-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, qJP+/c6/Zz9lYKIiaYtEkaT91bIVDZ2OAdqKjO8RjaqkJpG8/f9V/v8urmrga7Sk 90Get9Za/DpcGQTmb1HVSg== 0000719241-95-000012.txt : 19950516 0000719241-95-000012.hdr.sgml : 19950516 ACCESSION NUMBER: 0000719241-95-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSECO INC CENTRAL INDEX KEY: 0000719241 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 351468632 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09250 FILM NUMBER: 95538740 BUSINESS ADDRESS: STREET 1: 11825 N PENNSYLVANIA ST CITY: CARMEL STATE: IN ZIP: 46032 BUSINESS PHONE: 3175736100 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY NATIONAL OF INDIANA CORP DATE OF NAME CHANGE: 19840207 10-Q 1 CONSECO 3/31/95 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission File Number 1-9250 Conseco, Inc. Indiana No. 35-1468632 ______________________ ______________________________ State of Incorporation IRS Employer Identification No. 11825 N. Pennsylvania Street Carmel, Indiana 46032 (317) 817-6100 ______________________________________ _________ Address of principal executive offices Telephone Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] Shares of common stock outstanding as of May 1, 1995: 20,208,095 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Dollars in millions) ASSETS March 31, December 31, 1995 1994 ____ ____ (unaudited) (audited) Investments: Actively managed fixed maturities at fair value (amortized cost: 1995 - $8,249.2; 1994 - $7,440.5) $ 8,178.4 $ 7,067.1 Equity securities at fair value (cost: 1995 - $44.6; 1994 - $43.0) 43.2 39.6 Mortgage loans 129.3 142.6 Credit-tenant loans 84.2 69.0 Policy loans 175.3 175.1 Investment in CCP Insurance, Inc. 224.8 195.4 Other invested assets 64.4 68.7 Trading account securities - 21.6 Short-term investments 182.5 295.4 Assets held in separate accounts 88.2 84.9 _________ _________ Total investments 9,170.3 8,159.4 Accrued investment income 146.6 126.3 Reinsurance receivables 48.4 45.5 Income taxes 95.9 195.2 Cost of policies purchased 909.6 1,021.6 Cost of policies produced 347.5 300.7 Goodwill (net of accumulated amortization: 1995 - $30.0; 1994 - $25.3) 684.0 687.7 Property and equipment (net of accumulated depreciation: 1995 - $29.1; 1994 - $27.1) 91.6 89.1 Securities segregated for the future redemption of redeemable preferred stock of a subsidiary 36.9 36.2 Cash segregated for the redemption of subordinated debentures of a subsidiary 23.2 24.2 Other assets 136.1 126.0 _________ _________ Total assets $11,690.1 $10,811.9 ========= ========= (continued on next page) The accompanying notes are an integral part of the consolidated financial statements. /TABLE 3 CONSECO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) (Dollars in millions)
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31, 1995 1994 ____ ____ (unaudited) (audited) Liabilities: Insurance liabilities $ 8,723.4 $ 8,537.4 Investment borrowings 582.3 - Other liabilities 338.3 318.0 Liabilities related to separate accounts 88.2 84.9 Notes payable of Conseco 221.4 191.8 Notes payable of Partnership II entities, not direct obligations of Conseco 315.7 331.1 Notes payable of Bankers Life Holding Corporation, not direct obligations of Conseco 280.2 280.0 _________ _________ Total liabilities 10,549.5 9,743.2 _________ _________ Minority interest 395.0 321.7 _________ _________ Shareholders' equity: Preferred stock 283.5 283.5 Common stock, no par value, and additional paid-in capital; 500,000,000 shares authorized; shares issued and outstanding: 1995 - 20,203,705; 1994 - 22,184,850 152.0 165.8 Unrealized depreciation of securities (net of applicable deferred income tax benefits: 1995 - $34.9; 1994 - $65.9) (67.2) (139.7) Retained earnings 377.3 437.4 _________ _________ Total shareholders' equity 745.6 747.0 _________ _________ Total liabilities and shareholders' equity $11,690.1 $10,811.9 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
4 CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in millions) (unaudited) Three months ended March 31, ____________________ 1995 1994 ____ ____ Revenues: Insurance policy income $341.1 $321.1 Investment activity: Net investment income 179.4 68.5 Net trading income 1.6 - Net realized gains (losses) 1.1 (7.6) Fee revenue 10.7 12.9 Equity in earnings of CCP Insurance, Inc. 6.4 8.0 Equity in earnings of Western National Corporation - 21.9 Restructuring income - 65.3 Other income 2.7 .1 ______ ______ Total revenues 543.0 490.2 ______ ______ Benefits and expenses: Insurance policy benefits 255.8 232.3 Change in future policy benefits 6.6 11.1 Interest expense on annuities and financial products 87.4 14.6 Interest expense on notes payable 20.9 13.5 Interest expense on investment borrowings 2.2 2.2 Amortization related to operations 42.1 30.2 Amortization related to realized gains and losses 2.6 (.9) Other operating costs and expenses 55.1 53.0 ______ ______ Total benefits and expenses 472.7 356.0 ______ ______ Income before income taxes, minority interest and extraordinary charge 70.3 134.2 Income tax expense 26.1 39.8 ______ ______ Income before minority interest and extraordinary charge 44.2 94.4 Minority interest 19.8 11.9 ______ ______ Income before extraordinary charge 24.4 82.5 Extraordinary charge on extinguishment of debt, net of taxes and minority interest - 2.4 ______ ______ Net income 24.4 80.1 Less preferred stock dividends 4.6 4.7 ______ ______ Net income applicable to common stock $ 19.8 $ 75.4 ====== ====== (continued on next page) The accompanying notes are an integral part of the consolidated financial statements.
5 CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS, continued (Dollars in millions, except per share data) (unaudited) Three months ended March 31, ______________________ 1995 1994 ____ ____ Earnings per common share and common equivalent share: Primary: Weighted average shares outstanding 21,830,000 28,304,000 Net income before extraordinary charge $ .91 $2.76 Extraordinary charge - .09 _____ _____ Net income $ .91 $2.67 ===== ===== Fully diluted: Weighted average shares outstanding 21,830,000 32,814,000 Net income before extraordinary charge $ .91 $2.51 Extraordinary charge - .07 _____ _____ Net income $ .91 $2.44 ===== ===== The accompanying notes are an integral part of the consolidated financial statements.
6 CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in millions) (unaudited) Three months ended March 31, ______________________ 1995 1994 ____ ____ Preferred stock: Balance, beginning and end of period $ 283.5 $ 287.5 ======= ======= Common stock and additional paid-in capital: Balance, beginning of period $ 165.8 $ 102.8 Amounts related to stock options and employee benefit plans 1.1 17.4 Tax benefit related to issuance of shares under employee benefit plans .1 67.5 Cost of shares acquired charged to common stock and additional paid-in capital (15.0) (13.1) _______ _______ Balance, end of period $ 152.0 $ 174.6 ======= ======= Unrealized appreciation (depreciation) of securities: Balance, beginning of period $(139.7) $ 97.5 Change in unrealized appreciation (depreciation) 72.5 (126.6) _______ _______ Balance, end of period $ (67.2) $ (29.1) ======= ======= Retained earnings: Balance, beginning of period $ 437.4 $ 654.8 Net income 24.4 80.1 Cost of shares acquired charged to retained earnings (77.4) (175.9) Dividends on common stock (2.5) (3.2) Dividends on preferred stock (4.6) (4.7) _______ _______ Balance, end of period $ 377.3 $ 551.1 ======= ======= Total shareholders' equity $ 745.6 $ 984.1 ======= ======= The accompanying notes are an integral part of the consolidated financial statements.
