offset by: (i) dividends paid on
preferred stock of $27.4 million; (ii) dividends paid on common stock of $10.7
million; and (iii) the decline in unrealized appreciation of $73.8 million.
Book value per common share outstanding increased to $16.86 at December
31, 1996, from $10.22 at December 31, 1995. Such increase was primarily
attributable to the value of shares issued for: (i) Conseco's recent
acquisitions; and (ii) the conversion of preferred stock. Excluding unrealized
appreciation of fixed maturity securities in accordance with SFAS 115, book
value per common share outstanding was $16.62 at December 31, 1996, compared to
$8.83 at December 31, 1995.
Total assets increased by $8.3 billion in 1996, to $25.6 billion,
principally due to the assets acquired in the LPG Merger, the ATC Merger, and
the THI Merger.
In accordance with SFAS 115, Conseco records its actively managed fixed
maturity investments at estimated fair value. At December 31, 1996 and 1995,
such investments were increased by $103.8 million and $608.2 million,
respectively, as a result of the SFAS 115 adjustment.
36
<PAGE>
<TABLE>
<CAPTION>
Financial Ratios
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges:
As reported........................................................ 1.61X 1.57X 2.26X 2.19X 1.54X
Excluding interest on annuities and financial products(a).......... 4.55X 3.80X 4.55X 8.85X 6.24X
Ratio of earnings to fixed charges and preferred dividends:
As reported........................................................ 1.50X 1.50X 1.95X 2.04X 1.50X
Excluding interest on annuities and financial products(a) ........ 3.14X 3.06X 3.14X 6.00X 5.09X
Ratio of earnings to fixed charges, preferred dividends and
distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts:
As reported.................................................... 1.49X 1.50X 1.95X 2.04X 1.50X
Excluding interest on annuities and financial products(a)...... 3.06X 3.06X 3.14X 6.00X 5.09X
Ratio of adjusted statutory earnings to cash interest:(b)
As reported....................................................... 1.50X 1.41X 2.05X 1.47X 1.24X
Excluding interest on annuities and financial products(a)......... 4.56X 3.50X 4.52X 4.94X 5.75X
Ratio of debt to total capital: (c)
As reported....................................................... .22X .49X .43X .34X .49X
Excluding unrealized appreciation (depreciation)(d)............... .23X .53X .39X .36X .50X
Ratio of debt and Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts to total capital:(c) (e)
As reported.................................................... .35X .49X .43X .34X .49X
Excluding unrealized appreciation (depreciation) (d)........... .35X .53X .39X .36X .50X
</TABLE>
(a) 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 and preferred
dividends; the ratio of earnings to fixed charges, preferred dividends
and distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts; or the ratio of adjusted
statutory earnings to cash interest.
(b) Statutory earnings represent: (i) gain from operations of Conseco's
consolidated life insurance companies before interest (including, for
purposes of the "as reported" ratio, interest on annuities and financial
products) and income tax as reported for statutory accounting purposes;
plus (ii) income before interest and income tax 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's consolidated subsidiaries.
(c) For periods prior to 1996, debt includes obligations for which Conseco
was not directly liable.
(d) Excludes the effect of reporting fixed maturities at fair value which the
Company began to do in 1992 as described in note 1 to the consolidated
financial statements.
(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.
37
<PAGE>
Liquidity for Insurance Operations
Conseco's insurance operating companies generally receive adequate cash
flow from premium collections and investment income to meet their obligations.
Life insurance and annuity liabilities are generally long term in nature.
Policyholders may, however, withdraw funds or surrender their policies, subject
to surrender and withdrawal penalty provisions. The Company seeks to balance the
duration of its invested assets with the estimated duration of benefit payments
arising from contract liabilities.
Of the Company's total insurance liabilities at December 31, 1996,
approximately 20 percent could be surrendered by the policyholder without a
penalty. Approximately 65 percent could be surrendered by the policyholder
subject to penalty or the release of an insurance liability in excess of
surrender benefits paid. Payment characteristics of the insurance liabilities at
December 31, 1996, were as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Payments under contracts containing fixed payment dates:
Due in one year or less.............................................. $ 291.9
Due after one year through five years................................ 708.3
Due after five years through ten years............................... 383.8
Due after ten years.................................................. 783.0
---------
Total gross payments whose payment dates are fixed by contract.. 2,167.0
Less amounts representing future interest on such contracts.......... 845.4
---------
Insurance liabilities whose payment dates are fixed by contract. 1,321.6
Insurance liabilities whose payment dates are not fixed by contract........ 17,982.7
---------
Total insurance liabilities..................................... $19,304.3
=========
</TABLE>
Of the above insurance liabilities under contracts containing fixed
payment dates, approximately 55 percent related to payments that will be made
for the lifetime of the contract holder. Conseco considers expected mortality in
determining the amount of this liability. The remaining insurance liabilities
having fixed payment dates are payable regardless of the contract holder's
survival.
Approximately 20 percent of insurance liabilities were contracts subject
to a fixed interest rate for the life of the contract. The remaining liabilities
generally were subject to interest rates that could be reset at least annually.
The following summarizes insurance liabilities for investment contracts
by credited rate (excluding interest rate bonuses for the first policy year
only) at December 31, 1996 (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Below 4.75 percent......................................................... $ 2,361.9
4.75 percent - 5.00 pecent................................................. 1,054.6
5.00 percent - 5.25 percent................................................ 4,590.3
5.25 percent - 5.50 percent................................................ 1,611.5
5.50 percent - 5.75 percent................................................ 1,201.0
5.75 percent and above..................................................... 672.3
---------
Total insurance liabilities on investment contracts.................. $11,491.6
=========
</TABLE>
Conseco believes that the diversity of its investment portfolio and the
concentration of investments in high quality liquid securities provide
sufficient liquidity to meet foreseeable cash requirements. The Company's
investment portfolio at December 31, 1996, included $.3 billion of short-term
investments, $.6 billion of United States government and agency securities, $5.5
billion of mortgage-backed securities, and $10.6 billion of publicly traded
investment grade bonds. Although there is no present need or intent to dispose
of such investments, the life companies could readily liquidate portions of
their investments, if such a need arose. In addition, investments could be used
to facilitate borrowings under reverse repurchase agreements or dollar-roll
transactions. Such borrowings have been used by the life companies from time to
time to increase their return on investments and to improve liquidity. At
December 31, 1996, the Company's portfolio of bonds and redeemable preferred
stocks had an aggregate unrealized gain of $103.8 million.
38
<PAGE>
Liquidity of Conseco (Parent Company)
The parent company is a legal entity, separate and distinct from its
subsidiaries, and has no business operations. The parent company needs cash for:
(i) principal and interest on debt; (ii) dividends on preferred and common
stock; (iii) distributions on the Company-obligated mandatorily redeemable
preferred stock of subsidiary trusts; (iv) holding company administrative
expenses; (v) income taxes; and (vi) investments in subsidiaries. The primary
sources of cash to meet these obligations include statutorily permitted payments
from Conseco's life insurance subsidiaries including: (i) dividend payments;
(ii) tax sharing payments; and (iii) fees for services provided. The parent
company may also obtain cash by: (i) issuing debt or equity securities; (ii)
borrowing additional amounts under its revolving credit agreement, as described
in note 8 to the consolidated financial statements; or (iii) selling all or a
portion of its subsidiaries. These sources have historically provided adequate
cash flow to fund: (i) the needs of the parent company's normal operations; (ii)
internal expansion, acquisitions and investment opportunities; and (iii) the
retirement of debt and equity. In 1996, Conseco also issued new shares of its
common stock for all or a portion of the cost to acquire LPG, ATC, THI and BLH.
The following table shows the cash flow activity of the parent company
and its wholly owned non-life subsidiaries:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Items relating to operations:
Dividends and surplus debenture payments...................................... $109.9 $ 80.6 $ 19.7
Tax sharing payments from subsidiaries........................................ 4.6 2.7 13.7
Fees from affiliates.......................................................... 74.8 34.7 45.8
Fees from unaffiliated companies.............................................. 39.3 39.0 30.1
Parent company costs.......................................................... (39.8) (64.5) (67.6)
Interest on debt of Conseco, including direct and indirect obligations........ (71.3) (41.6) (21.2)
Interest on amounts due from Conseco to life subsidiaries..................... (7.3) (8.8) (9.3)
Income taxes.................................................................. 2.2 (7.7) (4.5)
Other......................................................................... (4.7) - 17.3
------- ------- ------
Total items relating to operations......................................... 107.7 34.4 24.0
------- ------- ------
Items relating to investing:
Purchase of investments....................................................... (71.1) (70.8) (51.6)
Sales and maturities of investments........................................... 45.3 125.6 22.9
Cash held by non-life subsidiaries prior to acquisition....................... 40.9 17.0 -
Proceeds from the sale of shares of WNC and related transactions.............. - - 811.7
Investment in consolidated subsidiaries....................................... (226.1) (552.3) (17.0)
Expense incurred in terminated merger......................................... - (5.5) (30.3)
Payments from subsidiaries.................................................... 36.5 - -
Payments to affiliates........................................................ - - (58.8)
------- ------- ------
Total items relating to investing.......................................... (174.5) (486.0) 676.9
------- ------- ------
Items relating to financing:
Proceeds from the issuance of convertible preferred stock, net
of issuance costs............................................................ 257.7 - -
Proceeds from issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts, net of issuance costs........... 587.7 - -
Proceeds from the issuance of equity securities............................... 20.6 1.8 3.2
Proceeds from the issuance of debt, net of issuance costs..................... 856.0 827.2 158.0
Common and preferred dividends................................................ (34.3) (24.6) (31.3)
Dividends on stock held by subsidiaries....................................... (38.1) (38.7) (4.6)
Distributions on Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts....................................................... (2.9) - -
Payments on debt, including prepayments and acquired debt..................... (1,467.2) (330.0) (378.4)
Repurchases of Conseco common stock .......................................... (21.5) (92.4) (354.3)
Payments to retire preferred stock ........................................... (.3) - (3.3)
-------- ------- -------
Total items relating to financing.......................................... 157.7 343.3 (610.7)
-------- ------- -------
Change in short-term investments of parent
and its non-life subsidiaries.......................................... 90.9 (108.3) 90.2
Short-term investments, beginning of year.................................. 24.2 132.5 42.3
-------- ------- -------
Short-term investments, end of year........................................ $ 115.1 $ 24.2 $ 132.5
======== ======= =======
</TABLE>
39
<PAGE>
At December 31, 1996, the parent company and its non-life subsidiaries
had short-term investments of $115.1 million, of which $12.6 million was
expended in January 1997 for accrued interest and dividends. The parent company
and its non-life subsidiaries had additional investments in fixed maturities,
equity securities and other invested assets of $65.3 million at December 31,
1996, which, if needed, could be liquidated or contributed to the insurance
subsidiaries.
The ability of Conseco's insurance subsidiaries to pay dividends is
subject to state insurance department regulations. These regulations generally
permit dividends to be paid for any twelve-month period in amounts equal to the
greater of (or in a few states, the lesser of): (i) net gain from operations; or
(ii) 10 percent of surplus as of the end of the preceding year. Any dividends in
excess of these levels require the approval of the director or commissioner of
the applicable state insurance department. The amount of dividends that the
Company's insurance subsidiaries could pay in 1997 without prior approval is
approximately $151.0 million.
Statutory operating results and statutory surplus are determined
according to statutes adopted by each state in which the subsidiaries do
business. Statutory surplus bears no direct relationship to equity as determined
under GAAP. With respect to new business, statutory accounting practices require
that: (i) acquisition costs and (ii) reserves for future guaranteed principal
payments and interest in excess of statutory rates, be expensed as the new
business is written. These items cause a statutory loss ("surplus strain") on
many insurance products in the year in which they are issued. Conseco manages
the effect of such statutory surplus strain by designing its products to
minimize such first-year losses, and by controlling the amount of new premiums
written.
Note 13 to the consolidated financial statements shows the difference
between pretax income reported using statutory accounting practices (before
deduction of expenses paid to affiliates and transfers to and from and
amortization of the interest maintenance reserve ("IMR")) and GAAP.
Insurance departments in the states where the Company's life insurance
subsidiaries are domiciled or do business require insurance companies to make
annual and quarterly filings. Portions of surplus, called the IMR and the asset
valuation reserve ("AVR"), are required to be appropriated and reported as
liabilities. The IMR captures all investment gains and losses resulting from
changes in interest rates and provides for such amounts to be amortized into
statutory net income on a basis reflecting the remaining lives of the assets
sold. The AVR captures investment gains and losses related to changes in
creditworthiness; it is also adjusted each year based on a formula related to
the quality and loss experience of the Company's investment portfolio. These
reserves affect the ability of the Company's insurance subsidiaries to reflect
investment gains and losses in statutory earnings and surplus.
Conseco's debt agreements require the Company to maintain minimum working
capital and RBC and limit the Company's ability to incur additional
indebtedness. They also restrict the amount of retained earnings that are
available for dividends and require Conseco to maintain certain minimum ratings
at its insurance subsidiaries.
INFLATION
Inflation does not have a significant effect on Conseco's balance sheet;
the Company has minimal investments in property, equipment or inventories.
Medical cost inflation has had a significant impact on the Company's
supplemental health operations. In recent years, these costs have increased more
rapidly than the Consumer Price Index. Medical costs will likely continue to
rise. The impact on Conseco's operations depends upon its ability to increase
its premium rates. Such increases are subject to approval by state insurance
departments. Before Medicare supplement plans were standardized, approximately
two-thirds of the states permitted rate plans with automatic escalation clauses.
This permitted Conseco, in periods following initial approval, to adjust premium
rates for changes in Medicare deductibles and increases in medical cost
inflation without refiling with the regulators. Currently, all rate changes for
standardized plans must be individually approved by each state. Conseco prices
its new standardized supplement plans to reflect the impact of these filings and
the lengthening of the period required to implement rate increases.
OUTLOOK
As indicated throughout this report, Conseco intends to continue to grow
its life and health insurance operations.
Conseco's operations in 1997 and in future years will be significantly
affected by several planned and recently completed acquisitions. Operating
earnings for 1996 were not affected by the ATC Merger, the THI Merger or the BLH
Merger, all of which were recorded as of December 31, 1996. On March 4, 1997,
Conseco completed the CAF Merger. On December 15, 1996, Conseco and PFS entered
into the PFS Merger Agreement pursuant to which PFS would become a wholly owned
subsidiary of Conseco. The PFS Merger is expected to be completed in the second
quarter of 1997. After an acquisition is completed, Conseco minimizes operating
expenses by centralizing, standardizing and more efficiently performing many
functions common to most life insurance companies.
40
<PAGE>
These functions include underwriting and policy administration, accounting and
financial reporting, marketing, regulatory compliance, actuarial services and
asset management.
Conseco believes that the consolidation of the U.S. life insurance
industry will continue, and Conseco intends to participate in this process.
Conseco believes that, under appropriate circumstances, it is more advantageous
to acquire companies with large books of in-force life and health insurance and
annuities and strong distribution channels, than to produce new business or
develop or enlarge distribution channels. Conseco believes that the purchased
blocks of business and the acquired distribution channels make more predictable
profit analysis possible.
The Company believes a number of life insurance companies will become
available for acquisition in the next 10 years as a result of strategic
restructuring and consolidation within the life insurance industry. The Company
may participate in such acquisitions (such as the LPG Merger, the ATC Merger,
the THI Merger and the CAF Merger), when the acquisition fits Conseco's
strategic growth plan and can be achieved with a capital structure that results
in: (i) increased earnings per share and value to Conseco's shareholders; (ii)
favorable rating agency actions; and (iii) an expansion of profitable marketing
activities by all Conseco companies. Conseco's ability to complete acquisitions
that achieve those objectives depends on a number of external factors,
including: (i) the attitudes of rating agencies toward Conseco's strategic plan
and capital structure; (ii) the availability and cost of both debt and equity
capital; (iii) pressures that motivate companies to seek to be acquired at a
reasonable cost; and (iv) competition from other acquirers, which affects the
cost of acquisitions.
Conseco believes it has the resources and capabilities to continue being
a successful acquirer of life insurance companies. It also believes that its
past record of successfully acquiring, financing and operating life insurance
companies will be an advantage compared to others who may attempt to acquire
available candidates. The pro forma capital structure of Conseco (giving effect
to the CAF Merger, completed in March 1997; and the PFS Merger, expected to be
completed in the second quarter of 1997) includes only 30 percent debt.
As part of its program of exploring opportunities to improve its capital
structure, Conseco continually reviews its corporate structure and the need and
desirability of restructuring the existing debt and equity of the Company.
As a result of its recent acquisitions and the planned PFS Merger,
Conseco will have significant in-force business and marketing activity in
multiple segments of the life insurance industry, including universal life,
ordinary life, term life, single- and flexible-premium deferred and immediate
annuities (including both variable and fixed), Medicare supplement, long-term
care, specified disease, and individual and group health insurance.
The following pro forma consolidated financial information as of and for
the year ended December 31, 1996, is provided for informational purposes only
and may not be indicative of the results of operations or financial condition
that would have been achieved had the transactions set forth below actually
occurred as of the dates indicated or of future results of operations or
financial condition of Conseco. Conseco anticipates cost savings and additional
benefits as a result of completing the transactions set forth below. 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 information.
The pro forma consolidated statement of operations information for the
year ended December 31, 1996, in the column headed "Pro forma for completed
transactions" reflects the following transactions, all of which have already
occurred, as if such transactions had occurred on January 1, 1996: (i) the
issuance of 4.37 million shares of PRIDES in January 1996; (ii) the BLH offer
for and repurchase of its 13 percent senior subordinated notes due 2002 and
related financing transactions completed in March 1996; (iii) the LPG Merger;
(iv) the call for redemption of Conseco's Series D Convertible Preferred Stock
completed on September 26, 1996; (v) the ALH Stock Purchase; (vi) the issuance
of $600 million of Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts; (vii) the ATC Merger; (viii) the THI Merger; (ix) the BLH
Merger; and (x) the CAF Merger. The pro forma consolidated statement of
operations information for the year ended December 31, 1996, in the column
headed "Pro forma for completed transactions and the PFS Merger" reflects
further adjustments to the consolidated operating results of Conseco as if the
PFS Merger had occurred on January 1, 1996.
41
<PAGE>
The pro forma consolidated balance sheet information at December 31,
1996, in the column headed "Pro forma for completed transactions" reflects the
application of certain pro forma adjustments for the CAF Merger, which was
completed March 4, 1997. The pro forma consolidated balance sheet data at
December 31, 1996, in the column headed "Pro forma for completed transactions
and the PFS Merger" reflect further adjustments to the financial position of
Conseco as if the PFS Merger had occurred on December 31, 1996.
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------
Pro forma for
Pro forma for completed
completed transactions and the
As reported transactions PFS Merger
----------- ------------ ----------
(Amounts in millions, except per share data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Insurance policy income........................................... $1,654.2 $2,599.8 $3,370.7
Investment activity:
Net investment income........................................... 1,302.5 1,598.0 1,678.5
Net investment gains............................................ 30.4 36.4 40.6
Total revenues.................................................... 3,067.3 4,320.1 5,213.6
Interest expense on notes payable................................. 108.1 138.7 142.5
Total benefits and expenses....................................... 2,573.7 3,666.5 4,508.6
Income before income taxes, minority interest and
extraordinary charge............................................ 493.6 653.6 705.0
Income before extraordinary charge................................ 278.9 367.1 399.1
PER SHARE DATA (a)
Income before extraordinary charge, primary....................... $2.12 $1.90 $1.98
Income before extraordinary charge, fully diluted................. 1.96 1.80 1.86
Dividends declared per common share............................... .083 .083 .083
Book value per common share outstanding........................... 16.86 17.26 18.39
Shares outstanding at year-end.................................... 167.1 170.0 178.7
Average fully diluted shares outstanding.......................... 142.5 204.3 216.0
BALANCE SHEET DATA - PERIOD END
Total assets...................................................... $25,612.7 $27,213.1 $29,304.3
Notes payable..................................................... 1,094.9 1,696.4 1,825.4
Total liabilities................................................. 21,829.7 23,314.4 25,053.2
Minority interests in consolidated subsidiaries:
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts.................... 600.0 600.0 600.0
Preferred stock................................................. 97.0 97.0 97.0
Common stock.................................................... .7 .7 .7
Shareholders' equity ............................................. 3,085.3 3,201.0 3,553.4
OTHER FINANCIAL DATA (a) (b)
Premiums collected (c)............................................ $3,210.4 $4,277.1 $5,071.3
Operating earnings (d)............................................ 267.7 353.4 382.7
Operating earnings per fully diluted common share (d)............. 1.89 1.74 1.78
Shareholders' equity excluding unrealized appreciation
(depreciation) of fixed maturity securities (e)................. 3,045.5 3,161.2 3,513.6
Book value per common share outstanding, excluding
unrealized appreciation (depreciation) of fixed
maturity securities (e)......................................... 16.62 17.02 18.17
</TABLE>
(a) All share and per-share amounts have been restated to reflect the
two-for-one stock splits paid on April 1, 1996, and February 11, 1997.
42
<PAGE>
(b) Amounts under this heading are included to assist the reader in analyzing
the Company's financial position and results of operations. Such amounts
are not intended to, and do not, represent insurance policy income, net
income, net income per share, shareholders' equity or book value per
share prepared in accordance with GAAP.
(c) Includes premiums received from annuities and universal life policies.
Such premiums are not reported as revenues under GAAP.
(d) Represents income before extraordinary charge, excluding net investment
gains (losses) (less amortization of cost of policies purchased and cost
of policies produced and income taxes relating to such gains) and
restructuring activities (net of income taxes).
(e) Excludes the effects of reporting fixed maturities at fair value and
recording the unrealized gain or loss on such securities as a component
of shareholders' equity, net of tax and other adjustments. Such
adjustments, which the Company began to do in 1992, are in accordance
with SFAS 115, as described in note 1 to the consolidated financial
statements.
43
<PAGE>
<TABLE>
<CAPTION>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page
<S> <C>
Report of Management............................................................................................... 45
Report of Independent Accountants.................................................................................. 46
Consolidated Balance Sheet at December 31, 1996 and 1995........................................................... 47
Consolidated Statement of Operations for the years ended
December 31, 1996, 1995 and 1994............................................................................... 49
Consolidated Statement of Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994........................................................... 51
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994............................................................................... 52
Notes to Consolidated Financial Statements......................................................................... 54
</TABLE>
44
<PAGE>
REPORT OF MANAGEMENT
To Our Shareholders
Management of Conseco, Inc. is responsible for the reliability of the
financial information in this annual report. The financial statements are
prepared in accordance with generally accepted accounting principles, and the
other financial information in this annual report is consistent with that of the
financial statements (except for such information described as being in
accordance with regulatory or statutory accounting requirements).
The integrity of the financial information relies in large part on
maintaining a system of internal control that is established by management to
provide reasonable assurance that assets are safeguarded and transactions are
properly authorized, recorded and reported. Reasonable assurance is based upon
the premise that the cost of controls should not exceed the benefits derived
from them. The Company's internal auditors continually evaluate the adequacy and
effectiveness of this system of internal control and actions are taken to
correct deficiencies as they are identified.
Certain financial information presented depends upon management's
estimates and judgments regarding the ultimate outcome of transactions which are
not yet complete. Management believes these estimates and judgments are fair and
reasonable in view of present conditions and available information.
The Company engages independent accountants to audit its financial
statements and express their opinion thereon. They have full access to each
member of management in conducting their audits. Such audits are conducted in
accordance with generally accepted auditing standards and include a review of
internal controls, tests of the accounting records, and such other auditing
procedures as they consider necessary to express an opinion on the Company's
financial statements.
The Audit Committee of the Board of Directors, composed solely of
nonmanagement directors, meets periodically with management, internal auditors
and the independent accountants to review internal accounting control, audit
activities and financial reporting matters. The internal auditors and the
independent accountants have full and free access to the Audit Committee.
Stephen C. Hilbert Rollin M. Dick
Chairman of the Board, Executive Vice President and
President and Chief Financial Officer
Chief Executive Officer
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders
Conseco, Inc.
We have audited the accompanying consolidated balance sheet of Conseco,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Conseco, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
46
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1996 and 1995
(Dollars in millions)
ASSETS
1996 1995
---- ----
<S> <C> <C>
Investments:
Actively managed fixed maturities at fair value (amortized cost:
1996 - $17,203.3; 1995 - $12,355.1)............................................. $17,307.1 $12,963.3
Equity securities at fair value (cost: 1996 - $97.6; 1995 - $34.6)................. 99.7 36.6
Mortgage loans..................................................................... 356.0 339.9
Credit-tenant loans................................................................ 447.1 259.1
Policy loans....................................................................... 542.4 307.6
Other invested assets ............................................................. 259.6 91.2
Short-term investments............................................................. 281.6 189.9
Assets held in separate accounts................................................... 337.6 227.0
--------- ---------
Total investments........................................................... 19,631.1 14,414.6
Accrued investment income.............................................................. 296.9 207.8
Cost of policies purchased............................................................. 2,015.0 1,030.7
Cost of policies produced.............................................................. 544.3 391.0
Reinsurance receivables................................................................ 504.2 84.8
Income tax assets...................................................................... 8.8 -
Goodwill (net of accumulated amortization: 1996 - $83.2; 1995 - $48.0)................ 2,200.8 894.1
Property and equipment (net of accumulated depreciation: 1996 - $69.7; 1995 - $36.3)... 110.5 88.7
Securities segregated for future redemption of redeemable preferred stock of a
subsidiary........................................................................... 45.6 39.2
Other assets........................................................................... 255.5 146.6
--------- ---------
Total assets................................................................ $25,612.7 $17,297.5
========= =========
</TABLE>
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
47
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1996 and 1995
(Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
---- ----
<S> <C> <C>
Liabilities:
Insurance liabilities:
Interest sensitive products..................................................... $14,795.5 $10,637.7
Traditional products............................................................ 3,180.1 2,035.4
Claims payable and other policyholder funds..................................... 1,056.3 517.4
Unearned premiums............................................................... 272.4 187.9
Income tax liabilities............................................................. - 93.3
Investment borrowings.............................................................. 383.4 298.1
Other liabilities.................................................................. 709.5 329.6
Liabilities related to separate accounts .......................................... 337.6 227.0
Notes payable of Conseco........................................................... 1,094.9 871.4
Notes payable of affiliates, not direct obligations of Conseco..................... - 584.7
--------- ---------
Total liabilities.......................................................... 21,829.7 15,782.5
--------- ---------
Minority interest:
Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts............................................................ 600.0 -
Preferred stock.................................................................... 97.0 110.7
Common stock....................................................................... .7 292.6
Shareholders' equity:
Preferred stock.................................................................... 267.1 283.5
Common stock and additional paid-in capital (no par value, 500,000,000 shares
authorized, shares issued and outstanding: 1996 - 167,128,228;
1995 - 81,031,828).............................................................. 2,029.6 157.2
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $21.5; 1995 - $66.8).................................................. 39.8 112.6
Other investments (net of applicable deferred income taxes:
1996 - $(.5); 1995 - $.1).................................................... (.9) .1
Retained earnings.................................................................. 749.7 558.3
--------- ---------
Total shareholders' equity................................................. 3,085.3 1,111.7
--------- ---------
Total liabilities and shareholders' equity................................. $25,612.7 $17,297.5
========= =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial
statements.
