Conseco Inc., Raising Cash
Through Life Subsidiaries
Six life insurance subsidiaries of Conseco Inc., declared extraordinary shareholder dividend payments to their parent companies in the second quarter of 2002, with two of those payments awaiting insurance department approval.
Extraordinary dividends are defined as dividends that exceed the larger of (1) 100% of the prior years earnings, or (2) 10% of the prior years surplus.
So far during 2002, seven life subsidiaries have declared a total of 21 shareholder dividend payments. Four life insurance subsidiaries have raised capital by reinsuring significant portions of their insurance in-force, with one transaction awaiting insurance department approval.
One life insurance subsidiary was sold in June, and a second sales agreement was signed in July and awaits insurance department approval.
Table 1 shows the components of changes in statutory surplus in the first six months of 2002, for the 15 major life insurance subsidiaries of Conseco Inc. Twelve of the 15 companies had a reduction in statutory surplus.
Although the parent company, Conseco Inc., is flirting with bankruptcy, its life insurance subsidiaries have, in general, been deemed safe because of the protection afforded by: (1) statutory limits on shareholder dividend payments which can be made without insurance department approval; and (2) risk-based capital requirements for life insurance companies under the Risk-Based Capital Model Act of the National Association of Insurance Commissioners.
However, since insurance departments have been permitting Consecos life insurance subsidiaries to make extraordinary shareholder dividend payments, it is imperative to look at the policyholders second line of defense, namely, the risk-based capital ratio for each of Consecos 15 major life insurance subsidiaries.
Unfortunately, risk-based capital ratios are calculated and reported only at year-end. Therefore, Table 2 estimates each companys risk-based capital ratio by multiplying (a) its 12/31/01 RBC ratio, times (b) the ratio of its 6/30/02 surplus to its 12/31/01 surplus. This assumes no change in the risk surplus required at 12/31/01.
When a companys RBC ratio is (a) below 125%, the company is subject to a regulatory trend test, (b) below 100%, the company must submit a plan to improve its RBC ratio, (c) below 75%, regulators will order corrective actions, (d) below 50%, regulators are authorized to take over the company, and (e) below 35%, regulators must take over the company.
Conseco Life Insurance Company of Texas, a holding company for 13 other life insurance companies, paid cash dividends of $40 million, $60 million, $20 million, $55 million, and $25 million to an intermediary holding company, CIHC, Inc., on April 5, April 29, May 29, June 17 and June 24, 2002, respectively, after approval by the Texas Department of Insurance. The total payments of $200 million exceeded the prior years operating earnings of $178 million.
Conseco Life Insurance Company of Texas also declared a cash dividend of $75.3 million on May 29, 2002, which has not yet been approved by the Texas department. This $75.3 million is the sum of cash dividends of $7.3 million, and $68 million, declared on April 17 and April 18, 2002, by a subsidiary, Conseco Variable Insurance Company, which earned only $11 million in 2001. The latter two dividend payments have not yet been approved by the Texas department.
Declaration of the $68 million dividend payment was contingent upon receipt of a ceding commission from the coinsurance of all of Conseco Variable Life Insurance Companys life insurance in-force to an unaffiliated insurer. The ceding commission of $49.5 million was received on June 28, 2002.
Subsequent to the declaration of dividend payments by Conseco Variable Insurance Company to Conseco Life Insurance Company of Texas, the latter company signed a definitive agreement on July 18, 2002, to sell Conseco Variable Insurance Company to an unaffiliated insurance holding company, subject to the approval of the Texas department.
Although Conseco Life Insurance Company of Texas paid $200 million in shareholder dividend payments to its parent company in the second quarter of 2002, in turn, the company received $220 million in dividend payments from three of its life insurance subsidiaries.
First, Bankers Life Insurance Company of Illinois paid cash dividends of $20 million, $60 million, $20 million, and $45 million on April 3, April 29, May 29 and June 17, 2002, respectively, after approval by the Illinois Department of Insurance. The total payments of $145 million exceeded the prior years operating earnings of $102 million.