7 CONSECO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (unaudited) Three months ended March 31, ______________________ 1995 1994 ____ ____ Cash flows from operating activities: Net income $ 24.4 $ 80.1 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation 46.7 31.1 Income taxes 17.1 34.2 Insurance liabilities 5.4 29.2 Interest credited to insurance liabilities 87.4 14.6 Fees charged to insurance liabilities (16.0) (8.9) Accrual and amortization of investment income (59.5) (11.1) Deferral of cost of policies produced (62.1) (31.6) Restructuring income - (65.3) Equity in undistributed earnings of Western National Corporation - (21.9) Equity in undistributed earnings of CCP Insurance, Inc. (6.2) (7.8) Trading account securities 21.6 20.9 Minority interest 14.2 11.4 Extraordinary charge on extinguishment of debt - 2.4 Other 24.1 13.9 _________ _______ Net cash provided by operating activities 97.1 91.2 _________ _______ Cash flows from investing activities: Sales of investments 470.4 562.2 Maturities and redemptions 35.6 56.5 Purchases of investments (1,283.1) (705.6) Purchase of additional shares of Bankers Life Holding Corporation (31.5) - Cash held by Western National Corporation before deconsolidation and the settlement of intercompany balances - (352.5) Proceeds from sale of shares of Western National Corporation and related transactions - 537.9 Other .2 (4.3) _________ _______ Net cash provided (used) by investing activities (808.4) 94.2 _________ _______ Cash flows from financing activities: Issuance of capital stock .3 16.0 Issuance of notes payable of Conseco, net 59.6 - Payments on notes payable of Conseco (30.0) (220.3) Payments on debt of subsidiaries - not direct obligations of Conseco (15.0) (11.0) Payments to repurchase equity securities of Conseco (92.4) (189.0) Deposits to insurance liabilities 336.1 76.2 Investment borrowings 582.3 105.1 Withdrawals from insurance liabilities (235.4) (30.5) Dividends paid (7.1) (7.9) _________ _______ Net cash provided (used) by financing activities 598.4 (261.4) _________ _______ Net decrease in short-term investments (112.9) (76.0) Short-term investments, beginning of period 295.4 666.4 _________ _______ Short-term investments, end of period $ 182.5 $ 590.4 ========= ======= The accompanying notes are an integral part of the consolidated financial statements.
8 CONSECO, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) The following notes should be read in conjunction with the notes to consolidated financial statements included in the 1994 Form 10-K of Conseco, Inc. ("We", "Conseco" or the "Company"). BASIS OF PRESENTATION Our unaudited consolidated financial statements as of March 31, 1995 and 1994, reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly Conseco's financial position and results of operations on a basis consistent with that of our prior audited consolidated financial statements. We have reclassified certain amounts from the prior period to conform to the 1995 presentation. Consolidation issues. Prior to its initial public offering ("IPO") on February 15, 1994, Western National Corporation ("WNC") was a wholly owned subsidiary of Conseco. We sold 60 percent of our equity interest in WNC in the IPO. After the IPO, we no longer had unilateral control of WNC and we ceased including the accounts of WNC in our consolidated financial statements. We sold our remaining 40 percent interest in WNC on December 23, 1994. Therefore, we had no earnings from WNC in the first quarter of 1995 and our equity in earnings of WNC in the first quarter of 1994 reflected: (i) all of WNC's earnings for the period through February 15, 1994; and (ii) 40 percent of WNC's earnings for the remainder of the quarter. Conseco Capital Partners II, L.P. ("Partnership II") acquired The Statesman Group, Inc. ("Statesman") on September 29, 1994 (the "Acquisition"). After the Acquisition, Partnership II owns 80 percent of the outstanding shares of Statesman's common stock. Because Conseco Partnership Management, Inc., a wholly owned subsidiary of Conseco, is the sole general partner of Partnership II, Conseco controls Partnership II and Statesman, even though its ownership interest is less than 50 percent. Because of this control, Conseco's consolidated financial statements are required to include the accounts of Partnership II and Statesman. Immediately after the Acquisition, Conseco, through its direct investment and through its equity interests in the investments made by Bankers Life Holding Corporation ("BLH"), CCP Insurance, Inc. ("CCP") and WNC, had a 27 percent ownership interest in Statesman. At March 31, 1995, Conseco's ownership interest in Statesman had decreased to 25 percent as the net result of: (i) the sale of Conseco's 40 percent equity interest in WNC on December 23, 1994; (ii) the sale of a portion of CCP's investment in Statesman to an unaffiliated company; and (iii) an increase in Conseco's percentage ownership in BLH and CCP due to our stock purchases and the stock purchases by BLH and CCP under their respective share repurchase programs. We accounted for the Acquisition of Statesman using the purchase method of accounting. Under purchase accounting, we allocated the total purchase cost of Statesman to the assets and liabilities acquired, based on a preliminary determination of their fair values. We may adjust this allocation when we make a final determination of such values. We do not believe any adjustment will be material, however. ADJUSTMENT TO ACTIVELY MANAGED FIXED MATURITIES We classify fixed maturity investments into three categories: "actively managed" (which are carried at estimated fair value), "trading account" (which are carried at estimated fair value) and "held to maturity" (which are carried at amortized cost). We did not classify any fixed maturity investments in the trading account or held to maturity categories at March 31, 1995. 9 Adjustments to carry actively managed fixed maturity investments at fair value have no effect on our earnings. We record them, net of tax and other adjustments, as an adjustment to shareholders' equity. The following table summarizes the effect of these adjustments on Conseco's actively managed fixed maturities and on Conseco's investment in CCP (as a result of similar adjustments made by CCP) as of March 31, 1995.
Effect of fair value Balance adjustment to before actively managed Reported adjustment fixed maturities amount __________ ________________ ______ (Dollars in millions) Actively managed fixed maturities $8,249.2 $(70.8) $8,178.4 Investment in CCP Insurance, Inc. 247.7 (22.9) 224.8 Cost of policies purchased 910.8 (1.2) 909.6 Cost of policies produced 334.6 12.9 347.5 Income tax asset 70.4 25.5 95.9 Minority interest 382.9 12.1 395.0 Unrealized appreciation (depreciation) of securities 1.4 (68.6) (67.2)
PRO FORMA DATA The pro forma data are presented as if the following transactions had all occurred on January 1, 1994: (i) the acquisition of Statesman by Partnership II; (ii) the IPO of WNC; and (iii) the sale by Conseco of its remaining 40 percent equity interest in WNC.
Three months ended March 31, 1994(a) _________________ (Dollars in millions, except per share data) Revenues $495.0 Income before extraordinary charge 19.8 Income before extraordinary charge per common share: Primary $ .54 Fully diluted .54 __________________ (a) Excludes revenues, net income, net income per primary common share and net income per fully diluted common share from restructuring income related to the IPO of WNC of $65.3 million, $42.4 million, $1.50 and $1.29, respectively.
