Conseco, a survivor of Chapter 11 bankruptcy, has a new dark
cloud hanging over it as it teeters on the brink of defaulting on
its senior secured bank credit facility.
The deciding factor will be the US life and
health insurer’s auditors who have warned they are considering
issuing a qualified opinion as to its ability to continue as a
going concern.
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Should such an opinion be included in
Conseco’s 2008 financial statements it would constitute a default
unless waived by lenders.
Default by Conseco would represent would be
another big blow to the already beleaguered US life industry.
According to the Insurance Information
Institute, based on Conseco’s total revenue of $4.57 billion in
2007 it was the 16th-largest life and health insurer in the US;
based on the number of individual whole life and endowment policies
issued, however, it ranked ninth.
Conseco had assets of $33.5 billion at the end
of 2007 while in 2008 it reported earned life insurance and annuity
premium income of $597 million and earned health insurance premium
income of $663 million.
The seriousness of Conseco’s plight was
highlighted by the reaction of rating agency Moody’s which has
severely downgraded the insurer and placed it on a negative
outlook.
Particularly ominous was Moody’s downgrading
of Conseco’s bank debt rating from B2 to Caa1. According to Moody’s
obligations rated Caa are judged to be of poor standing and subject
to very high credit risk. In its ratings Moody’s appends numerical
modifiers 1, 2, and 3 with 1 being the highest and 3 being the
lowest.
In addition, ratings of Conseco’s life
insurance units were downgraded from Ba1 to Ba2.
Providing background on this, Moody’s notes:
“Insurance companies rated Ba offer questionable financial
security. Often the ability of these companies to meet policyholder
obligations may be very moderate and thereby not well safeguarded
in the future.”
Conseco’s major insurance units are Bankers
Life, Colonial Penn, Conseco Life, Conseco Health Insurance and
Washington National.
Scott Robinson, a Moody’s senior credit
officer, said: “Financial flexibility is pressured over the near
term by [Conseco’s] tight bank covenants, and over the medium term,
by approximately $300 million of senior convertible debt that is
putable to the company in 2010.”
Robinson added that increased pressure on
capital adequacy, potentially driven by investment losses, may also
diminish the ability of operating companies to send dividends up to
the holding company, Conseco Incorporated.
Close on Moody’s heels, rating agency Fitch
also announced hefty downgrades, lowering Conseco’s bank debt
rating to BB-, a rating that falls in Fitch’s speculative
category.
Conseco’s auditors’ reservations about its
status as a going concern come against the background of the
insurer’s $406.8 million net loss in the fourth quarter of 2008, up
from a $71.5 million loss in the fourth quarter of 2007, and
full-year net loss of $1.08 billion, up from a $194 million loss in
2007.
Though Conseco increased its operating profit
after tax from $73.5 million in 2007 to $156.5 million in 2008
negative exceptional items took a heavy toll. These included
realised investment losses of $217.4 million, a deferred tax
adjustment of $298 million and $722.7 million related to a
discontinued operation.
Specifically, the discontinued operation
involved the hiving off by Conseco off its long term care insurance
unit into an independent trust (see LII 227).
Reflecting serious investor concern, Conseco’s
share price now at about $0.50
is down from $12 in early-March 2008 and a peak of $26 in May 2006,
some three years after emerging from Chapter 11 bankruptcy.
