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Conseco - The Once &
Future Company |
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By Jerome R. Corsi, Ph.d.
TheUSBroker.com Sr. Editor
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Conseco assumes a formidable position in insurance distribution. As 2002
begins, the company ranks as the Number 1 provider of agent distributed
Medicare supplement insurance, the Number 1 provider of heart/stroke
insurance, the Number 2 provider of cancer insurance and the Number 3
provider of long-term care insurance. Over the past 15 years, Conseco has
been a leading provider of annuities in the senior market, often taking a
leading position in the distribution of annuities through financial
institutions. Through then-owned Bankmark, Conseco worked to establish
insurance distributions systems at some of the largest financial
institutions in America, reaching run rates in the 1990s close to $1 billion
per year in annuity sales.
Yet, despite the marketing success of Conseco's insurance subsidiaries, the
company's stock (New York Stock Exchange: CNC) since 1985 has been a focus
of constant controversy. There has never been a period in the last 15 years
when Conseco did not have critics who predicted its imminent demise. Yet
the company has persisted despite the constant criticism.
Conseco's First Fifteen Years - A Rough Ride
Since coming on the insurance industry scene in the mid-1980s, the ups and
downs of Conseco are nearly legendary. The near-mythic genesis of the
insurance holding company is a tale frequently repeated - stories abound of
founder Steve Hilbert and his partners going from farmhouse to farmhouse in
Indiana to raise the initial venture capital to launch Conseco.The vision in
the early 1980s was straightforward. Conseco aimed to provide a platform to
acquire insurance companies and realize gains by consolidating their
operations and drastically reducing overhead, leveraging anticipated gains
from the streamlining of top-heavy insurance administrations made more
efficient through the innovative introduction of computerized back-offices.
Conseco developed a reputation for taking a "Dr. Death" approach to early
acquisitions, lopping off managements and bringing all operational functions
back to the company's home base in remote and little-known Carmel, Indiana.
The late 1980s and early 1990s saw heady days of Wall Street investment
banks beating paths to this largely rural hub located some 40 minutes drive
from ORD, Chicago's bustling airport mega-center. Investors were lured by
phenomenal returns as the acquisition engine gained steam. By the mid-1990s
some hitches began appearing. A much-touted attempt failed to take over
insurance and mutual fund investment powerhouse Kemper, whose own fortunes
had faltered. Then there were rumors of executive high living as Steve
Hilbert's personal life entered a rancorous divorce and eyebrow-raising
re-marriage.
Always there were nay-sayers, led by investment banking firms who insisted
on shorting Conseco's stock, goaded by critical articles in publications
such as Barron's questioning CNC's accounting practices. Still, Conseco
roared on, with undiminished bally-ho. The arena in which the National
Basketball Association's Indiana Pacers was renamed the Conseco Fieldhouse.
Conseco sponsored an Indy 500 racecar that it promoted from the company's
executive box above the Finish Line at the Indianapolis Speedway. Conseco
took up office space in New York on fashionable Fifth Avenue, occupying a
suite in the Bergdorff-Goodman Building across from the Plaza. In
partnership with Donald Trump, Steve Hilbert acquired the adjoining GM
building, a prominent landmark in New York's famed Mid-Town landscape.
The demise of Hilbert and his management team might be typified as "One
Acquisition Too Many." The company was saddled with the problems of
acquisition target Green Tree, a finance company that specialized in trailer
parks. By the late-1990s, the raucous ride was coming to an end for Hilbert
and Associates. The Board axed Hilbert along with several once high-flying
executives and brought in discipline, recruiting to the helm Garry Wendt, a
turnaround expert with GE credentials.
Enter Gary Wendt - the Turnaround Guru
In 1998 Conseco stock tumbled 33%, followed by another 41% decline in 1999.
In June 2000, Conseco's principal stockholders, investor Irwin Jacobs and
Thomas Lee & Associates, called Jack Welch at GE to ask if Gary Wendt could
be released from his non-compete agreement with GE to help bail Conseco out.
As Jack Welch described the situation in his best-selling book Jack:
Straight from the Gut (Warner Books, 2001, pp. 247-249), Gary Wendt was the
perfect guy for this assignment. At first Jack Welch's inclination was to
hold Gary to all obligations to GE. After several phone calls, including
one from David Hawkins, the Conseco Board Member who was then serving as
Conseco's interim Chairman, Welch finally agreed to release Gary in exchange
for Conseco agreeing to buy out all GE's remaining obligations to Gary and
issuing 10.5 million warrants allowing GE to buy Conseco stock for $5.75 a
share, the price at the time of the agreement.
Welch made the decision that the warrants would ultimately be worth more
than any cash settlement he could get for releasing Wendt. When Conseco's
stock rose to around $20.00 per share in May 2001, everyone looked like a
sure winner. As Welch explained in his book, "The nice thing about this
deal is that everybody won. Gary found his ideal spot, a place where he's
the boss and his brains will work wonders. Conseco got the turnaround in
stock price that it wanted, and we got to sit on the sidelines and cheer for
Gary again. We had skin in the game and could take the ride with him."