CHANGES IN NOTES PAYABLE Notes payable of Conseco At March 31, 1995, we had drawn $30.0 million under our $200.0 million revolving credit agreements. The interest rate on this amount was 6.88 percent at March 31, 1995. Notes payable of Partnership II entities (not direct obligations of Conseco) During March 1995, Statesman made a scheduled $15.0 million principal payment on its senior term loan. The interest rates on this loan at March 31, 1995, were 8.5 percent for the $115.0 million borrowed under Tranche A and 9.0 percent for the $40.0 million borrowed under Tranche B. 10 In connection with the Acquisition, cash was segregated for the redemption of Statesman's subordinated debentures. During the three months ended March 31, 1995, an additional $1.0 million principal amount of such subordinated debentures was converted and redeemed. Funds to pay such holders will be held in escrow until the debentures are converted, redeemed or mature. Notes payable of BLH (not direct obligations of Conseco) During April 1995, BLH made a scheduled $16.0 million principal payment on its senior term loan. The interest rate on this loan was 8.5 percent at March 31, 1995. CHANGES IN CAPITAL STOCK We repurchased 2.0 million of our common shares during the first three months of 1995 as part of our previously announced stock repurchase program. The total cost of shares repurchased during the first quarter of 1995 of $92.4 million was allocated to shareholders' equity accounts as follows: (i) $15.0 million to common stock and additional paid-in capital (such allocation was based on the average common stock and paid-in capital balance per share); and (ii) $77.4 million to retained earnings. In April 1995, we announced that we had terminated our common stock repurchase program. During the first three months of 1995, we issued 38,218 common shares upon the exercise of stock options. Proceeds from the exercise of options of $.3 million and the related tax benefit of $.1 million were added to common stock and additional paid-in capital. During the first three months of 1995, we issued 3,137 shares of common stock to employee benefit plans. As a result, we added $.8 million to common stock and additional paid-in capital. REINSURANCE The cost of reinsurance ceded for policies containing mortality or morbidity risks totaled $6.9 million and $6.0 million in the first three months of 1995 and 1994, respectively. We deducted this cost from insurance policy income. Reinsurance premiums assumed on policies containing mortality risks totaled $.9 million and $1.3 million in the first three months of 1995 and 1994, respectively. Reinsurance recoveries netted against insurance policy benefits totaled $5.8 million and $5.7 million in the first three months of 1995 and 1994, respectively. CHANGES IN MINORITY INTEREST During the first quarter of 1995, Conseco purchased an additional 1.5 million common shares of BLH for $31.5 million. This increased our common equity ownership interest in BLH to 62 percent. Changes in minority interest during the first three months of 1995 and 1994 are summarized below (dollars in millions):
1995 1994 ____ ____ Minority interest, beginning of period $321.7 $223.8 Purchase of equity securities of BLH by Conseco (31.5) - Minority interests' equity in the change in financial position of the Company's subsidiaries: Net income before extraordinary charge 19.8 11.9 Unrealized appreciation (depreciation) of securities 87.8 (8.4) Dividends (5.3) (4.1) Other 2.5 - ______ ______ Minority interest, end of period $395.0 $223.2 ====== ======
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion highlights material factors affecting our results of operations and the significant changes in our balance sheet items. Changes in 1995 and 1994 balances in the consolidated financial statements are largely affected by the transactions described in the notes to the consolidated financial statements included herein and the notes to the consolidated financial statements included in our 1994 Form 10-K. This discussion should be read in conjunction with both sets of consolidated financial statements and notes. RESULTS OF OPERATIONS Conseco generates earnings by: - Operating life insurance companies; - Providing services to affiliates and non-affiliates for fees; and - Acquiring and restructuring life insurance companies in partnership with other investors (currently conducted through Partnership II). 12 The following table shows the sources of Conseco's net income (after taxes and minority interest) for the first quarter of 1995 and 1994:
Three months ended March 31, ___________________ 1995 1994 ____ ____ (Dollars in millions) Operations of life insurance companies: BLH: Operating earnings $13.5 $11.5 Net realized losses (.3) (.3) ______ _____ Net income 13.2 11.2 ______ _____ Statesman: Operating earnings 2.3 - Net trading income .1 - Net realized gains .1 - ______ _____ Net income 2.5 - ______ _____ WNC: Operating earnings - 17.5 Net trading income - 2.6 Net realized gains - 1.6 ______ _____ Net income - 21.7 ______ _____ CCP: Operating earnings 5.9 7.2 Net realized gains .1 .2 Extraordinary charge - (.5) ______ _____ Net income 6.0 6.9 ______ _____ Wholly Owned Insurance Subsidiaries: Operating earnings 5.0 6.3 Net realized losses (1.4) (5.0) ______ _____ Net income 3.6 1.3 ______ _____ Total from operations of life insurance companies: Operating earnings 26.7 42.5 Net trading income .1 2.6 Net realized losses (1.5) (3.5) Extraordinary charge - (.5) ______ _____ Net income 25.3 41.1 ______ _____ Services provided for fees 6.5 6.1 ______ _____ Restructuring income: Sale of 60 percent common equity interest in WNC - 42.4 ______ _____ Corporate and other: Operating expenses, net of revenues (3.8) (3.5) Interest expense on notes payable (4.2) (5.1) Net trading income .6 - Net realized gains - 1.0 Extraordinary charge - (1.9) ______ _____ Net loss (7.4) (9.5) ______ _____ Consolidated earnings: Operating earnings 25.2 40.0 Net trading income .7 2.6 Net realized losses (1.5) (2.5) Restructuring income - 42.4 Extraordinary charge - (2.4) ______ _____ Net income $ 24.4 $80.1 ====== =====
13 The following table shows the source of Conseco's fully diluted earnings per share for the first quarter of 1995 and 1994:
Three months ended March 31, ___________________ 1995 1994 ____ ____ (Dollars in millions) Operations of life insurance companies: BLH: Operating earnings $ .54 $ .35 Net realized losses (.01) (.01) _____ _____ Net income .53 .34 _____ _____ Statesman: Operating earnings .09 - Net trading income .01 - _____ _____ Net income .10 - _____ _____ WNC: Operating earnings - .53 Net trading income - .08 Net realized gains - .05 _____ _____ Net income - .66 _____ _____ CCP: Operating earnings .23 .23 Extraordinary charge - (.02) _____ _____ Net income .23 .21 _____ _____ Wholly Owned Insurance Subsidiaries: Operating earnings .19 .19 Net realized losses (.06) (.15) _____ _____ Net income .13 .04 _____ _____ Total from operations of life insurance companies: Operating earnings 1.05 1.30 Net trading income .01 .08 Net realized losses (.07) (.11) Extraordinary charge - (.02) _____ _____ Net income .99 1.25 _____ _____ Services provided for fees .26 .19 _____ _____ Restructuring income: Sale of 60 percent common equity interest in WNC - 1.29 _____ _____ Corporate and other: Operating expenses, net of revenues (.17) (.11) Interest expense on notes payable (.19) (.16) Net trading income .02 - Net realized gains - .03 Extraordinary charge - (.05) _____ _____ Net loss (.34) (.29) _____ _____ Consolidated earnings: Operating earnings .95 1.22 Net trading income .03 .08 Net realized losses (.07) (.08) Restructuring income - 1.29 Extraordinary charge - (.07) _____ _____ Net income $ .91 $2.44 ===== ===== /TABLE 14 Additional Discussion of Consolidated Statement of Operations for the First Quarter of 1995 Compared to the First Quarter of 1994: The following tables and narratives summarize amounts reported in the consolidated statement of operations. Many of the changes from period to period resulted from: (i) changes in Conseco's percentage ownership in BLH, WNC and CCP; and (ii) the acquisition of Statesman on September 29, 1994. Operations of Life Insurance Companies: BLH:
