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    Thursday, March 12, 2009

    March 5, 2008, 12:11 am Conseco, Again

    It’s been almost five years since Conseco emerged from bankruptcy, having been run into the ground by Steve Hilbert, its founder, who became the big man of Indianapolis while being paid hundreds of millions of dollars — and running up huge debts for the company. The local symphony hall was named for him, and the basketball arena bore the Conseco name. After Mr. Hilbert was ousted, the company turned to Gary Wendt, formerly of General Electric, and destroyed his reputation too.
    Conseco has been running through chief executives since bankruptcy, as well. The current boss, C. James Prieur, arrived in the fall of 2006 from Sun Life, a Canadian insurer, just as Conseco’s long-term care insurance policies were starting to bring big losses. He raised premiums, which angered regulators and policy holders.

    And it turns out he did something else that seems a little odd to the Securities and Exchange Commission. Last year’s annual report disclosed the company had changed the way it estimates reserves. On Tuesday Conseco reported that the commission did not like that change:
    “On February 28, 2008, the SEC Staff informed Conseco of their view that the use of a method which prospectively changes reserve assumptions for long-term care policies based solely on changes in premium rates is not consistent with the guidance of Statement of Financial Accounting Standards No. 60, ‘Accounting and Reporting by Insurance Enterprises.’”
    I went back and read the accounting policy disclosure, and found it baffling. Conseco used something it called the “pivot method” of estimating reserves, which sounds like something from that basketball arena. I think that means Conseco decided that it should only have to put aside reserves for claims if it was getting enough premium income from the policies. If that is what it means, it is a testament to financial ingenuity, if not to common sense.
    It is not Mr. Prieur’s fault that Conseco is stuck with having sold underpriced insurance, but it was on his watch that the company spent $64.3 million to buy back 4 million shares in the first nine months of 2007 — an average price a little above $16, about 50 percent more than the current price of Conseco stock. On Tuesday it fell $1.15 to $10.49. Once again a company found a way to reward fleeing shareholders at the expense of those who held on to their stock.
    It was also on his watch that Conseco settled with Mr. Hilbert, who owed $84 million from loans the company made to him. The amount of the settlement was not disclosed, but the Indianapolis Star quoted Mr. Hilbert and his wife as saying they were “eager to return their attentions to their own business ventures and their philanthropy.”
    “It’s a win-win-win situation,” Mr. Hilbert was quoted as saying.
    Not for the shareholders, it appears. But that is an old story at Conseco.
    Addendum: Tony Zehnder, a spokesman for Conseco, called Wednesday morning to say that Conseco viewed the Pivot method as conservative accounting, since it meant that only part of a rate increase would flow through to profits, with the rest added to reserves. To me, the level of reserves should be based on estimated losses, whether or not an insurance company is able to increase rates.
    Conseco3 Comments
    1. 1. March 5, 2008 12:26 pm Link
      During the past two decades, I have analyzed numerous companies in a multitude of sectors and have never seen anything so volatile and confusing as the insurance industry. It is virtually impossible to assess the risk associated with any class of policy, and in aggregate across all the business lines. Now that the insurance companies, similar to the banks, have loosened the definition of “risk” and use a variety of fictitious instruments and Derivatives to hedge their “bets”, in my view, they are also due for some regulatory tough love as well. AIG, the gold standard of the industry has been hit hard recently and my sense is that there would be more to come throughout this industry.
      — Hassan Azarm
    2. 2. May 18, 2008 3:41 pm Link
      Hello Norris,
      Quick question. I am investing in life settlements through a settlement provider that offers fractional, direct ownership. I am investing $10K in 5 different senior policies to minimize the longevity risk. The settlement provider underwrites senior settlements from B+ rate, legal reserve insurance companies. I never thought that there was an additional risk on the financial soundness of these insurance companies that are the “financial backbone” of America.
      The settlement company is publicly trade and has been around servicing institutions for over 16 years and they have an impressive track record underwriting. There is no blind pool risk as I will have a fractional direct ownership interest in each of the policies.
    Floyd Norris

    Copyright 2009 The New York Times Company
    Last edited by gazzettee; 03-12-2009 at 04:02 PM.

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