Conseco, Inc. Has Been Raising Cash Through Life Subsidiaries

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.