48
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions, except per share data)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Insurance policy income:
Traditional products............................................. $1,384.3 $1,355.6 $1,240.6
Interest sensitive products...................................... 269.9 109.4 45.0
Net investment income............................................... 1,302.5 1,142.6 385.7
Net investment gains (losses)....................................... 30.4 188.9 (30.5)
Fee revenue and other income........................................ 49.8 43.6 75.5
Restructuring income................................................ 30.4 15.2 80.8
Equity in earnings of unconsolidated subsidiaries................... - - 64.9
-------- -------- --------
Total revenues.............................................. 3,067.3 2,855.3 1,862.0
-------- -------- --------
Benefits and expenses:
Insurance policy benefits........................................... 1,173.3 1,075.5 915.4
Change in future policy benefits.................................... 21.7 32.0 42.6
Interest expense on annuities and financial products................ 668.6 585.4 134.7
Interest expense on notes payable................................... 108.1 119.4 59.3
Interest expense on short-term investment borrowings................ 22.0 22.2 7.7
Amortization related to operations.................................. 240.0 203.6 133.3
Amortization related to investment gains (losses)................... 36.0 126.6 (5.3)
Other operating costs and expenses.................................. 304.0 272.1 214.1
Expenses incurred in conjunction with terminated merger............. - - 35.8
-------- -------- --------
Total benefits and expenses................................. 2,573.7 2,436.8 1,537.6
-------- -------- --------
Income before income taxes, minority interest
and extraordinary charge ............................... 493.6 418.5 324.4
Income tax expense...................................................... 179.8 87.0 111.0
-------- -------- --------
Income before minority interest and
extraordinary charge ................................... 313.8 331.5 213.4
Minority interest:
Distributions on Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts.................................. 3.6 - -
Dividends on preferred stock........................................ 8.9 11.9 3.3
Equity in earnings.................................................. 22.4 97.1 55.7
-------- -------- --------
Income before extraordinary charge ......................... 278.9 222.5 154.4
Extraordinary charge on extinguishment of
debt, net of taxes and minority interest............................ 26.5 2.1 4.0
-------- -------- --------
Net income.................................................. 252.4 220.4 150.4
Less preferred stock dividends.......................................... 27.4 18.4 18.6
-------- -------- --------
Net income applicable to common stock....................... $ 225.0 $ 202.0 $ 131.8
======== ======== ========
</TABLE>
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
49
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions, except per share data)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Earnings per common share and common equivalent share:
Primary:
Weighted average shares outstanding............................. 126,812,000 86,094,000 105,392,000
Net income before extraordinary charge ......................... $2.12 $2.37 $1.29
Extraordinary charge ........................................... .21 .02 .04
----- ----- ------
Net income................................................. $1.91 $2.35 $1.25
===== ===== =====
Fully diluted:
Weighted average shares outstanding............................. 142,487,000 104,480,000 123,436,000
Net income before extraordinary charge ......................... $1.96 $2.13 $1.25
Extraordinary charge............................................ .19 .02 .03
----- ----- -----
Net income................................................. $1.77 $2.11 $1.22
===== ===== =====
</TABLE>
The accompanying notes are an integral
part of the consolidated financial
statements.
50
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Preferred stock:
Balance, beginning of year................................................ $ 283.5 $ 283.5 $ 287.5
Issuance of convertible preferred stock................................ 267.1 - -
Conversion of preferred shares into common stock....................... (283.2) - -
Preferred shares redeemed.............................................. (.3) - (4.0)
-------- --------- -------
Balance, end of year...................................................... $ 267.1 $ 283.5 $ 283.5
======== ========= =======
Common stock and additional paid-in capital:
Balance, beginning of year................................................ $ 157.2 $ 165.8 $ 102.8
Issuance of shares in merger with Life Partners Group, Inc............. 586.8 - -
Issuance of shares in merger with American Travellers Corporation...... 630.9 - -
Issuance of shares in merger with Transport Holdings Inc............... 227.9 - -
Issuance of shares in merger with Bankers Life Holding Corporation..... 123.0 - -
Issuance of shares for stock options and employee benefit plans........ 29.5 6.0 19.3
Tax benefit related to issuance of shares under employee benefit plans. 15.9 .4 69.2
Conversion of preferred stock into common stock........................ 283.2 - -
Cost of issuance of preferred stock.................................... (21.7) - -
Cost of shares acquired charged to common stock
and additional paid-in capital...................................... (3.1) (15.0) (25.5)
-------- --------- -------
Balance, end of year...................................................... $2,029.6 $ 157.2 $ 165.8
======== ========= =======
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities:
Balance, beginning of year ............................................ $ 112.6 $ (137.7) $ 87.4
Change in unrealized appreciation (depreciation).................... (72.8) 250.3 (225.1)
-------- --------- -------
Balance, end of year................................................... $ 39.8 $ 112.6 $(137.7)
======== ========= =======
Other investments:
Balance, beginning of year ............................................ $ .1 $ (2.0) $ 10.1
Change in unrealized appreciation (depreciation).................... (1.0) 2.1 (12.1)
-------- --------- -------
Balance, end of year................................................... $ (.9) $ .1 $ (2.0)
======== ========= =======
Retained earnings:
Balance, beginning of year................................................ $ 558.3 $ 437.4 $ 654.8
Net income ............................................................ 252.4 220.4 150.4
Dividends on preferred stock........................................... (27.4) (18.4) (18.6)
Dividends on common stock.............................................. (10.7) (3.7) (12.2)
Cost of shares acquired charged to retained earnings................... (22.9) (77.4) (337.0)
-------- --------- -------
Balance, end of year...................................................... $ 749.7 $ 558.3 $ 437.4
======== ========= =======
Total shareholders' equity.......................................... $3,085.3 $ 1,111.7 $ 747.0
======== ========= =======
</TABLE>
The accompanying notes are an integral
part of the consolidated financial
statements.
51
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................... $ 252.4 $ 220.4 $ 150.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation................................ 336.3 339.4 136.3
Income taxes................................................. 15.5 (34.7) (5.7)
Insurance liabilities........................................ (84.4) (4.2) 67.9
Interest credited to insurance liabilities................... 668.6 585.4 134.7
Fees charged to insurance liabilities ....................... (239.5) (108.1) (43.0)
Accrual and amortization of investment income................ (29.5) (71.8) (37.6)
Deferral of cost of policies produced ...................... (308.4) (282.1) (161.8)
Restructuring income ........................................ (30.4) (15.2) (80.8)
Equity in undistributed earnings of unconsolidated
subsidiaries............................................... - - (61.1)
Minority interest............................................ 21.3 91.9 45.1
Extraordinary charge on extinguishment of debt............... 36.9 3.7 5.0
Net investment (gains) losses................................ (30.4) (188.9) 30.5
Other........................................................ (70.3) (28.9) (37.2)
--------- --------- --------
Net cash provided by operating activities.................. 538.1 506.9 142.7
--------- --------- --------
Cash flows from investing activities:
Sales of investments............................................... 8,394.1 7,900.9 2,789.3
Maturities and redemptions......................................... 614.3 417.1 148.2
Purchases of investments........................................... (9,409.7) (9,112.3) (3,613.3)
Cash received (paid) in reinsurance transactions................... - (71.1) 158.8
Purchase of additional shares of Bankers Life Holding Corporation.. (27.7) (304.5) (35.7)
Purchase of additional shares of CCP Insurance, Inc................ - (281.8) -
Repurchase of equity securities by CCP Insurance, Inc.............. - (44.5) -
Purchase of American Life Holdings, Inc............................ (165.0) - (215.3)
Purchase of preferred stock of American Life Holdings, Inc......... (12.6) - -
Short-term investments held by Life Partners Group, Inc.
before consolidation............................................ 79.1 - -
Short-term investments held by American Travellers Corporation
before consolidation............................................ 65.4 - -
Short-term investments held by Transport Holdings Inc. before
consolidation................................................... 47.1 - -
Short-term investments held by CCP Insurance, Inc. before
consolidation at January 1, 1995................................ - 123.0 -
Proceeds from sale of Western National Corporation,
net of cash held before deconsolidation......................... - - 459.2
Other.............................................................. (21.3) (3.3) (31.3)
--------- --------- --------
Net cash used by investing activities........................ (436.3) (1,376.5) (340.1)
--------- --------- --------
</TABLE>
(continued on next page)
The accompanying notes are an integral
part of the consolidated financial
statements.
52
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of capital stock, net..................................... $ 20.6 $ 1.8 $ 16.9
Issuance of convertible preferred stock............................ 257.7 - -
Issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts....................... 587.7 - -
Issuance of equity interests in subsidiaries, net.................. 2.2 16.8 68.0
Issuance of notes payable of Conseco, net.......................... 856.0 795.2 158.0
Issuance of notes payable of affiliates, net - not direct
obligations of Conseco ......................................... 459.4 233.4 306.4
Redemption of preferred stock...................................... (.3) - -
Payments to repurchase equity securities of Conseco ............... (21.5) (92.4) (366.5)
Payments on notes payable of Conseco............................... (1,207.9) (330.0) (378.4)
Payments on notes payable of affiliates - not direct
obligations of Conseco.......................................... (926.4) (269.0) (66.5)
Deposits to insurance liabilities.................................. 1,811.5 1,757.4 634.6
Investment borrowings.............................................. 30.6 298.1 (207.2)
Withdrawals from insurance liabilities............................. (1,842.5) (1,622.6) (307.6)
Distributions paid on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts....................... (2.9) - -
Dividends paid..................................................... (34.3) (24.6) (31.3)
-------- --------- --------
Net cash provided (used) by financing activities.......... (10.1) 764.1 (173.6)
-------- --------- --------
Net increase (decrease) in short-term investments.......... 91.7 (105.5) (371.0)
Short-term investments, beginning of year.............................. 189.9 295.4 666.4
-------- --------- --------
Short-term investments, end of year.................................... $ 281.6 $ 189.9 $ 295.4
======== ======== ========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial
statements.
53
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The following summary explains the accounting policies we use to arrive
at some of the more significant numbers in our financial statements. We have
restated all share and per-share amounts for the two-for-one stock splits
distributed April 1, 1996, and February 11, 1997. We prepare our financial
statements in accordance with generally accepted accounting principles ("GAAP").
We follow the accounting standards established by the Financial Accounting
Standards Board, the American Institute of Certified Public Accountants and the
Securities and Exchange Commission.
Conseco, Inc. ("We," "Conseco" or "the Company") is a financial services
holding company engaged primarily in the development, marketing and
administration of annuity, supplemental health and individual life products.
Conseco's operating strategy is to grow the insurance business within its
subsidiaries by focusing its resources on the development and expansion of
profitable products and strong distribution channels. Conseco supplements such
growth by acquiring companies that have profitable niche products, strong
distribution systems and progressive management teams who can work with Conseco
to implement Conseco's operating and growth strategies. Once a company is
acquired, our operating strategy is to consolidate and streamline management and
administrative functions, to realize superior investment returns through active
asset management, to eliminate unprofitable products and distribution channels,
and to expand and develop the profitable distribution channels and products.
We own the following life insurance companies: Bankers Life and Casualty
Company ("Bankers Life"), Bankers Life Insurance Company of Illinois, Certified
Life Insurance Company, Great American Reserve Insurance Company ("Great
American Reserve"), Beneficial Standard Life Insurance Company ("Beneficial
Standard"), Jefferson National Life Insurance Company of Texas, Bankers National
Life Insurance Company, National Fidelity Life Insurance Company, Lincoln
American Life Insurance Company, American Life and Casualty Insurance Company
("ALC"), Vulcan Life Insurance Company, Philadelphia Life Insurance Company,
Massachusetts General Life Insurance Company, Lamar Life Insurance Company,
Wabash Life Insurance Company, American Travellers Life Insurance Company,
United General Life Insurance Company, American Travellers Insurance Company of
New York, TLIC Life Insurance Company, Transport Life Insurance Company ("TLIC")
and Continental Life Insurance Company.
Consolidation issues. Conseco Capital Partners, L.P. ("Partnership I"),
an investment partnership formed by Conseco with other investors, was the
Company's vehicle for acquiring four insurance companies: Great American Reserve
in June 1990, Jefferson National Life Insurance Company in November 1990 (it was
merged with Great American Reserve in 1994), Beneficial Standard in March 1991
and Bankers Life in November 1992. We accounted for all of these acquisitions as
purchases, reflecting the acquired operations in our financial statements
beginning with the acquisition dates. As sole general partner, Conseco exercised
unilateral control over Partnership I even though our ownership interest was
less than 50 percent. We were therefore required to include the accounts of
Partnership I and its majority-owned subsidiaries in our consolidated financial
statements until Partnership I was liquidated on March 31, 1993.
CCP Insurance, Inc. ("CCP"), a newly organized holding company for
Partnership I's first three acquisitions, completed an initial public offering
("IPO") in July 1992. As a result of the IPO, we no longer had unilateral
control over those entities and stopped including their accounts in our
consolidated financial statements. We carried our investment in CCP and its
subsidiaries in our financial statements on the equity basis in 1994 and 1993.
In August 1995, we completed the purchase of all the shares of CCP common stock
we did not previously own in a transaction pursuant to which CCP was merged with
Conseco, with Conseco being the surviving corporation (the merger and related
transactions are referred to herein as the "CCP Merger"). As a result, CCP's
subsidiaries (Great American Reserve and Beneficial Standard) became wholly
owned subsidiaries of the Company. The Company's consolidated statements reflect
the operations of CCP on a consolidated basis effective January 1, 1995.
We were required to use step-basis accounting when we acquired the shares
of CCP common stock in various transactions. As a result, the assets and
liabilities of CCP included in our consolidated balance sheet represent the
following combination of values: (i) the portion of CCP's net assets acquired by
Conseco in the initial acquisitions of CCP's subsidiaries made by Partnership I
is valued as of those respective acquisition dates; and (ii) the portion of
CCP's net assets acquired in the CCP Merger is valued as of August 31, 1995.
54
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Bankers Life Holding Corporation ("BLH"), a company formed by Partnership
I to acquire Bankers Life, completed an IPO in March 1993. As a result of the
IPO, Conseco owned 31 percent of BLH and no longer had unilateral control of
BLH. However, after we acquired additional common shares of BLH in September
1993, our ownership position in BLH increased to 56 percent. In June 1995, we
purchased additional common shares of BLH, increasing the Company's ownership of
BLH to 85 percent. Conseco's ownership of BLH increased to 88 percent at
December 31, 1995, and 90.5 percent at March 5, 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 1996 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
Partnership I 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.
Western National Corporation ("WNC"), the holding company for Western
National Life Insurance Company ("Western National"), completed an IPO in
February 1994. Prior to the IPO, WNC was a wholly owned subsidiary of Conseco.
We sold 60 percent of our equity interest in the IPO and our remaining 40
percent interest in WNC on December 23, 1994. Our equity in earnings of WNC in
1994 therefore reflected: (i) all of WNC's earnings for the period through
February 15, 1994; and (ii) 40 percent of WNC's earnings for the period from
February 15, 1994, through December 23, 1994.
Conseco Capital Partners II, L.P. ("Partnership II"), Conseco's second
investment partnership, acquired American Life Holdings, Inc. ("ALH" and the
parent of ALC) 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.
On November 30, 1995, ALH issued 2,142,857 shares of its common stock for
$30.0 million (including $13.2 million paid by Conseco and its subsidiaries) in
a private placement transaction. Conseco's ownership interest in ALH increased
to 36 percent at December 31, 1995, as a result of this transaction and changes
in our ownership of affiliated companies with ownership interests in ALH.
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 the December 31, 1996, consolidated balance sheet
represent the following combination of values: (i) the portion of ALH's net
assets acquired by Conseco in the initial acquisition of ALH made by Partnership
II 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. Accordingly, the accounts of LPG are consolidated with Conseco
effective July 1, 1996 and the accounts of ATC and THI are consolidated
effective December 31, 1996.
55
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Neither "consolidation" nor "non-consolidation" methods of accounting for
partially owned subsidiaries affect our reported net income or shareholders'
equity. Our consolidated financial statements do not include the results of
material transactions between us and our consolidated affiliates, or among our
consolidated affiliates. We reclassified some figures in our 1995 and 1994
consolidated financial statements and notes to conform with the 1996
presentation.
Investments
Fixed maturities are securities that mature more than one year after
issuance. They include bonds, notes receivable and preferred stocks with
mandatory redemption features and are classified as follows:
Actively managed - fixed maturity securities that we may sell prior
to maturity in response to changes in interest rates, issuer credit
quality or our liquidity requirements. We carry actively managed
securities at estimated fair value. We record any unrealized gain
or loss, net of tax and the related adjustments described below, as
a component of shareholders' equity.
Trading account - fixed maturity securities that we buy principally
for the purpose of selling in the near term. We carry trading
account securities at estimated fair value. We include any
unrealized gain or loss in net investment gains (losses). We did
not hold any trading account securities at December 31, 1996 or
1995.
Held to maturity - (all other fixed maturities) securities which we
have the ability and positive intent to hold to maturity. When we
own such securities, we carry them at amortized cost. We may
dispose of these securities if the credit quality of the issuer
deteriorates, if regulatory requirements change or under other
unforeseen circumstances. We have not held any held to maturity
securities since implementing SFAS 115 in 1993.
We consider the anticipated returns from investing policyholder balances,
including investment gains and losses, in determining the amortization of the
cost of policies purchased and the cost of policies produced. When we state
actively managed fixed maturities at fair value, we also adjust the cost of
policies purchased and the cost of policies produced to reflect the change in
cumulative amortization that we would have recorded if we had sold these
securities at their fair value and reinvested the proceeds at current yields. If
future yields on such securities decline, it may be necessary to increase
certain of our insurance liabilities. We are required to adjust such liabilities
when their balances and future net cash flows (including investment income) are
insufficient to cover future benefits and expenses.
The unrealized gains and losses and the related adjustments described
above have no effect on our earnings. We record them, net of tax, to
shareholders' equity. The following table summarizes the effect of these
adjustments on the related balance sheet accounts as of December 31, 1996:
<TABLE>
<CAPTION>
Effect of fair value
adjustment to
Balance actively managed
before fixed maturity Reported
adjustment securities amount
---------- ---------- ------
(Dollars in millions)
<S> <C> <C> <C>
Actively managed fixed maturity securities.................... $17,203.3 $103.8 $17,307.1
Cost of policies purchased.................................... 2,059.2 (44.2) 2,015.0
Cost of policies produced..................................... 542.6 1.7 544.3
Income tax assets............................................. 30.3 (21.5) 8.8
Unrealized appreciation of fixed maturity securities.......... - 39.8 39.8
</TABLE>
56
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
When there are changes in conditions that cause us to transfer a fixed
maturity investment to a different category (i.e., actively managed, trading or
held to maturity), we transfer it at its fair value on that date. We account for
the security's unrealized gain or loss (such amounts were immaterial in 1996) as
follows:
For a transfer to the trading category - we recognize the unrealized
gain or loss immediately in earnings.
For a transfer from the trading category - we do not reverse the
unrealized gain or loss already recognized in earnings.
For a transfer to actively managed from held to maturity - we
recognize the unrealized gain or loss immediately in shareholders'
equity.
For a transfer to held to maturity from actively managed - we continue
to report the unrealized gain or loss at the date of transfer in
shareholders' equity, but we amortize the gain or loss over the
remaining life of the security as an adjustment of yield.
Equity securities include investments in common stocks and non-redeemable
preferred stock. We treat them like actively managed fixed maturities (as
described above).
Credit-tenant loans ("CTLs") are loans for commercial properties. When we
make these loans: (i) the lease of the principal tenant must be assigned to
Conseco; (ii) the lease must produce adequate cash flow to fund substantially
all the requirements of the loan; and (iii) the principal tenant or the
guarantor of such tenant's obligations must have an investment-grade credit
rating when the loan is made. These loans also must be collateralized by the
value of the related property. Our underwriting guidelines take into account
such factors as: (i) the lease term of the property; (ii) the borrower's
management ability, including business experience, property management
capabilities and financial soundness; and (iii) such economic, demographic or
other factors that may affect the income generated by the property, or its
value. The underwriting guidelines generally require a loan-to-value ratio of 75
percent or less. We carry both CTLs and traditional mortgage loans at amortized
cost.
As part of our investment strategy, we may enter into reverse repurchase
agreements and dollar-roll transactions to increase our investment return or to
improve our liquidity. We account for these transactions as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities.
Other invested assets include certain non-traditional investments,
including investments in venture capital funds, limited partnerships, mineral
rights and promissory notes. Such investments are accounted for using either the
cost method, or for investments in partnerships over whose operations the
Company exercises significant influence, the equity method.
Policy loans are stated at their current unpaid principal balances.
Short-term investments include commercial paper, invested cash and other
investments purchased with maturities of less than three months. We carry them
at amortized cost, which approximates their estimated fair value. We consider
all short-term investments to be cash equivalents.
We defer any fees received or costs incurred when we originate
investments--principally CTLs and mortgages. We amortize fees, costs, discounts
and premiums as yield adjustments over the contractual lives of the investments.
We consider anticipated prepayments on mortgage-backed securities in determining
estimated future yields on such securities.
We record the cost of each individual investment security. When we sell a
security, we report the difference between our sale proceeds and its carrying
value (before unrealized adjustment) as a realized gain or loss on investments.
If the proceeds result from prepayments by the issuer prior to maturity, we
record those differences as an adjustment to investment income.
57
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
We regularly evaluate all our CTLs, mortgage loans and other investments
based on current economic conditions, credit loss experience and other
investee-specific developments. If there is a decline in a security's net
realizable value that is other than temporary, we treat it as a realized loss
and we reduce our cost basis of the security to its estimated fair value. If a
loan becomes impaired (i.e., it becomes probable that we will be unable to
collect all amounts due according to the contractual terms of the agreement), we
revalue the loan at the present value of expected cash flows, discounted at the
loan's effective interest rate. We accrue interest thereafter on its net
carrying amount.
Separate Accounts
Separate accounts are funds on which investment income and gains or
losses accrue directly to certain policyholders. The assets of these accounts
are legally segregated. They are not subject to the claims which may arise out
of any other business of Conseco. We report separate account assets at market
value; the underlying investment risks are assumed by the contract holders. We
record the related liabilities at amounts equal to the underlying assets; the
fair value of these liabilities equals their carrying amount.
Cost of Policies Purchased
When we acquire an insurance company, we assign a portion of its cost to
the right to receive future cash flows from insurance contracts existing at the
date of the acquisition. This cost of policies purchased represents the
actuarially determined present value of the projected future cash flows from the
acquired policies. To determine this value, we use a method that is consistent
with methods commonly used to value blocks of insurance business and with the
basic methodology generally used to value assets. It can be summarized as
follows:
- Identify the expected future cash flows from the blocks of business.
- Identify the risks to realizing those cash flows (i.e., assess the
probability that the cash flows will be realized).
- Identify the rate of return that we must earn in order to accept these
risks, based on consideration of the factors summarized below.
- Determine the value of the policies purchased by discounting the
expected future cash flows by the discount rate we need to earn.
The expected future cash flows we use in determining such value are based
on actuarially determined projections of future premium collections, mortality,
surrenders, operating expenses, changes in insurance liabilities, investment
yields on the assets held to back the policy liabilities and other factors.
These projections take into account all factors known or expected at the
valuation date, based on the collective judgment of Conseco's management. Our
actual experience on purchased business may vary from projections due to
differences in renewal premiums collected, investment spread, investment gains
or losses, mortality and morbidity costs and other factors.
The discount rate we use to determine the value of the cost of policies
purchased is the rate of return we need to earn in order to invest in the
business being acquired. In determining this required rate of return, we
consider the following factors:
- The magnitude of the risks associated with each of the actuarial
assumptions used in determining expected future cash flows (as
described above).
- The cost of our capital required to fund the acquisition.
- The likelihood of changes in projected future cash flows that might
occur if there are changes in insurance regulations and tax laws.
- The acquired company's compatibility with other Conseco activities that
may favorably affect future cash flows.
- The complexity of the acquired company.
58
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
- Recent prices (i.e., discount rates used in determining valuations)
paid by others to acquire similar blocks of business.
After we determine the cost of policies purchased, we amortize that
amount based on the incidence of the expected cash flows. We amortize this asset
using the interest rate credited to the underlying policies.
If renewal premiums collected, investment spread, investment gains or
losses, mortality and morbidity costs or other factors differ from our
expectations, we adjust our amortization of the cost of policies purchased. For
example, the sale of a fixed maturity investment may result in a gain (or loss).
If the sale proceeds are reinvested at a lower (or higher) earnings rate, there
may also be a reduction (or increase) in our future investment spread. We must
then increase (or decrease) amortization to reflect the change in the incidence
of expected cash flows. We adjust amortization consistent with the methods used
with the cost of policies produced (described below).
Each year, we evaluate the recoverability of the cost of policies
purchased to the unamortized asset balance by line of business within each block
of purchased insurance business. If our current estimate indicates that the
existing insurance liabilities, together with the present value of future net
cash flows from the blocks of business purchased, will be insufficient to
recover the cost of policies purchased, we charge the difference to expense. We
adjust amortization consistent with the methods used with the cost of policies
produced (as described below).
The cost of policies purchased related to acquisitions completed prior to
November 19, 1992 (representing 12 percent of the balance of cost of policies
purchased at December 31, 1996) is amortized under a slightly different method
than that described above. However, the effect of the different method
on 1996 net income was insignificant.
Cost of Policies Produced
The costs that vary with and are primarily related to producing new
business are referred to as cost of policies produced. They consist primarily of
commissions, first-year bonus interest and certain costs of policy issuance and
underwriting, net of fees charged to the policy in excess of ultimate fees
charged. To the extent that they are recoverable from future profits, we defer
these costs and amortize them with interest as follows:
- For universal life-type contracts and investment-type contracts, in
relation to the present value of expected gross profits from the
contracts, discounted using the interest rate credited to the policy.
- For immediate annuities with mortality risks, in relation to the
present value of benefits to be paid.
- For traditional life and accident and health products, in relation to
future anticipated premium revenue, using the same assumptions that
are used in calculating the insurance liabilities.
Each year, we evaluate the recoverability of the unamortized balance of
the cost of policies produced. For universal life-type contracts and
investment-type contracts, we increase or decrease the accumulated amortization
whenever there is a material change in the estimated gross profits expected over
the life of a block of business. We do this in order to maintain a constant
relationship between the cumulative amortization and the present value
(discounted at the rate of interest that accrues to the policies) of expected
gross profits. For most other contracts, we reduce the unamortized asset balance
(by a charge to income) only when the present value of future cash flows, net of
the policy liabilities, is insufficient to recover the asset balance.
Goodwill
Goodwill is the excess of the amount we paid to acquire a company over
the fair value of its net assets. We amortize goodwill on the straight-line
basis over a 40-year period. We continually monitor the value of our goodwill
based on our estimates of future earnings. We determine whether goodwill is
fully recoverable from projected undiscounted net cash flows from earnings of
the subsidiaries over the remaining amortization period. If we were to determine
that changes in such projected cash flows no longer supported the recoverability
of goodwill over the remaining amortization period, we would reduce its carrying
value with a corresponding charge to expense or shorten the amortization period
(no such changes have occurred).