Three months ended March 31, ____________________ 1995 1994 ____ ____ (Dollars in millions) Revenues: Insurance policy income $313.9 $303.6 Investment activity: Net investment income 60.8 47.9 Net trading income .2 - Net realized losses (1.7) (1.9) Total revenues 374.1 349.6 Benefits and expenses: Insurance policy benefits and change in future policy benefits 240.5 224.9 Interest expense on annuities and financial products 19.7 10.3 Interest expense on notes payable 8.0 7.6 Interest expense on investment borrowings .7 2.0 Amortization related to operations 30.2 28.7 Amortization related to realized losses (1.0) ( .9) Other operating costs and expenses 35.9 38.7 Income before taxes and minority interest 40.1 38.3 Income tax expense 16.2 15.2 Income before minority interest 23.9 23.1 Minority interest 10.7 11.9 Net income 13.2 11.2 Summarized by component, all net of applicable expenses, taxes and minority interest: Operating earnings 13.5 11.5 Net realized losses (.3) (.3) Net income 13.2 11.2 /TABLE General. Conseco's first quarter 1994 earnings reflected a 57 percent ownership interest in BLH. During the last nine months of 1994, BLH acquired 1.8 million shares of its common stock at a cost of $35.7 million. During the first quarter of 1995, Conseco acquired 1.5 million common shares of BLH at a cost of $31.5 million. These transactions increased Conseco's average ownership interest in BLH for the first quarter of 1995 to 60 percent. All activities of BLH are included in Conseco's financial statements on a consolidated basis. However, Conseco's minority interest adjustment removes the portion of BLH's net income applicable to other owners. BLH participated in the investment by Partnership II in Statesman. Because a subsidiary of Conseco is the sole general partner of Partnership II, Conseco controls Statesman. Accordingly, Conseco accounts for its investment in Statesman using the consolidation method. Conseco's ownership interest in Statesman through BLH is included in the Statesman segment. At March 31, 1995, the BLH shares owned by Conseco had a net carrying value of $555.8 million, a fair value of $657.2 million and a cost of $344.6 million. Insurance policy income increased as a result of increases in Medicare supplement and long-term care premiums, offset by the anticipated decrease in comprehensive major medical product premiums due to prior steps taken to improve the profitability of this product. Net investment income increased by 27 percent in the 1995 period. The increase was due to the growth of invested assets as a result of: (i) recurring operations; and (ii) the recapture, on April 1, 1994, of a reinsurance treaty with assets totaling $371.0 million. Net realized losses often fluctuate from period to period. BLH sold $81.9 million and $435.2 million of actively managed securities during the first quarters of 1995 and 1994, respectively. Net realized gains and losses arise when securities are sold in response to changes in the investment environment which create opportunities to enhance the total return of the investment portfolio without adversely affecting either the quality of the portfolio or the matching of expected maturities of assets and liabilities. Realized gains and losses affect the timing of the amortization of cost of policies purchased and cost of policies produced. As a result of realized gains and losses from the sales of fixed maturity investments, amortization of the cost of policies purchased and the cost of policies produced decreased by $1.0 million in the 1995 period and by $.9 million in the 1994 period. Insurance policy benefits (including change in future policy benefits) in the 1995 period reflect the increase in insurance policy income and increased benefits incurred primarily in the Medicare supplement line of business. Interest expense on annuities and financial products increased by 91 percent in the 1995 period. This reflects an increase in annuity liabilities resulting from: (i) the reinsurance recapture transaction described above; and (ii) increased annuity deposits. Interest expense on notes payable increased by 5 percent in the 1995 period, due to increased interest rates on the senior term loan partially offset by the $11.0 million reduction in notes payable through a scheduled payment made in April 1994. Interest expense on investment borrowings decreased by 65 percent in the 1995 period due to decreased investment borrowing activities. BLH's average investment borrowings were $48.3 million and $250.9 million in the first quarters of 1995 and 1994, respectively. 16 Statesman:
Three months ended March 31, _______________________________ 1995 1994 ______________ ______________ As included in Prior to Conseco's Acquisition by accounts Partnership II ________ _______________ (Dollars in millions) Revenues: Insurance policy income $ 14.6 $ 13.5 Investment activity: Net investment income 102.1 80.3 Net trading income .6 - Net realized gains 3.8 5.3 Total revenues 122.8 100.4 Benefits and expenses: Insurance policy benefits and change in future policy benefits. 8.1 8.9 Interest expense on annuities and financial products 64.1 50.4 Interest expense on notes payable 8.8 1.9 Interest expense on investment borrowings 1.5 1.5 Amortization related to operations 10.5 9.2 Amortization related to realized gains 2.4 2.8 Other operating costs and expenses 8.0 8.2 Income before taxes and minority interest 19.4 17.5 Income tax expense 7.8 5.7 Income before minority interest 11.6 11.8 Minority interest 9.1 2.2 Net income 2.5 9.6 Summarized by component, all net of applicable expenses, taxes, and minority interest: Operating earnings 2.3 8.0 Net trading income .1 - Net realized gains .1 1.6 Net income 2.5 9.6
General. Conseco, through both its direct investment and its equity interests in the investments made by BLH and CCP, had a 25 percent ownership interest in Statesman in the first quarter of 1995. While all activities of Statesman are required to be included in Conseco's financial statements on a consolidated basis for all periods after September 29, 1994, the minority interest adjustment removes from Conseco's net income the portion applicable to other owners so that net income reflects only Conseco's applicable ownership interest. To enhance comparability, the amounts for the quarter ended March 31, 1994, are presented separately. The 1994 amounts relate to periods which preceded the Acquisition and do not reflect the application of purchase accounting. Insurance policy income consists of premiums received on traditional life insurance products and policy fund and surrender charges assessed against investment-type products. This account increased by 8.1 percent during the 1995 period, primarily because increased annuity policy withdrawals resulted in higher surrender charges. The increase in withdrawals was due to: (i) the growth of Statesman's annuity portfolio; and (ii) decisions by policyholders in 1995 to surrender policies and incur a surrender charge to invest funds in higher-yielding alternative investments. Net investment income increased by 27 percent in the 1995 period. This occurred because: (i) invested assets increased; and (ii) the application of purchase accounting caused yields on invested assets to increase after the Acquisition. Redemption of fixed maturity investments prior to their regularly scheduled maturity dates resulted in additional investment income of approximately $.4 million in the first quarter of 1994. Such additional investment income was not material in the first quarter of 1995. 