Conseco Inc. continues to face a significant hurdle on its path back to vigorous financial health.[@@]

Conseco, Indianapolis, emerged from bankruptcy reorganization proceedings, which had to do with consumer finance operations that are no longer part of the company, in September 2003.

The company is reporting $79 million in net income for the second quarter, up 76% from the total for the second quarter of 2004.

Expense management and improvements to distribution systems are starting to pay off, according to Conseco Chief Executive William Kirsch.

But Conseco is having trouble persuading A.M. Best Company, Oldwick, N.J., to award it an “A” rating.

Best recently improved its rating outlook on most of Conseco’s life and health subsidiaries to positive, from stable, but it has declined to assign “A” insurance financial strength ratings to Conseco’s main insurance units.

Best has assigned a rating of “BBB plus” to Conseco’s main insurance units, and it has assigned a rating of “BB plus” to Conseco’s recent $300 million offering of convertible debentures.

Conseco faces the same challenges in its Medicare supplement and long term care insurance businesses that all competitors in those markets face, Best says in a comment on its ratings decisions.

Meanwhile, Best says, “we believe additional work needs to be done to expand its distribution systems, particularly to broaden its independent marketing relationships, which remain highly concentrated but continue to produce sustainable revenues.”

Conseco’s refusal to award Conseco an “A” rating because of distribution concerns could actually cause distribution problems: Conseco’s lack of an “A” Best rating will limit independent agents’ willingness to promote the company’s brands, says Jukka Lipponen, an analyst in the Hartford office of Keefe, Bruyette & Woods Inc.

Among independent agents, “when you get to that “A minus” category, it makes a big difference, particularly in the middle market,” Lipponen says

But Lipponen is predicting that Conseco could move to the “A” level within a year.