59
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Property and Equipment
We carry property and equipment at depreciated cost. We depreciate
property and equipment on a straight-line basis over the estimated useful lives
of the assets, which average approximately 13 years. Our depreciation expense
was $11.9 million in 1996, $9.3 million in 1995 and $8.3 million in 1994.
Insurance Liabilities, Recognition of Insurance Policy Income and Related
Benefits and Expenses
Our reserves for universal life-type and investment-type contracts are
based either on the contract account balance (if future benefit payments in
excess of the account balance are not guaranteed) or on the present value of
future benefit payments (if such payments are guaranteed). We make additions to
insurance liabilities if we determine that future cash flows (including
investment income) are insufficient to cover future benefits and expenses.
For investment contracts without mortality risk (such as deferred
annuities and immediate annuities with benefits paid for a period certain) and
for contracts that permit either Conseco or the insured to make changes in the
contract terms (such as single- premium whole life and universal life), we are
required to record premium deposits and benefit payments as increases or
decreases in a liability account, rather than as revenue and expense. We record
as revenue any amounts charged against the liability account for the cost of
insurance, policy administration and surrender penalties. We record as expense
any interest credited to the liability account and any benefit payments that
exceed the contract liability account balance.
We calculate our reserves for traditional and limited-payment life
contracts generally using the net-level-premium method, based on assumptions as
to investment yields, mortality, withdrawals and dividends. We make these
assumptions at the time we issue the contract, or in the case of contracts
acquired by purchase, at the purchase date. We base these assumptions on
projections from past experience, modified as necessary to reflect anticipated
trends and making allowance for possible unfavorable deviation.
For traditional life insurance contracts, we recognize premiums as income
when due or, for short-duration contracts, over the period to which the premiums
relate. We recognize benefits and expenses as a level percentage of earned
premiums. We accomplish this by providing for future policy benefits and by
amortizing deferred policy acquisition costs.
For contracts with mortality risk, but with premiums paid for only a
limited period (such as single-premium immediate annuities with benefits paid
for the life of the annuitant), we use an accounting treatment similar to that
used for traditional contracts. An exception is that we defer the excess of the
gross premium over the net premium and recognize it in relation to the present
value of expected future benefit payments (when accounting for annuity
contracts) or in relation to insurance in force (when accounting for life
insurance contracts).
We establish reserves for the estimated present value of the remaining
net cost of all reported and unreported claims. We base our estimates on past
experience and on published tables for disabled lives. We believe that the
reserves we have established are adequate. Final claim payments, however, may
differ from the established reserves, particularly when those payments may not
occur for several years. Any adjustments we make to reserves are reflected in
the results for the year during which the adjustments are made.
The liability for future policy benefits for accident and health policies
consists of active life reserves and the estimated present value of the
remaining ultimate net cost of incurred claims. Active life reserves include
unearned premiums and additional reserves. The additional reserves are computed
on the net level premium method using assumptions for future investment yield,
mortality and morbidity experience. Our assumptions are based on projections of
past experience and include provisions for possible adverse deviation.
For participating policies, we determine annually the amount of dividends
to be paid. We include as an insurance liability the portion of the earnings
allocated to participating policyholders.
60
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Reinsurance
In the normal course of business, Conseco seeks to limit its exposure to
loss on any single insured and to recover a portion of the benefits paid over
such limits. We do this by ceding reinsurance to other insurance enterprises or
reinsurers under excess coverage and coinsurance contracts. We limit how much
risk per policy we will retain. We currently retain no more than $.8 million of
risk on any one policy.
We report assets and liabilities related to insurance contracts before
the effects of reinsurance. We report reinsurance receivables and prepaid
reinsurance premiums (including amounts related to insurance liabilities) as
assets. We recognize estimated reinsurance receivables in a manner consistent
with the liabilities related to the underlying reinsured contracts.
Income Taxes
Our income tax expense includes deferred income taxes arising from
temporary differences between the tax and financial reporting basis of assets
and liabilities. This liability method of accounting for income taxes also
requires us to reflect in income the effect of a tax-rate change on accumulated
deferred income taxes in the period in which the change is enacted.
In assessing the realization of deferred income tax assets, we consider
whether it is more likely than not that the deferred income tax assets will be
realized. The ultimate realization of deferred income tax assets depends upon
generating future taxable income during the periods in which temporary
differences become deductible. If future income is not generated as expected,
deferred income tax assets may need to be written off.
Minority Interest
Our consolidated financial statements include all of the assets,
liabilities, revenues and expenses of BLH, ALH (since its acquisition by
Partnership II on September 29, 1994), and CCP (since January 1, 1995, as a
result of the CCP Merger) even though we did not own all of the common and
preferred stock of these subsidiaries during all periods. We make a charge
against consolidated income for the share of earnings allocable to minority
interests, for dividends on preferred stock of subsidiaries and for
distributions on the Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts. We show the shareholders' equity of such
entities allocable to the minority interests separately on our consolidated
balance sheet.
We report Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts at their liquidation value under minority interest. We
charge the distributions on these securities against consolidated income.
Earnings Per Share
We compute primary net income per share by dividing earnings less
preferred dividend requirements by the weighted average number of common and
common equivalent shares outstanding for the period. We compute fully diluted
net income per share on the same basis, except that, if more dilutive: (i) the
number of common equivalent shares related to stock options is based on the
period- end market value of the shares, instead of the average market value; and
(ii) convertible preferred stock is assumed to be converted into common shares.
We have restated all share and per-share amounts for the two-for-one stock
splits distributed April 1, 1996 and February 11, 1997.
Use of Estimates
Our financial statements have been prepared in accordance with GAAP. As
such, they include amounts based on our informed estimates and judgment, with
consideration given to materiality. We use many estimates and assumptions
calculating cost of policies produced, cost of policies purchased, goodwill,
insurance liabilities, guaranty fund assessment accruals and deferred income
taxes. Actual experience may differ from those estimates.
61
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
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 $7.2 million at December 31, 1996. Such
instruments are classified as other invested assets.
Fair Values of Financial Instruments
We use the following methods and assumptions to determine the estimated
fair values of financial instruments:
Investment securities. For fixed maturity securities (including
redeemable preferred stocks) and for equity and trading account
securities, we use quotes from independent pricing services, where
available. For investment securities for which such quotes are not
available, we use values obtained from broker-dealer market makers or by
discounting expected future cash flows using a current market rate
appropriate for the yield, credit quality and, for fixed maturity
securities, the maturity of the investment being priced.
Short-term investments. We use quoted market prices. The carrying amount
reported on our consolidated balance sheet for these instruments
approximates their estimated fair value.
Mortgage loans, credit-tenant loans and policy loans. We discount future
expected cash flows based on interest rates currently being offered for
similar loans to borrowers with similar credit ratings. We aggregate
loans with similar characteristics in our calculations.
Other invested assets. We use quoted market prices, where available. For
other invested assets, which are not material, we have assumed a market
value equal to carrying value.
Securities segregated for the future redemption of redeemable preferred
stock of a subsidiary. Estimated fair values of the U.S. Treasury
securities held in escrow for the future redemption of redeemable
preferred stock of a subsidiary of ALH are based on quoted market prices.
Insurance liabilities for investment contracts. We use discounted cash
flow calculations based on interest rates currently being offered for
similar contracts having maturities consistent with the contracts being
valued.
Investment borrowings and notes payable. We use either: (i) discounted
cash flow analyses based on our current incremental borrowing rates for
similar types of borrowing arrangements; or (ii) current market values
for publicly traded debt.
Other liabilities. The portion of other liabilities representing the
value attributable to the conversion feature of subordinated convertible
debentures acquired in conjunction with the ATC Merger is valued at
estimated fair value.
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts. We use quoted market prices.
Redeemable preferred stock of a subsidiary of ALH (a component of
minority interest). The estimated fair value of redeemable preferred
stock which is publicly-traded is based on quoted market prices. The
estimated fair value of the privately placed redeemable preferred stock
is determined by discounting expected future cash flows using assumed
incremental dividend rates for similar duration securities.
62
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Here are the estimated fair values of our financial instruments:
<TABLE>
<CAPTION>
1996 1995
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Financial assets issued for purposes other than trading:
Actively managed fixed maturities.......................... $17,307.1 $17,307.1 $12,963.3 $12,963.3
Equity securities ......................................... 99.7 99.7 36.6 36.6
Mortgage loans............................................. 356.0 356.1 339.9 363.3
Credit-tenant loans........................................ 447.1 446.3 259.1 258.6
Policy loans............................................... 542.4 542.4 307.6 307.6
Other invested assets...................................... 259.6 259.6 91.2 91.2
Short-term investments..................................... 281.6 281.6 189.9 189.9
Securities segregated for future redemption of
redeemable preferred stock of a subsidiary............... 45.6 49.1 39.2 50.1
Financial liabilities issued for purposes other than trading:
Insurance liabilities for investment contracts (1)......... 11,491.6 11,491.6 9,628.9 9,628.9
Investment borrowings...................................... 383.4 383.4 298.1 298.1
Other liabilities.......................................... 145.5 145.5 - -
Notes payable of Conseco................................... 1,094.9 1,140.8 871.4 890.3
Notes payable of affiliates, not direct
obligations of Conseco................................... - - 584.7 611.0
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts............... 600.0 604.3 - -
Redeemable preferred stock of a subsidiary of
ALH (a component of minority interest).................. 97.0 97.0 99.0 94.0
</TABLE>
(1) The estimated fair value of the liabilities for investment contracts
was approximately equal to its carrying value at December 31, 1996 and
1995. This was because interest rates credited on the vast majority of
account balances approximate current rates paid on similar investments
and because these rates are not generally guaranteed beyond one year.
We are not required to disclose fair values for insurance liabilities,
other than those for investment contracts. However, we take into
consideration the estimated fair values of all insurance liabilities
in our overall management of interest rate risk. We attempt to
minimize exposure to changing interest rates by matching investment
maturities with amounts due under insurance contracts.
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, Conseco would have
reported basic earnings per share of $2.32 and diluted earnings per share of
$1.82 for the year ended December 31, 1996.
63
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
2. ACQUISITIONS/DISPOSITIONS:
CCP Insurance, Inc.
At January 1, 1994, we owned 40 percent of the common stock of CCP, which
was acquired through several separate transactions beginning in 1992. During
1994, CCP acquired 3.5 million shares of its common stock under a stock
repurchase program which increased our ownership interest in CCP to 45 percent
at December 31, 1994. In early 1995, CCP repurchased an additional 2.2 million
shares under this program increasing our ownership interest to 49 percent.
In August 1995, we completed the purchase of all of the shares of common
stock of CCP that we did not previously own. A total of 11.8 million shares were
purchased for $281.8 million (including transaction costs and the cost to settle
outstanding stock options of CCP) in a transaction pursuant to which CCP was
merged with Conseco, with Conseco being the surviving corporation. Income tax
expense was reduced by $8.4 million in the third quarter of 1995 as a result of
the release of deferred income taxes previously accrued on income related to
CCP. Such deferred tax is no longer required because the CCP Merger was
completed without incurring additional tax. We funded the CCP Merger with
available cash and borrowings from our credit facility.
Bankers Life Holding Corporation
Effective November 1, 1992, Partnership I formed BLH to acquire Bankers
Life from I.C.H. Corporation ("ICH"). Immediately after the acquisition, Conseco
owned approximately 44 percent of the common equity interest in BLH through
direct investments and investments in Partnership I. On March 25, 1993, BLH
completed an IPO of 19.6 million shares of its common stock at $22 per share.
After the IPO, Conseco owned 31 percent of the shares of BLH common stock. On
September 30, 1993, Conseco acquired 13.3 million shares of BLH common stock
from ICH for $287.6 million. The shares purchased represented 25 percent of
BLH's outstanding shares. Conseco paid for these shares by surrendering for
redemption $50.0 million stated value of ICH preferred stock, and by paying
$237.6 million in cash. The transaction with ICH increased Conseco's ownership
of BLH to 56 percent.
During 1994, BLH acquired 1.8 million shares of its common stock under a
stock repurchase program at a cost of $35.7 million. BLH's repurchases increased
Conseco's ownership interest in BLH to 58 percent. During 1995, we acquired 12.8
million shares of BLH common stock for $262.4 million in open market and
negotiated transactions, increasing our ownership of BLH to 85 percent. Income
tax expense was reduced by $66.5 million in the second quarter of 1995 as a
result of the release of deferred income taxes previously accrued on income
related to BLH. Such deferred tax is no longer required since we are permitted
to file a consolidated tax return with BLH. In addition, BLH repurchased 2.2
million shares of its common stock during 1995 at a cost of $42.1 million,
increasing our ownership interest in BLH to 88 percent as of December 31, 1995.
During the first three months of 1996, BLH repurchased 1.3 million shares of its
common stock at a cost of $27.7 million. As a result of such repurchases,
Conseco's ownership interest in BLH increased to 90.4 percent.
On December 31, 1996, we completed the BLH Merger. Each outstanding share
of BLH common stock not already owned by Conseco was exchanged for 0.7966 shares
of Conseco common stock. We issued 3.9 million shares of common stock (including
.1 million common equivalent shares in exchange for BLH's outstanding options)
with a value of $123.0 million.
Western National Corporation
In connection with the organization of WNC and the transfer of the stock
of Western National to WNC by Conseco, WNC issued 60 million shares of its
common stock and a $150.0 million, 6.75 percent senior note due March 31, 1996
(the "Conseco Note") to Conseco. On February 15, 1994, WNC completed the IPO of
37.2 million shares of its common stock. Of these shares, 2.3 million were new
shares sold by WNC and 34.9 million were sold by Conseco. In addition, Conseco
sold .2 million WNC shares to the president of WNC at the IPO price, less
underwriting discounts and commissions. On February 22, 1994, WNC completed a
public offering of $150.0 million aggregate principal amount of 7.125 percent
senior notes due February 15, 2004. The net proceeds from the offering of $147.5
million (after original issue discount, underwriting discount and offering
expenses) together with some of the proceeds from WNC's IPO of common stock,
were used to repay the Conseco Note.
64
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The shares sold by Conseco represented a 60 percent interest in WNC. Net
pre-tax proceeds to Conseco from the repayment of the Conseco Note and the sale
of WNC shares totaled $537.3 million. These proceeds were used to repay a $200
million senior unsecured loan and for other general corporate purposes. In the
first quarter of 1994, Conseco reported restructuring income of approximately
$42.4 million (net of taxes of $22.9 million) as a result of these transactions.
On December 23, 1994, Conseco sold its remaining 40 percent interest in
WNC to American General Corporation for $274.4 million in cash, or $11.00 for
each of the 24,947,500 WNC shares owned by Conseco. Conseco recognized
restructuring income from the sale of approximately $4.1 million, net of taxes
of $11.4 million. Net cash proceeds from the sale were used for general
corporate purposes, including the repurchase of common stock of Conseco.
American Life Holdings, Inc.
On September 29, 1994, Partnership II completed the acquisition of ALH.
ALH's former stockholders received $15.25 in cash per common equivalent share.
They also received a contingent payment right to receive up to another $2.00 in
cash per common equivalent share (the "Contingent Consideration"), based on the
outcome of ALH's pending litigation against the U.S. Government concerning ALH's
former savings bank subsidiary (the "ALH Litigation").
The Acquisition and related transactions were funded with: (i) $45.9
million of cash contributions from Partnership II (including $7.4 million
provided by Conseco, $1.8 million by BLH, and $1.8 million by CCP); (ii) $57.0
million in cash from the sale in a private placement of payment-in-kind
preferred stock (the "1994 Series PIK Preferred Stock") (including $25.9 million
purchased by BLH and $24.0 million purchased by CCP, $3.0 million of which was
sold by CCP in December 1994); (iii) $150.0 million in cash from the sale in a
public offering of 11-1/4% Senior Subordinated Notes due 2004 (the "Senior
Subordinated Notes"); and (iv) $200.0 million in cash from a senior secured loan
(the "Senior Term Loan"). The sources and uses of this financing are summarized
below (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
Sources of funds:
Senior Term Loan:
Borrowed upon closing of the Acquisition.................................... $170.0
To be borrowed upon determination of ALH Litigation ........................ 30.0 (i)
Senior Subordinated Notes...................................................... 150.0
1994 Series PIK Preferred Stock................................................ 57.0
Common equity contribution from Partnership II................................. 45.9
------
Total sources....................................................... $452.9
======
Uses of funds:
Payment of cash consideration to acquire ALH................................... $314.1 (ii)
Payment upon determination of ALH Litigation................................... 30.1 (i)
Repayment of bank indebtedness of a subsidiary of ALH.......................... 55.5 (iii)
Transaction fees and expenses.................................................. 15.7
Purchase of surplus note from American Life and
Casualty Insurance Company, ALH's
principal operating subsidiary.............................................. 24.0
Cash retained.................................................................. 13.5
------
Total uses.......................................................... $452.9
======
</TABLE>
(i) In the event of a determination of the ALH Litigation that is unfavorable
to ALH, $30.1 million would be paid to the holders of ALH's 1988 Series I
and II Preferred Stock $1 Par (the "ALH 1988 Series Preferred Stock"). This
stock is currently held by the U.S. Government. In the event of a favorable
determination of this litigation, the same amount, representing a portion
of the Contingent Consideration, would be paid to the other former
stockholders of ALH. On August 30, 1995, the United States Court of Appeals
of the Federal Circuit, in banc, affirmed the summary judgment of the Court
of Federal Claims in favor of ALH by a decision of nine to two. On July 1,
1996, the Supreme Court affirmed the summary judgment of the Court of
Federal Claims in ALH's favor by a decision of seven to two. A trial has
been scheduled in May 1997, in the Court of Federal Claims to determine
damages related to the breach of contract by the United States of America.
Since the timing of a final determination of the litigation is uncertain,
we are unable to predict when such $30.1 million amount will become
payable.
65
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
(ii) This amount assumes conversion for redemption of all of ALH's outstanding
6-1/4% Convertible Subordinated Debentures due 2003 (the "Convertible
Debentures"). These debentures were convertible into an aggregate of
4,528,125 shares of ALH common stock. At December 31, 1996, $13.0 million
of the Convertible Debentures remained outstanding.
(iii) A subsidiary of ALH was the borrower under a credit facility having an
outstanding balance (including accrued interest and fees) of $55.5
million at the Acquisition date. This facility was repaid with a portion
of the proceeds from the financing.
In accordance with the Partnership II agreement, Conseco earned fees of
$2.5 million (net of taxes of $1.3 million) for services related to the
financing of the Acquisition.
On November 30, 1995, ALH issued 2,142,857 shares of its common stock for
$30.0 million (including $13.2 million paid by Conseco and its subsidiaries) in
a private placement transaction. Eighty percent of the shares were purchased by
Partnership II and the remainder were purchased by the other holders of ALH
common stock. The proceeds from the sale were used to reduce the amount of ALH's
outstanding debt. In accordance with the Partnership II agreement, Conseco
earned fees of $.2 million (net of taxes of $.1 million) for services in
connection with such transaction. On September 30, 1996, we repurchased all of
the common shares of ALH we did not already own for $165.0 million in cash in
the ALH Stock Purchase.
The Partnership II agreement provided that an additional ownership
interest in ALH would be allocated to Conseco if returns to the limited partners
were in excess of prescribed targets. Upon termination of Partnership II, such
targets were exceeded and the additional ownership interest allocated to Conseco
was recognized as follows: (i) $10.2 million, which represents Conseco's
increased ownership interest in the previously reported net income of
Partnership II, was recorded as a reduction of amounts that would otherwise be
charged to the minority interest; and (ii) $16.6 million was recorded as
restructuring income. Such restructuring income of Conseco was offset by $16.2
million of expenses incurred in connection with the realization of the
restructuring income.
Acquisition of Life Partners Group, Inc.
Effective July 1, 1996, we completed the LPG Merger. Each of the issued
and outstanding shares of LPG common stock was converted into 1.1666 shares of
Conseco common stock. We issued 32.6 million shares of common stock (including
.4 million common equivalent shares issued in exchange for LPG's outstanding
options) with a value of $586.8 million. In connection with the LPG Merger, we
also assumed notes payable of $253.1 million.
The LPG Merger was accounted for under the purchase method of accounting.
Under this method, we allocated the cost to acquire LPG to the assets and
liabilities acquired based on their fair values as of July 1, 1996, and recorded
the excess of the total purchase cost over the fair value of the liabilities we
assumed as goodwill. The LPG Merger did not qualify to be accounted for under
the pooling of interest method in accordance with Accounting Principles Board
Opinion No. 16, Business Combinations ("APB No. 16"), because of Conseco's
significant common stock repurchases within the last two years.
Acquisition of American Travellers Corporation
On December 17, 1996, we completed the ATC Merger. Each outstanding share
of ATC common stock was exchanged for 1.1672 shares of Conseco common stock. We
issued 21.0 million shares of common stock (including .9 million common
equivalent shares issued in exchange for ATC's outstanding options) with a value
of $630.9 million. We also assumed ATC's convertible subordinated debentures,
which are convertible into 7.9 million shares of Conseco common stock with a
value of $248.3 million (of which $102.8 million, representing the principal
amount outstanding, is included in notes payable and $145.5 million,
representing the additional value attributable to the conversion feature, is
included in other liabilities).
The ATC Merger was accounted for under the purchase method of accounting
effective December 31, 1996. Under this method, we allocated the cost to acquire
ATC to the assets and liabilities acquired based on fair values as of the date
of the ATC Merger, and reported the excess of the total purchase cost over the
fair value of the assets acquired less the fair values of the liabilities
assumed as goodwill. The ATC Merger did not qualify to be accounted for under
the pooling of interests method in accordance with APB No. 16 because an
affiliate of ATC sold a portion of the Conseco common stock received in the ATC
Merger shortly after the consummation of the ATC Merger.
66
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Acquisition of Transport Holdings Inc.
On December 23, 1996, we completed the THI Merger. Each outstanding share
of THI common stock was exchanged for 2.8 shares of Conseco common stock. We
issued 4.9 million shares of common stock (including .4 million common
equivalent shares issued in exchange for THI's outstanding options and warrants)
with a value of $121.7 million. In addition, pursuant to an exchange offer, all
of THI's Convertible Notes were exchanged for 4.2 million shares of Conseco
common stock with a value of $106.2 million plus a cash premium of $11.9
million.
We accounted for the THI Merger under the purchase method of accounting
effective December 31, 1996. Under this method, we allocated the cost to acquire
THI to the assets and liabilities acquired based on fair values as of the date
of the THI Merger. There was no goodwill acquired with the THI Merger. The THI
Merger did not qualify to be accounted for under the pooling of interests method
in accordance with APB No. 16 because THI was a subsidiary of another
corporation within two years of the transaction.
Effect of Merger Transactions on Consolidated Financial Statements
We used purchase accounting to account for all our acquisitions during
1996, 1995 and 1994. We allocated the total purchase cost of acquisitions
completed in 1996 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 Company intends to minimize the operating expenses of the companies
acquired during 1996 by centralizing many operations with those of its other
companies. At the dates of the mergers, we began to assess and formulate plans
to involuntarily terminate or relocate employees of the acquired companies. At
December 31, 1996, all aspects of such plans have not yet been completed. We
anticipate completion and communication of the plans of termination (relocation)
(including the number of employees of the acquired companies to be terminated
(relocated), their job classifications or functions, and their locations) prior
to June 30, 1997. The following estimated liabilities related to these plans
were included in the allocation of 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; and $7.8 million, with respect to THI. During 1996, the
following amounts were paid and charged against the estimated liabilities: $6.0
million, with respect to LPG and $3.3 million, with respect to ALH. 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.
67
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The following summarizes the effects of the transactions described above
on the consolidated statement of cash flows and consolidated balance sheet as of
the dates of the respective transactions:
<TABLE>
<CAPTION>
1996 Transactions
---------------------------------------------------------------
BLH
ALH Merger and
LPG ATC THI Stock share
Merger Merger Merger Purchase repurchases
------ ------ ------ -------- -----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Fixed maturities................................... $ 3,284.1 $ 679.8 $ 483.6 $ - $ -
Mortgage loans..................................... 99.1 .4 6.5 1.6 -
Credit-tenant loans................................ 86.8 1.6 - - -
Policy loans....................................... 227.4 - 17.1 - -
Short-term investments............................. 79.1 65.4 47.1 - -
Other investments.................................. 108.9 17.5 8.4 - -
Accrued investment income.......................... 54.9 7.9 6.0 - -
Cost of policies purchased......................... 507.9 272.9 94.4 80.2 86.6
Cost of policies produced.......................... - - - (96.5) (54.7)
Goodwill........................................... 679.9 530.0 - 101.8 60.6
Income taxes....................................... 91.3 (41.6) (40.2) (3.5) (10.5)
Reinsurance receivables............................ 285.2 - 83.4 - -
Insurance liabilities.............................. (4,520.4) (608.0) (381.5) - (12.4)
Investment borrowings.............................. (73.3) - - - -
Notes payable...................................... (253.1) (102.8) (78.5) (13.8) -
Minority interest.................................. - - - 131.2 79.2
Common stock and additional paid-in capital........ (586.8) (630.9) (227.9) - (123.0)
Other.............................................. (69.5) (186.3) (6.2) (36.0) 1.9
--------- --------- ------- ------- -------
Cash used................................. $ 1.5 $ 5.9 $ 12.2 $ 165.0 $ 27.7
========= ========= ======= ======= =======
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
1995 Transactions 1994 Transactions
-------------------------- --------------------------
BLH
share CCP ALH Sale of
repurchases Merger acquisition WNC
----------- ------ ----------- ---
(Dollars in millions)
<S> <C> <C> <C> <C>
Fixed maturities................................... $ - $4,051.3 $3,906.0 $(7,125.7)
Mortgage loans..................................... - 230.6 64.7 (97.1)
Credit-tenant loans................................ - 155.8 - (267.8)
Policy loans....................................... - 136.7 59.1 (71.6)
Short-term investments............................. - 200.1 - (811.7)
Investment in CCP.................................. - (266.1) - -
Investment in WNC.................................. - - - 760.9
Other investments.................................. - 20.0 51.9 (80.2)
Accrued investment income.......................... - 73.2 - -
Cost of policies purchased......................... 179.9 313.8 454.3 (61.9)
Cost of policies produced.......................... (107.5) 62.8 - (84.9)
Goodwill........................................... 125.9 115.7 355.4 -
Income taxes....................................... (34.9) (80.0) 119.9 (12.1)
Reinsurance receivables............................ - - 5.6 (74.9)
Cash segregated for future redemption
of Convertible Debentures........................ - - 69.1 -
Securities segregated for future redemption
of redeemable preferred stock.................... - - 35.5 -
Insurance liabilities.............................. (26.8) (4,379.0) (4,658.4) 7,379.9
Investment borrowings.............................. - (219.6) - -
Notes payable...................................... - (213.7) (122.0) -
Minority interest.................................. 171.6 53.8 (99.0) -
Other.............................................. (3.7) 26.4 (26.8) 87.9
-------- -------- -------- --------
Cash (provided) used........................ $ 304.5 $ 281.8 $ 215.3 $ (459.2)
======== ======== ======== ========
</TABLE>
The following unaudited pro forma results of operations of the Company
are presented as if the following had occurred as of January 1, 1995: (i) the
LPG Merger; (ii) the call for redemption of Conseco's Series D Convertible
Preferred Stock (the "Series D Call") completed on September 26, 1996; (iii) the
ALH Stock Purchase; (iv) the issuance of $600.0 million of Company - obligated
mandatorily redeemable preferred securities of subsidiary trusts (see note 9);
(v) the ATC Merger; (vi) the THI Merger; (vii) the BLH Merger; (viii) the CCP
Merger; (ix) the increase of Conseco's ownership in BLH to 90.4 percent, as a
result of purchases of BLH common shares in 1995 and 1996; (x) the issuance of
4.37 million shares of Preferred Redeemable Increased Dividend Equity Securities
Convertible Preferred Stock ("PRIDES") in January 1996; (xi) the BLH tender
offer for and repurchase of its 13 percent senior subordinated notes due 2002
and related financing transactions completed in March 1996; and (xii) the debt
restructuring of ALH in the fourth quarter of 1995.