17 Net realized gains often fluctuate from period to period. Statesman sold approximately $.4 billion of fixed maturity investments in the first quarters of both 1995 and 1994. Net realized gains in 1994 were partially offset by a write-down of $1.2 million on an equity security whose decline in fair value was deemed to be other than temporary. Net realized gains affect the timing of the amortization of cost of policies purchased and cost of policies produced. As a result of net realized gains from the sales of fixed maturity investments, this amortization increased by $2.4 million in the 1995 period and by $2.8 million in the 1994 period. Insurance policy benefits (including change in future policy benefits) decreased by 9.0 percent in the 1995 period, primarily due to a decline in death benefits paid on annual renewable term policies. Interest expense on annuities and financial products increased by 27 percent in the 1995 period, primarily due to a larger block of annuity business in force in 1995 and higher crediting rates. At March 31, 1995, the weighted average crediting rate for Statesman's annuity liabilities was 5.9 percent, compared to 5.6 percent at March 31, 1994. Interest expense on notes payable increased by 363 percent as a result of additional interest on debt incurred to finance the Acquisition. This increase was partially offset by a decrease in interest expense resulting from: (i) the conversion and redemption of $45.8 million of Statesman's convertible subordinated debentures; and (ii) the repayment of bank debt in conjunction with the Acquisition. Amortization related to operations increased by 14 percent in the 1995 period. The increase in this expense was principally attributable to: (i) an increase in the amortization of the cost of policies produced due to new sales; and (ii) the amortization of goodwill and the cost of policies purchased established at the Acquisition date. Amortization related to realized gains decreased by 14 percent in the 1995 period primarily as a result of the decrease in realized gains. Income tax expense increased by 37 percent during the 1995 period. This increase is partially due to the 11 percent increase in pretax income. The effective tax rate for 1995 was 40 percent, compared to 33 percent in 1994. The effective tax rate for 1995 exceeded the statutory corporate federal income tax rate (35 percent) because goodwill amortization is not deductible for federal income tax purposes. The effective tax rate for 1994 was less than the statutory corporate tax rate because of a reduction in the valuation allowance for net operating loss carryforwards. Minority interest in the first quarter of 1994 includes dividends on preferred stock of a subsidiary of Statesman. Minority interest in the first quarter of 1995 included such dividends, plus: (i) dividends on preferred stock held by minority shareholders of Statesman issued to finance a portion of the Acquisition; and (ii) the portion of earnings applicable to minority shareholders. 18 CCP:
Three months ended March 31, ________________________________________________ 1995 1994 ____________________ ____________________ Included in Included in Total Conseco's Total Conseco's CCP Accounts CCP Accounts ___ ________ ___ ________ (Dollars in millions) Revenues: Insurance policy income $ 26.6 $ - $ 30.1 $ - Investment activity: Net investment income 92.3 - 95.2 - Net trading income .1 - - - Net realized gains .4 - 1.5 - Equity in earnings of CCP - 6.4 - 8.0 Total revenues 119.4 6.4 126.8 8.0 Benefits and expenses: Insurance policy benefits and change in future policy benefits 16.3 - 16.9 - Interest expense on annuities and financial products 50.8 - 53.8 - Interest expense on notes payable 5.3 - 2.8 - Interest expense on investment borrowings 1.2 - 1.6 - Amortization related to operations 9.2 - 6.8 - Amortization related to realized gains .1 - .9 - Other operating costs and expenses 12.9 - 12.3 - Income before taxes and extraordinary charge 23.6 6.4 31.7 8.0 Income tax expense 8.9 .4 11.3 .6 Income before extraordinary charge 14.7 6.0 20.4 7.4 Extraordinary charge - - (1.3) (.5) Net income 14.7 6.0 19.1 6.9 Summarized by component, all net of applicable expenses and taxes: Operating earnings 14.5 5.9 20.0 7.2 Net realized gains .2 .1 .4 .2 Extraordinary charge - - (1.3) (.5) Net income 14.7 6.0 19.1 6.9
CCP's earnings during the first quarter of 1995 were affected by: (i) increased interest expense, resulting from a higher average note payable balance and higher interest rates; (ii) increased amortization related to operations due to an increase in annuities in force, an increase in expected profits from existing business, and a rescheduling of amortization on certain blocks of business as a result of revised surrender assumptions; (iii) decreased investment income, due to lower income provided by reverse repurchase agreements and dollar-roll transactions; and (iv) increased operating expenses. Conseco's equity in the earnings of CCP was affected by these factors, and also by changes in Conseco's ownership interest in CCP resulting from CCP's share repurchase program. Under this program, CCP repurchased 5.2 million shares at a cost of $104.7 million since March 31, 1994. Conseco's equity in the earnings of CCP in the first three months of 1994 included a $.5 million extraordinary charge related to CCP's prepayment of debt. At March 31, 1995, Conseco owned 49 percent of the common stock of CCP (compared to 40 percent at March 31, 1994). At March 31, 1995, the shares owned by Conseco had a net carrying value of $224.8 million, a fair value of $245.6 million and a total cost of $102.8 million. 19 CCP participated in the investment by Conseco Capital Partners, L.P. ("Partnership I") in BLH. In conjunction with BLH's IPO, CCP's investment in Partnership I was exchanged for approximately 2.8 percent of the common stock of BLH. Since the IPO, CCP carries its investment in BLH at fair value, with any unrealized gain or loss, net of income tax, included directly in shareholders' equity. Conseco's direct ownership in BLH, together with its indirect ownership through CCP, represents a controlling interest in BLH. Accordingly, Conseco accounts for its investment in BLH using the consolidation method. Conseco's ownership interest in BLH through CCP is included in the BLH segment. CCP also participated in the investment by Partnership II in Statesman. Because a subsidiary of Conseco is the sole general partner of Partnership II, Conseco controls Statesman. Accordingly, Conseco also accounts for its investment in Statesman using the consolidation method. Conseco's ownership interest in Statesman through CCP is included in the Statesman segment. WNC: Prior to the completion of its IPO, WNC was a wholly owned subsidiary of Conseco. Conseco sold 60 percent of WNC in the IPO. On December 23, 1994, Conseco sold its remaining 40 percent equity interest in WNC. Amounts included in Conseco's accounts for the first quarter of 1994, therefore include: (i) all of WNC's earnings from January 1 through February 15, 1994, the date the IPO was completed; and (ii) 40 percent of WNC's earnings for the period from February 15 through March 31, 1994.
