Conseco Inc. Has Been Raising Cash Through Life Subsidiaries

Six life insurance subsidiaries of Conseco Inc., paid extraordinary shareholder dividend payments to their parent companies in the second quarter of 2002. 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.

During 2002, seven life subsidiaries paid or declared shareholder dividends in a series of 20 payments in Consecos vertical holding company structure. And, three life insurance subsidiaries raised capital by reinsuring significant portions of their life insurance in-force, which supported most of the dividend payments.

One life insurance subsidiary was sold in June. 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 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 that 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.

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.

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, Conseco Life Insurance Company of Texas 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 Company 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 insurance 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 Company 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 ordinary 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 Life Insurance Company of Texas may also receive a cash dividend of $75.3 million, which has not yet been approved by the Texas insurance 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 $11 million in 2001.

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 insurance department.

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. The total dividends of $76 million exceed the prior years operating earnings of $52 million.

In summary, prior to adopting a restructuring plan in August 2002, Conseco actively engaged in the sale of life insurance subsidiaries, and the reinsurance of blocks of insurance in-force, to raise capital, which was then dividended upstream to Conseco to meet financial obligations to its lenders.

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 23, 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.