<TABLE>
<CAPTION>
1996 1995 (1)
---- --------
(Dollars in millions,
except per share data)
<S> <C> <C>
Revenues...................................................................................... $3,967.8 $4,031.6
Income before extraordinary charge............................................................ 352.7 314.1
Income before extraordinary charge per common share and common equivalent share:
Primary..................................................................................... $1.86 $1.70
Fully diluted............................................................................... 1.76 1.62
</TABLE>
69
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
(1) We have excluded $74.9 million from pro forma income before extraordinary
charge and $.39 from income before extraordinary charge per fully diluted
common share. These amounts related to the release of deferred income
taxes that are no longer required to be accrued as a result of the CCP
Merger and the purchase of additional BLH common shares in 1995.
The following unaudited pro forma results of operations of the Company
are presented as if the following had occurred as of January 1, 1994: (i) the
CCP Merger; (ii) the acquisition of additional shares of BLH common stock in
1995; (iii) the acquisition of ALH by Partnership II; (iv) the IPO of WNC; and
(v) the sale by Conseco of its remaining 40 percent equity interest in WNC.
<TABLE>
<CAPTION>
1994(1)
-------
(Dollars in millions,
(except per share data)
<S> <C>
Revenues..................................................................................... $2,471.7
Income before extraordinary charge........................................................... 105.4
Income before extraordinary charge per common share and common equivalent share:
Primary............................................................................... $1.03
Fully diluted......................................................................... 1.03
</TABLE>
(1) We have excluded $80.8 million from pro forma total revenues, $46.5
million from income before extraordinary charge and $.46 from income
before extraordinary charge per fully diluted common share. These amounts
related to the initial public offering of WNC and the sale of the
Company's remaining equity interest in WNC.
3. INVESTMENTS:
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations of
United States government corporations and agencies.................. $ 509.9 $ 5.1 $ 1.2 $ 513.8
Obligations of states and political subdivisions........................ 103.5 2.8 .2 106.1
Debt securities issued by foreign governments........................... 144.4 1.4 2.2 143.6
Public utility securities............................................... 2,148.8 42.8 35.4 2,156.2
Other corporate securities.............................................. 8,808.3 145.1 81.2 8,872.2
Mortgage-backed securities ............................................. 5,488.4 64.5 37.7 5,515.2
--------- ------ ------ ---------
Total actively managed fixed maturities.......................... $17,203.3 $261.7 $157.9 $17,307.1
========= ====== ====== =========
</TABLE>
70
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
At December 31, 1995, the amortized cost and estimated fair value of
actively managed fixed maturities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C>
United States Treasury securities and obligations of
United States government corporations and agencies.................. $ 241.3 $ 16.5 $ - $ 257.8
Obligations of states and political subdivisions........................ 47.6 2.0 .1 49.5
Debt securities issued by foreign governments........................... 75.1 2.4 1.7 75.8
Public utility securities............................................... 2,196.1 144.1 11.3 2,328.9
Other corporate securities.............................................. 5,934.6 332.7 35.1 6,232.2
Mortgage-backed securities ............................................. 3,860.4 165.6 6.9 4,019.1
--------- ------ ----- ---------
Total actively managed fixed maturities.......................... $12,355.1 $663.3 $55.1 $12,963.3
========= ====== ===== =========
</TABLE>
At December 31, 1996, the amortized cost and estimated fair value of
actively managed fixed maturities based upon the pricing source used to
determine estimated fair value were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Nationally recognized pricing services............................................................ $14,659.6 $14,750.2
Broker-dealer market makers....................................................................... 2,218.7 2,234.9
Internally developed methods (calculated based on a weighted-average
current market yield of 9.5 percent)........................................................... 325.0 322.0
--------- ---------
Total actively managed fixed maturities.................................................... $17,203.3 $17,307.1
========= =========
</TABLE>
The following table sets forth fixed maturity investments at December 31,
1996, classified by rating categories. The category assigned is the highest
rating by a nationally recognized statistical rating organization or, as to
$482.0 million fair value of fixed maturities not rated by such firms, the
rating assigned by the National Association of Insurance Commissioners ("NAIC").
For purposes of the table, NAIC Class 1 is included in the "A" rating; Class 2,
"BBB-"; Class 3, "BB-"; and Classes 4-6, "B+ and below."
<TABLE>
<CAPTION>
Percent of Percent of
Investment rating fixed maturities total investments
----------------- ---------------- -----------------
<S> <C> <C>
AAA.................................. 36% 32%
AA................................... 9 8
A.................................... 26 22
BBB+................................. 9 8
BBB.................................. 10 9
BBB- ................................ 5 5
---- ---
Investment grade................. 95 84
---- ---
BB+.................................. 1 1
BB................................... 1 1
BB-.................................. 1 1
B+ and below......................... 2 1
---- ----
Below investment grade............ 5 4
---- ---
Total fixed maturities........ 100% 88%
=== ==
</TABLE>
71
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The following table sets forth below investment grade fixed maturity
investments as of December 31, 1996, summarized by the amount their amortized
cost exceeds fair value:
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Amortized cost exceeds fair value by 30% or more................................................. $ 10.1 $ 4.6
Amortized cost exceeds fair value by 15%, but less than 30%...................................... 13.6 10.7
Amortized cost exceeds fair value by 5%, but less than 15%....................................... 52.1 47.7
All others....................................................................................... 795.8 816.1
------ ------
Total below investment grade fixed maturity investments................................... $871.6 $879.1
====== ======
</TABLE>
The following table sets forth the amortized cost and estimated fair
value of actively managed fixed maturities at December 31, 1996, by contractual
maturity. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties and because most mortgage-backed securities provide for
periodic payments throughout their lives.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
---- -----
(Dollars in millions)
<S> <C> <C>
Due in one year or less......................................................................... $ 188.0 $ 188.2
Due after one year through five years........................................................... 1,605.4 1,622.9
Due after five years through ten years.......................................................... 4,051.9 4,080.7
Due after ten years............................................................................. 5,869.6 5,900.1
---------- ---------
Subtotal................................................................................... 11,714.9 11,791.9
Mortgage-backed securities...................................................................... 5,488.4 5,515.2
---------- ---------
Total actively managed fixed maturities ................................................ $17,203.3 $17,307.1
========= =========
</TABLE>
Equity securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- -----------------
Estimated Estimated
fair fair
Cost value Cost value
---- ----- ---- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Preferred stock, non-redeemable.......................................... $64.7 $66.3 $28.4 $29.9
Common stock............................................................. 32.9 33.4 6.2 6.7
----- ----- ----- -----
Total equity securities........................................... $97.6 $99.7 $34.6 $36.6
===== ===== ===== =====
</TABLE>
72
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Net investment income consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities..................................................................... $1,109.5 $ 988.6 $322.6
Equity securities.................................................................... 6.5 2.8 1.7
Mortgage loans....................................................................... 42.6 43.3 17.4
Credit-tenant loans.................................................................. 28.8 19.7 4.1
Policy loans......................................................................... 25.9 19.4 7.6
Other................................................................................ 27.8 17.5 13.3
Short-term investments............................................................... 15.6 26.4 20.5
Separate accounts.................................................................... 48.4 28.8 2.6
-------- -------- ------
Gross investment income........................................................ 1,305.1 1,146.5 389.8
Investment expenses.................................................................. 2.6 3.9 4.1
-------- -------- ------
Net investment income.......................................................... $1,302.5 $1,142.6 $385.7
======== ======== ======
</TABLE>
The carrying value of fixed maturity investments and mortgage loans not
accruing investment income totaled $2.1 million, $1.5 million and $11.2 million
at December 31, 1996, 1995 and 1994, respectively.
The proceeds from sales of fixed maturity investments were $8.2 billion in
1996, $7.9 billion in 1995 and $2.8 billion in 1994.
Investment gains (losses), net of investment gain expenses, were included
in revenue as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Fixed maturities:
Gross gains......................................................................... $126.8 $270.8 $ 15.5
Gross losses........................................................................ (52.5) (17.5) (26.5)
Other than temporary decline in fair value.......................................... (.6) (21.9) (1.0)
------ ------ ------
Net investment gains (losses) from fixed maturities before expenses............ 73.7 231.4 (12.0)
Equity securities....................................................................... 2.6 .4 (2.4)
Mortgages............................................................................... (.4) (2.1) -
Other than temporary decline in fair value.............................................. (8.3) (3.0) -
Other................................................................................... (.5) (1.3) (2.0)
------ ------ ------
Net investment gains (losses) before expenses.................................. 67.1 225.4 (16.4)
Investment gain expenses................................................................ 36.7 36.5 14.1
------ ------ ------
Net investment gains (losses) ................................................. $ 30.4 $188.9 $(30.5)
====== ====== ======
</TABLE>
73
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Changes in unrealized appreciation (depreciation) on investments were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Investments carried at fair value:
Actively managed fixed maturities .................................................. $(504.4) $981.6 $(668.6)
Equity securities................................................................... .1 5.4 (3.5)
Other investments................................................................... (2.2) (2.7) (10.9)
------- ------ -------
(506.5) 984.3 (683.0)
Equity in unrealized appreciation (depreciation) of CCP's investments................... - 46.2 (70.8)
Adjustment for effect on other balance sheet accounts:
Cost of policies purchased ......................................................... 141.6 (269.6) 115.9
Cost of policies produced........................................................... 45.4 (56.7) 134.3
Insurance liabilities............................................................... - - 39.1
Income taxes........................................................................ 116.4 (246.5) 151.7
Minority interest................................................................... 129.3 (205.3) 75.6
------- ------- -------
Change in unrealized appreciation (depreciation) of investments ............... $ (73.8) $ 252.4 $(237.2)
======= ======= =======
</TABLE>
At December 31, 1996, net appreciation of equity securities (before
income tax) was $2.1 million, consisting of $3.6 million of appreciation and
$1.5 million of depreciation.
At December 31, 1996, fixed maturity investments in default as to the
payment of principal or interest were insignificant. Conseco recorded writedowns
of fixed maturity investments and other invested assets of $8.9 million in 1996,
$24.9 million in 1995 and $1.0 million in 1994. These writedowns were the result
of changes in conditions that caused the Company to conclude that the decline in
fair value of the investment was other than temporary. Investment income forgone
due to defaulted securities was $3.8 million in 1996, $1.6 million in 1995 and
$3.9 million in 1994.
Investments in mortgage-backed securities at December 31, 1996, included
collateralized mortgage obligations ("CMOs") of $2,766.6 million and
mortgage-backed pass-through securities of $2,748.6 million. CMOs are securities
backed by pools of pass-through securities and/or mortgages that are segregated
into sections or "tranches." These securities provide for sequential retirement
of principal, rather than the pro rata share of principal return that occurs
through regular monthly principal payments on pass-through securities.
The following table sets forth the par value, amortized cost and
estimated fair value of investments in mortgage-backed securities including CMOs
at December 31, 1996, summarized by interest rates on the underlying collateral:
<TABLE>
<CAPTION>
Par Amortized Estimated
value cost fair value
----- ---- ----------
(Dollars in millions)
<S> <C> <C> <C>
Below 7 percent .................................................................... $1,808.2 $1,738.8 $1,731.9
7 percent - 8 percent............................................................... 2,753.8 2,659.1 2,684.9
8 percent - 9 percent............................................................... 667.3 663.3 669.7
9 percent and above................................................................. 421.3 427.2 428.7
-------- -------- --------
Total mortgage-backed securities.................................. $5,650.6 $5,488.4 $5,515.2
======== ======== ========
</TABLE>
74
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The amortized cost and estimated fair value of mortgage-backed securities
including CMOs at December 31, 1996, summarized by type of security were as
follows (dollars in millions):
<TABLE>
<CAPTION>
Estimated fair value
--------------------
Percent
Amortized of fixed
Type cost Amount maturities
- ---- ---- ------ ----------
<S> <C> <C> <C>
Pass-throughs and sequential and targeted amortization classes...................... $3,885.4 $3,903.2 23%
Planned amortization classes and accretion directed bonds........................... 1,023.2 1,022.1 6
Support classes..................................................................... 157.9 163.0 1
Accrual (Z tranche) bonds........................................................... 52.9 54.3 -
Subordinated classes ............................................................... 369.0 372.6 2
-------- -------- --
Total mortgage-backed securities................................... $5,488.4 $5,515.2 32 %
======== ======== ==
</TABLE>
At December 31, 1996, approximately 84 percent of the estimated fair
value of Conseco's mortgage-backed securities was determined by nationally
recognized pricing services, 13 percent was determined by broker-dealer market
makers, and 3 percent was determined by internally developed methods.
At December 31, 1996, the mortgage loan balance was primarily comprised
of commercial loans, including multifamily residential loans. Approximately 30
percent, 12 percent and 6 percent of the mortgage loan balance were on
properties located in California, Texas and Mississippi, respectively. No other
state comprised greater than 5 percent of the mortgage loan balance. Less than 1
percent of the mortgage loan balance was noncurrent at December 31, 1996. At
December 31, 1996, the Company had an allowance for loss on mortgage loans of
$2.4 million.
At December 31, 1996, we held $447.1 million of CTLs. CTLs are mortgage
loans for commercial properties that we make based on the underwriting
guidelines described in note 1. We classify CTLs as a separate class of
securities because they are principally underwritten based on the
creditworthiness of the tenant rather than the value of the underlying property.
As with commercial mortgages, CTLs are additionally collateralized by liens on
the underlying property.
As part of its investment strategy, the Company enters into reverse
repurchase agreements and dollar-roll transactions to increase its return on
investments and improve its liquidity. Reverse repurchase agreements involve a
sale of securities and an agreement to repurchase the same securities at a later
date at an agreed upon price. Dollar rolls are similar to reverse repurchase
agreements except that the repurchase involves securities that are only
substantially the same as the securities sold. These transactions are accounted
for as short-term collateralized borrowings. Such borrowings averaged
approximately $424.7 million during 1996 (compared to an average of $393.7
million during 1995) and were collateralized by investment securities with fair
values approximately equal to the loan value. The weighted average interest rate
on short-term collateralized borrowings was 5.2 percent in 1996 and 5.6 percent
in 1995. The primary risk associated with short-term collateralized borrowings
is that the counterparty will be unable to perform under the terms of the
contract. The Company's exposure is limited to the excess of the net replacement
cost of the securities over the value of the short-term invesments (which was
not material at December 31, 1996). The Company believes that the counterparties
to its reverse repurchase and dollar roll agreements are financially responsible
and that the counterparty risk is minimal.
Other invested assets include certain non-traditional investments,
including investments in venture capital funds, limited partnerships, mineral
rights and promissory notes. During 1996, Conseco sold its investment in Noble
Broadcast Group, Inc.: restructuring income of $30.0 million was recognized.
During 1995, Conseco sold its investment in Eagle Credit (a finance subsidiary
of Harley-Davidson): restructuring income of $20.6 million was recognized.
Life insurance companies are required to maintain certain investments on
deposit with state regulatory authorities. Such assets had an aggregate carrying
value of $141.3 million at December 31, 1996.
Conseco had no investments in any single entity in excess of 10 percent
of shareholders' equity at December 31, 1996, other than investments issued or
guaranteed by the United States government or a United States government agency.
75
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
Prior to January 1, 1995, Conseco's investment in CCP was accounted for
under the equity method because Conseco did not control CCP's operations.
Conseco's investment in WNC was accounted for under the equity method during
1994, prior to the sale of our remaining interest in WNC in December 1994.
The following table summarizes selected 1994 account balances of CCP and
WNC.
<TABLE>
<CAPTION>
CCP WNC
--- ---
(Dollars in millions)
<S> <C> <C>
Total revenues......................................................................... $484.3 $615.7
Insurance policy income.............................................................. 114.5 27.4
Net investment income................................................................ 367.8 637.5
Net investment gains (losses)........................................................ 2.0 (49.2)
Total benefits and expenses............................................................ 383.9 501.6
Interest expense on annuities and financial products................................. 208.6 344.2
Interest expense on notes payable................................................... 10.7 9.6
Income before income taxes and extraordinary charge.................................... 100.4 114.1
Income tax expense..................................................................... 37.4 40.8
Income before extraordinary charge..................................................... 63.0 73.3
Extraordinary charge on extinguishment of debt, net of tax............................. 4.9 -
Net income............................................................................. 58.1 73.3
Amounts recorded by Conseco:
Equity in earnings before extraordinary charge....................................... $24.7 $40.2
Fees received for services provided by Conseco....................................... 12.0 16.3
Extraordinary charge................................................................. 2.1 -
Dividends received................................................................... .9 3.0
</TABLE>
76
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
5. INSURANCE LIABILITIES:
Insurance liabilities consisted of the following:
<TABLE>
<CAPTION>
Interest
Withdrawal Mortality rate
assumption assumption assumption 1996 1995
---------- ---------- ---------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Future policy benefits:
Interest sensitive products:
Investment contracts............................ N/A N/A (c) $11,491.6 $ 9,628.9
Universal life-type contracts................... N/A N/A 5% 3,303.9 1,008.8
--------- ---------
Total interest sensitive products............. 14,795.5 10,637.7
--------- ---------
Traditional products:
Traditional life insurance contracts............ Company (b) 5% 1,234.7 646.0
experience
Limited-payment contracts....................... None (a) 6% 761.5 695.8
Individual accident and health ................. Company Company 7% 1,112.6 649.5
experience experience
Group life and health........................... N/A N/A N/A 71.3 44.1
--------- ---------
Total traditional products.................... 3,180.1 2,035.4
--------- ---------
Claims payable and other policyholders' funds ...... N/A N/A N/A 1,056.3 517.4
Unearned premiums................................... N/A N/A N/A 272.4 187.9
--------- ---------
Total insurance liabilities..................... $19,304.3 $13,378.4
========= =========
<FN>
(a) Principally the 1984 United States Population Table and the NAIC 1983
Individual Annuitant Mortality Table.
(b) Principally modifications of the 1965 - 70 and 1975 - 80 Basic, Select
and Ultimate Tables.
(c) In 1996 and 1995: (i) approximately 95 percent and 96 percent of this
liability, respectively, represented account balances where future
benefits are not guaranteed; and (ii) 5 percent and 4 percent,
respectively, represented the present value of guaranteed future
benefits determined using an average interest rate of approximately 5
percent.
</FN>
</TABLE>
Participating policies represented approximately 2 percent, 12 percent
and 8 percent of total life insurance in force at December 31, 1996, 1995 and
1994, respectively. Participating policies represented approximately 1 percent,
1 percent and 2 percent of premium income for 1996, 1995 and 1994, respectively.
Dividends on participating policies amounted to $13.4 million, $12.3 million and
$12.0 million in 1996, 1995 and 1994, respectively.
6. REINSURANCE:
Cost of reinsurance ceded where the reinsured policy contains mortality
risks totaled $313.8 million, $72.6 million and $33.4 million in 1996, 1995 and
1994, respectively. This cost was deducted from insurance premium revenue.
Conseco is contingently liable for claims reinsured if the assuming company is
unable to pay. Reinsurance recoveries netted against insurance policy benefits
totaled $281.4 million, $59.8 million and $23.7 million in 1996, 1995 and 1994,
respectively.
The Company has ceded certain policy liabilities under assumption
reinsurance agreements. Since all of Conseco's obligations under these insurance
contracts have been ceded to another company, insurance liabilities related to
such policies were not reported in the balance sheet. We believe the assuming
companies are able to honor all contractual commitments under the assumption
reinsurance agreements, based on our periodic reviews of financial statements,
insurance industry reports and reports filed with state insurance departments.
77
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The Company's reinsurance receivable at December 31, 1996, relates to
approximately 175 reinsurers. Three major United States insurance companies
rated "A- (Excellent)" or better by A.M. Best Company, a recognized insurance
rating agency, account for approximately 26 percent, 9 percent and 5 percent,
respectively, of such balance. Other than these companies, no single reinsurer
accounts for more than 4 percent.
7. INCOME TAXES:
Income tax assets (liabilities) were comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Deferred income tax assets (liabilities):
Investments................................................................................... $ 52.2 $ 16.8
Cost of policies purchased and cost of policies produced...................................... (573.7) (383.4)
Insurance liabilities......................................................................... 474.0 345.6
Unrealized depreciation (appreciation)........................................................ (34.8) (138.4)
Net operating loss carryforward............................................................... 154.4 142.9
Other......................................................................................... (73.8) (53.7)
------ ------
Deferred income tax liabilities......................................................... (1.7) (70.2)
Current income tax assets (liabilities)........................................................... 10.5 (23.1)
------ ------
Income tax assets (liabilities)......................................................... $ 8.8 $(93.3)
====== ======
</TABLE>
Income tax expense was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Current tax provision......................................................................... $110.5 $121.0 $ 78.6
Deferred tax provision (benefit).............................................................. 69.3 (34.0) 32.4
------ ------- ------
Income tax expense................................................................ $179.8 $ 87.0 $111.0
====== ====== ======
</TABLE>
Income tax expense differed from that computed at the applicable federal
statutory rate (35 percent) for the following reasons:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Tax on income before income taxes
at statutory rate......................................................................... $172.8 $146.5 $113.5
Dividend received deduction on equity
in earnings of non-consolidated affiliates................................................ - - (13.7)
Tax on undistributed earnings of consolidated subsidiaries.................................... 2.0 2.5 5.5
Reversal of deferred tax liabilities as a result of the ALH Stock Purchase.................... (1.3) - -
Reversal of deferred tax liabilities as a result of CCP Merger................................ - (8.4) -
Reversal of deferred tax liabilities as a result of the increase in ownership of BLH.......... - (66.5) -
Nondeductible items........................................................................... 2.5 8.8 4.5
State taxes................................................................................... 7.3 .3 3.1
Other......................................................................................... (3.5) 3.8 (1.9)
------ ------- ------
Income tax expense................................................................ $179.8 $ 87.0 $111.0
====== ======= ======
</TABLE>
At December 31, 1996, Conseco had federal income tax loss carryforwards
of $441.1 million available (subject to various statutory restrictions) for use
on future tax returns. Portions of these carryforwards begin expiring in 1999.
Of the loss carryforwards: (i) $24.5 million may be used to offset income only
from the non-life insurance companies; and (ii) $67.3 million are attributable
to acquired companies and may be used only to offset the income from those
companies. None of the carryforwards are available to
78
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
reduce the tax provision for financial reporting purposes. With respect to
determining that the Company's net operating loss carryforwards will be fully
utilized, the Company is relying upon its past history of earnings.
The IRS has completed its examination of Conseco's consolidated tax
returns for years through 1992 and is currently conducting an examination for
years 1993 through 1994. Certain companies acquired in the LPG Merger have been
audited by the IRS for years 1990 and 1991 and are appealing the proposed
adjustments to the IRS's Appeals Division. Certain companies acquired in the LPG
Merger are currently being audited by the IRS for years 1992 through 1994. We
believe adjustments, if any, related to these audits will not be significant.
8. NOTES PAYABLE:
Notes payable of the Company at December 31, 1996 and 1995, were as
follows:
<TABLE>
<CAPTION>
Interest rate 1996 1995
------------- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Borrowings under revolving credit agreements......................... 5.9% (1) $ 465.0 $ 715.0
Senior notes due 2003................................................ 8.125% 170.0 195.0
Senior notes due 2004................................................ 10.5% 200.0 200.0
Subordinated notes due 2004.......................................... 11.25% 98.1 150.0
Convertible subordinated debentures due 2005......................... 6.5% 102.8 -
Other................................................................ Various 45.2 195.0
------- -------
Total principal amount.......................................... 1,081.1 1,455.0
Unamortized net premium.............................................. 13.8 1.1
------- --------
Total........................................................... $1,094.9 $1,456.1 (2)
======== ========
</TABLE>
(1) Current weighted average rate at December 31, 1996.
(2) At December 31, 1995, notes payable with a carrying value of $584.7
million (consisting of borrowings under revolving credit agreements of
$235.0 million; subordinated notes due 2004 of $150.0 million; other debt
of $195.0 million; and unamortized discount and issuance costs of $4.7
million) were notes payable of affiliates, which were not direct
obligations of Conseco. As a result of the ALH Stock Purchase and the BLH
Merger, such notes payable became direct obligations of Conseco.
Maturities of notes payable at December 31, 1996, were as follows
(dollars in millions):
<TABLE>
<CAPTION>
Maturity date Amount
------------- ------
<S> <C>
1997....................................................................... $ 1.1
1998....................................................................... 1.1
1999....................................................................... 1.1
2000....................................................................... 1.1
2001....................................................................... 466.1
Thereafter................................................................. 610.6
--------
Total par value at December 31, 1996................................... $1,081.1
========
</TABLE>
Borrowings under revolving credit agreements. The Company's current
revolving credit agreement (the "Credit Facility"), executed in November 1996,
permits borrowings up to $1.4 billion. Borrowings bear interest at the bank's
base rate, a Eurodollar rate or a rate determined based on a solicitation of
bids from lenders. Eurodollar rates are equal to the reserve-adjusted LIBOR rate
plus a margin of .225 percent to .75 percent, based on the credit rating of
Conseco's senior notes. The current margin of .375 percent will increase by .125
percent after December 31, 1997, if Conseco's debt to total capitalization ratio
exceeds 35 percent. Borrowings
79
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
at December 31, 1996, bore interest at a weighted average rate of 5.90 percent.
The Credit Facility also permits revolving Swingline loans up to $50.0 million.
Such loans are due within 7 days and bear interest at the bank's base rate or a
reserve adjusted three-month CD rate plus the Eurodollar rate margin and an
assessment rate. Maximum permitted borrowings under the Credit Facility are
reduced by any aggregate outstanding commercial paper of Conseco.
Borrowings are due in November 2001. Mandatory prepayments, which reduce
the maximum permitted borrowings, are required under the Credit Facility upon
the sale or disposition of any significant assets other than in the ordinary
course of business. The Credit Facility contains various restrictive covenants
that primarily pertain to levels of indebtedness, limitations on payment of
dividends, limitations on the quality and types of investments, and capital
expenditures. Additionally, the Company must comply with several financial
covenant restrictions, including maintaining: (i) shareholders' equity in excess
of $1.75 billion at December 31, 1996, $2.4 billion in 1997 and 1998 and $3.5
billion thereafter; (ii) the interest coverage ratio in excess of 2.0:1 through
March 1997 (escalating to 3.0:1 after 1997); and (iii) the debt to total capital
ratio less than .45:1. As of December 31, 1996, the Company was in compliance
with all covenants under its debt agreements.
On the last day of each quarter, we pay a commitment fee that ranges from
.08 percent to .25 percent per annum (depending on the credit rating of
Conseco's senior debt) on the average daily unused commitments during the
quarter. This fee was .125 percent per annum during the fourth quarter of 1996.