Three months ended March 31, _________________ 1995 1994 ____ ____ (Dollars in millions) Equity in earnings of WNC $ - $21.9 Income tax expense - .2 Net income - 21.7 Summarized by component, all net of applicable expenses and taxes: Operating earnings - 17.5 Net trading income - 2.6 Net realized gains - 1.6 Net income - 21.7 /TABLE 20 Wholly Owned Insurance Subsidiaries:
Three months ended March 31, __________________ 1995 1994 ____ ____ (Dollars in millions) Revenues: Insurance policy income $12.6 $17.5 Investment activity: Net investment income 17.1 20.6 Net realized losses (1.0) (7.6) Total revenues 28.7 30.5 Benefits and expenses: Insurance policy benefits and change in future policy benefits 13.8 18.5 Interest expense on annuities and financial products 3.6 4.3 Amortization related to operations 1.2 1.4 Other operating costs and expenses 2.9 3.8 Income before taxes 6.3 2.4 Income tax expense 2.7 1.1 Net income 3.6 1.3 Summarized by component, all net of applicable expenses and taxes: Operating earnings 5.0 6.3 Net realized losses (1.4) (5.0) Net income 3.6 1.3
Insurance policy income relates primarily to premiums from products with mortality and morbidity features. Recent declines resulted from decreased emphasis on generating new premiums from these products. Net investment income decreased by 17 percent in the 1995 period, primarily due to a reduction in income from other invested assets. Net realized losses often fluctuate from period to period. The wholly owned subsidiaries sold fixed maturity investments of $9.6 million and $100.4 million in the first quarters of 1995 and 1994, respectively. Such securities were sold in response to changes in the investment environment which created opportunities to enhance the total return of the investment portfolio without adversely affecting the quality of the portfolio or the matching of expected maturities of assets and liabilities. Insurance policy benefits (including change in future policy benefits) relate solely to policies with mortality and morbidity features. These benefits decreased by 25 percent in the 1995 period primarily as a result of a decrease in premiums from such products. Interest expense on annuities and financial products decreased by 16 percent in the 1995 period as a result of a smaller block of business in force. The average rate credited on all insurance liabilities was approximately 7.0 percent at both March 31, 1995 and 1994. 21 Services Provided for Fees:
Three months ended March 31, __________________ 1995 1994 ____ ____ (Dollars in millions) Revenues: Investment management $11.1 $ 9.6 Commissions 3.0 3.3 Administrative services, net of directly related expenses 2.3 1.5 Total revenues 16.4 14.4 Less intercompany eliminations (5.7) (1.5) Revenues reported 10.7 12.9 Net income attributable to: Investment management 5.0 4.9 Commissions - .2 Administrative services 1.5 1.0 Net income 6.5 6.1
Conseco's fee revenues include: (i) fees for investment management and mortgage origination and servicing; (ii) commissions earned for insurance and investment product marketing and distribution; (iii) administrative fees for policy administration, data processing, product marketing and executive management services; and (iv) fees for financing services provided to Partnership II. Fees earned from services provided to consolidated entities are eliminated. Total revenue growth in the first quarter of 1995 was the result of an increase in fee-producing activities provided to Statesman and other affiliated clients, partially offset by a reduction in the rates charged to WNC for investment management services. Restructuring Activities:
Three months ended March 31, __________________ 1995 1994 ____ ____ (Dollars in millions) Gain on sale of stock $ - $65.3 Income tax expense - 22.9 Net income - 42.4
Gain on sale of stock in the 1994 period related to the sale of a 60 percent common equity interest in WNC. Corporate and Other:
Three months ended March 31, __________________ 1995 1994 ____ ____ (Dollars in millions) Net investment income $ 1.4 $ 1.7 Total revenues 2.2 3.5 Interest expense on notes payable 6.4 7.9 Other operating costs and expenses 7.9 7.0 Income tax benefit 4.7 3.8 Loss before extraordinary charge 7.4 7.6 Extraordinary charge on extinguishment of debt - 1.9 Net loss 7.4 9.5
22 Corporate and other includes financing costs of notes payable for which Conseco is directly liable and the costs associated with the holding company operations. Net investment income decreased by 18 percent in the 1995 period primarily as a result of lower average invested assets. Interest expense on notes payable decreased by 19 percent in the 1995 period as a result of the repayment of: (i) a $200 million note in February 1994; and (ii) notes payable with book values totaling $19.2 million in March 1994. These notes were repaid with the proceeds from the sale of shares of WNC and resulted in an extraordinary charge in the first quarter of 1994 of $1.9 million (net of a $1.0 million tax benefit). SALES In accordance with generally accepted accounting principles, insurance policy income shown in Conseco's consolidated statement of operations consists of premiums received for policies which have life contingencies or morbidity features. For annuity and universal life contracts without such features, premiums collected are not reported as revenues, but rather are reported as deposits to insurance liabilities. We recognize revenues for these products over time in the form of investment income and surrender or other charges. Premiums collected by BLH for the first quarter of 1995 were $407.3 million, of which $81.7 million were recorded as deposits to policy liability accounts. This compared to $385.0 million collected and $63.1 million recorded as deposits to policy liability accounts in the first quarter of 1994. Collected premiums by type are provided in the following table:
Three months ended March 31, __________________ 1995 1994 ____ ____ (Dollars in millions) Individual health: Medicare supplement $159.9 $157.9 Long-term care 37.6 32.1 Other 25.9 32.4 _____ ______ Total individual health 223.4 222.4 Annuities 80.0 61.7 Individual life 24.0 23.3 Group and other 79.9 77.6 ______ ______ Total $407.3 $385.0 ====== ======
Medicare supplement premiums collected increased slightly in the 1995 period. Long-term care collected premiums increased by 17 percent in the 1995 period, due to growth in new business and a larger base of renewal premiums. Collected premiums for other individual health products decreased by 20 percent in the 1995 period. This decrease, which was anticipated, follows steps previously taken by BLH to improve the profitability of its comprehensive major medical product included in this category. Annuity premiums increased by 30 percent in the 1995 period due to increased sales of single premium deferred annuities. BLH sold more single premium deferred annuities because of an increased marketing emphasis placed on such sales. Premiums collected by Statesman in the first quarter of 1995 were $249.6 million, of which $241.9 million were recorded as deposits to liability accounts. This compares to $253.6 million collected and $245.7 million recorded as deposits to liability accounts in the first quarter of 1994. Of the premiums collected in the first quarters of 1995 and 1994, 97 percent were from sales of single and flexible premium deferred annuities; 3 percent were from life insurance products and less than 1 percent were from accident and health insurance. 23 Premiums collected by Conseco's wholly owned insurance subsidiaries decreased by 19 percent to $21.0 million in the first quarter of 1995 from $26.0 million in the first quarter of 1994. Conseco's wholly owned subsidiaries are not actively marketing new products. LIQUIDITY AND CAPITAL RESOURCES Changes in the consolidated balance sheet between December 31, 1994, and March 31, 1995, reflect growth in Conseco's assets and liabilities from the three earnings activities previously discussed, together with the notes payable and capital stock transactions described in the accompanying notes to the consolidated financial statements. The decrease in shareholders' equity in the first three months of 1995 resulted from the stock repurchase program described in the notes to the consolidated financial statements, largely offset by: (i) earnings; and (ii) the change in unrealized depreciation to reflect the increase in the estimated fair value of Conseco's investments. The change in unrealized depreciation of securities is recorded consistent with the requirements of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"). The change in unrealized depreciation resulted from a decreasing interest rate environment which generally caused the fair value of fixed maturities to increase. The ratio of debt (for which the Company is directly liable) to total capital increased to .23 to 1 at March 31, 1995, from .20 to 1 at December 31, 1994, as a result of borrowings under the Company's revolving credit agreement. The ratio of debt (for which the Company is directly liable) to total capital excluding unrealized depreciation of securities recorded consistent with the requirements of SFAS 115 increased to .21 to 1 at March 31, 1995, from .18 to 1 at December 31, 1994. Book value per common share was $22.87 at March 31, 1995, compared to $20.89 at December 31, 1994. This increase was due to the decrease in shares outstanding and the change in unrealized depreciation of securities. Excluding unrealized depreciation of securities recorded consistent with the requirements of SFAS 115, the book value per common share was $26.27 at March 31, 1995, compared to $27.10 at December 31, 1994. The return on average common equity was 17 percent (annualized) for the three months ended March 31, 1995, compared to 22 percent for the year ended December 31, 1994. This decrease occurred primarily because of the difference in restructuring income during these periods. Dividends declared on common stock for the three months ended March 31, 1995, were $.125 per share. On March 3, 1995, the Company announced that its Board of Directors intends to reduce its quarterly cash dividend to $.02 per share, effective with the dividend to be paid in July 1995. INVESTMENTS The amortized cost and estimated fair value of fixed maturities (all of which were actively managed) were as follows at March 31, 1995:
Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ____ ____ ______ _____ (Dollars in millions) United States Treasury securities and obligations of United States government corporations and agencies. $ 301.4 $ 6.2 $ 4.8 $ 302.8 Obligations of states and political subdivisions 30.1 1.2 .5 30.8 Debt securities issued by foreign governments 61.4 .3 1.7 60.0 Public utility securities 1,538.3 34.3 58.9 1,513.7 Other corporate securities 3,442.4 60.4 85.3 3,417.5 Mortgage-backed securities 2,875.6 62.7 84.7 2,853.6 ________ ______ ______ ________ Total fixed maturities $8,249.2 $165.1 $235.9 $8,178.4 ======== ====== ====== ========
24 The following table sets forth fixed maturity investments at March 31, 1995, classified by rating categories. The category assigned is the highest rating by a nationally recognized statistical rating organization or, as to $224.3 million fair value of fixed maturities not rated by such firms, the rating assigned by the National Association of Insurance Commissioners ("NAIC"). For purposes of the table, NAIC Class 1 is included in the "A" rating; Class 2, "BBB-"; Class 3, "BB-" and Classes 4 to 6, "B+ and below."
