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Conseco Inc. may be flirting with bankruptcy, but regulators assert that its life insurance operations remain statutorily sound, despite some public perception that the fate of the corporate offsprings is tied to the parents.

In its quarterly filing with the Securities and Exchange Commission last week, Carmel, Ind.-based Conseco raised the possibility of a bankruptcy filing–either voluntary or involuntary.

The company has received two repreives from lenders on principal and interest due on $4 billion in debt and $481.3 million in guarantees from directors and officers loans. It also owes approximately $1.9 billion of trust preferred securities through cross-default provisions.

The last repreive was on $224.9 million of principal plus accrued interest due on Oct. 15.

In its filing, Conseco said that “if the holders of such indebtedness or preferred securities exercised their rights to accelerate the maturity of all principal and interest due, we would be unable to satisfy these obligations.

“These forbearance agreements expire on Nov. 27, 2002, and are subject to various conditions. The Company is currently in negotiations with the relevant lenders to extend the expiration date of these forbearance agreements, although we cannot assure you that we will be able to do so.”

A representative for a Conseco bondholders group, Brad Eric Scheler, a lawyer with the New York law firm of Fried, Frank, Harris, Shriver & Jacobson, told National Underwriter that negotiations, which are “ongoing” could produce results “very shortly.” He advised, “Stay tuned. We hope to have something sooner than later.”

Meanwhile, regulators are closely monitoring the health of Consecos insurance operations.

Conseco noted in its quarterly filing that rating agency downgrades and stock market vagaries have impacted sales of its products.

For the first nine months of 2002, annuity premiums collected dropped to $804.1 million from $877 million during the same 2001 time frame. During third-quarter 2002, total annuity premiums collected declined to $270.4 million from $291.7 million in third-quarter 2001.

Total life insurance premium fell to $483.9 million in the first nine months of 2002 compared with $632.1 million in the same 2001 period. In third-quarter 2002, life premiums collected dropped to $112.6 million from $204.6 million.

In addition to the downgrades, Conseco said the decline in life premiums is related to reinsurance agreements executed in 2002.

Betty Patterson, senior associate commissioner with the Texas insurance department, one of the lead states in Consecos oversight, says of the insurance units that “they are still solvent and still operating.”

However, she noted that there has been some surrender activity, which was expected given the common name of the holding company and the insurance operations. “People dont make the distinction, and there is a distinction,” she says.

All the Conseco insurance operations are meeting statutory requirements, she says. When asked how well they were meeting it, Patterson replied, “They are meeting it. We cant really quantify in terms beyond that.”

There have been no additional requests from the parent for dividends from these companies, she says.

Indeed, Conseco said in its filing that it has agreed with regulators on safeguarding individual company assets.

The power of perception or satisfying consumer concerns may prove as challenging a hurdle as meeting debtholder demands, suggested one prominent former regulator with several insolvencies under his belt.

The regulator who declined to be named, said, “If consumers think a company is in trouble, then it can become a self-fulfilling prophecy. If a product is surrenderable, then people generally surrender it.”

That perception may also be driven by the reality of producers replacing the business of the troubled carrier, he adds.

“Every time that an agent replaces business, he gets a commission, and he can argue that he is doing the consumer a favor,” he says.

Victor Palmieri, who took the reins of the seized Mutual Benefit Life Insurance Company in the mid-1990s, offered his perceptions.

Palmieri, who continues work as a turnaround specialist operating out of Los Angeles, maintains that “in many cases, the policyholder has no idea who the carrier is and even if they do, often they are not aware of the difficulties that are affecting the company.”

In the cases of MBL and Confederation Life, another highly visible mid-90s rehabilitation, Palmieri says the issue of “unscrupulous agents” did come up. He qualified this observation by noting “that is not what scrupulous agents do and that is the majority of agents.”

When such activity arose, he explains, he took “very aggressive” action seeking sanctions against such agents. Twisting can result in agents losing their licenses, he notes.

When a holding company is in a cash crunch, according to an informed observer, what often happens is that costs of subsidiaries that would normally be consolidated and assumed by the parent are returned to the individual subsidiaries, which are expected to bear their own costs, this observer notes.

Although it is commonly believed that an insurance companys assets are safe from a parents creditors under law, some interviews suggest it is best for regulators to establish controls for this.

These controls have to be handled carefully, though, says this source. It is a “dance” because if you issue an order to conserve assets you might create the perception of insolvency and start a run on the bank, this source says.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 25, 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.