With a $1.3 billion quarterly loss on its books, its stock delisted, the Feds investigating for possible accounting irregularities, and the smell of bankruptcy in the air, Conseco is going through some tough times. The Indiana-based insurance giant has more tough times ahead as it struggles to recover from losses incurred through the purchase of Green Tree Financial Corp., a high-risk consumer loan specialist. Green Tree, purchased in 1998, cost the parent company some $6 billion to acquire, but the purchase price was only part of its cost to Conseco; Green Tree rapidly became a liability instead of an asset as default rates rose on its loans.
What does this mean for advisors, and for their clients, who may be holding various Conseco products? For the moment, not much but a downgraded rating, according to various industry sources. While Weiss Ratings Inc. has now downgraded 12 subsidiaries of Conseco to E+, or "very weak", as of August 19, other industry observers are not sounding the alarm. While the parent company is awash in debt, its insurance subsidiaries are sound, say industry experts. The Indiana Department of Insurance office has indicated that it is keeping a close eye on the situation. Says Greg Thomas, chief deputy commissioner, "What people need to understand is that it's the holding company parent that has the difficulties. The subsidiaries seem to be in compliance." Reserves, he says, are more than adequate to pay clients, and Conseco has been "pretty forthcoming" with regulators from Indiana, Pennsylvania, New York, and Texas.
While past experience within the industry has shown that bad publicity can panic policyholders, causing them to cash in policies and create a "run" on a company's assets, nothing of the kind has been reported in the case of Conseco. In fact, Townsend & Schupp, a division of Insurance Research Group Inc. in Hartford, Connecticut, has issued an analysis stating that the parent company debt "should pose no threat" to its subsidiaries. "The probability of [a run on Conseco's subsidiaries] is low," according to Fred Townsend, founder of Townsend & Schupp. Townsend feels that individual policyholders are not likely to hear of Conseco's difficulties, since news agencies are focusing on "Worldcom, Enron, and [companies like them]" rather than insurance companies.
Even if individuals were to hear of Conseco's troubles and think they had to salvage assets from their policies or annuities, Townsend says that the subsidiaries have more than adequate reserves: "I think that for most of the companies, you'd have to have 85% or more policyholders demand surrender values before the companies would exhaust liquid assets," he says. Subsidiaries carrying health insurance would have even less to worry about, he says, since health insurance has no cash surrender value, if policyholders dropped their policies, it would free up reserve liability funds held against the payment of future benefits. This money would therefore flow into the surplus and improve the company's overall asset position with respect to paying policyholders.
However, John Ryan, an independent insurance consultant to financial advisors based in Highlands Ranch, Colorado, says that he is telling people to stay away from Conseco policies. "There's nothing they're doing that's so unique that we have to deal with them," says Ryan. While he points out that Conseco may pull through its difficulties, until it does, he is advising that prospective policy buyers "stick with companies that manage things a little better."
Conseco did not return phone calls seeking comments.