Investment Percent of Percent of rating fixed maturities total investments ______ ________________ _________________ AAA 39% 35% AA 8 7 A 27 24 BBB+ 7 6 BBB 9 8 BBB- 7 6 ___ __ Investment grade 97 86 ___ __ BB+ 1 1 BB - - BB- 1 1 B+ and below 1 1 ___ __ Below investment grade 3 3 ___ __ Total fixed maturities 100% 89% === ==
Fixed maturities which were below investment grade had an amortized cost of $291.3 million and an estimated fair value of $285.0 million at March 31, 1995. During the first three months of 1995 and 1994, the Company recorded writedowns of fixed maturity investments of $2.2 million and $.2 million, respectively. These writedowns were the result of changes in conditions which caused us to conclude that a decline in fair value of the investments was other than temporary. At March 31, 1995, fixed maturity investments in default as to the payment of principal or interest had an aggregate amortized cost of $9.8 million and a fair value of $11.1 million. Proceeds from the sales of invested assets were $473.1 million for the three months ended March 31, 1995. Such sales resulted in net realized gains of $1.1 million and trading gains of $1.6 million. Proceeds from sales of invested assets during the first three months of 1994 were $554.6 million. These sales resulted in net realized losses of $7.6 million. At March 31, 1995, fixed maturity investments included $2,853.6 million (35 percent of Conseco's fixed maturity investment portfolio) of mortgage-backed securities, of which $2,106.9 million were collateralized mortgage obligations ("CMOs") and $746.7 million were pass-through securities. CMOs are securities backed by pools of pass-through securities and/or mortgages that are segregated into sections or "tranches." These securities provide for sequential retirement of principal, rather than the pro-rata share of principal return which occurs through regular monthly principal payments on pass-through securities. The yield characteristics of mortgage-backed securities differ from those of traditional fixed income securities. Interest and principal payments occur more frequently, often monthly, and mortgage-backed securities are subject to risks associated with variable prepayments. Prepayment rates are influenced by a number of factors which cannot be predicted with certainty, including the relative sensitivity of the underlying mortgages backing the assets to changes in interest rates, a variety of economic, geographic and other factors and the repayment priority of the securities in the overall securitization structures. 25 In general, prepayments on the underlying mortgage loans, and the securities backed by these loans, increase when the level of prevailing interest rates declines significantly below the interest rates on such loans. Mortgage-backed securities purchased at a discount to par will experience an increase in yield when the underlying mortgages prepay faster than expected. Those securities purchased at a premium that prepay faster than expected will incur a reduction in yield. When declines in interest rates occur, 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. As the level of prevailing interest rates increases, 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. The following table sets forth the par value, amortized cost and estimated fair value of investment in mortgage-backed securities at March 31, 1995, summarized by the interest rates on the underlying collateral.
Par Amortized Estimated value cost fair value _____ ____ _________ (Dollars in millions) Pass-through securities: Below 7% $ 314.6 $ 313.6 $ 289.0 7% - 8% 243.5 241.8 234.5 8% - 9% 218.0 216.9 218.8 9% and above 4.2 4.3 4.4 Planned amortization class CMO instruments: Below 7% 425.2 384.7 368.8 7% - 8% 348.9 330.3 313.1 8% - 9% 78.0 78.3 75.0 9% and above 14.8 15.3 15.4 Targeted amortization class CMO instruments: 7% - 8% 79.5 67.6 70.4 8% - 9% 33.6 30.6 31.1 9% and above 30.8 31.5 30.5 Other CMO instruments: Below 7% 276.3 222.9 230.2 7% - 8% 698.4 568.2 586.6 8% - 9% 276.9 249.2 262.5 9% and above 136.5 120.4 123.3 ________ ________ ________ Total mortgage-backed securities $3,179.2 $2,875.6 $2,853.6 ======== ======== ========
We limit our exposure to prepayment risk by: (i) generally avoiding securities whose cost significantly exceeds par; (ii) purchasing securities which are backed by collateral with lower prepayment sensitivity (such as higher dollar mortgages included in mortgage-backed securities issued by non-government entities and mortgages that are seasoned); (iii) limiting investments in securities whose values are heavily influenced by changes in prepayments (such as interest only strips and accrual bonds); and (iv) concentrating on intermediate-tranche CMOs and securities with prepayment-protected structures (such as planned amortization class ("PAC") or targeted amortization class ("TAC") CMOs). PAC and TAC investments are designed to amortize in a more predictable manner by shifting the primary risk of prepayment of the underlying collateral to other CMO tranches. PACs and TACs have more stable cash flows than other CMO tranches because they have better call protection in a declining interest rate environment and less extension risk in a rising interest rate environment. PAC and TAC instruments represented 31 percent of the Company's mortgage-backed securities at March 31, 1995. 26 Included in the Company's CMO holdings at March 31, 1995, were accrual bonds with a carrying value of $267.5 million. Accrual bonds are CMOs structured such that the payment of coupon interest is deferred until principal payments begin on these bonds. On each accrual date, the principal balance is increased by the amount of the interest (based upon the stated coupon rate) that otherwise would have been payable. As such, these securities act much the same as zero coupon bonds until cash payments begin. Cash payments typically do not commence until earlier classes in the CMO structure have been retired, which can be significantly influenced by the prepayment experience of the underlying mortgage loan collateral in the CMO structure. Because of the zero coupon element of these securities and the potential uncertainty as to the timing of cash payments, their market values and yields are more sensitive to changing interest rates than other CMOs, pass-through securities and coupon bonds. At March 31, 1995, the balance of mortgage loans was comprised of 91 percent commercial loans, 7 percent residual interests in collateralized mortgage obligations and 2 percent residential loans. Less than 1 percent of mortgage loans were noncurrent at March 31, 1995. There were no realized losses on mortgage loans during the three months ended March 31, 1995 and 1994. At March 31, 1995, the Company had a loan loss reserve of $2.2 million. Borrowings under reverse repurchase agreements and dollar-roll transactions were $582.3 million at March 31, 1995. These borrowings were collateralized by pledged securities with fair values approximately equal to the borrowings. Such borrowings averaged approximately $154 million during the first three months of 1995, compared to approximately $266 million during the same period of 1994. STATUTORY INFORMATION Statutory accounting practices prescribed or permitted for the Company's insurance subsidiaries by regulatory authorities differ from generally accepted accounting principles. The Company's life insurance subsidiaries that are included on a consolidated basis in these financial statements reported the following amounts to regulatory agencies at March 31, 1995, after appropriate eliminations of intercompany accounts among such subsidiaries (dollars in millions): Statutory capital and surplus $555.1 Asset valuation reserve ("AVR") 66.5 Interest maintenance reserve ("IMR") 85.5 ______ Total $707.1 ======
