Agents Have Questions On Conseco Bankruptcy

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Conseco, Inc., the beleaguered, debt-laden insurance holding company, filed for Chapter 11 protection on Dec. 17, becoming the third largest U.S. bankruptcy on record, behind Worldcom and Enron.

The long anticipated action still had state insurance regulators assuring consumers that the companys insurance operations were sound and annuity distributors hand-holding concerned agents. These agents, according to interviews, want information to determine whether they should advise their clients to stay with Conseco or move to other carriers.

Conseco had $51.18 billion in liabilities and $52.29 billion in assets as of Sept. 30, 2002. It has $6.5 billion in debt and has been getting extensions from debt holders since Aug. 9.

Conseco says the bankruptcy proceeding will help facilitate a restructuring. In addition to Consecos filing, Conseco Finance Corp., the finance arm of Conseco, entered into a separate Chapter 11 filing and reached an agreement in principle to sell its assets to CFN Investment Holdings LLC.

“The decision we made in August was to get into bankruptcy,” said Conseco spokesman Mark Lubbers via e-mail.

“Our insurance business leaders were the strongest proponents of the bankruptcy option. They have stand-alone capital structures that are overseen by regulators–and are therefore safe from the bankruptcy–so they can weather the short storm and see this path as the fastest way to restore their Excellent rating from A.M. Best,” Lubbers wrote.

“The mood among our insurance folks last night was celebratory. One exec who shall remain nameless cracked open a bottle of champagne for the staff. This is truly the beginning of a restoration,” he continued.

Conseco management had been working with banks and bondholders to reach a restructuring agreement. At press time a representative for the bondholders did not comment on the terms of the restructuring.

Two of three annuity distributors contacted by National Underwriter said they had been fielding calls all day following the filing. A third said that although they had not yet received calls, they could still come in as agents learn of the filing.

“We had over 300 calls today,” said Ron Lane, president of Fairlane Financial Corp., an annuity distributor in Fort Lauderdale, Fla. At 5:30 p.m. on Dec. 18, Lane told NU, “I just got off the horn. We still have the whole switchboard lit and we are staying overtime.”

What agents want, according to Lane, is reassurance that they did the right thing in selling a Conseco annuity. He notes that when many sold these contracts the company was rated A by rating agencies.

Even so, he adds, there is the possibility “competitors and stock brokers” will try to move annuity contracts. And, there are those agents, Lane continues, who say that “they still might pull contracts because their clients cant sleep at night.”

Lane applauds Conseco for keeping agents abreast of what was going on and called the restructuring and bankruptcy filing “a cleansing, so to speak. It is a final cut from the apron strings. It is the mother company that is having a problem.”

A Midwest annuity distributor who asked not to be identified, says Conseco has sent “reams of paper” in an effort to keep everyone abreast of what was happening. A representative for the distributor says this has helped with the many phone calls the distributor has received. Even so, he says there is a possibility that agents will “roll the business.”

Conseco has also made a strong effort to communicate and work with regulators, says Betty Patterson, senior associate commissioner, with the Texas insurance department.

Patterson and other insurance regulators, including those at the Indiana and Florida departments, took pains to reassert what they have been saying for months: The assets of the insurers are protected from the parent by a statutory firewall, and those assets are sufficient to keep the insurance operations afloat.

“Overall, we expect the insurance companies to go right on with business,” says Patterson. “The filing was not unexpected. Ultimately, it will be a good thing for the companies.”

The restructuring, she continues, is a good thing because it will protect the insurance operations. “If you look at the Conseco operation, there is a strong reliance on insurance. Up to the time they purchased the finance company [Conseco Finance Corp.], insurance was what Conseco was all about.”

The insurance operations have seen an uptick of contract surrenders over 2001 but “overall, on all lines, there is nothing that we were not expecting,” Patterson says.

Greg Thomas, chief deputy insurance commissioner with the Indiana department, asserts that there will be no impact on policyholders.

The goal is to move the rating from the current “B” rating assigned by A.M. Best to an “A-” rating, a goal that could take two to three years, he says.

“Right now, they are within the statutory requirements” for capital and surplus, Thomas says.

Surrenders spike and then level, he explains. “It is up and down, then flat lines for two to three weeks.”

But, he adds that there has also been some uptick on sales of certain Conseco products.

New annualized premium suggests that Conseco life and annuity products have been most adversely affected, particularly those products that have the Conseco name in them, says Mark Pufahl, chief examiner with the Indiana department.

The insurance operations have “adequate capital and liquidity,” says Yvonne Bernard, managing senior financial analyst with A.M. Best, Oldwick, N.J.

Scott Robinson, a vice president and senior analyst with Moodys Investors Service, New York, says the restructuring will help reduce the parents debt load. In order to give the new Conseco more freedom, he says, the company will need a debt to capitalization ratio of no more than 30%.

Although the filing could cause an increase in surrenders, at this point, “policyholders have had enough time to surrender their contracts,” Robinson says. “The ones who are going to move their money probably already have. The fast, quick money has left.”

Standard & Poors Corp., New York, affirmed its B+ financial strength rating on Consecos insurance units, says Jayan Dhru, a credit analyst with S&P. In a sense, “the cloud has lifted.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 30, 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.