Yet Wendt's tenure at Conseco has not been a smooth ride. In the third
Quarter of 2001, as interest rates fell and the economy turned down, CNC
dropped to a low of around $2.50 per share. While the stock has rebounded
in early 2002, trading around $3.50 per share, the hits have been hard.
Vocal critics have reappeared, led by TheStreet.com in a series of damaging
articles questioning the company's cash flow situation and its ability to
pay off debt. TheStreet.com's sometimes shrill negative tone has been
followed by short selling, a one-two punch reminiscent of the activity
surrounding the criticism published by Barron's during the Hilbert days.
In November 2001, amidst all the noise and furor, Gary Wendt quietly
acquired another 1 million shares of CNC at $2.94 per share. Savvy industry
insiders are willing to bet that Gary is not simply making a public
relations move.
Is My Insurance Policy with Conseco Safe?
Agents dread this question. Yes, there is always the answer about State
Insurance Guarantee Funds, the answer State Insurance Exams admonish
prospective agents never to use in a sales setting. What will freeze an
agent's new business faster than anything is the concern: "Is the state
fund the only safety net?" Conseco may well be poised to walk the high wire
once again, despite critics calling for "Last Rites."
The core of Wendt's turnaround strategy has been to transform Conseco from
an acquisition engine to a company that can generate profits on operations.
To reassure insurance policyholders, Conseco has retained $25 billion of
assets on the books of its insurance subsidiaries and has made sure that the
risk-based-capital (RBC) ratios of the insurance operating companies are
well in excess of prescribed levels. Conseco has worked diligently since
Wendt took the helm to maintain the confidence of insurance regulators
around the country. Responsible analysts, including State regulators and
industry rating agencies, have not called in doubt the claims paying ability
of Conseco's insurance subsidiaries. The first line of defense in Conseco'
s turnaround strategy has been to make sure policyholders have good reason
to feel safe.
Another key has been to pay down debt. Conseco management has announced an
intention to pay down debt by more than $3 billion by the end of 2003. As
of early 2002, Conseco has already eliminated $2.2 billion of that debt.
Conseco has stayed the course on debt reduction despite the economic
downturn being compounded by the tragic 9-11 terrorist attack on the World
Trade Center.
New Horizons
Gary Wendt has taken the restructuring of Conseco seriously. As an expert
in risk-reward, Wendt has trimmed Conseco by some 4000 employees. No more
GM buildings.No more riverboat gambling or entertainment subsidiaries. Just
finance, insurance and banking.
New talent has been recruited, talent with a proven track record in building
operating companies.To head Conseco Finance, Wendt brought in Chuck Cremens,
an executive with 20 years diverse experience in financial services. Cremens
served as President and Chief Operating of WMF Group, Ltd., the largest
originator of Fannie Mae and FHA multi-family loans, with a $15 billion
mortgage-servicing portfolio. Prior to WMF, Cremens was Chief Investment
Officer for Beacon Properties Corp., where he spearheaded the growth of the
office REIT from $500 million to $4 billion in under two years. This new
leadership signals a dramatic change in focus for Conseco
Finance
Conseco enjoys one of the largest sales forces of independent agents and
brokers in the industry - licensed agents who are a variable expense,
commission only, not a fixed salary of captive agent expense. Conseco has
consolidated its three separate product-based insurance units - Life
insurance, Supplemental Health Insurance, and Annuities - into one business
unit. Leading the new combined unit is Liz Georgakopolos who joined Conseco
in 2000 as president of its supplemental health business. Georgakopolos
previously had operating responsibility for the Long-Term Care insurance
business at Travelers Insurance Company. She holds an MBA from Harvard and
worked several years for the Boston Consulting Group (BCG).
While the turnaround process is not yet complete, a new direction is
emerging for Conseco. Central to Wendt's strategic vision has been to
protect the solvency and ratings of the insurance operating entities. A
second major objective has been to curb the hemorrhaging from poor operating
results in the finance unit and to reduce the burden of corporate debt.
Conseco has retained the licenses to be formidable once again in insurance,
finance, and banking. A solid bet is that the darkest days are over for the
leaner and more focused Conseco. With management determined to stay off the
acquisition trail and concentrate on the systematic building of business
units capable of delivering reliable operating profits, Conseco is
positioned to prove its critics once again wrong.
Jerome R. Corsi holds a Ph.D. from Harvard University. He has spent
the past 25 years in the financial services industry, focusing largely upon
alternative methods of distribution, including bank marketing. Dr. Corsi
has had a working relationship with Conseco since 1985, both as a licensed
agent and as a consultant. From 1919-1994 he was a Senior Officer of
Bankmark while the company was a Conseco subsidiary. Dr. Corsi currently
serves as a Special Consultant to IIC Marketing in New York and New Jersey.
IIC is a nationwide network of insurance agents and brokers with advanced
underwriting expertise and securities experience. Dr. Corsi can be reached
at
jcorsi@theusbroker.com. Dr. Corsi can also be reached by leaving a
message at IIC's Home Office in Syracuse, New York ph:(877)341-3342.
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