At March 31, 1995, the ratio of such consolidated statutory account balances to consolidated statutory liabilities (excluding AVR, IMR, liabilities from separate account business and short-term collateralized borrowings) was 8.4 percent, compared to a ratio of 9.1 percent at December 31, 1994. The decline in the ratio is primarily due to $67.3 million of dividend payments made by the life insurance subsidiaries to non-life parent companies, partially offset by statutory earnings of such life subsidiaries. In connection with BLH's acquisition, BLH increased the capital of one of its life insurance subsidiaries (Bankers Life Insurance Company of Illinois "BLI") by providing cash in exchange for a surplus debenture. The remaining balance of the surplus debenture of $460.0 million at March 31, 1995, is considered a part of BLI's statutory capital and surplus. Payments to BLH of principal and interest on the surplus debenture may be made from available funds only with the approval of the Illinois Department of Insurance ("DOI") when its Director is satisfied that the financial condition of BLI warrants that action. Such approval may not be withheld provided the surplus of BLI exceeds, after such payment, approximately $128.0 million. BLI's surplus at March 31, 1995, was $332.1 million. During April 1995, BLI made a scheduled principal payment on the surplus debenture of $30.0 million plus accrued interest. 27 BLI's ability to service its obligations under the surplus debenture is dependent upon its ability to receive dividends and tax sharing payments from its subsidiary, Bankers Life & Casualty Insurance Company ("BLC"). BLC may, upon prior notice to the DOI, pay dividends in any twelve-month period up to the greater of: (i) statutory net gain from operations for the prior year; or (ii) 10 percent of statutory capital and surplus at the end of the prior year. Additionally, as a condition to its 1992 acquisition, BLC agreed not to pay dividends if, immediately after such payment, BLC's ratio of adjusted capital to risk-based capital ("RBC") would be less than 100 percent. Calculations using the RBC formula indicate that BLC's adjusted capital is twice its total RBC at March 31, 1995. Dividends in excess of maximum amounts prescribed by the state statutes may not be paid without DOI approval. During March 1995, BLC paid regular dividends of $25.0 million. During the remainder of 1995, BLC may pay additional dividends up to $68.4 million without regulatory approval. The surplus of Statesman's primary life insurance subsidiary (American Life and Casualty Insurance Company) includes surplus notes with a balance of $50.2 million at March 31, 1995. Each payment of interest or principal on the surplus notes requires the prior approval of the Iowa Insurance Division. The Iowa insurance law also provides that payments of dividends on capital stock and interest and principal on surplus notes may be made only out of an insurer's earned surplus. At March 31, 1995, the subsidiary had earned surplus of $112.1 million. During the first quarter of 1995, the subsidiary made a scheduled principal payment on a surplus note of $1.0 million and paid cash dividends of $20.3 million to another subsidiary of Statesman (American Life Holding Company). During the remainder of 1995, American Life and Casualty Insurance Company can pay cash dividends to American Life Holding Company of approximately $15.0 million (reduced by any surplus note principal or interest payments) without prior approval of the Iowa Insurance Division. During the first quarter of 1995, our wholly owned life insurance subsidiaries paid $40.0 million of ordinary dividends to Conseco. During the remainder of 1995, our wholly owned insurance subsidiaries may pay additional dividends up to $8.4 million without the permission of state regulatory authorities. PROPOSED ACQUISITIONS On February 27, 1995, Conseco announced that its Board of Directors had approved proposals to acquire, in separate transactions, the outstanding shares of CCP and BLH that Conseco does not already own. Under the proposals, CCP and BLH would merge into Conseco, with Conseco being the surviving corporation. Each holder of CCP shares other than Conseco would receive $22.50 per share in cash. Each holder of BLH shares other than Conseco would receive $22.00 per share in cash. Each proposed merger transaction would require the approval of holders of a majority of outstanding shares of the company being acquired (other than shares held by Conseco) voting at a special stockholders' meeting. 28 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits. 11.1 Computation of Earnings Per Share - Primary. 11.2 Computation of Earnings Per Share - Fully Diluted. 27.0 Financial Data Schedule b) Reports on Form 8-K. None. 29 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONSECO, INC. Dated: May 12, 1995 By:/s/ ROLLIN M. DICK ____________________ Rollin M. Dick, Executive Vice President and Chief Financial Officer (authorized officer and principal financial officer) EX-11.1 2 EXHIBIT 11.1 FOR 3/31/95 FORM 10-Q FOR CONSECO, INC. 1 EXHIBIT 11.1 CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - PRIMARY (unaudited) Three months ended March 31, _________________________ 1995 1994 ____ ____ Shares outstanding, beginning of period 22,184,850 25,311,773 Weighted average shares issued (acquired) during the period: Treasury stock acquired (1,482,542) (1,396,021) Exercise of stock options 26,169 2,977,213 Common equivalent shares related to: Stock options at average market price 692,756 995,079 Employee stock plans 408,843 416,312 ___________ ___________ Weighted average primary shares outstanding 21,830,076 28,304,356 =========== =========== Net income for primary earnings per share: Net income as reported $24,422,000 $80,144,000 Less preferred stock dividends (4,607,000) (4,672,000) ___________ ___________ Net income for primary earnings per share $19,815,000 $75,472,000 =========== =========== Net income per primary common share $ .91 $2.67 ===== =====
EX-11.2 3 EXHIBIT 11.2 FOR 3/31/95 FORM 10-Q FOR CONSECO, INC. 1 EXHIBIT 11.2 CONSECO, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE - FULLY DILUTED (unaudited) Three months ended March 31, ______________________ 1995 1994 ____ ____ Weighted average primary shares outstanding 21,830,076 28,304,356 Incremental common equivalent shares: Related to options and employee stock plans based on market price at the end of the period - 13 Related to convertible preferred stock (a) - 4,509,509 ___________ ___________ Weighted average fully diluted shares outstanding 21,830,076 32,813,878 =========== =========== Net income for fully diluted earnings per share: Net income as reported $24,422,000 $80,144,000 Less preferred stock dividends (4,607,000) - ___________ ___________ Net income for fully diluted earnings per share $19,815,000 $80,144,000 =========== =========== Net income per fully diluted common share $.91 $2.44 ==== ===== _______________________ (a) The effect of the assumed conversion of convertible preferred stock on the computation of fully diluted earnings per share was antidilutive in the 1995 period.
EX-27 4 ARTICLE 7 FDS FOR 3/31/95 FORM 10-Q OF CONSECO, INC.
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR CONSECO, INC. DATED MARCH 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1995 MAR-31-1995 8,178,400 0 0 43,200 213,500 0 9,170,300 0 48,400 1,257,100 11,690,100 8,068,500 204,100 223,400 227,400 817,300 152,000 0 283,500 310,100 11,690,100 341,100 179,400 2,700 19,800 349,800 40,000 55,100 70,300 26,100 44,200 0 0 0 24,400 .91 .91 0 0 0 0 0 0 0 Includes $84,200 of credit-tenant loans. Cash and cash equivalents are classified as short-term investments, which are included in total investments. Includes $909,600 of cost of policies purchased. Includes notes payable of Bankers Life Holding Corporation of $280,200 and Partnership II entities of $315,700 which are not direct obligations of Conseco. Includes retained earnings of $377,300, offset by net unrealized depreciation of securities of $67,200. Includes net realized gains of $1,100 and net trading income of $1,600. Includes fee revenue of $10,700, equity in earnings of CCP Insurance, Inc. of $6,400 and other income of $2,700. Includes insurance policy benefits of $255,800, change in future policy benefits of $6,600 and interest expense on annuities and financial products of $87,400. Includes amortization of cost of policies purchased of $20,700 and cost of policies produced of $16,700 and amortization related to realized losses of $2,600.
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