Conseco Inc. took a major step toward freeing itself of a troubling line of business last week when it announced plans to unload most of its closed block of long term care insurance.

Conseco Inc., Carmel, Ind., has applied to the Pennsylvania Insurance Department to spin off Conseco Senior Health Insurance Company, with about $2.9 billion in assets, as a new independent entity called the Senior Health Care Oversight Trust. Conseco Senior Health, domiciled in Pennsylvania, ultimately would be renamed Senior Health Insurance Company of Pennsylvania if regulators approve the deal.

Conseco Senior Health, with 142,000 LTC policyholders, represents the largest part of the company’s run-off block of LTC business. Financial analysts observe that block has had significant adverse claims experience in recent years.

Conseco says it would continue to retain about 12% of its run-off LTC business among other subsidiaries but that it would shift administration of those policies to the new entity.

Transfer of the closed block would represent the most important part of a program Conseco announced last year to pursue “strategic alternatives,” says CEO Jim Prieur.

In the 11 years since Conseco acquired Senior Health’s LTC business from other insurers, it has contributed $915 million to the company, mostly to shore up claim reserves and maintain regulatory capital levels, the company notes.

Conseco says it expects the Pennsylvania department will hold a period of public comment until the end of September before ruling on the deal. If approved, Conseco says it hopes to complete the deal by Dec. 31.

A spokeswoman for the Pennsylvania department confirmed it has received Conseco’s transfer plan and said it normally takes the agency 60 to 90 days to rule on such applications.

Under the plan, Conseco would contribute $175 million in additional capital to Health Care Oversight, funded through a combination of cash and a $125 million note. The infusion would give the new trust a total of about $300 million in capital.

Conseco says it plans to record about $504 million in accounting charges for the deal in the second quarter, and $654 million in additional charges by the time it completes the transfer.

John Wells, president of Conseco Senior Health, would be president of Senior Health Insurance.

The deal should be good both for Conseco Senior Health policyholders and Conseco’s 4 million other policyholders, says Prieur.

Conseco notes in a filing with the U.S. Securities and Exchange Commission that Conseco shareholders have been pressing it to improve its financial performance.

Weakness at Senior Health has contributed to Conseco having relatively weak financial strength ratings and hurt its ability to compete, Conseco says.

In a conference call with investors, Conseco executives noted the trust would be able to focus solely on its LTC business and operate for the sole benefit of policyholders, without regard to any profit expectations.

Prieur says Conseco has recently stabilized the company with a steady infusion of capital and by pursuing rate increases and management improvements.

As a result, Senior Health has made significant progress, he says. “Claims volatility has been fixed, requested rates have come through, and there have been improvements in claims management. Significant improvements in performance and in customer service have been very apparent over the past 4 quarters.”

Jukka Lipponen, an analyst with Keefe, Bruyette & Woods, New York, observes that Conseco’s run-off LTC business has been the company’s biggest uncertainty.

The cost that Conseco would incur in spinning off the unit “is much larger than I would have expected, but on the positive side, the transaction means Conseco would have no more liability” for the run-off business, he says.

If the transaction is completed as planned, “it is permanently going to remove this liability from its balance sheet,” Lipponen notes, pointing out the liability would represent 88% of Conseco’s LTC insurance run-off liability.

As for Conseco’s remaining closed block of LTC business, Lipponen notes it still has seen losses with its Bankers Life and Casualty Company’s LTC business.

At the same time, he says, the company has an action plan for the business including “rate increases, improving claims handling and better underwriting. When you look at their track record with dealing with the runoff, they have delivered on that, so I have confidence they can fix the Bankers Life block as well.”

The Bankers Life policies have a lot less variations in policy provisions than does the Senior Health business, he notes, and that makes it relatively easy for Conseco to file for changes with the states.

Fitch Ratings says the proposed deal would have no immediate effect on its ratings of Conseco and its affiliates. It approved, however, the spin-off would “have a positive impact on Conseco’s risk profile.”

Standard & Poor’s, New York, says its ratings also would remain unchanged for Conseco and its units and that its outlook for the firm “remains negative.”

A.M. Best Co., Oldwick N.J., says it has placed debt ratings for Conseco and its subsidiaries under review, along with its overall financial rating.

If regulators approve the deal, Best says it would consider upgrading the company’s outlook. However, “failure to complete the transaction could result in a downgrade to some, if not all, of Conseco’s ratings.”

Also last week, Conseco announced earnings for the 2nd quarter, reporting a loss of $487 million on revenue of $1 billion. In the same period a year earlier, it had a $55 million loss on revenue of $1.2 billion.

In a presentation to investors, Conseco noted it has filed for 35% rate increase for 155,000 LTC policies with its Bankers Life Insurance subsidiary. The requested increases total $100 million, the company says, and it expects to receive approvals for about $70 million.