Conseco dumps costly problem

In a unique approach to a costly
problem, US insurer Conseco is to hive off its long-term care (LTC)
insurance unit Conseco Senior Health Insurance Company (CSHI) into
an independent trust, the Senior Health Care Oversight Trust. The
strategy will enable Conseco to rid itself of a unit consisting of
142,000 LTC policies in run-off that has over the past 11 years
absorbed $915 million to maintain a minimum level of regulatory
capital and strengthen claim reserves.

“This unique structure aligns the interests of the independent
trust, management and regulators with the policyholders,” said
Conseco CEO Jim Prieur.

The last financial pain CSHI will inflict on Conseco comes in the
form of a contribution of $175 million of additional capital to the
trust and a $1.2 billion accounting charge related to the
transaction. In 2007 Conseco’s loss on run off business totalled
$184.9 million, up from $34.5 million in 2006.

Conseco no doubt hopes that rating agencies will take a positive
view of its LTC strategy. In late-2007 the insurer was the subject
of downgrades and negative outlooks announced by rating agencies
Standard & Poor’s, AM Best and Fitch. In April 2008 Moody’s
placed Conseco’s ratings under review for possible downgrade,
citing poor profit figures.

In the wake of the trust announcement, AM Best placed the financial
strength ratings and issuer credit ratings of Conseco core
insurance subsidiaries under review with “developing
implications.”

In a statement the rating agency commented: “Post transaction, AM
Best believes Conseco would likely benefit from some enhanced
financial flexibility as well as the ability to focus management
time and efforts on developing strategies to improve the
organisation’s business profile and operating performance of its
core product lines.”

However the agency added: “AM Best notes the current projected
debt-to-capital ratio at roughly 28 percent – incorporating a $1.2
billion accounting charge related to the transaction – approaches
the maximum permitted leverage per the covenants in Conseco’s
existing credit facility.”

Conseco, reported a net loss attributable to shareholders of $492.9
million in the first half of 2008, up from a $69.8 million loss in
the first half of 2007. New annualised premium income was up 2
percent at $176.8 million while total revenue fell 6.3 percent to
$2.13 billion.