We recognized an extraordinary loss of $12.9 million during 1996 (net of
a $7.0 million tax benefit) as a result of prepaying our prior bank credit
agreements and the bank credit agreements of BLH and ALH.
8.125% senior notes due 2003 were issued to the public in 1993, are
unsecured and rank pari passu with all other unsecured and unsubordinated
indebtedness of the Company. The notes are not redeemable prior to maturity.
10.5% senior notes due 2004 were issued to the public by CCP in 1994, are
unsecured and rank pari passu with all other unsecured and unsubordinated
indebtedness of Conseco. The notes are not redeemable prior to maturity.
11.25% senior subordinated notes due 2004 were issued to the public by
ALH in conjunction with its acquisition by Partnership II. Such notes are
unsecured and will be subordinated in the right of payment to the prior payment
in full of all senior indebtedness. The notes are redeemable at the Company's
option, in whole or in part, at any time on or after September 15, 1999,
initially at 105.625 percent of their principal amount, plus accrued interest,
declining to 100 percent of their principal amount, plus accrued interest, on
and after September 15, 2001. We recognized an extraordinary charge of $4.2
million (net of a $2.3 million tax benefit) during 1996 as a result of
repurchasing $51.9 million par value of these notes.
6.5% convertible subordinated debentures due 2005 were acquired in
conjunction with the ATC Merger and are convertible into Conseco common stock at
any time prior to maturity, at a conversion ratio of 76.96 shares of Conseco
common stock for each $1,000 principal amount of debentures. The convertible
debentures may be redeemed at Conseco's option at a price equal to 103.25
percent after October 1998, declining to 100 percent after October 2001. The
value of the convertible debentures in excess of the principal balance at the
ATC Merger date (the value attributable to the conversion feature) of $145.5
million is included in other liabilities.
Other debt. In March 1996, BLH completed a tender offer in which it
repurchased $148.3 million principal balance of its senior subordinated notes.
In addition, Conseco repurchased $28.5 million of such notes during 1996.
Conseco recognized an extraordinary charge of $9.0 million (net of a $4.9
million tax benefit) related to such repurchases.
In conjunction with the LPG Merger and the THI Merger, Conseco repaid
acquired debt of $214.5 million and $78.5 million, respectively. Conseco also
repurchased other debt of $65.8 million during 1996. Conseco recognized an
extraordinary charge of $.4 million (net of $.2 million tax benefit) related to
such repurchases.
Conseco recognized extraordinary charges of $2.1 million (net of a $1.5
million tax benefit) in 1995 and $4.0 million (net of a $2.2 million tax
benefit) in 1994, related to the repayment of notes payable.
80
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
9. OTHER DISCLOSURES:
Leases
The Company rents office space, equipment and computer software under
noncancellable operating leases. Rental expense was $21.3 million in 1996, $20.8
million in 1995 and $18.8 million in 1994. Future required minimum rental
payments as of December 31, 1996, were as follows (dollars in millions):
<TABLE>
<CAPTION>
<S> <C>
1997 ........................ $ 22.2
1998 ........................ 22.1
1999 ........................ 20.3
2000 ........................ 18.6
2001 ........................ 16.7
Thereafter.................... 55.1
------
Total................... $155.0
======
</TABLE>
Employment Arrangements
Some officers of the Company are employed under long-term employment
agreements. One of these agreements provides for a base salary plus an annual
bonus equal to 3 percent of the Company's consolidated defined pretax profits.
This agreement renews annually for a five-year period unless either party
notifies the other, in which case the agreement expires five years from the last
renewal date. Additionally, a $1.9 million interest-free loan has been granted
to the officer. Repayment is due two years after termination of the officer's
employment contract.
The agreements described above also include provisions under which the
employee may elect to receive, in the event of a termination of the agreement
following a change in control of the Company (as defined), a severance allowance
equal to 60 months' salary, bonus and other benefits. The employee also may
elect to have the Company purchase all Conseco stock and all options to purchase
Conseco stock, without deduction of the applicable exercise prices, held by such
person at a price per share equal to the highest market price in the preceding
six months.
The Company has qualified defined contribution plans in which
substantially all employees are eligible to participate. Company contributions,
which match certain voluntary employee contributions to the plan, totaled $2.0
million in 1996, $2.2 million in 1995 and $1.7 million in 1994. These
contributions may be made either in cash or in Conseco common stock.
The Company also has a stock bonus and deferred compensation program for
certain officers and directors. Company contributions vary based on the
profitability of the Company. Each year's contribution, which is fully funded in
the form of Conseco common stock, vests five years later or upon certain other
events. The cost of the program is charged to expense over the vesting period
and amounted to $3.9 million in 1996, $3.7 million in 1995 and $1.4 million in
1994. The market value of Conseco common stock held under the program (included
in other assets and other liabilities) was $101.7 million and $46.0 million at
December 31, 1996 and 1995, respectively.
BLH has a noncontributory, unfunded deferred compensation plan for
qualifying members of its career agency force. Benefits are based on years of
service and career earnings. The liability recognized in the consolidated
balance sheet for the agents' deferred compensation plan was $34.5 million and
$32.2 million at December 31, 1996 and 1995, respectively. Substantially all of
this liability represents vested benefits. Costs incurred on this plan,
primarily representing interest on unfunded benefit costs, were $3.2 million,
$2.8 million and $2.7 million during 1996, 1995 and 1994, respectively.
81
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
BLH also provides certain health care and life insurance benefits for
eligible retired employees. Benefits are provided under a contributory unfunded
plan which includes cost-sharing features determined at the discretion of
management. During 1994, several modifications were made to postretirement
benefit plans that: (i) established cost-sharing for certain future retirees;
(ii) established maximum annual costs and benefits; and (iii) revised certain
other benefits. Such changes made in 1994 resulted in a $9.2 million amendment
gain and a $5.2 million curtailment gain. The amendment gain is amortized over
the remaining service period of active plan participants. The curtailment gain
is included in other income. Amounts related to the postretirement benefit plan
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Retirees............................................................................................ $4.6 $ 5.2
Fully eligible active plan participants............................................................. 1.9 1.9
Other active plan participants...................................................................... .6 .7
---- -----
Total accumulated postretirement benefit obligation............................................... 7.1 7.8
Unrecognized net reduction in prior service costs................................................... 2.5 6.1
Unrecognized net gain............................................................................... .3 .8
---- -----
Accrued liability included in other liabilities................................................... $9.9 $14.7
==== =====
</TABLE>
The discount rates used in determining the accumulated postretirement
benefit obligation was 7 percent at December 31, 1996 and 1995. Future increases
in salaries and the assumed health care cost trend rates produce no change in
the accumulated postretirement benefit obligation at December 31, 1996 and 1995,
because of the employer's maximum cost sharing provisions discussed above. The
net periodic cost of providing these benefits is not significant.
Litigation
From time to time, the Company and its subsidiaries are involved in
lawsuits related to their operations. In most cases, such lawsuits involve
claims under insurance policies or other contracts of the Company. Even though
the Company may be contesting the validity or extent of its liability in
response to such lawsuits, the Company has established reserves in its
consolidated financial statements that approximate its estimated potential
liability. Accordingly, none of the lawsuits currently pending, either
individually or in the aggregate, is expected to have a material effect on the
Company's consolidated financial condition, cash flows or results of operations.
Guaranty Fund Assessments
From time to time, mandatory assessments are levied on the Company's
insurance subsidiaries by life and health guaranty associations of most states
in which these subsidiaries are licensed. These assessments are to cover losses
to policyholders of insolvent or rehabilitated insurance companies. The
associations levy assessments (up to prescribed limits) on all insurers in a
particular state in order to pay claims on the basis of the proportionate share
of premiums written by insurers in the lines of business in which the insolvent
or rehabilitated insurer is engaged. These assessments may be deferred or
forgiven in certain states if they would threaten an insurer's financial
strength and, in some states, these assessments can be partially recovered
through a reduction in future premium taxes. The balance sheet at December 31,
1996, includes accruals of $17.2 million, which approximate the Company's
estimate of: (i) all known assessments that will be levied against the Company's
insurance subsidiaries by various state guaranty associations based on premiums
that have been written through December 31, 1996; less (ii) amounts that would
be recoverable through a reduction in future premium taxes as a result of such
assessments. Such estimate is subject to change as the associations determine
more precisely the losses that have occurred and how such losses will be
allocated to insurance companies. The Company's cost for such assessments
incurred by its insurance company subsidiaries and equity investees was $4.0
million in 1996, $3.2 million in 1995 and $8.0 million in 1994.
82
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Expenses Related to Terminated Merger Agreement
In November 1994, Conseco and another company agreed to terminate a
merger agreement. Conseco incurred pre-tax expenses totaling approximately $35.8
million including: (i) $15.1 million of fees to banks for financing commitments;
(ii) $9.8 million loss on the decline in fair value of common stock acquired by
Conseco in connection with the proposed merger; and (iii) $10.9 million of
legal, accounting and actuarial fees and other expenses.
Minority Interest
Minority interest represents the interest of investors other than Conseco
in its subsidiaries. Minority interest at December 31, 1996, included: (i)
$600.0 million par value of Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts; (ii) $97.0 million interest in the redeemable
preferred stock of a subsidiary of ALH; and (iii) $.7 million interest in the
common stock of a subsidiary of ALH.
Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts
Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts at December 31, 1996, were as follows (dollars in millions):
<TABLE>
<CAPTION>
Estimated
Amount fair
outstanding value
----------- -----
<S> <C> <C>
9.16% Trust Originated Preferred Securities ("TOPrS")........................ $275.0 $280.5
8.70% Capital Trust Pass-through Securities ("TruPS")........................ 325.0 323.8
------ ------
$600.0 $604.3
====== ======
</TABLE>
On November 19, 1996, Conseco issued 11 million of the TOPrS of Conseco
Financing Trust ("Trust I") at $25 per security. Each TOPrS security will pay
cumulative cash distributions at the annual rate of 9.16 percent of the stated
liquidation amount per security, payable quarterly commencing December 31, 1996.
The TOPrS are fully and unconditionally guaranteed by Conseco. Proceeds from the
offering of approximately $266.1 million (after underwriting and associated
costs) were used to repay bank debt. Conseco has the right to redeem the
securities at any time, in whole or in part, on or after November 19, 2001, at
the principal amount plus accrued and unpaid interest. The securities are
subordinated to all senior indebtedness of Conseco and mature on November 30,
2026. Conseco may extend the maturity date by one or more periods, but in no
event later than November 30, 2045. The terms of the TOPrS parallel the terms of
Conseco's debentures held by Trust I, which debentures comprise substantially
all of the assets of Trust I.
On November 27, 1996, Conseco issued 325,000 of the TruPS of Conseco
Financing Trust II ("Trust II") at $1,000 per security. Each TruPS security will
pay cumulative cash distributions at the annual rate of 8.70 percent of the
stated $1,000 liquidation amount per security payable semi-annually commencing
May 15, 1997. The TruPS are fully and unconditionally guaranteed as to
distributions and other payments by Conseco. Proceeds from the offering of
approximately $321.6 million (after underwriting and associated costs) were used
to repay bank debt. Conseco has the right to redeem the securities at the
principal amount plus a premium equal to the excess, if any, of the sum of the
discounted present values of the remaining scheduled payments of principal and
interest over the principal amount of securities to be redeemed. The securities
are subordinated to all senior indebtedness of Conseco and mature on November
15, 2026. The terms of the TruPS parallel the terms of Conseco's debentures held
by Trust II, which debentures comprise substantially all of the assets of Trust
II.
Preferred Stock
At December 31, 1996, the preferred stock consists of 2,760,000 shares of
$2.16 Redeemable Cumulative Preferred Stock (the "$2.16 Preferred Shares") and
940,000 shares of $2.32 Redeemable Cumulative Preferred Stock (the "$2.32
Preferred Shares") of a subsidiary of ALH.
83
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The $2.16 Preferred Shares are entitled to cash dividends of $2.16 per
share per annum payable quarterly and may be redeemed, in whole or in part, at
any time after August 25, 1997, at $26.25 per share declining to $25.00 per
share on or after September 30, 2000, plus cumulative unpaid dividends. The
$2.16 Preferred Shares are mandatorily redeemable on September 30, 2007.
The $2.32 Preferred Shares are entitled to cash dividends of $2.32 per
share per annum payable quarterly and may be redeemed, in whole or in part, at
any time after February 2, 1998, at $26.25 per share declining to $25.00 per
share on or after February 1, 2001, plus unpaid cumulative dividends. The $2.32
Preferred Shares are mandatorily redeemable on February 15, 2008.
Zero coupon U.S. Government bonds have been placed in an escrow account
to be used for the future redemption of the $2.16 Preferred Shares and the $2.32
Preferred Shares on or before their mandatory redemption dates. The aggregate
redemption values and the maturity dates of such bonds correspond to the
redemption values (excluding cumulative unpaid dividends) and the mandatory
redemption dates of the $2.16 Preferred Shares and the $2.32 Preferred Shares.
At December 31, 1996, the bonds had an amortized cost of $45.6 million and an
estimated fair value of $49.1 million.
During 1996, the Company repurchased preferred stock of ALH with a value
of $12.6 million and acquired 260,000 shares of the $2.32 Preferred Stock in the
LPG Merger.
Common Stock
At December 31, 1996, minority interest in common stock of Conseco's
subsidiaries includes only the $.7 million interest in the common stock of
Vulcan. At December 31, 1995, such minority interest also included the interests
of the non-Conseco shareholders in ALH and BLH. Conseco acquired such ownership
interests from the minority interest in the ALH Stock Purchase and the BLH
Merger.
84
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Changes in minority interest in common and preferred stock of
consolidated subsidiaries during 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Minority interest, beginning of year........................................................... $ 403.3 $ 321.7
Consolidation of CCP, effective January 1, 1995............................................ - 191.2
Changes in investments held by minority interest:
ALH Stock Purchase...................................................................... (131.2) -
ALH preferred stock purchase............................................................ (12.6) -
Preferred stock of a subsidiary of ALH held by LPG at the date of the LPG Merger........ (6.5) -
BLH Merger.............................................................................. (60.5) -
Repurchase by BLH of its common stock .................................................. (18.7) (27.7)
Purchase of BLH common stock by Conseco................................................. - (141.8)
Repurchase by CCP of its common stock................................................... - (44.5)
Purchase of CCP common stock in the CCP Merger.......................................... - (241.7)
Conseco's additional ownership interest in BLH and ALH
as a result of the CCP Merger........................................................ - (53.8)
Investment in Partnership II ........................................................... - 16.3
Other ................................................................................. 4.6 2.1
Equity of minority interest in the change in financial position of the
Company's subsidiaries:
Net income before extraordinary charge.................................................. 31.3 109.0
Extraordinary charge.................................................................... (1.7) (2.8)
Unrealized appreciation (depreciation) of securities ................................... (100.3) 292.4
Dividends............................................................................... (10.0) (17.1)
------- -------
Minority interest, end of year ................................................................ $ 97.7 $ 403.3
======= =======
</TABLE>
10. SHAREHOLDERS' EQUITY:
Authorized preferred stock is 20,000,000 shares. On January 23, 1996,
Conseco completed the offering of 4.37 million shares of PRIDES. Proceeds from
the offering of $257.7 million (after underwriting and other associated costs)
were used to repay notes payable of Conseco. Each share of PRIDES pays quarterly
dividends at the annual rate of 7 percent of the $61.125 liquidation preference
per share (equivalent to an annual amount of $4.279 per share). On February 1,
2000, unless either previously redeemed by Conseco or converted at the option of
the holder, each share of PRIDES will mandatorily convert into four shares of
Conseco common stock, subject to adjustment in certain events. Shares of PRIDES
are not redeemable prior to February 1, 1999. From February 1, 1999 through
February 1, 2000, the Company may redeem any or all of the outstanding shares of
PRIDES. Upon such redemption, each holder will receive, in exchange for each
share of PRIDES, the number of shares of Conseco common stock equal to (i) the
sum of (a) $62.195, declining after February 1, 1999 to $61.125, and (b) accrued
and unpaid dividends divided by (ii) the market price of Conseco common stock at
such date. In no event will a holder receive less than 3.42 shares of Conseco
common stock. During 1996, 400 shares of PRIDES were converted by holders of
such shares into 1,368 shares of Conseco common stock.
Conseco issued 5,750,000 shares of Series D Cumulative Convertible
Preferred Stock ("Series D preferred stock") with annual dividends of $3.25 per
share and with a total stated value of $287.5 million ($50 per share) in January
1993 in a public offering. During 1993, 274 Series D preferred shares were
converted to 860 common shares. In December 1994, the Company repurchased 80,000
Series D preferred shares in open market transactions in connection with its
stock repurchase program at a total cost of $3.3 million. Such preferred shares
would have been convertible into 250,980 shares of common stock. In 1996, the
Company exercised its right to redeem all outstanding Series D preferred stock.
A total of 6,358 Series D shares were redeemed at $52.916 per share including
$.641 per share of accrued and unpaid dividends. Holders of the remaining
5,381,437 Series D shares elected to convert their shares into 16,882,390 shares
of Conseco common stock.
85
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Changes in the number of shares of common stock outstanding for the years
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year...................................................... 81,031,828 88,739,400 101,247,092
Stock options exercised..................................................... 4,893,484 365,432 15,461,816
Shares issued in conjunction with acquired companies........................ 60,559,840 - -
Shares issued in exchange for THI Convertible Notes......................... 4,249,830 - -
Common shares converted from Series D preferred shares...................... 17,766,864 - -
Common shares converted from PRIDES......................................... 1,368 - -
Shares issued under compensation plans...................................... 281,604 16,996 17,548
Treasury stock purchased.................................................... (1,656,590) (8,090,000) (27,987,056)
----------- ---------- -----------
Balance, end of year............................................................ 167,128,228 81,031,828 88,739,400
============ ========== ===========
</TABLE>
Dividends declared on common stock for 1996, 1995 and 1994, were $.083,
$.046 and $.125 per common share, respectively. A liability was accrued for
dividends declared but unpaid at December 31, 1996, totaling $4.8 million. Such
dividends were paid in January 1997.
In 1996, 1995 and 1994, the Company repurchased approximately 1.7
million, 8.1 million and 28.0 million shares of its common stock for $26.0
million, $92.4 million and $360.2 million, respectively, in connection with its
stock repurchase program. The cost of the common stock repurchased by Conseco
was allocated to the shareholders' equity accounts in 1996, 1995 and 1994 as
follows: (i) $3.1 million, $15.0 million, and $25.5 million, respectively, to
common stock and additional paid-in capital (such allocation was based on the
average common stock and paid-in capital balance per share) and (ii) $22.9
million, $77.4 million and $337.0 million, respectively, to retained earnings
(representing the purchase price in excess of such average).
The Company was authorized under its 1983 employee stock option plan to
grant options to purchase up to 48 million shares of Conseco common stock at a
price not less than its market value on the date the option was granted. The
1983 stock option plan continues to govern options granted thereunder, but
expired in all other respects in December 1993. A new plan was adopted in 1994
that authorizes the granting of options to employees and directors of the
Company to purchase up to 24 million shares of Conseco common stock at a price
not less than its market value on the date the option is granted. The options
may become exercisable immediately or over a period of time. The plan also
permits granting of stock appreciation rights and certain other awards.
Conseco implemented two option exercise programs under which its chief
executive officer and four of its executive vice presidents exercised
outstanding options to purchase 3.1 million shares of Conseco common stock under
a March 1996 program (the "1996 Program") and 14.4 million shares under a
February 1994 program (the "1994 Program"). The options exercised would
otherwise have remained exercisable until the years 2000 through 2002 with
respect to the 1996 Program and 1999 and 2000 with respect to the 1994 Program.
We implemented these programs in order to accelerate: (i) the tax benefits we
derived from the exercise of the options; and (ii) the receipt of the exercise
price of the options. The programs resulted in the following increases to common
stock and additional paid-in capital: (i) a tax benefit of $15.1 million (net of
payroll taxes incurred of $.7 million) and exercise proceeds of $5.2 million
related to the 1996 Program; and (ii) a tax benefit of $67.8 million (net of
payroll taxes incurred of $2.9 million) and exercise proceeds of $15.4 million
related to the 1994 Program. The Company withheld shares to cover federal and
state taxes owed by the executives as a result of the exercise transactions. Net
of shares withheld, the Company issued approximately 1.6 million and 7.2 million
shares of common stock to the executives under the 1996 Program and the 1994
Program, respectively. As an inducement to encourage the exercise of options
prior to their expiration date, the Company granted to the executive officers
new options to purchase a total of 1.6 million shares at $16.22 per share and
8.1 million shares at $14.81 per share (in each case equal to the market price
per share on the grant date) to replace the shares surrendered for taxes and the
exercise price in connection with the 1996 and 1994 Programs, respectively.
In April 1996, Conseco approved a Director, Executive and Senior Officer
Stock Purchase Plan to encourage direct, long-term ownership of Conseco stock by
Board members, executive officers and certain senior officers. Under the
program, up to 4 million shares of Conseco common stock could be purchased in
open market or negotiated transactions with independent parties. Participants
could elect to purchase up to 50 percent of their participation in the form of
Conseco PRIDES. Purchases were financed by personal loans to the participants
from a bank. Such loans were 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, Conseco has agreed to provide loans to
the
86
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
participants for interest payments under the bank loans. A total of 22 directors
and officers of Conseco elected to participate in the plan and purchased all 4
million shares of Conseco common stock offered under the Plan. At December 31,
1996, the bank loans guaranteed by Conseco totaled $83.4 million and the loans
provided by Conseco totaled $2.2 million. The common stock that collateralizes
the loans had a fair value of $144.5 million on February 6, 1997. On February
18, 1997, the program was expanded, to permit the purchase of an additional 4
million shares.
In December 1996, the Company granted options to selected key managers to
purchase 1,100,000 shares at a price of $30.41 per share (the "Key Manager
Program"). These options contain lengthy vesting and non-compete requirements
designed to encourage continuity of employment with these individuals. The
options are fully vested only upon both: (i) eleven years of continuous
employment; and (ii) the earlier of: (a) two years after the termination of
employment during which time the individual is not in competition with the
Company; (b) the grantee reaching age 65; or (c) death or disability of the
grantee. In certain cases the options remain exercisable throughout the lifetime
of the grantee.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for such plans. Had compensation cost been determined based on
the fair value at the grant dates for awards in 1996 and 1995 under the plan
consistent with the method of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's pro
forma net income and pro forma earnings per share for the years ended December
31, 1996 and 1995, would have been as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
As reported Pro forma As reported Pro forma
----------- --------- ----------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C>
Net income................................. $252.4 $245.4 $220.4 $211.9
Primary earnings per share................. 1.91 1.86 2.35 2.25
Fully diluted earnings per share........... 1.77 1.72 2.11 2.03
</TABLE>
The fair value of each option grant used for purposes of estimating the
pro forma amounts summarized above is estimated on the date of grant using the
Black-Scholes option-price model with the following weighted-average assumptions
for 1996 and 1995:
<TABLE>
<CAPTION>
1996 Grants
---------------------------------------
Option Key
Traditional exercise Manager 1995
grants program Program Grants
------ ------- ------- ------
<S> <C> <C> <C> <C>
Risk-free interest rates............................... 6.1% 6.0% 6.8% 6.2%
Dividend yields........................................ .1% .1% .1% .2%
Volatility factors..................................... .28 .28 .28 .43
Weighted average expected life......................... 5 years 5 years 25 years 5 years
Weighted average fair value per share.................. $10.17 $5.54 $24.50 $5.53
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferrable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its employee stock options. Because SFAS 123 is
effective only for awards granted after January 1, 1995, the pro forma
disclosures provided above may not be representative of the effects on reported
net income for future years.
87
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
In conjunction with the LPG Merger, the ATC Merger, the THI Merger and the
BLH Merger, outstanding options to purchase common stock of LPG, ATC, THI or BLH
were converted into options that are immediately exercisable for the same
consideration payable to exercise such options immediately prior to the
respective mergers for the number of shares of Conseco common stock that the
holders would have been entitled to receive at the dates of the mergers had the
options been fully vested and exercised at that time. The fair value of these
options is not included in the pro forma net income summarized above but is
included in the cost to acquire the companies (see note 2). A summary of options
issued in connection with the mergers and related information is presented
below:
<TABLE>
<CAPTION>
Weighted
Total value average
at merger exercise price
Shares date per share
------ ---- ---------
(Dollars in millions, except
per share data)
<S> <C> <C> <C>
Options issued in connection with the:
LPG Merger............................................... 1,132,678 $ 7.7 $11.18
ATC Merger............................................... 2,048,982 26.9 16.87
THI Merger............................................... 643,994 6.5 14.90
BLH Merger............................................... 609,152 2.6 27.18
---------- ------
4,434,806 $43.7 16.54
========== =====
</TABLE>
A summary of the Company's stock option activity and related information
for the years ended December 31, 1996, 1995 and 1994, is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ---------------------- ---------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of year.... 25,486,864 $11.76 22,028,624 $11.43 26,957,136 $4.05
Granted in connection with:
Traditional grants................... 1,206,430 28.54 4,117,200 12.60 4,792,000 14.17
Option exercise program.............. 1,604,720 16.22 - 8,064,000 14.81
Key Manager Program.................. 1,100,000 30.41 - -
Mergers.............................. 4,434,806 16.54 - -
---------- ---------- -----------
Total granted.................. 8,345,956 20.04 4,117,200 12.60 12,856,000 14.58
---------- ---------- -----------
Exercised............................... (4,893,484) 4.75 (365,432) 3.06 (15,461,816) 1.09
Forfeited............................... (219,088) 11.62 (293,528) 9.98 (2,322,696) 12.04
---------- ---------- -----------
Outstanding at the end of the year...... 28,720,248 15.38 25,486,864 11.76 22,028,624 11.43
========== ========== ==========
Options exercisable at year-end......... 9,553,774 7,352,044 3,098,176
========== ========== ==========
Available for future grant.............. 2,932,561 8,398,800 12,490,000
========== ========== ==========
</TABLE>
88
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
---------------------------------------- ------------------------
Weighted Weighted Weighted
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding life (in years) price exercisable price
- --------------- ----------- --------------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ .72- $ .77...................... 716,840 .7 $ .73 716,840 $ .73
1.36- 1.71...................... 94,766 1.4 1.53 94,766 1.53
2.61- 2.81...................... 46,222 2.1 2.62 46,222 2.62
4.57- 6.34...................... 278,234 3.7 5.73 228,234 5.59
6.91- 10.28...................... 304,062 4.2 8.19 157,224 7.53
10.47- 13.49...................... 7,239,814 6.9 12.57 4,585,792 12.49
14.09- 14.81...................... 13,927,870 6.9 14.67 463,872 14.25
15.47- 19.81...................... 3,360,262 9.1 17.57 2,906,076 17.36
25.11- 30.41...................... 1,652,178 6.6 29.23 354,748 27.91
30.41 (Key Manager Program).......... 1,100,000 25.0 30.41 - -
---------- ---------
28,720,248 9,553,774
========== =========
</TABLE>
In addition to 25,680,392 shares of common stock reserved for issuance
under the employee stock option plans, 3,039,856 shares are reserved for
issuance related to the recent mergers, 3,186,782 shares of common stock are
reserved for issuance under stock bonus and deferred compensation plans and
900,000 shares are reserved for the warrants described below. The common stock
and additional paid-in capital account was reduced by $9.0 million at December
31, 1996, for the unearned portion of amounts granted under such plans.
