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The beleaguered finance unit of Conseco, Inc., continues to whipsaw the insurance and finance holding company.

In a letter released on Jan. 7, Conseco said it would fall short of projected earnings of 72 cents a share for 2001.

The letter also responded to an ongoing disagreement between Conseco, based in Carmel, Ind., and Salomon Smith Barney Managing Director Colin Devine over Conseco’s financial condition.

In a report dated Jan. 3, Devine rated the company a “sell, speculative” and dropped earnings estimates to 70 cents a share for 2001 and 80 cents a share for 2002. The target price for the stock, according to his report, remains $1.

The downgrade was based on a deteriorating manufactured housing loan market, a major business focus for the finance unit.

The report also noted “ongoing weak operating ratios at the life insurance operations.” It continued, “as implied by our nominal $1 price target, we believe Conseco’s shares offer little, if any, value. On a liquidation basis, we do not believe Conseco’s common shareholders would realize any value, although policyholders should be reasonably well protected by various state guaranty funds.”

Devine declined to say whether the company’s insurance operations could be seized by insurance regulators, but noted the discount to face value at which Conseco’s debt is trading.

Greg Thomas, a chief deputy commissioner with the Indiana insurance department, says putting the life insurance companies in rehabilitation is “definitely not on the table at this time.”

Thomas says the department is regularly monitoring Conseco. Last month, management visited with regulators and presented a plan that he says “on paper seemed a doable thing.”

Mark Pufahl, chief examiner with the department, says the department has been focused on Conseco’s life operations and has not received fourth quarter 2001 information on manufactured housing delinquency rates for the finance unit. Any information received on company cash flows is confidential, he adds.

According to Pufahl, Conseco’s life insurance units are in excess of minimum risk-based capital requirements.

Devine says Greenpoint Financial Corp.’s exit from manufactured housing that led it to take a $663 million after-tax charge on $5 billion in manufactured housing receivables suggests the extent of the deterioration in that market. He says Conseco was a “much more aggressive lender” on a portfolio of $25.8 billion in MH receivables as of Sept. 30, 2001 than Greenpoint Financial, New York .

The report says that “were Conseco to reach Greenpoint Financial’s loss projection rates of 26.2%, a level more than double the company’s current assumed rate of 12.6%, this would imply potential additional future MH loan losses over and above those already assumed in the company’s investment-only writedowns of $3.5 billion.”

Conseco’s Mark Lubbers, executive vice president-corporate affairs, challenges the report on several counts.

Lubbers questions using Greenpoint Financial data to mirror Conseco’s MH experience. He asserts in a letter that the data of the two companies do not mirror each other and will not in the future.

Lubbers also challenges the report’s statement that Greenpoint is “considered to be a much more disciplined and prudent lender than Conseco Finance.” Lubbers’ response is “based on what?”

Lubbers also calls “irresponsible” the report’s statement regarding Conseco’s liquidation value and policyholder protections under the state guaranty laws.

He notes that Consecos insurance policyholders are backed by $25 billion of assets that are held on the books of its insurance subsidiaries, and its risk-based-capital ratios are “well in excess of prescribed levels.” The claims paying ability of this company is not in doubt, he says.

Although he challenges the report’s findings, Lubbers says that “none of this note should be construed to say that performance in the MH sector is by any means rosy. It is not. We are in a very difficult economy that will continue to put pressure on earnings in the Finance company.”

On Jan. 9, Moody’s Investors Service lowered the credit ratings of Conseco and its affiliates to ‘B2′ from ‘B1.’

The insurance financial strength ratings of the insurance units were lowered to ‘Ba2′ from ‘Ba1′ and ‘Baa3.’

Moody’s says the outlook on the company’s ratings remains ‘negative.’ It noted the “continued uncertainty of the company’s financial flexibility.” However, it also said the company’s liquidity appears secure through June 2002.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 14, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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