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Regulators: Conseco Insurance Subs Are Solvent

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NU Online News Service, Aug. 13, 5:19 p.m. – Conseco Inc. executives are telling insurance regulators that the Carmel, Ind., financial-services company’s life and health insurance subsidiaries are solid.

Regulators in California, Florida, Illinois, Texas and Conseco’s home state, Indiana, say they are confident that the insurance subsidiaries are meeting state solvency standards.

“The insurance companies are solvent and profitable,” says Greg Thomas, chief deputy commissioner of the Indiana Department of Insurance. “It is the parent company that is really the problem.”

But Conseco has not yet addressed the possible effects of ratings changes on producers’ willingness to place business with the Conseco insurance units, regulators say.

Conseco announced plans Aug. 9 to exercise a 30-day grace period on upcoming bond payments, and to hire an investment bank, Lazard Freres & Company L.L.C., New York, and a law firm, Kirkland & Ellis, to help it work with debt holders to restructure the parent company’s finances.

Although Moody’s Investors Service, New York, has left the ratings of most of Conseco’s insurance units unchanged at B2, and Standard & Poor’s, New York, has kept the insurance units’ ratings at B+-negative, the ratings are lower than they used to be.

Fitch Ratings, Chicago, responded to the Aug. 9 announcement by lowering its insurance ratings to B, from BB.

Regulators say Conseco has tried to keep them informed about the status of the insurance operations, and about the nature of the parent company’s second-quarter earnings, which are supposed to be released Wednesday.

In Florida, for example, all 12 Conseco units that operate in the state are in good standing, according to Beth Vecchioli, deputy director of insurance services with the Florida Department of Insurance.

“Conseco has been really good about reaching out,” Vecchioli says.

“Everyone is hoping and praying that Conseco will right itself,” says Lee Jones, a spokesman for the Texas Department of Insurance.

Regulators emphasize that state insurance laws and regulations build strong walls around the insurance subsidiaries’ assets.

The Indiana department hired outside lawyers to study whether Conseco’s creditors could get to the subsidiaries’ assets if the parent company filed for bankruptcy, Thomas says.

The outside lawyers found no case law on the issue, but they suggested in a privileged memorandum that the creditors would not have access to the insurance subsidiaries’ assets, Thomas says.

In Illinois, the insurance department must give approval before an insurance subsidiary can “upstream” any dividends or surplus notes to a parent company, according to Jack Messmore, deputy director of the financial division at the Illinois Department of Insurance.

Regulators can also use risk-based capital requirements to keep insurance subsidiaries from writing new business if a parent company lets insurance subsidiaries’ capital fall below the required levels, says John Charlton, a spokesman for the Ohio Department of Insurance.

Similarly, state regulators must give their approval before a parent company can sell its insurance subsidiaries, Jones says.

When Conseco managers spoke to Florida department regulators, they said the parent company had no plans to sell any of the insurance operations or to move books of business, Vecchioli says.

One open question has to do with the role state guaranty funds would play if Conseco’s insurance subsidiaries ran into serious problems.

Regulators interviewed were not sure whether the guaranty funds would cover all of Conseco’s product lines. The National Organization of Life and Health Insurance Guaranty Associations, Herndon, Va., could not immediately be reached for comment.