In connection with the THI Merger, the outstanding warrants to purchase
shares of THI common stock were converted into warrants to purchase the same
number of shares of Conseco common stock that the holders would have been
entitled to receive if such warrants were exercised immediately prior to the THI
Merger. Such warrants may be exercised to buy 700,000 shares of Conseco common
stock for $13.8 million at anytime through September 29, 2005. The value of the
warrants on the THI Merger date of $3.8 million is included in the total cost to
acquire THI (see note 2).
11. OTHER OPERATING STATEMENT DATA:
Insurance policy income consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Direct premiums collected............................................................. $3,458.4 $3,172.9 $1,907.4
Reinsurance assumed................................................................... 65.8 6.1 5.1
Reinsurance ceded..................................................................... (313.8) (72.6) (33.4)
-------- -------- --------
Premiums collected, net of reinsurance...................................... 3,210.4 3,106.4 1,879.1
Change in unearned premiums........................................................... (14.6) 6.6 (3.9)
Less premiums on universal life and products
without mortality and morbidity risk which are
recorded as additions to insurance liabilities ................................... 1,811.5 1,757.4 634.6
--------- --------- --------
Premiums on products with mortality or morbidity risk,
recorded as insurance policy income...................................... 1,384.3 1,355.6 1,240.6
Fees and surrender charges............................................................ 239.5 108.1 43.0
Amortization of deferred policy fees.................................................. 30.4 1.3 2.0
--------- --------- --------
Insurance policy income..................................................... $1,654.2 $1,465.0 $1,285.6
======== ======== ========
</TABLE>
89
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The five states with the largest shares of premiums collected in 1996
were Illinois (10 percent), Florida (9.1 percent), California (8.7 percent),
Texas (7.6 percent) and Michigan (6.6 percent). No other state accounted for
more than 5 percent of total collected premiums.
Other operating costs and expenses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Commission expense.................................................................... $ 72.5 $ 47.7 $ 27.5
Other................................................................................. 231.5 224.4 186.6
------ ------ ------
Other operating costs and expenses........................................... $304.0 $272.1 $214.1
====== ====== ======
</TABLE>
Conseco considers anticipated returns from the investment of policyholder
balances in determining the amortization of the cost of policies purchased and
cost of policies produced. Sales of fixed maturity investments change the
incidence of profits on such policies because gains (losses) are recognized
currently and, if the sale proceeds are reinvested at the current market yields,
the expected future yields on the investment of policyholder balances are
reduced (increased). Accordingly, amortization of the cost of policies purchased
was increased (decreased) by $31.1 million, $106.4 million and $(3.9) million in
the years ended December 31, 1996, 1995 and 1994, respectively, and amortization
of the cost of policies produced was increased (decreased) by $4.9 million,
$20.2 million and $(1.4) million in the years ended December 31, 1996, 1995 and
1994, respectively.
The changes in the cost of policies purchased were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $1,030.7 $1,021.6 $ 623.7
Consolidation of CCP effective January 1, 1995.................................... - 345.2 -
Amortization related to operations:
Cash flow realized............................................................. (285.1) (252.0) (184.8)
Interest added................................................................. 127.6 133.2 108.6
Amortization related to sales of investments...................................... (31.1) (106.4) 3.9
Amounts related to fair value adjustment
of actively managed fixed maturities........................................... 141.6 (395.6) 94.6
Transferred to cost of policies produced related to
exchanged health policies...................................................... (13.4) (13.5) (20.2)
Amounts related to BLH Merger and share repurchases............................... 86.6 179.9 -
Amounts acquired in LPG Merger.................................................... 507.9 - -
Amounts acquired in ATC Merger.................................................... 272.9 - -
Amounts acquired in THI Merger.................................................... 94.4 - -
Amounts related to CCP Merger..................................................... - 118.3 -
Amounts related to acquisitions of ALH............................................ 80.2 - 454.3
Amounts related to deconsolidation of WNC......................................... - - (61.9)
Reinsurance and other ............................................................ 2.7 - 3.4
-------- -------- --------
Balance, end of year.................................................................. $2,015.0 $1,030.7 $1,021.6
======== ======== ========
</TABLE>
Based on current conditions and assumptions as to future events on all
policies in force, the Company expects to amortize approximately 11 percent of
the December 31, 1996, balance of cost of policies purchased in 1997, 11 percent
in 1998, 10 percent in 1999, 8 percent in 2000, and 8 percent in 2001. The
discount rates used to determine the amortization of the cost of policies
purchased prior to November 19, 1992, ranged from 15 percent to 20 percent
during the three-year period ended December 31, 1996. The discount rates used to
determine the amortization of the cost of policies purchased ranged from 4
percent to 8 percent and averaged 5.5 percent.
90
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
The changes in the cost of policies produced were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Balance, beginning of year............................................................ $391.0 $300.7 $238.6
Consolidation of CCP, effective January 1, 1995................................... - 111.9 -
Additions......................................................................... 331.5 302.9 164.0
Amortization related to operations................................................ (72.9) (62.0) (46.1)
Amortization of deferred revenue.................................................. 1.4 1.3 1.6
Amortization related to sales of investments...................................... (4.9) (20.2) 1.4
Amounts related to fair value adjustment of
actively managed fixed maturities.............................................. 45.4 (74.9) 18.6
Transferred from cost of policies purchased related to
exchanged health policies, net of related reserves............................. 4.0 1.6 7.5
Amounts related to BLH Merger and share repurchases............................... (54.7) (107.5) -
Amounts related to ALH Stock Purchase............................................. (96.5) - -
Amounts related to CCP Merger..................................................... - (62.8) -
Amounts related to deconsolidation of WNC......................................... - - (84.9)
------ ------- ------
Balance, end of year.................................................................. $544.3 $ 391.0 $300.7
====== ======= ======
</TABLE>
12. CONSOLIDATED STATEMENT OF CASH FLOWS:
The following non-cash items were not reflected in the consolidated
statement of cash flows in 1996: (i) the effects of the LPG Merger, the ATC
Merger, the THI Merger, the ALH Stock Purchase and the BLH Merger and share
repurchases summarized in note 2; (ii) the conversion of Series D preferred
stock of Conseco with a value of $283.2 million into 16.9 million shares of
Conseco common stock; (iii) the issuance of Conseco common stock to employee
benefit plans of $12.2 million; and (iv) the tax benefit of $15.9 million
related to the issuance of Conseco common stock under employee benefit plans;
and (v) the acquisition of $25.0 million par value of Conseco's 8.125% senior
notes and $6.5 million par value of preferred stock of ALH that were held by LPG
prior to the LPG Merger. The following non-cash items were not reflected in
1995: (i) the redemption of convertible subordinated debentures of a subsidiary
with a principal amount of $9.2 million using segregated cash; (ii) the issuance
of Conseco common stock to employee benefit plans of $4.2 million; and (iii) the
tax benefit of $.4 million related to the issuance of Conseco common stock under
employee benefit plans. The following non-cash items were not reflected in 1994:
(i) recapture of insurance liabilities and invested assets totaling $390.2
million and $371.0 million, respectively; (ii) redemption of convertible
subordinated debentures of a subsidiary with a principal amount of $44.8 million
using segregated cash; (iii) the issuance of Conseco common stock to employee
benefit plans of $2.4 million; and (iv) the tax benefit of $69.2 million related
to issuance of Conseco common stock under employee benefit plans.
Cash flows from operations included interest paid on debt of $111.3
million, $112.0 million and $54.3 million in 1996, 1995 and 1994, respectively.
Income taxes paid were $122.5 million, $90.3 million and $99.8 million in 1996,
1995 and 1994, respectively.
91
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
13. STATUTORY INFORMATION:
Statutory accounting practices prescribed or permitted for the Company's
insurance subsidiaries by regulatory authorities differ from GAAP. The Company's
life insurance subsidiaries reported the following amounts to regulatory
agencies, after appropriate eliminations of intercompany accounts among such
subsidiaries:
<TABLE>
<CAPTION>
1996 1995
---- ----
(Dollars in millions)
<S> <C> <C>
Statutory capital and surplus.................................................................... $1,170.8 $ 832.2
Asset valuation reserve.......................................................................... 232.9 124.1
Interest maintenance reserve..................................................................... 272.6 247.4
Portion of surplus debenture carried as a liability ............................................. 98.8 95.0
-------- --------
Total...................................................................................... $1,775.1 $1,298.7
======== ========
</TABLE>
Combined statutory net income of the Company's life insurance
subsidiaries was $215.0 million, $183.8 million and $112.5 million in 1996, 1995
and 1994, respectively, after appropriate eliminations of intercompany amounts
among such subsidiaries.
The statutory capital and surplus of the insurance subsidiaries include
surplus debentures of the parent holding companies totaling $855.8 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.
Certain subsidiaries follow permitted accounting practices, which have
been approved by the insurance department of the subsidiary's state of domicile,
but have not been specifically prescribed in state laws, regulations, general
administration rules and various NAIC publications. Such permitted accounting
practices do not affect statutory surplus.
Statutory accounting practices require the asset valuation reserve
("AVR") and the interest maintenance reserve ("IMR") be reported as liabilities.
The purpose of these reserves is to stabilize statutory surplus against
fluctuations in the market value of investments. The IMR captures all realized
investment gains and losses, net of income tax, on debt instruments resulting
from changes in interest rates and provides for subsequent amortization of such
amounts into statutory net income on a basis reflecting the remaining lives of
the assets sold. The AVR captures all realized, net of income tax, and
unrealized investment gains and losses related to equity investments and to
changes in creditworthiness of debt instruments. AVR is also adjusted each year
based on a formula related to the quality and loss experience of the Company's
investment portfolio.
92
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Included in statutory capital and surplus shown above are the following
investments in affiliates, all of which are eliminated in the consolidated
financial statements prepared in accordance with GAAP:
<TABLE>
<CAPTION>
1996 1995
------------------- --------------------
Admitted Admitted
asset asset
Cost value Cost value
---- ----- ---- -----
(Dollars in millions)
<S> <C> <C> <C> <C>
Common stock of Conseco purchased in open market transactions
(1996 includes 19,510,911 shares and 1995 includes
18,588,952 shares of Conseco and 2,314,737 shares of BLH
which were converted into Conseco shares in 1996 in
the BLH Merger)..................................................... $ 89.6 $ 80.9 $ 89.6 $ 58.2
Notes payable of Conseco and its non-life subsidiaries................. 261.3 245.2 68.0 48.0
Common stock of ALH (614,057 shares in 1996 and 463,649
shares in 1995) .................................................... 5.8 9.8 2.4 6.3
Preferred stock of Conseco............................................. 900.0 - 900.0 -
Investment in ALH 1994 Series PIK Preferred Stock...................... 62.8 62.8 43.9 43.9
Preferred stock of American Life Holding Company....................... 6.5 6.5 - -
</TABLE>
The following table compares the consolidated pretax income determined on a
statutory accounting basis with such income reported herein in accordance with
GAAP:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(Dollars in millions)
<S> <C> <C> <C>
Life insurance subsidiaries:
Pretax income as reported on a statutory
accounting basis before deduction of
expenses paid to affiliates and
transfers to and from and amortization
of the IMR.......................................................................... $ 431.0 $ 463.6 $229.2
GAAP adjustments:
Change in difference in carrying values of investments.............................. 53.6 189.3 31.7
Eliminate financial reinsurance effects............................................. - - 4.4
Changes in cost of policies purchased............................................... (185.8) (225.1) (74.2)
Changes in cost of policies produced................................................ 258.0 224.4 123.3
Changes in insurance liabilities.................................................... 5.0 (46.4) (27.1)
Reinsurance recapture............................................................... - - 19.2
Other adjustments, net.............................................................. 2.4 - 13.5
------- ------- ------
GAAP pretax income of life insurance subsidiaries................................ 564.2 605.8 320.0
Non-life companies:
Interest expense...................................................................... (108.1) (119.4) (59.3)
Equity in earnings of CCP ............................................................ - - 24.7
Equity in earnings of WNC............................................................. - - 40.2
Restructuring income.................................................................. 30.4 15.2 80.8
Loss on terminated acquisition........................................................ - - (35.8)
All other income and expense, net
(excluding amounts received from affiliates)........................................ 7.1 (83.1) (46.2)
------- ------- ------
GAAP consolidated pretax income.................................................. $ 493.6 $ 418.5 $324.4
======= ======= ======
</TABLE>
93
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
State insurance laws generally restrict the ability of insurance companies
to pay dividends or make other distributions. Net assets of the Company's wholly
owned life insurance subsidiaries, determined in accordance with GAAP,
aggregated approximately $5.1 billion at December 31, 1996, of which
approximately $151.0 million is available for distribution to Conseco in 1997
without the permission of state regulatory authorities.
Most states have adopted risk-based capital ("RBC") rules to evaluate the
adequacy of statutory capital and surplus in relation to investment and
insurance risks. The RBC formula is designed as an early warning tool to help
state regulators identify possible weakly capitalized companies for the purpose
of initiating regulatory action. At December 31, 1996, the ratios of total
adjusted capital to RBC, as defined by the rules, for the primary insurance
subsidiaries of Conseco were greater than twice the level at which regulatory
attention is triggered.
14. BUSINESS SEGMENT AND DISTRIBUTION CHANNELS:
Conseco conducts and manages its business through four segments, reflecting
the Company's major lines of insurance business and target markets: (i)
annuities; (ii) supplemental health; (iii) life insurance; and (iv) other. In
addition, from time to time Conseco's earnings also include restructuring income
representing the gains realized upon the sale of: (i) portions of acquired
companies; and (ii) certain special capital investments. Summarized data for the
Company's business segments follow (dollars in millions):
94
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
<TABLE>
<CAPTION>
Income before
Amortization income taxes,
of cost of minority
policies produced interest and
Premiums Total and cost of policies extraordinary Total
collected revenues purchased (a) charge assets
--------- -------- ------------- ------ ------
<S> <C> <C> <C> <C> <C>
1996
Annuities................................ $1,542.4 $1,047.4 $ 95.1 $ 254.3 $14,201.1
Supplemental health...................... 825.1 873.3 81.2 136.9 4,159.3
Life insurance........................... 453.7 676.9 41.5 129.3 6,120.3
Other ................................... 389.2 439.3 23.0 55.1 647.5
Interest and other corporate expense..... - - - (112.4) 484.5
Restructuring activities................. - 30.4 - 30.4 -
-------- -------- ------ --------- ---------
Total.................................. $3,210.4 $3,067.3 $240.8 $ 493.6 $25,612.7
======== ======== ====== ========= =========
1995
Annuities................................ $1,659.5 $1,135.1 $169.7 $ 316.1 $12,092.9
Supplemental health...................... 755.8 827.4 78.3 97.2 1,743.9
Life insurance........................... 276.2 436.5 38.7 77.1 2,728.1
Other ................................... 414.9 441.1 20.8 53.4 478.3
Interest and other corporate expense..... - - - (140.5) 254.3
Restructuring activities................. - 15.2 - 15.2 -
-------- -------- ------ --------- ---------
Total.................................. $3,106.4 $2,855.3 $307.5 $ 418.5 $17,297.5
======== ======== ====== ========= =========
1994
Annuities................................ $ 571.8 $ 243.7 $ 5.7 $ 59.8 $ 6,948.8
Supplemental health...................... 723.7 775.9 77.4 107.8 1,450.1
Life insurance........................... 183.3 242.8 15.4 39.1 1,722.4
Other ................................... 400.3 453.9 18.5 95.8 406.1
Interest and other corporate expense..... - - - (88.0) 284.5
Equity in earnings of CCP and WNC........ - 64.9 - 64.9 -
Restructuring activities................. - 80.8 - 45.0 -
-------- -------- ------ -------- ---------
Total.................................. $1,879.1 $1,862.0 $117.0 $ 324.4 $10,811.9
======== ======== ====== ======= =========
<FN>
(a) Includes additional amortization related to gains on sales of investments.
</FN>
</TABLE>
95
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
15. LPG, ALH AND BLH FINANCIAL INFORMATION:
After the LPG Merger, the ALH Stock Purchase and the BLH Merger, LPG, ALH
and BLH ceased filing periodic reports with the Securities and Exchange
Commission. At December 31, 1996, the following notes remain outstanding: (i)
$23.5 million of LPG's senior subordinated notes; (ii) $13.0 million of ALH
6.25% convertible subordinated debentures; and (iii)) $3.2 million of BLH's
subordinated notes. These notes are fully guaranteed by Conseco. Because the
notes remain outstanding, summarized financial information of LPG, ALH and BLH
is presented as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
(predecessor basis (a))
LPG
- ---
(Dollars in millions)
<S> <C> <C>
Financial position:
Total assets........................................................................ $5,584.2 $4,980.9
Total investments................................................................. 3,962.7 3,977.9
Cost of policies purchased........................................................ 444.1 306.0
Cost of policies produced......................................................... 36.7 238.7
Total liabilities................................................................... 4,793.3 4,580.4
Insurance liabilities............................................................. 4,574.6 4,146.9
Notes payable..................................................................... 101.2 246.1
Common shareholders' equity......................................................... 790.9 400.5
</TABLE>
<TABLE>
<CAPTION>
Predecessor basis (a)
-------------------------------------
Years ended
Six months ended December 31,
---------------------------------------- ------------------
December 31, 1996 June 30, 1996 1995 1994
----------------- ------------- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Results of operations:
Total revenues............................. $344.4 $306.9 $576.1 $428.2
Insurance policy income.................. 182.2 155.7 280.1 217.9
Net investment income.................... 158.5 146.2 277.1 225.4
Net investment gains (losses)............ 1.8 2.3 15.8 (19.7)
Total benefits and expenses................ 276.3 279.4 592.8 369.7
Insurance policy benefits and change in
future policy benefits............... 109.4 69.5 153.3 110.9
Interest expense on annuities and financial
products............................. 75.3 88.6 165.4 136.9
Interest expense on notes payable........ 4.1 11.8 27.9 20.7
Income (loss) before income taxes and
extraordinary charge..................... 68.1 27.5 (16.7) 58.5
Income tax expense (benefit)............... 27.3 11.6 (3.3) 21.3
Income (loss) before extraordinary charge.. 40.8 15.9 (13.4) 37.2
Extraordinary charge on extinguishment of
debt, net of tax......................... - - - 2.6
Net income (loss).......................... 40.8 15.9 (13.4) 34.6
<FN>
(a) Amounts for periods prior to June 30, 1996, reflect the accounting
basis of LPG prior to the LPG Merger. Because of the purchase
accounting adjustments made as a result of the LPG Merger, the
financial data for periods after June 30, 1996, may not be
comparable with the prior periods.
</FN>
</TABLE>
96
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
---- ----
(prior basis (a))
ALH
- ---
(Dollars in millions)
<S> <C> <C>
Financial position:
Total assets......................................................................... $6,424.6 $6,208.0
Total investments................................................................. 5,440.7 5,369.4
Cost of policies purchased........................................................ 331.9 250.1
Cost of policies produced......................................................... 68.9 77.6
Total liabilities.................................................................... 5,812.3 5,702.8
Insurance liabilities............................................................. 5,342.3 5,148.7
Notes payable..................................................................... 171.1 282.5
Minority interest, primarily redeemable stock of a subsidiary........................ 104.2 99.6
Shareholders' equity................................................................. 508.1 405.6
</TABLE>
<TABLE>
<CAPTION>
Predecessor
Prior basis (a) basis (a)
----------------------------------------- ---------
Three months Nine months Three months Nine
ended ended Year ended ended ended
December 31, September 30, December 31, December 31, September 30,
1996 1996 1995 1994 1994
---- ---- ---- ---- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Results of operations:
Total revenues................................ $124.8 $353.2 $629.3 $108.9 $278.5
Insurance policy income..................... 11.2 33.0 58.1 13.6 40.2
Net investment income....................... 102.7 306.4 415.6 92.8 250.8
Net investment gains (losses)............... 10.4 9.9 149.3 .4 (16.8)
Total benefits and expenses................... 100.2 292.0 495.5 96.4 259.9
Insurance policy benefits and change in
future policy benefits.................. 6.2 17.9 33.1 9.4 26.1
Interest expense on annuities and
financial products...................... 62.0 184.2 258.8 61.3 158.8
Interest expense on notes payable........... 4.2 21.5 33.8 8.8 6.7
Income before income taxes, minority interest
and extraordinary charge................... 24.5 61.2 133.8 12.5 18.6
Income tax expense............................ 10.0 23.6 49.9 5.1 6.7
Income before minority interest and extraordinary
charge...................................... 14.5 37.6 83.9 7.4 11.9
Minority interest - primarily dividends on
preferred stock of a subsidiary............. 1.7 6.6 8.8 2.2 6.7
Income before extraordinary charge............ 12.8 31.0 75.1 5.2 5.2
Extraordinary charge on extinguishment of
debt, net of tax............................ - .8 4.0 - -
Net income.................................... 12.8 30.2 71.1 5.2 5.2
Preferred stock dividends..................... 2.4 6.3 7.7 1.9 1.1
Net income applicable to common stock......... 10.4 23.9 63.4 3.3 4.1
<FN>
(a) Amounts for the nine months ended September 30, 1996, the year ended
December 31, 1995 and the three months ended December 31, 1994, reflect the
accounting basis (the "prior basis") of ALH prior to ALH adopting a new
basis of accounting concurrent with the ALH Stock Purchase. Amounts for the
nine months ended September 30, 1994, are the historical financial data of
ALH prior to ALH's acquisition by Partnership II (the "predecessor basis").
Because of the accounting adjustments made as a result of the changes in
bases described above, the financial data for periods reflecting different
bases, may not be comparable with the other periods.
</FN>
</TABLE>
97
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
(prior basis (a))
BLH (Dollars in millions)
<S> <C> <C>
Financial position:
Total assets........................................................................ $5,128.3 $4,785.2
Total investments................................................................. 3,500.6 3,514.9
Cost of policies purchased........................................................ 564.8 515.6
Cost of policies produced......................................................... 299.6 244.2
Total liabilities................................................................... 4,008.7 3,753.3
Insurance liabilities............................................................. 3,446.6 3,265.7
Notes payable..................................................................... 3.4 301.5
Notes payable to Conseco.......................................................... 395.0 -
Common shareholder's equity......................................................... 1,119.6 1,031.9
</TABLE>
<TABLE>
<CAPTION>
Prior basis (a)
------------------------------
Year ended Six months ended Year ended
December 31, ----------------------------------- December 31,
1996 December 31, 1995 June 30, 1995 1994
---- ----------------- ------------- ----
(Dollars in millions)
<S> <C> <C> <C> <C>
Results of operations:
Total revenues.............................. $1,570.8 $760.3 $766.9 $1,437.9
Insurance policy income................... 1,282.5 626.3 620.9 1,214.0
Net investment income..................... 269.3 127.2 127.9 222.1
Net investment gains (losses)............. 8.0 13.6 15.7 (6.8)
Total benefits and expenses................. 1,345.1 653.1 673.0 1,229.5
Insurance policy benefits and change in
future policy benefits.................. 936.5 455.5 477.8 880.3
Interest expense on annuities and
financial products...................... 82.1 39.7 38.0 59.7
Interest expense on notes payable......... 25.4 14.9 16.1 31.6
Income before income taxes and
extraordinary charge...................... 225.7 107.2 93.9 208.4
Income tax expense.......................... 82.8 39.1 33.7 74.8
Income before extraordinary charge.......... 142.9 68.1 60.2 133.6
Extraordinary charge on extinguishment of
debt, net of tax.......................... 12.2 1.6 - -
Net income.................................. 130.7 66.5 60.2 133.6
<FN>
(a) Amounts for the six months ended June 30, 1995, and the year ended
December 31, 1994, reflect the accounting basis (the "prior basis") of
BLH prior to BLH adopting a new basis of accounting concurrent with
Conseco's ownership in BLH exceeding 80 percent. Amounts for the year
ended December 31, 1996, and the six months ended December 31, 1995,
reflect the adoption of a new basis of accounting concurrent with
Conseco's ownership in BLH exceeding 80 percent. Because of the
accounting adjustments made as a result of the changes in bases described
above, the financial data for periods after June 30, 1995, may not be
comparable with the prior periods.
</FN>
</TABLE>
98
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
16. QUARTERLY FINANCIAL DATA (UNAUDITED):
We compute earnings per common share for each quarter independently of
earnings per share for the year. The sum of the quarterly earnings per share may
not equal the earnings per share for the year because of: (i) transactions
affecting the weighted average number of shares outstanding in each quarter; and
(ii) the uneven distribution of earnings during the year.
<TABLE>
<CAPTION>
1996
-----------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Insurance policy income..................................................... $369.8 $371.6 $451.8 $461.0
Revenues.................................................................... 691.8 672.5 834.3 866.8
Income before income taxes, minority interest
and extraordinary charge ............................................... 120.2 101.3 131.5 140.6
Net income.................................................................. 46.3 50.1 78.1 77.9
Net income per common share and common equivalent share:
Primary:
Income before extraordinary charge .................................. $.60 $.43 $.55 $.54
Extraordinary charge................................................. .18 - .01 .05
----- ---- ---- -----
Net income........................................................ $.42 $.43 $.54 $.49
==== ==== ==== ====
Fully diluted:
Income before extraordinary charge .................................. $.54 $.41 $.50 $.54
Extraordinary charge................................................. .15 - .01 .05
----- ---- ----- ----
Net income........................................................ $.39 $.41 $.49 $.49
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
-------- -------- -------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C>
Insurance policy income..................................................... $367.6 $362.6 $373.1 $361.7
Revenues.................................................................... 652.3 737.1 676.7 789.2
Income before income taxes, minority interest
and extraordinary charge ............................................... 85.8 116.5 83.6 132.6
Net income.................................................................. 24.4 99.9 43.5 52.6
Net income per common share and common equivalent share:
Primary:
Income before extraordinary charge................................... $.23 $1.12 $.46 $.58
Extraordinary charge ............................................... - - - .03
---- ----- ---- ----
Net income........................................................ $.23 $1.12 $.46 $.55
==== ===== ==== ====
Fully diluted:
Income before extraordinary charge................................... $.23 $.97 $.42 $.52
Extraordinary charge ................................................ - - - .02
---- ---- ---- -----
Net income........................................................ $.23 $.97 $.42 $.50
==== ==== ==== ====
</TABLE>
99
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------
Our quarterly results of operations are based on numerous estimates,
principally related to policy reserves, amortization of cost of policies
purchased, amortization of cost of policies produced and income taxes. We revise
all such estimates each quarter and we ultimately adjust them to year-end
amounts. When we determine revisions are necessary, we report them as part of
operations of the current quarter.
17. SUBSEQUENT EVENTS (UNAUDITED):
Completed Acquisition
On March 4, 1997, Conseco acquired (the "CAF Merger") Capitol American
Financial Corporation ("CAF"). CAF was merged with and became a wholly owned
subsidiary of Conseco. In the CAF Merger, each of the approximately 17.7 million
shares of CAF common stock and common stock equivalents was converted into the
right to receive $30.75 in cash plus 0.1647 of a share of Conseco common stock.
Conseco paid $545 million in cash and issued 2.9 million shares of Conseco
common stock with a value of approximately $115.7 million to acquire the CAF
common stock. In addition, Conseco assumed a note payable of CAF of $31.0
million. 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, which accounted for more than
97 percent of CAF's earned premiums over the last five years. 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. CAF had total assets of
$1.1 billion at December 31, 1996.
