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.