has reached a multi-million dollar settlement with 40 US states
following an investigation of its long-term care insurance business
co-ordinated by regulatory body the National Association of
Insurance Commissioners and led by the Pennsylvania Insurance
Department (PID). The investigation revealed what the PID termed “a
pattern of consumer harm” relating to poor claims handling.
According to the terms of the settlement Conseco will pay a $2.3
million penalty to participating states, at least $4 million in
restitution costs to harmed policyholders and invest $26 million in
system upgrades and improved claims administration. Conseco is also
obligated to pay a further $10 million in fines if problems are not
corrected over the next two-and-a-half years.
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Findings of an on-site examination during the investigation
revealed that:
• Investigation of pending claims were not handled in a timely
manner;
• Claim files were not properly documented or maintained; and
• Time taken for responses to claimants did not adhere to
applicable regulations.
The PID noted that Conseco self-reported serious issues in
complaint and claims handling and blamed the problems on the
challenge of integrating various computer systems.
In a statement Conseco’s CEO Jim Prieur said: “Conseco is committed
to meeting the standards set forth in the forward-looking
settlement.”
Conseco, which emerged from Chapter 11 bankruptcy in 2003, reported
a net loss attributable to shareholders of $194 million in 2007 and
total premium income of $3.17 billion. In 2006 a net profit of $68
million and premium income of $2.99 billion were reported.
Rating agencies have taken a dim view of Conseco with downgrades
and negative outlooks announced in late-2007 by Standards &
Poors, AM Best and Fitch. In April 2008 Moody’s placed Conseco’s
ratings under review for possible downgrade, citing poor profit
figures.
In the first quarter of 2008 Conseco reported a $5.8 million loss.
Much of Conseco’s poor performance results from a closed block of
long-term care business in run off. The loss on run off business
totalled $184.9 million in 2007, up from $34.5 million in
2006.
Conseco has become a target of aggressive shareholder activism
directed at it by San Francisco-based hedge fund Steel Partners
(SP). An active participant in companies in which it holds stakes –
generally either as the largest or one of the largest shareholders
– SP has criticised Conseco’s board on issues such as what it
believes is an inadequate return on equity and failure to implement
strategic changes in the company.
SP holds a 9.8 percent stake in Conseco and on 19 May approached
the latter’s board with a proposal that would increase its stake to
22 percent. Steel Partners would require the Conseco board’s
support to increase it stake above 10 percent as this would require
the filing of an acquisition of control application – termed a Form
A – with regulators in the six states in which Conseco's
subsidiaries are domiciled. According to Conseco, regulators must
determine that the Form A applicant has the experience and
integrity to control 100 percent of an insurance company.
This is because once the 10 percent ownership threshold is exceeded
no further approvals are generally required to increase the
potential controlling applicant’s shareholding. SP proposed the 22
percent ownership level as it believes this is the maximum it could
acquire without endangering Conseco's ability to use its
tax losses in terms of Section 382 of the Internal Revenue
code.
In essence SP proposed that it would acquire the additional shares
via a tender offer to existing shareholders at prices ranging from
$12.50 to $14 per share. Conseco is currently trading at about
$11.50 per share compared with a 12-month high of $21.25 per share
attained in June 2007.
Conseco’s board has rejected the SP approach, citing risks of
falling foul of Section 382. “Section 382 substantially limits a
corporation's ability to utilise its tax loss
carry-forwards if the corporation undergoes an ownership change as
defined by Section 382,” wrote Prieur in response to SP. As at 31
December 2007 Conseco had net income tax assets of $1.91
billion.
He continued that determination of whether a company has undergone
an ownership change is highly complex but, in general, increases in
ownership by individuals or institutions owning 5 percent or more
by value of a company's shares that aggregate to over 50
percent during any three year period result in an ownership change
and, therefore, potentially severely restricts the company’s
ability to utilise its tax losses.