Pending Acquisition
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 will 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, .89280
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 March 14, 1997), Conseco
will issue 8.7 million shares of Conseco common stock with a value of
approximately $352.4 million to acquire the PFS common stock. In addition,
Conseco will assume notes payable of PFS of $27.8 million and the 6 1/2%
Convertible Subordinated Notes due 2003 of PFS, which will be convertible into
an assumed 3.0 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 $794.2 million
in 1996.
100
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
The information required by Part III is hereby incorporated by reference
from the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A within 120 days after December 31, 1996, except that
the information required by Item 10 regarding Executive Officers is included
herein under a separate caption at the end of Part I.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. See Index to Financial Statements on page 44
for a list of financial statements included in this Report.
2. Financial Statement Schedules. The following financial statement
schedules are included as part of this Report immediately following
the signature page:
Schedule II -- Condensed Financial Information of Registrant
(Parent Company)
Schedule III -- Supplementary Insurance Information
Schedule IV -- Reinsurance
All other schedules are omitted, either because they are not applicable,
not required, or because the information they contain is included elsewhere in
the consolidated financial statements or notes.
3. Exhibits. See Exhibit Index immediately preceding the Exhibits
filed with this report
(b) Reports on Form 8-K.
A report on Form 8-K dated November 15, 1996, was filed with the
Commission to report under Item 5, updated unaudited pro forma
consolidated financial statements of Conseco.
A report on Form 8-K dated November 19, 1996, was filed with the
Commission to report under Item 5, the closing of the public offering
of 11,000,000, 9.16% Trust Originated Preferred Securities.
A report on Form 8-K dated November 27, 1996, was filed with the
Commission to report under Item 5, the closing of the offering by
Conseco Financing Trust II of 325,000, 8.70% Capital Pass-through
Securities.
A report on Form 8-K dated December 15, 1996, was filed with the
Commission to report under Item 5, the signing of a merger agreement
with Pioneer Financial Services, Inc.
A report on Form 8-K dated December 17, 1996, was filed with the
Commission to report under Item 2, the acquisition of American
Travellers Corporation.
A report on Form 8-K dated December 23, 1996, was filed with the
Commission to report under Item 2, the acquisition of Transport
Holdings Inc.
A report on Form 8-K dated December 31,1996, was filed with the
Commission to report under Item 5, the acquisition of Bankers Life
Holding Corporation.
101
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, this 25th day of March, 1997.
CONSECO, INC.
By: /s/ STEPHEN C. HILBERT
-----------------------------
Stephen C. Hilbert, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title (Capacity) Date
--------- ---------------- ----
<S> <C> <C>
/s/ STEPHEN C. HILBERT Chairman of the Board, March 25, 1997
- ---------------------- President and Director
Stephen C. Hilbert (Principal Executive Officer)
/s/ ROLLIN M. DICK Executive Vice President and Director March 25, 1997
- ------------------- (Principal Financial Officer and
Rollin M. Dick Principal Accounting Officer)
/s/ NGAIRE CUNEO Director March 25, 1997
- --------------------
Ngaire Cuneo
/s/ DAVID R. DECATUR Director March 25, 1997
- --------------------
David R. Decatur
/s/ JOHN M. MUTZ Director March 25, 1997
- ----------------
John M. Mutz
/s/ DONALD F. GONGAWARE Director March 25, 1997
- -----------------------
Donald F. Gongaware
/s/ M. PHIL HATHAWAY Director March 25, 1997
- --------------------
M. Phil Hathaway
/s/ DENNIS E. MURRAY, SR. Director March 25, 1997
- -------------------------
Dennis E. Murray, Sr.
/s/ JAMES D. MASSEY Director March 25, 1997
- --------------------
James D. Massey
</TABLE>
102
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Shareholders and
Board of Directors
Conseco, Inc.
Our report on the consolidated financial statements of Conseco, Inc. and
Subsidiaries is included on page 46 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 101 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 14, 1997
103
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Balance Sheet
as of December 31, 1996 and 1995
(Dollars in millions)
ASSETS
1996 1995
---- ----
<S> <C> <C>
Short-term investments......................................................................... $ 74.9 $ 4.6
Actively managed fixed maturities ............................................................. 2.1 -
Equity securities.............................................................................. 7.9 .5
Other invested assets.......................................................................... 55.3 10.7
Investment in wholly owned subsidiaries (eliminated in consolidation).......................... 3,811.9 764.6
Investment in Bankers Life Holding Corporation (eliminated in consolidation)................... - 898.5
Investment in American Life Holdings, Inc. (eliminated in consolidation)....................... - 85.5
Receivable from subsidiaries (eliminated in consolidation)..................................... 871.5 174.8
Income taxes................................................................................... 155.7 166.8
Other assets................................................................................... 188.6 71.7
-------- --------
Total assets......................................................................... $5,167.9 $2,177.7
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable.............................................................................. $1,094.9 $ 871.4
Notes payable to subsidiaries (eliminated in consolidation)................................ 101.6 63.4
Other liabilities due subsidiaries (eliminated in consolidation)........................... 93.5 45.5
Other liabilities.......................................................................... 192.6 85.7
-------- --------
Total liabilities.................................................................... 1,482.6 1,066.0
-------- --------
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts............. 600.0 -
Shareholders' equity:
Preferred stock............................................................................ 267.1 283.5
Common stock and additional paid-in capital (no par value, 500,000,000
shares authorized, shares issued and outstanding: 1996 - 167,128,228;
1995 - 81,031,828)...................................................................... 2,029.6 157.2
Unrealized appreciation (depreciation) of securities:
Fixed maturity securities (net of applicable deferred income taxes:
1996 - $21.5; 1995 - $66.8).......................................................... 39.8 112.6
Other investments (net of applicable deferred income taxes: 1996 - $(.5);
1995 - $.1).......................................................................... (.9) .1
Retained earnings.......................................................................... 749.7 558.3
-------- --------
Total shareholders' equity........................................................... 3,085.3 1,111.7
-------- --------
Total liabilities and shareholders' equity........................................... $5,167.9 $2,177.7
======== ========
</TABLE>
The accompanying note is an integral
part of the condensed financial
information.
104
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income................................................................. $ 5.5 $ 8.5 $ 2.7
Dividends from subsidiaries (eliminated in consolidation)............................. 146.9 106.5 39.6
Equity in earnings of unconsolidated subsidiaries..................................... - - 64.9
Fee and interest income from subsidiaries (eliminated in consolidation)............... 30.9 12.9 4.3
Restructuring income.................................................................. 30.1 20.6 80.8
Other income (losses)................................................................. 1.1 (6.4) 1.4
------- ------- -------
Total revenues................................................................ 214.5 142.1 193.7
------- ------- -------
Expenses:
Interest expense on notes payable..................................................... 69.2 42.6 20.6
Interest expense to subsidiaries (eliminated in consolidation)........................ 7.2 7.5 7.1
Operating costs and expenses.......................................................... 10.2 27.8 29.3
Expenses incurred in conjunction with terminated merger............................... - - 35.8
------- ------- -------
Total expenses................................................................ 86.6 77.9 92.8
------- ------- -------
Income before income taxes, equity in undistributed earnings of
subsidiaries, distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts
and extraordinary charge..................................................... 127.9 64.2 100.9
Income tax expense (benefit).............................................................. 1.2 (93.2) 8.5
------- ------- -------
Income before equity in undistributed earnings
of subsidiaries, distributions on Company-obligated
mandatorily redeemable preferred securities of subsidiary trusts
and extraordinary charge..................................................... 126.7 157.4 92.4
Equity in undistributed earnings of subsidiaries (eliminated in consolidation)............ 155.8 65.1 62.0
------- ------- -------
Income before distributions on Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts and extraordinary charge........ 282.5 222.5 154.4
Company-obligated mandatorily redeemable preferred securities of subsidiary trusts........ 3.6 - -
------- ------- -------
Income before extraordinary charge............................................ 278.9 222.5 154.4
Extraordinary charge on extinguishment of debt, net of tax................................ 26.5 2.1 4.0
------- ------- -------
Net income.................................................................... 252.4 220.4 150.4
Less preferred stock dividends............................................................ 27.4 18.4 18.6
------- ------- -------
Earnings applicable to common stock........................................... $225.0 $202.0 $131.8
====== ====== ======
</TABLE>
The accompanying note is an
integral part of the condensed
financial information.
105
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
Condensed Financial Information of Registrant (Parent Company)
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................................... $ 252.4 $ 220.4 $ 150.4
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of consolidated subsidiaries...................... (155.8) (65.1) (62.0)
Equity in undistributed earnings of equity investments ............................ - - (61.0)
Restructuring income............................................................... (30.1) (20.6) (80.8)
Income taxes ...................................................................... (3.2) (101.3) 24.5
Extraordinary charge on extinguishment of debt..................................... 36.9 3.7 5.0
Investment related expense......................................................... - - 35.8
Other.............................................................................. (15.9) 10.8 15.3
-------- ------- -------
Net cash provided by operating activities....................................... 84.3 47.9 27.2
-------- ------- -------
Cash flows from investing activities:
Sales and maturities of investments...................................................... 45.0 125.6 22.9
Investments in consolidated subsidiaries................................................. (226.1) (556.9) -
Payment to affiliate..................................................................... - - (58.8)
Purchases of investments................................................................. (66.0) (70.8) (51.6)
Investment in Conseco Capital Partners II, L.P........................................... - (7.1) (17.0)
Expenses incurred in conjunction with terminated merger.................................. - (5.5) (30.3)
Cash held by subsidiaries prior to acquisition........................................... 38.9 17.0 -
Payments from subsidiaries............................................................... 36.5 - -
Proceeds from sale of shares of Western National
Corporation and related transactions.................................................. - - 811.7
-------- ------- -------
Net cash provided (used) by investing activities................................. (171.7) (497.7) 676.9
-------- ------- -------
Cash flows from financing activities:
Issuance of equity securities, net....................................................... 20.6 1.8 3.2
Issuance of convertible preferred stock.................................................. 257.7 - -
Issuance of Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts.................................................................. 587.7 - -
Issuance of notes payable, net........................................................... 856.0 827.2 158.0
Payments on notes payable................................................................ (1,467.2) (330.0) (378.4)
Payments to repurchase equity securities of Conseco...................................... (21.5) (92.4) (357.6)
Dividends paid .......................................................................... (34.3) (24.6) (31.3)
Dividends on stock held by subsidiaries.................................................. (38.1) (38.7) (4.6)
Payments to retire preferred stock....................................................... (.3) - -
Distributions paid on Company-obligated mandatorily redeemable preferred securities
of subsidiary trusts.................................................................. (2.9) - -
-------- -------- -------
Net cash provided (used) by financing activities................................. 157.7 343.3 (610.7)
-------- -------- -------
Net increase (decrease) in short-term investments................................ 70.3 (106.5) 93.4
Short term investments, beginning of year................................................ 4.6 111.1 17.7
-------- -------- -------
Short term investments, end of year...................................................... $ 74.9 $ 4.6 $ 111.1
======== ======== =======
</TABLE>
The accompanying note is an
integral part of the condensed financial
information.
106
<PAGE>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE II
Note to Condensed Financial Information
Basis of Presentation
The condensed financial information should be read in conjunction with
the consolidated financial statements of Conseco, Inc. The condensed financial
information includes the accounts and activity of the Parent Company and its
wholly-owned non-insurance subsidiaries which act as the holding companies for
the Company's life insurance subsidiaries.
107
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE III
Supplementary Insurance Information
(Dollars in millions)
Amortization
of
Cost of policies Insurance cost of policies
produced and Insurance Net policy benefits produced and Other
cost of policies Insurance policy investment and cost of policies operating
Segment purchased liabilities income income expenses(1) purchased(2) expenses(3)
- ------- --------- ----------- ------ ------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1996
Annuity operations............ $ 858.6 $ 12,084.2 $ 77.6 $ 939.6 $ 638.9 $ 95.1 $ 59.1
Supplemental health
operations................ 990.8 1,792.3 805.9 66.6 531.7 81.2 123.5
Life operations............... 626.5 5,112.4 393.6 280.8 397.4 41.5 108.7
Other......................... 83.4 315.4 377.1 15.5 295.6 23.0 66.0
Corporate..................... - - - - - - 112.0
--------- --------- -------- -------- -------- ------ ------
Total.................... $2,559.3 $19,304.3 $1,654.2 $1,302.5 $1,863.6 $240.8 $469.3
======== ========= ======== ======== ======== ====== ======
1995
Annuity operations............ $ 535.9 $10,169.1 $ 68.4 $ 879.9 $ 595.4 $169.7 $ 53.9
Supplemental health
operations................ 571.8 842.6 757.0 67.0 525.5 78.3 126.4
Life operations............... 221.0 2,121.7 254.1 177.9 259.6 38.7 61.1
Other......................... 93.0 245.0 385.5 17.8 312.4 20.8 54.5
Corporate..................... - - - - - - 140.5
-------- --------- -------- -------- -------- ------ ------
Total.................... $1,421.7 $13,378.4 $1,465.0 $1,142.6 $1,692.9 $307.5 $436.4
======== ========= ======== ======== ======== ====== ======
1994
Annuity operations............ $ 490.0 $ 6,120.3 $ 31.0 $ 223.0 $ 164.9 $ 5.7 $ 13.3
Supplemental health
operations................ 519.3 787.1 716.7 59.0 471.9 77.4 118.9
Life operations............... 223.8 1,418.0 168.1 90.4 155.4 15.4 32.9
Other......................... 89.2 212.0 369.8 13.3 300.5 18.5 39.0
Corporate..................... - - - - - - 88.0
-------- ---------- -------- -------- -------- ------ ------
Total.................... $1,322.3 $ 8,537.4 $1,285.6 $385.7 $1,092.7 $117.0 $292.1
======== ========== ======== ====== ======== ====== ======
</TABLE>
(1) Includes insurance policy benefits, change in future policy benefits and
interest expense on annuities and financial products.
(2) Includes additional amortization related to gains on sales of investments.
(3) Includes interest expense on notes payable, interest expense on short-term
investment borrowings, change in future policy benefits related to realized
gains, amortization of goodwill and other operating costs and expenses.
108
<PAGE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
SCHEDULE IV
Reinsurance
for the years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Life insurance in force:
Direct........................................................... $ 98,835.5 $36,040.7 $28,002.9
Assumed.......................................................... 3,659.3 562.8 72.7
Ceded............................................................ (22,345.3) (2,820.3) (2,008.0)
---------- --------- ---------
Net insurance in force................................... $ 80,149.5 $33,783.2 $26,067.6
========== ========= =========
Percentage of assumed to net............................. 4.6% 1.7% .3%
=== === ==
Premiums recorded as revenue for generally accepted accounting principles:
Direct........................................................ $1,632.3 $1,422.1 $1,268.9
Assumed....................................................... 65.8 6.1 5.1
Ceded......................................................... (313.8) (72.6) (33.4)
--------- ---------- ---------
Net premiums............................................. $1,384.3 $1,355.6 $1,240.6
======== ======== ========
Percentage of assumed to net............................. 4.7% .4% .4%
=== == ==
</TABLE>
109
<PAGE>
EXHIBIT INDEX
Annual Report on Form 10-K
of Conseco, Inc.
Exhibit
No. Document
2.4 Agreement and Plan of Merger dated as of May 19, 1995, by and
between CCP Insurance, Inc. and Conseco, Inc. was filed with
the Commission as Exhibit 2.4 to the Registrant's Report on
Form 8-K dated August 31, 1995, and is incorporated herein by
this reference.
2.5 Agreement and Plan of Merger dated as of March 11, 1996, by
and among Conseco, Inc., LPG Acquisition Company and Life
Partners Group, Inc. was filed with the Commission as Exhibit
2.5 to the Registrant's Report on Form 8-K dated March 11,
1996, and is incorporated herein by this reference.
2.6 Agreement and Plan of Merger dated as of August 25, 1996, by
and between the Registrant and American Travellers Corporation
was filed with the Commission as Exhibit 2.6 to the
Registrant's Report on Form 8-K dated August 25, 1996, and is
incorporated herein by this reference.
2.7 Agreement and Plan of Merger dated August 25, 1996, by and
among the Registrant, CAF Acquisition Company and Capitol
American Financial Corporation was filed with the Commission
as Exhibit 2.7 to the Registrant's Report on Form 8-K dated
August 25, 1996, and is incorporated herein by this reference.
2.8 Agreement and Plan of Merger dated as of September 25, 1996,
by and between the Registrant and Transport Holdings Inc. was
filed with the Commission as Exhibit 2.8 to the Registrant's
Report on Form 8-K dated September 25, 1996, and is
incorporated herein by this reference.
2.8.1 First Amendment to Agreement and Plan of Merger dated as of
November 7, 1996, by and between the Registrant and Transport
Holdings Inc. was filed with the Commission as Exhibit 2.8.1
to its Registration Statement on Form S-4, No. 333-14377 and
is incorporated herein by this reference.
2.9 Agreement and Plan of Merger dated as of December 15, 1996, by
and among the Registrant, Rock Acquisition Company and Pioneer
Financial Services, Inc. was filed with the Commission as
Exhibit 2.9 to the Registrant's Report on Form 8-K dated
December 15, 1996, and is incorporated herein by this
reference.
3.1 Amended and Restated Articles of Incorporation of the
Registrant were filed with the Commission as Exhibit 3.1 to
the Registration Statement on Form S-2, No. 33-8498; Articles
of Amendment thereto, as filed September 9, 1988 with the
Indiana Secretary of State, were filed with the Commission as
Exhibit 3.1.1 to the Registrant's Annual Report on Form 10-K
for 1988; and Articles of Amendment thereto, as filed June 13,
1989 with the Indiana Secretary of State, were filed with the
Commission as Exhibit 3.1.2 to the Registrant's Report on Form
10-Q for the quarter ended June 30, 1989, Articles of
Amendment thereto, as filed June 29, 1993 with the Indiana
Secretary of State, were filed with the Commission as Exhibit
3.1.3 to the Registrant's Report on Form 10-Q for the quarter
ended June 30, 1993, and Articles of Amendment thereto
relating to the PRIDES were filed with the Commission as
Exhibit 3.(i).3 to the Registrant's Report on Form 8-K dated
January 17, 1996, and are incorporated herein by this
reference.
3.2 Amended and Restated By-Laws of the Registrant effective
February 10, 1986 were filed with the Commission as Exhibit
3.2 to its Registration Statement on Form S-1, No. 33-4367,
and an Amendment thereto was filed with the Commission as
Exhibit 3.2.1 to Amendment No. 2 to its Registration Statement
on Form S-1, No. 33-4367; and are incorporated herein by this
reference.
4.8 Indenture dated as of February 18, 1993, between the
Registrant and Shawmut Bank Connecticut, National Association,
as Trustee, for the 8 1/8 percent Senior Notes due 2003, was
filed with the Commission as Exhibit 4.8 to the Registrant's
Annual Report on Form 10-K for 1992, and is incorporated
herein by this reference.
<PAGE>
Exhibit
No. Document
4.12 Indenture dated as of September 29, 1994 between ALHC Merger
Corporation and LTCB Trust Company and First Supplemental
Indenture dated as of September 29, 1994 between American Life
Holding Company and the Trustee for the 11 1/4% Senior
Subordinated Notes due 2004 were filed with the Commission as
Exhibit 4.12 to the Registrant's Report on Form 8-K dated
September 29, 1994, and are incorporated herein by this
reference.
4.13 Indenture dated as of December 15, 1994, between CCP
Insurance, Inc., and LTCB Trust Company, as Trustee, for the
$200,000,000 aggregate principal amount of 10 1/2% Senior
Notes due 2004 was filed with the Commission as Exhibit 4.13
to the Registrant's Annual Report on Form 10-K for 1995, and
is incorporated herein by this reference.
4.13.1 First Supplemental Indenture between Conseco, Inc., as Issuer,
and LTCB Trust Company as Trustee, dated as of August 31,
1995, was filed with the Commission as Exhibit 4.13.1 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1995, and is incorporated herein by this
reference.
4.14 Credit Agreement among the Registrant, Bank of America
National Trust and Savings Association, First Union National
Bank of North Carolina and Nationsbank, N.A. dated November
22, 1996, was filed with the Commission as Exhibit 4.17 to the
Registrant's Report on Form 8-K dated December 17, 1996, and
is incorporated herein by this reference.
4.17.1 Subordinated Indenture, dated as of November 14, 1996, between
the Registrant and Fleet National Bank, as Trustee, was filed
with the Commission as Exhibit 4.17.1 to the Registrant's
Report on Form 8-K dated November 19, 1996, and is
incorporated herein by this reference.
4.17.2 First Supplemental Indenture, dated as of November 14, 1996,
between the Registrant and Fleet National Bank, as Trustee,
was filed with the Commission as Exhibit 4.17.2 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.3 9.16% Subordinated Deferrable Interest Debenture due 2006 was
filed with the Commission as Exhibit 4.17.3 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.17.4 Second Supplemental Indenture, dated as of November 22, 1996,
between Conseco, Inc. and Fleet National Bank, as Trustee was
filed with the Commission as Exhibit 4.17.1 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.17.5 8.70% Subordinated Deferrable Interest Debenture due 2026 was
filed with the Commission as Exhibit 4.17.4 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.18.1 Amended and Restated Declaration of Trust of Conseco Financing
Trust I, dated as of November 14, 1996, among Conseco, Inc.,
as sponsor, the Trustees named therein and the holders from
time to time of undivided beneficial interests in the assets
of Conseco Financing Trust I was filed with the Commission
as Exhibit 4.18.1 to the Registrant's Report on Form 8-K dated
November 19, 1996, and is incorporated herein by this
reference.
4.18.2 Global Certificate for Preferred Security of Conseco Financing
Trust I was filed with the Commission as Exhibit 4.18.2 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
4.18.3 Preferred Securities Guarantee Agreement, dated as of
November 19, 1996, between the Registrant and Fleet National
Bank was filed with the Commission as Exhibit 4.18.3 to the
Registrant's Report on Form 8-K dated November 19, 1996, and
is incorporated herein by this reference.
<PAGE>
Exhibit
No. Document
4.19.1 Amended and Restated Declaration of Trust of Conseco Financing
Trust II, dated as of November 22, 1996, among Conseco, Inc.,
as sponsor, the Trustees named therein and the holders from
time to time of undivided beneficial interests in the assets
of Conseco Financing Trust II was filed with the Commission as
Exhibit 4.19.1 to the Registrant's Report on Form 8-K dated
November 27, 1996, and is incorporated herein by this
reference.
4.19.2 Global Certificate for Preferred Security of Conseco Financing
Trust II was filed with the Commission as Exhibit 4.19.2 to
the Registrant's Report on Form 8-K dated November 27, 1996,
and is incorporated herein by this reference.
4.19.3 Preferred Securities Guarantee Agreement, dated as of November
27, 1996, between Conseco, Inc. and Fleet National Bank was
filed with the Commission as Exhibit 4.19.3 to the
Registrant's Report on Form 8-K dated November 27, 1996, and
is incorporated herein by this reference.
4.20 Indenture relating to the 6.5% Convertible Subordinated
Debentures due October 1, 2005 issued by American Travellers
Corporation was filed with the Commission as Exhibit 4(c) to
the Annual Report on Form 10-K of American Travellers
Corporation for the year ended December 31, 1995, and is
incorporated herein by this reference.
*4.20.1 First Supplemental Indenture between the Registrant and
Firstar Bank of Minnesota, N.A. Trustee, as Trustee, relating
to the 6.5% Convertible Subordinated Debentures due October 1,
2005.
The Registrant agrees to furnish the Commission upon its
request a copy of any instrument defining the rights of
holders of long-term debt of the Company and its consolidated
subsidiaries.
10.1.2 Employment Agreement dated January 1, 1987, between the
Registrant and Stephen C. Hilbert was filed with the
Commission as Exhibit 10.1.2 to the Registrant's Annual Report
on Form 10-K for 1986, and Amendment No. 1 thereto were filed
with the Commission as Exhibit 10.1.2 to the Registrant's
Annual Report on Form 10-K for 1987; and are incorporated
herein by this reference.
10.1.3 Employment Agreement dated July 1, 1991, between the
Registrant and Rollin M. Dick was filed with the Commission as
Exhibit 10.1.3 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1991, and is incorporated herein by
this reference.
*10.1.3(a) Amendment No. 1 to Employment Agreement between the Registrant
and Rollin M. Dick.
10.1.4 Employment Agreement dated July 1, 1991, between the
Registrant and Donald F. Gongaware was filed with the
Commission as Exhibit 10.1.4 to the Registrant's Report on
Form 10-Q for the quarter ended June 30, 1991, and is
incorporated herein by this reference.
*10.1.4(a) Amendment No. 1 to Employment Agreement between the Registrant
and Donald F. Gongaware.
10.1.5 Employment Agreement dated July 1, 1991, between the
Registrant and Lawrence W. Inlow was filed with the Commission
as Exhibit 10.1.5 to the Registrant's Report on Form 10-Q for
the quarter ended June 30, 1991, and is incorporated herein by
this reference.
*10.1.5(a) Amendment No. 1 to Employment Agreement between the Registrant
and Lawrence W. Inlow.
*10.1.9 Unsecured Promissory Note of Stephen C. Hilbert dated May 13,
1996.
10.1.10 Employment Agreement dated August 17, 1992, between the
Registrant and Ngaire E. Cuneo was filed with the Commission
as Exhibit 10.1.10 to the Registrant's Report on Form 10-Q for
the quarter ended September 30, 1992, and is incorporated
herein by this reference.
<PAGE>
Exhibit
No. Document
*10.1.10(a) Amendment No. 1 to Employment Agreement between the Registrant
and Ngaire E. Cuneo.
10.8 The Registrant's Stock Option Plan was filed with the
Commission as Exhibit B to its definitive Proxy Statement
dated December 10, 1983; Amendment No. 1 thereto was filed
with the Commission as Exhibit 10.8.1 to its Report on Form
10-Q for the quarter ended June 30, 1985; Amendment No. 2
thereto was filed with the Commission as Exhibit 10.8.2 to its
Registration Statement on Form S-1, No. 33-4367; Amendment No.
3 thereto was filed with the Commission as Exhibit 10.8.3 to
the Registrant's Annual Report on Form 10-K for 1986;
Amendment No. 4 thereto was filed with the Commission as
Exhibit 10.8 to the Registrant's Annual Report on Form 10-K
for 1987; Amendment No. 5 thereto was filed with the
Commission as Exhibit 10.8 to the Registrant's Report on Form
10-Q for the quarter ended September 30, 1991; and are
incorporated herein by this reference.
10.8.3 The Registrant's Cash Bonus Plan was filed with the Commission
as Exhibit 10.8.3 to the Registrant's Report on Form 10-Q for
the quarter ended March 31, 1989, and is incorporated herein
by this reference.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred
Compensation Program was filed with the Commission as Exhibit
10.8.4 to the Registrant's Annual Report on Form 10-K for
1992, and is incorporated herein by this reference.
10.8.6 Conseco Performance - Based Compensation Bonus Plan for
Executive Vice Presidents was filed with the Commission as
Exhibit B to the Registrant's definitive Proxy Statement dated
April 29, 1994, and is incorporated herein by this reference.
