Out of bankruptcy, Conseco remains vulnerable

Conseco Inc. emerged from bankruptcy last week slimmer and more streamlined, but it is still saddled with a name many associate with financial disaster.

Regaining the confidence of consumers and independent insurance agents may take the Carmel, Ind., insurance company longer than it took to shed billions in debt in its reorganization, some observers say.

“If it was me, I wouldn’t buy a Conseco policy. Would you?” says Don Woodley, principal at Indianapolis-based Woodley Farra Manion Portfolio Management Inc., an investment advisory firm with about $200 million under management.

“Do people want to put their money in a company that has just come out of bankruptcy?”

But considering that Conseco’s insurance companies weren’t insolvent – only the holding company and finance unit were – agents may give them another chance.

“Agents have a great desire to forgive and move on,” says Doug Mc- Dermott, president of The Annuity Store Financial and Insurance Services LLC in Sacramento, Calif., a marketing distributor of Conseco products to independent agents.

Still, in order for that to happen, it will take improved ratings, more products, public relations and agent compensation that – because of the so-so ratings – are better than the competition’s, he says.

For certain products, Conseco will soon roll out sales incentives, from performance-based production bonuses to a trip to its annual meeting in Naples, Fla.

“Basically, they are going to have a coming-out-of-bankruptcy party,” says Dan McNerney, president of McNerney Management Group Inc. in Columbia, Mo., a distributor to 3,500 agents. “Here’s all the reasons to come back to Conseco, and here are some extra little rah-rah things we’re going to do to give you even more incentives to do that.” Incentives or not, he doesn’t think agents will balk at selling Conseco products.

Conseco, which was approved last week to resume trading on the New York Stock Exchange, recognizes that much work lies ahead.

Last Tuesday, a bankruptcy court judge in Chicago approved a plan that cut Conseco’s debt load to $1.4 billion, from $7 billion in December, when it made the third-largest bankruptcy filing in U.S. corporate history. The judge also approved the bankruptcy plan of Conseco Finance Corp., which was sold at auction for $1.3 billion in March.

“It’s an interesting milestone, but it’s by no means the end of what we have to do to restore our company to where we think it belongs,” said Eugene Bullis, Conseco’s chief financial officer, after the court session.

Under the reorganization, top-priority bank lenders such as J.P. Morgan Chase & Co. in New York, Bank of America Corp. in Charlotte, N.C., and Bank of New York Co. Inc. are receiving $1.3 billion in new bank debt and preferred stock.

Bondholders’ debt is being ex- changed for common equity. Finally, preferred debt holders – referred to as TOPRs – settled their $2 billion in claims for a bit of direct equity and warrants to buy direct equity, which Conseco’s lawyers valued at $75 million. Holders of the old Conseco common stock were wiped out.

The new Conseco will offer supplemental health, universal life, and traditional fixed and equity-indexed annuities. Conseco stopped selling new long-term-care policies this year. For now, Conseco has scaled back on particular life insurance and annuity sales to focus on supplemental health products, which will help it build the capital to raise its insurance rating from a B to an A rating, says a spokesman, Jim Rosensteele.

If Conseco doesn’t regain an A-minus rating with A.M. Best Co. in Oldwick, N.J., by Aug. 15, 2005, it risks returning to bankruptcy to be liquidated. Conseco also plans to streamline its back-office operations, reduce the risk profile in its investment portfolio and merge several of its insurance companies.

To win back agents, Mr. Rosensteele says, Conseco must offer products that independent marketing organizations and agents feel are appropriate. “IMOs want the same things that investors want, which is stability, predictability and a solid base of products to sell,” he says.

Judging by last week’s trading in Conseco bonds and common shares on the “when-issued market,” the reorganization appears to be viewed by institutional investors as “reasonably successful,” says David Erb, managing director of Merrion Group LLC in Westfield, N.J. Bonds were trading at around 80 cents on the dollar, and shares on the when-issued market were priced at $19.

“They’ve been trading very strong, which is clearly an indication that investors in the distressed market consider the prospects of the entity to be pretty good post-bankruptcy,” he says.