Although Bankers Life Insurance Company of Illinois paid $145 million in shareholder dividend payments to its parent company in the second quarter of 2002, in turn, Bankers Life of Illinois received $158 million in dividend payments from its subsidiary, Bankers Life and Casualty Company.
Bankers Life and Casualty paid cash dividends of $47.5 million, $40 million, $20 million, and $50.5 million on April 3, April 29, May 29 and June 17, 2002, respectively, after approval by the Illinois department. The total payments of $158 million exceeded the prior years operating earnings of $106 million.
In turn, on Jan. 1, 2002, Bankers Life and Casualty ceded 80% of its traditional life insurance business to an unaffiliated insurer, in a coinsurance transaction approved by the Illinois department. Bankers received a gross ceding commission of $124 million on April 2, 2002, which added $93 million to surplus, after taxes.
Second, Conseco Annuity Assurance Company paid a cash dividend of $37 million on June 17, 2002, after approval by the Illinois department. This dividend was equal to the normal statutory limit of 10% of the prior years surplus.
Third, Conseco Health Insurance Company paid a cash dividend of $40 million on April 5, 2002, to Conseco Life Insurance Company of Texas. This dividend exceeded the prior years operating earnings of $15 million.
Conseco Health Insurance Company has entered into a reinsurance agreement to cede 45% of its individual specified disease business in-force to an unaffiliated insurer, under which the company would receive $145 million.
On June 21, 2002, the company declared a cash dividend to its shareholder of $133 million, subject to receipt of the ceding commission and approval by the Arizona Department of Insurance. Neither transaction is accrued in the companys June 30, 2002 statutory financial statements.
Conseco Direct Life Insurance Company entered into a modified coinsurance transaction effective Jan. 1, 2002, to cede 80% of its traditional life insurance business to an unaffiliated insurer. The company received a gross ceding commission of $83 million on May 28, 2002, which added $51.7 million to surplus, after taxes.
In connection with the reinsurance agreement, Conseco Direct Life Insurance Company terminated an existing agreement with its indirect parent, CIHC Inc., and paid a cash termination fee of $32 million to CIHC on June 11, 2002. CIHC is a direct subsidiary of Conseco Inc.
Pioneer Life Insurance Company, a direct subsidiary of Conseco Life Insurance Company of Texas, sold its wholly-owned subsidiary, Manhattan National Life Insurance Company, to Great American Life Insurance Company on June 28, 2002, for $48.4 million in cash, which realized a pretax capital gain of $20.9 million.
Bankers National Life Insurance Company is a direct subsidiary of CIHC Inc., not of Conseco Life Insurance Company of Texas. Bankers National paid cash dividends to CIHC of $36 million, $20 million, and $20 million on March 29, June 10 and June 24, 2002, respectively, after approval by the Texas Department of Insurance. The total dividends of $76 million exceed the prior years operating earnings of $52 million.
In summary, Conseco is actively engaged in the sale of its life insurance subsidiaries and the reinsurance of blocks of insurance in-force, to raise capital that can then be distributed to the parent company to meet its debt and interest obligations.
Insurance departments in Texas and Illinois have approved the payment of extraordinary dividends to shareholders in four of the Conseco life insurance subsidiaries.
Additional dividends of $208 million were declared, but not yet approved, as of Aug. 15, 2002. All of the extraordinary dividends, both paid and unpaid in 2002, are supported by proceeds realized from reinsurance transactions.
Payment of extraordinary dividends runs the risk of reducing RBC ratios below 125%, which calls for various regulatory actions. After payment of extraordinary dividends in the first six months of 2002, 11 of Consecos 15 life insurance subsidiaries may have RBC ratios under the 180% level.
Frederick S. Townsend, a founder of The Townsend & Schupp Company, is an investment banker in Hartford, Conn.
Reproduced from National Underwriter Life & Health/Financial Services Edition, September 16, 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.