10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation Plan
was filed with the Commission as Exhibit A to the Registrant's
definitive Proxy Statement dated April 26, 1995, and is
incorporated herein by this reference.
10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus and
Deferred Compensation Program was filed with the Commission as
Exhibit 10.8.8 to the Registrant's Annual Report on Form 10-K
for 1994, and is incorporated herein by this reference.
10.8.9 Conseco 1994 Stock and Incentive Plan was filed as Exhibit A
to the Registrant's definitive Proxy Statement dated April 29,
1994 and is incorporated herein by this reference.
10.8.10 Amendment Number 2 to the Amended and Restated Conseco Stock
Bonus and Deferred Compensation Program was filed with the
Commission as Exhibit 10.8.10 to the Registrant's Annual
Report on Form 10-K for 1995 and is incorporated herein by
reference.
10.8.11 Director, Executive and Senior Officer Stock Purchase Plan was
filed with the Commission as Exhibit 10.8.11 to the
Registrant's Report on Form 10-Q for the quarter ended June
30, 1996, and is incorporated herein by this reference.
10.8.12 Guaranty regarding Director, Executive and Senior Officer
Stock Purchase Plan was filed with the Commission as Exhibit
10.8.12 to the Registrant's Report on Form 10-Q for the
quarter ended June 30, 1996, and is incorporated herein by
this reference.
10.8.13 Form of Promissory Note payable to the Registrant relating to
the Registrant's Director, Executive and Senior Officer Stock
Purchase Plan was filed with the Commission as Exhibit 10.8.13
to the Registrant's Report on Form 10-Q for the quarter ended
September 30, 1996, and is incorporated herein by this
reference.
10.23 Aircraft Lease Agreement dated December 22, 1988, between
General Electrical Capital Corporation and Conseco Investment
Holding Company was filed with the Commission as Exhibit 10.23
to the Registrant's Annual Report on Form 10-K for 1988, and
is incorporated herein by this reference.
<PAGE>
Exhibit
No. Document
10.23.1 Amendment to Aircraft Lease Agreement dated December 22, 1988,
between General Electric Capital Corporation and Conseco
Investment Holding Company was filed with the Commission as
Exhibit 10.23.1 to the Registrant's Annual Report on Form 10-K
for 1993, and is incorporated herein by this reference.
10.24 Aircraft Lease Agreement dated April 26, 1991 between General
Electric Capital Corporation and Conseco Investment Holding
Company was filed with the Commission as Exhibit 10.29 to the
Registrant's Report on Form 10-Q for the quarter ended
September 30, 1991, and is incorporated herein by this
reference.
10.24.1 Amendment to Aircraft Lease Agreement dated April 26, 1991,
between General Electric Capital Corporation and Conseco
Investment Holding Company was filed with the Commission as
Exhibit 10.24.1 to the Registrant's Annual Report on Form 10-K
for 1993, and is incorporated herein by this reference.
10.25 Aircraft Lease Purchase Agreement dated December 28, 1993,
between MetLife Capital Corporation and Conseco Investment
Holding Company was filed with the Commission as Exhibit 10.25
to the Registrant's Annual Report on Form 10-K for 1993, and
is incorporated herein by this reference.
10.31 Helicopter Lease Agreement dated April 9, 1992 between General
Electric Capital Corporation and Conseco Investment Holding
Company was filed with the Commission as Exhibit 10.31 to the
Registrant's Report on Form 10-Q for the quarter ended June
30, 1992, and is incorporated herein by this reference.
10.32 Aircraft Lease Agreement dated October 6, 1993, between
General Electric Capital Corporation and Conseco Investment
Holding Company and the associated Assignment Agreement dated
October 25, 1993, between General Electric Capital Corporation
and Nationsbanc Leasing Corporation were filed with the
Commission as Exhibit 10.32 to the Registrant's Annual Report
on Form 10-K for 1993, and are incorporated herein by this
reference.
10.36 Lease dated as of December 18, 1992 between LaSalle National
Trust, N.A. as trustee and Bankers Life and Casualty Company
relating to the lease of executive office and administration
space by BLH was filed with the Commission as Exhibit 10.17 to
Amendment No. 1 to BLH's Registration Statement on Form S-1,
No. 33-55026, and is incorporated herein by this reference.
10.37 Lease dated as of August 20, 1993 between REO Holding
Corporation and Bankers Life and Casualty Company relating the
lease of warehouse space by BLH was filed with the Commission
as Exhibit 10.14 to BLH's Report on Form 10-K for 1994, and is
incorporated herein by this reference.
10.38 Purchase Agreement relating to Preferred Redeemable Increased
Dividend Equity Securities, 7% PRIDES, Convertible Preferred
Stock was filed with the Commission as Exhibit 1.1 to the
Registrant's Report on Form 8-K dated January 17, 1996, and is
incorporated herein by this reference.
10.39 Underwriting Agreement and Pricing Agreement for 11,000,000
Preferred Securities of Conseco Financing Trust I dated
November 14, 1996 were filed with the Commission as
Exhibits 1.1 and 1.2 to the Registrant's Report on Form 8-K
dated November 19, 1996, and are incorporated herein by this
reference.
10.40 Underwriting Agreement and Pricing Agreement for 325,000
Preferred Securities of Conseco Financing Trust II dated
November 22, 1996 were filed with the Commission as Exhibits
1.1 and 1.2 to the Registrant's Report on Form 8-K dated
November 27, 1996, and are incorporated herein by this
reference.
*11.1 Computation of Earnings Per Share - Primary.
*11.2 Computation of Earnings Per Share - Fully Diluted.
*12.1 Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends.
*21 List of Subsidiaries.
<PAGE>
Exhibit
No. Document
*23 Consent of Independent Accountants.
*27 Financial data schedule for Conseco, Inc. dated December 31,
1995
*Filed herewith
Compensation Plans and Arrangements
10.1.2 Employment Agreement dated January 1, 1987, between the
Registrant and Stephen C. Hilbert.
10.1.3 Employment Agreement dated July 1, 1991, between the
Registrant and Rollin M. Dick.
*10.1.3(a) Amendment No. 1 to Employment Agreement between the Registrant
and Rollin M. Dick.
10.1.4 Employment Agreement dated July 1, 1991, between the
Registrant and Donald F. Gongaware.
*10.1.4(a) Amendment No. 1 to Employment Agreement between the Registrant
and Donald F. Gongaware.
10.1.5 Employment Agreement dated July 1, 1991, between the
Registrant and Lawrence W. Inlow.
*10.1.5(a) Amendment No. 1 to Employment Agreement between the Registrant
and Lawrence W. Inlow.
*10.1.9 Unsecured Promissory Note of Stephen C. Hilbert.
10.1.10 Employment Agreement dated August 17, 1992, between the
Registrant and Ngaire E. Cuneo.
*10.1.10(a) Amendment No. 1 to Employment Agreement between the Registrant
and Ngaire E. Cuneo.
10.8 The Registrant's Stock Option Plan; Amendment No. 1 thereto;
Amendment No. 2 thereto; Amendment No. 3 thereto; Amendment
No. 4 thereto; and Amendment No. 5 thereto.
10.8.3 The Registrant's Cash Bonus Plan.
10.8.4 Amended and Restated Conseco Stock Bonus and Deferred
Compensation Program.
10.8.6 Conseco Performance - Based Compensation Bonus Plan for
Executive Vice Presidents.
10.8.7 Conseco, Inc. Amended and Restated Deferred Compensation Plan.
10.8.8 Amendment to the Amended and Restated Conseco Stock Bonus and
Deferred Compensation Program.
10.8.9 Conseco 1994 Stock and Incentive Plan.
10.8.10 Amendment No. 2 to the Amended and Restated Stock Bonus and
Deferred Compensation Program.
10.8.11 Director, Executive and Senior Officer Stock Purchase Plan.
10.8.12 Guaranty regarding Director, Executive and Senior Officer
Stock Purchase Plan.
10.8.13 Form of Promissory Note Payable to the Registrant relating to
the Registrant's Director, Executive and Senior Officer Stock
Purchase Plan.
EXHIBIT 4.20.1
------------------------------------
FIRST SUPPLEMENTAL INDENTURE
BETWEEN
CONSECO, INC., as Successor Issuer
AND
FIRSTAR BANK OF MINNESOTA, N.A., Trustee
------------------------------------
Dated as of December 17, 1996
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of December 17, 1996, (this
"Supplemental Indenture"), between CONSECO, INC. an Indiana corporation (the
"Company"), and FIRSTAR BANK OF MINNESOTA, N.A.
(the "Trustee").
WHEREAS, American Travellers Corporation, a Pennsylvania corporation
("ATC"), and the Trustee have entered into an indenture (the "Indenture") dated
as of September 15, 1995, to provide for the issuance of $103,500,000 principal
amount of ATC's 6.5% Convertible Subordinated Debentures Due 2005 (the
"Securities"); and
WHEREAS, on December 17, 1996, ATC merged with and into the Company
(the "Merger"), with the Company succeeding to the business of ATC and assuming
all of the obligations of ATC under the Securities and the Indenture; and
WHEREAS, the Company has made a request to the Trustee that the Trustee
join with it in the execution of this Supplemental Indenture to permit the
Company to assume all the obligations of ATC under the Indenture pursuant to
Section 5.1 of the Indenture;
NOW, THEREFORE, for and in consideration of the premises and the mutual
covenants contained herein and in the Indenture and for other good and valuable
consideration, the receipt and sufficiency of which are herein acknowledged, the
Company and the Trustee hereby agree for the equal and ratable benefit of all
holders of the Securities as follows:
ARTICLE 1.
Definitions
Section 1.01. Definitions. For purposes of this Supplemental Indenture,
the terms defined in the recitals shall have the meanings therein specified; any
terms defined in the Indenture and not defined herein shall have the meanings
therein specified.
ARTICLE 2.
Assumption and Substitution
Section 2.01. Assumption of Obligations. The Company as the surviving
corporation of the Merger expressly acknowledges and assumes the due and
punctual payment of the principal of, premium, if any, and interest on all the
Securities and the performance and observance of all other obligations under the
Indenture or the Securities to be performed or observed by ATC.
2
<PAGE>
Section 2.02. Substitution. On the date hereof, the Company (as the
surviving corporation of the Merger) shall, by virtue of the assumption
described in Section 2.01 and the execution and delivery of this Supplemental
Indenture, succeed to and be substituted for ATC.
ARTICLE 3.
Miscellaneous
Section 3.01. Effect of the Supplemental Indenture. This Supplemental
Indenture supplements the Indenture and shall be a part, and subject to all the
terms, thereof. Except as expressly supplemented hereby, the Indenture and the
Securities issued thereunder shall continue in full force and effect.
Section 3.02. Counterparts. This Supplemental Indenture may be executed
in counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same instrument.
Section 3.03. GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the date first written above.
CONSECO, INC.
By: /s/ Rollin M. Dick
--------------------------
Name: Rollin M. Dick
Title: Chief Financial Officer
and Executive Vice President
FIRSTAR BANK OF MINNESOTA, N.A.
By:/s/Frank P. Leslie, III
--------------------------
Name: Frank P. Leslie, III
Title: Vice President
3
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 is made to that certain Employment Agreement dated
July 1, 1991 (the "Employment Agreement") between Conseco, Inc. (the "Company")
and Rollin M. Dick ("Executive").
NOW THEREFORE, in consideration of the mutual covenants contained herein
and in the Employment Agreement, Company and Executive agree as follows:
1. Section 2 of the Employment Agreement is hereby amended in its entirety
to read as follows:
"2. Term. The effective date of this Agreement shall be July 1, 1991.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning July 1, 1991, and ending
December 31, 2001 (hereinafter called the "Basic Employment Period")."
2. Except as modified by this Amendment and any previous addendum or
amendment not in conflict herewith, the parties confirm that the Employment
Agreement remains in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company and Executive have executed this Amendment
to be effective the 12th day of March, 1996.
CONSECO, INC.
By:/s/ Stephen C. Hilbert
-------------------------
Stephen C. Hilbert,
Chairman of the Board
"Company"
/s/ Rollin M. Dick
-------------------------
Rollin M. Dick
"Executive"
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 is made to that certain Employment Agreement dated
July 1, 1991 (the "Employment Agreement") between Conseco, Inc. (the "Company")
and Donald F. Gongaware ("Executive").
NOW THEREFORE, in consideration of the mutual covenants contained herein
and in the Employment Agreement, Company and Executive agree as follows:
1. Section 2 of the Employment Agreement is hereby amended in its entirety
to read as follows:
"2. Term. The effective date of this Agreement shall be July 1, 1991.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning July 1, 1991, and ending
December 31, 2001 (hereinafter called the "Basic Employment Period")." 2. Except
as modified by this Amendment and any previous addendum or amendment not in
conflict herewith, the parties confirm that the Employment Agreement remains in
full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company and Executive have executed this Amendment
to be effective the 12th day of March, 1996.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
----------------------------------
Stephen C. Hilbert,
Chairman of the Board
"Company"
/s/ Donald F. Gongaware
--------------------------------
Donald F. Gongaware
"Executive"
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 is made to that certain Employment Agreement dated
July 1, 1991 (the "Employment Agreement") between Conseco, Inc. (the "Company")
and Lawrence W. Inlow ("Executive").
NOW THEREFORE, in consideration of the mutual covenants contained herein
and in the Employment Agreement, Company and Executive agree as follows:
1. Section 2 of the Employment Agreement is hereby amended in its entirety
to read as follows:
"2. Term. The effective date of this Agreement shall be July 1, 1991.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning July 1, 1991, and ending
December 31, 2001 (hereinafter called the "Basic Employment Period")."
2. Except as modified by this Amendment and any previous addendum or
amendment not in conflict herewith, the parties confirm that the Employment
Agreement remains in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company and Executive have executed this Amendment
to be effective the 12th day of March, 1996.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
------------------------------
Stephen C. Hilbert,
Chairman of the Board
"Company"
/s/ Lawrence W. Inlow
------------------------------
Lawrence W. Inlow
"Executive"
PROMISSORY NOTE
On or before the Due Date, as hereinafter defined, for value received,
the undersigned, STEPHEN C. HILBERT (the "Maker") promises to pay to the order
of Conseco, Inc. ("Conseco"), an Indiana corporation, or its successors or
assigns, at such place as the holder hereof may from time to time designate in
writing, in lawful money of the United States which shall be legal tender in
payment of all debts and dues public and private at the time of payment, the
principal sum of ONE MILLION NINE HUNDRED THOUSAND DOLLARS ($1,900,000.00),
without interest until the Due Date, and with interest at the rate of ten
percent (10%) per annum after the Due Date until paid, without relief from
valuation and appraisement laws, and with attorneys' fees and costs of
collection.
The Maker shall have the privilege of prepaying the indebtedness
evidenced hereby, in whole or in part, at any time.
The Maker of this Note is employed by Conseco as a chief executive
officer pursuant to a certain Employment Agreement dated January 1, 1987 (the
"Employment Agreement"). The Due Date of this Note shall be two years after the
date of termination of the Employment Agreement pursuant to the terms thereof.
In the event that the Employment Agreement is terminated by Conseco or it
successors or assignee on or before the expiration of the remaining term
thereunder, then the remaining unpaid principal balance of this Note shall be
deemed forgiven and the Maker shall have no further liability for the payment
thereof.
In consideration of the lending to the Maker of the indebtedness
represented by this Note, the Maker hereby covenants and agrees with Conseco
that until the earlier of (a) the Due Date of this Note or (b) the date on which
the remaining principal balance of this Note is repaid in full or is forgiven
pursuant to the terms hereof, the Maker will not, directly or indirectly,
anywhere in the United States of America (i) render any services to, as an
agent, independent contractor, consultant or otherwise, or become employed or
compensated by, any other corporation, person or entity engaged in the business
of selling or providing life or accident and health insurance products or
services; (ii) in any manner compete with Conseco or any of its subsidiaries;
(iii) solicit or attempt to convert to other insurance carriers providing the
same or similar products or services provided by Conseco and its subsidiaries,
any customers or policy holders of Conseco or any of its subsidiaries; or (iv)
solicit for employment or employ any employee of Conseco or any of its
subsidiaries.
The Maker of this Note waives presentment for payment; notice of
protest, dishonor and demand; protest; and due diligence in bringing suit.
Executed and delivered in Carmel, Indiana, this 13th day of May, 1996.
/S/Stephen C. Hilbert
-----------------------
Stephen C. Hilbert
AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
This Amendment No. 1 is made to that certain Employment Agreement dated
August 17, 1992 (the "Employment Agreement") between Conseco, Inc. (the
"Company") and Ngaire E. Cuneo ("Executive").
NOW THEREFORE, in consideration of the mutual covenants contained herein
and in the Employment Agreement, Company and Executive agree as follows:
1. Section 2 of the Employment Agreement is hereby amended in its entirety
to read as follows:
"2. Term. The effective date of this Agreement shall be September 1, 1992.
Subject to the provisions for termination as provided in Section 10 hereof, the
term of this Agreement shall be the period beginning September 1, 1992, and
ending December 31, 2001 (hereinafter called the "Basic Employment Period")."
2. Except as modified by this Amendment and any previous addendum or
amendment not in conflict herewith, the parties confirm that the Employment
Agreement remains in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, the Company and Executive have executed this Amendment
to be effective the 12th day of March, 1996.
CONSECO, INC.
By: /s/ Stephen C. Hilbert
---------------------------
Stephen C. Hilbert,
Chairman of the Board
"Company"
/s/ Ngaire E. Cuneo
----------------------------
Ngaire E. Cuneo
"Executive"
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Exhibit 11.1
COMPUTATION OF EARNINGS PER SHARE - PRIMARY
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Shares outstanding, beginning of year................................ 81,031,828 88,739,400 101,247,092
Weighted average shares issued (acquired) during the year:
New shares issued................................................ 16,090,989 - -
Shares issued under employee stock plans......................... - 3,736 13,944
Treasury stock acquired.......................................... (1,299,073) (7,550,044) (15,423,280)
Exercise of stock options........................................ 3,027,823 211,772 14,428,788
Preferred stock conversions...................................... 5,732,663 - -
Common equivalent shares at average market price related to:
Stock options................................................. 6,013,310 2,920,876 3,454,412
Employee stock plans.......................................... 2,172,134 1,768,100 1,671,532
PRIDES........................................................ 14,042,106 - -
----------- ---------- -----------
Weighted average primary shares outstanding.......................... 126,811,780 86,093,840 105,392,488
=========== ========== ===========
Net income for primary earnings per share:
Net income as reported........................................... $252,378,000 $220,425,000 $150,398,000
Less preferred stock dividends................................... (9,807,000) (18,427,000) (18,632,000)
------------ ------------ ------------
Net income for primary earnings per share............................ $242,571,000 $201,998,000 $131,766,000
============ ============ ============
Net income per primary common share.................................. $1.91 $2.35 $1.25
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Exhibit 11.2
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED
for the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average primary shares outstanding.......................... 126,811,780 86,093,840 105,392,488
Incremental common equivalent shares:
Related to options and employee stock plans based
on market price at end of period.............................. 3,626,226 598,916 17,972
Related to convertible preferred stock........................... 12,048,691 17,787,060 18,026,444
------------ ----------- -----------
Weighted average fully diluted shares outstanding ................... 142,486,697 104,479,816 123,436,904
============ =========== ===========
Net income for fully diluted earnings per share:
Net income as reported........................................... $252,378,000 $220,425,000 $150,398,000
Less preferred stock dividends................................... - - -
------------ ------------ ------------
Net income for fully diluted earnings per share...................... $252,378,000 $220,425,000 $150,398,000
============ ============ ============
Net income per fully diluted common share............................ $1.77 $2.11 $1.22
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
CONSECO, INC. AND SUBSIDIARIES
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges,
Preferred Dividends and Distributions on Company-Obligated Mandatorily
RedeemablePreferred Securities of Subsidiary
Trusts - Consolidated Basis for the
years ended December 31, 1996, 1995 and 1994
(Dollars in millions)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pretax income from operations:
Net income $ 252.4 $ 220.4 $150.4
Add income tax expense 179.8 87.0 111.0
Add extraordinary charge on extinguishment of debt 26.5 2.1 4.0
Add minority interest 34.9 109.0 59.0
Less equity in undistributed earnings of unconsolidated subsidiaries - - (61.0)
-------- -------- ------
Pretax income from operations 493.6 418.5 263.4
-------- -------- ------
Add fixed charges:
Interest expense on annuities and financial products 668.6 585.4 134.7
Interest expense on long-term debt, including amortization 108.1 119.4 59.3
Interest expense on investment borrowings 22.0 22.2 7.7
Other .9 1.0 .9
Portion of rental(1) 8.0 6.9 6.2
-------- -------- ------
Fixed charges 807.6 734.9 208.8
-------- -------- ------
Adjusted earnings $1,301.2 $1,153.4 $472.2
======== ======== ======
Ratio of earnings to fixed charges 1.61X 1.57X 2.26X
===== ===== =====
Ratio of earnings to fixed charges, excluding
interest on annuities and financial products 4.55X 3.80X 4.55X
===== ===== =====
Fixed charges $ 807.6 $ 734.9 $208.8
Add dividends on preferred stock, including dividends
on preferred stock of subsidiaries (divided by the
rate of income before minority interest and extraordinary
charge to pretax income) 62.3 36.0 33.2
-------- -------- ------
Adjusted fixed charges $ 869.9 $ 770.9 $242.0
======== ======== ======
Adjusted earnings $1,301.2 $1,153.4 $472.2
======== ======== ======
Ratio of earnings to fixed charges and preferred dividends 1.50X 1.50X 1.95X
===== ===== =====
Ratio of earnings to fixed charges and preferred dividends,
excluding interest on annuities and financial products 3.14X 3.06X 3.14X
===== ===== =====
Adjusted fixed charges $ 869.9 $ 770.9 $242.0
Add distributions on Company-obligated manatorily
redeemable preferred securities of subsidiary trusts 5.6 - -
-------- -------- ------
Fixed charges $ 875.5 $ 770.9 $242.0
======== ======== ======
Adjusted earnings $1,301.2 $1,153.4 $472.2
======== ======== ======
Ratio of earnings to fixed charges, preferred dividends
and distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts 1.49X 1.50X 1.95X
===== ===== =====
Ratio of earnings to fixed charges, preferred dividends
and distributions on Company-obligated mandatorily
redeemable preferred securities of subsidiary trusts,
excluding interest on annuities and financial products 3.06X 3.06X 3.14X
===== ===== =====
<FN>
(1) Interest portion of rental is assumed to be 33 percent.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 21
LIST OF SUBSIDIARIES
NAME(1) JURISDICTION
------- ------------
<S> <C>
CIHC, Incorporated Delaware
Bankers National Life Insurance Company Texas
National Fidelity Life Insurance Company Missouri
Bankers Life Insurance Company of Illinois Illinois
Bankers Life and Casualty Company Illinois
Certified Life Insurance Company Illinois
Jefferson National Life Insurance Company of Texas Texas
Beneficial Standard Life Insurance Company California
Great American Reserve Insurance Company Texas
AmericanTravellers Life Insurance Company Pennsylvania
United General Life Insurance Company Pennsylvania
American Travellers Insurance Company of New York New York
TLIC Life Insurance Company Texas
Transport Life Insurance Company Texas
Continental Life Insurance Company Texas
American Life Holdings, Inc. Delaware
American Life Holding Company Delaware
American Life and Casualty Marketing Division Co. Iowa
American Life and Casualty Insurance Company Iowa
Vulcan Life Insurance Company (2) Alabama
Conseco Marketing, L.L.C. Indiana
Conseco Services, L.L.C. Indiana
CNC Entertainment Nevada, Inc. Nevada
Life Partners Group, Inc. Delaware
Wabash Life Insurance Company Kentucky
Massachusetts General Life Insurance Company Massachusetts
Philadelphia Life Insurance Company Pennsylvania
Lamar Life Insurance Company Mississippi
Conseco Financial Services, Inc. Pennsylvania
Conseco Entertainment, Inc. Indiana
Conseco Entertainment, L.L.C. Indiana
Conseco Risk Management, Inc. Indiana
Wells & Company, Inc. Indiana
Wellsco, Inc. Indiana
Lincoln American Life Insurance Company Tennessee
Marketing Distribution Systems Consulting Group, Inc. Delaware
Conseco Capital Management, Inc. Delaware
Conseco Mortgage Capital, Inc. Delaware
Conseco Private Capital Group, Inc. Indiana
Conseco Global Investments, Inc. Delaware
CNC Real Estate, Inc. Delaware
Conseco Equity Sales, Inc. Texas
<FN>
(1) Except as otherwise indicated, each company is a direct or indirect wholly owned subsidiary of the indicated parent.
(2) American Life and Casualty Insurance Company owns 98 percent of Vulcan Life
Insurance Company.
</FN>
</TABLE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Conseco, Inc. on Form S-8 (File Nos. 33- 57079, 33-56901,
33-57931, 33-40556, 33-58710, 33-58712, 333-10297, 333-18037, 333-18581,
333-19783 and 333-23251) of our report dated March 14, 1997, on our audits of
the consolidated financial statements and financial statement schedules of
Conseco, Inc. as of December 31, 1996 and 1995, and for the years ended December
31, 1996, 1995 and 1994, which report is included in this Annual Report on Form
10-K.
/s/ COOPERS & LYBRAND L.L.P.
---------------------------
Coopers & Lybrand L.L.P.
Indianapolis, Indiana
March 14, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM FORM 10-K FOR CONSECO,
INC. DATED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 17,307,100
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 99,700
<MORTGAGE> 803,100 <F1>
<REAL-ESTATE> 0
<TOTAL-INVEST> 19,631,100
<CASH> 0
<RECOVER-REINSURE> 504,200
<DEFERRED-ACQUISITION> 2,559,300 <F2>
<TOTAL-ASSETS> 25,612,700
<POLICY-LOSSES> 17,975,600
<UNEARNED-PREMIUMS> 272,400
<POLICY-OTHER> 815,900
<POLICY-HOLDER-FUNDS> 240,400
<NOTES-PAYABLE> 1,094,900
697,000
267,100
<COMMON> 2,029,600
<OTHER-SE> 788,600 <F3>
<TOTAL-LIABILITY-AND-EQUITY> 25,612,700
1,654,200
<INVESTMENT-INCOME> 1,302,500
<INVESTMENT-GAINS> 30,400
<OTHER-INCOME> 80,200 <F4>
<BENEFITS> 1,863,600 <F5>
<UNDERWRITING-AMORTIZATION> 266,400 <F6>
<UNDERWRITING-OTHER> 304,000
<INCOME-PRETAX> 493,600
<INCOME-TAX> 179,800
<INCOME-CONTINUING> 313,800
<DISCONTINUED> 0
<EXTRAORDINARY> (26,500)
<CHANGES> 0
<NET-INCOME> 252,400
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.77
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Includes $447,100 of credit-tenant loans.
<F2> Includes $2,015,000 of cost of policies purchased.
<F3> Includes retained earnings of $749,700, and net unrealized appreciation
of securities of $38,900.
<F4> Includes fee revenue and other income of $49,800 and retructuring income
of $30,400.
<F5> Includes insurance policy benefits of $1,173,300, change in future policy
benefits of $21,700 and interest expense on annuities and financial products
of $668,600.
<F6> Includes amortization of cost of policies purchased of $157,500 and cost
of policies produced of $72,900 and amortization related to realized gains of
$36,000.
</FN>
</TABLE>
