P.O. Box 1911
Carmel, Indiana 46032
Fax: (317) 573-6818
Sales: $2.64 billion
Stock Exchanges: New York
SICs: 6311 Life Insurance; 6719 Holding Companies NEC
Conseco, Inc. is a specialized financial services holding company that invests primarily in the insurance industry. It makes money by acquiring insurance companies and increasing their profitability and value through restructuring. The company also earns advisement and management fees from various financial institutions. Conseco was one of the fastest growing insurance holding company in the United States in the early 1990s.
Stephen C. Hilbert founded the company and guided its meteoric rise. The 48-year-old Hilbert has an unusual background for a chairman of a major financial institution. He was raised in a small rural community near Terre Haute, Indiana, and attended nearby Indiana State University. After only two years of college, however, Hilbert became restless. “I dropped out to sell encyclopedias,” Hilbert explained to Barron’s in 1991. “After I made $19,000 my first year as a 19-year-old, I knew I didn’t need a college education to make a good living.”
Hilbert drifted into the insurance business in the 1970s. After working for a small company for a few years, he got a taste of the corporate world at Aetna. Although Hilbert admired the muscle of Aetna and its corporate counterparts, he was frustrated by their lack of innovation. During this experience he conceived the idea for a new kind of enterprise—a life insurance company that would combine the flexibility and innovation of a small firm with the marketing savvy, financial strength, and computer systems of a big financial institution.
Just as he had done to sell encyclopedias in the mid-1960s, Hilbert started knocking on doors in the late 1970s. This time, however, he was looking for seed capital to fund his business start-up, Security National of Indiana Corp. Although several regional securities firms laughed Hilbert and his five-page business plan back into the street, by the early 1980s he had raised $3 million in capital. In 1982, Hilbert acquired his first life insurance company, Executive Income Life Insurance Co., for $1.3 million. By slashing the fat and inefficiency out of his new purchase, Hilbert was able to return the ailing insurer to profitability after only one year.
True to his original concept of combining size with innovation, Hilbert established his enterprise in 1982 under two separate companies. Security National Corp. was formed to acquire and manage existing life insurance companies. To complement that holding company’s subsidiaries, Security National of Indiana was established to develop and market new life insurance products and services. Although the two companies merged to form one holding company late in 1983, internal operations still reflected Hilbert’s original concept.
Hilbert’s company acquired Consolidated National Life Insurance Co. in August of 1983. In December of that year Hilbert’s two holding companies were merged under the name Conseco, Inc. With about 25 employees and assets worth $3 million, Conseco substantially improved the performance of its two acquisitions during 1983 and 1984. The company then purchased Lincoln American Life Insurance Co. early in 1985 for $25 million. It quickly moved Lincoln’s headquarters from Memphis to Conseco’s burgeoning offices in Carmel, Indiana. Hilbert, now with a few successful acquisitions under his belt, took Conseco public in 1985 in an effort to boost its investment capital. By the end of the year the company’s asset base had increased to $102 million.
Satisfied with its recipe for acquiring and improving insurance companies, Conseco stepped up its acquisition efforts in 1986. It purchased Lincoln Income Life Insurance Co. and Bankers National Life Insurance Co. for $32 million and $118 million, respectively. In 1987, it added Western National Life Insurance to its portfolio at a cost of $262 million. By the end of 1987, Conseco’s assets had grown to a whopping $3.4 billion, and its work force had grown almost 20-fold since 1984, to nearly 500.
Conseco reorganized and caught its breath in 1988. It moved the balance of the operations from its largest purchase, Bankers National, to its ballooning Carmel headquarters. It also moved much of its Lincoln subsidiary from Kentucky. Although it increased the value of its holdings to more than $4 billion in 1988, Conseco was able to reduce its work force by almost 10 percent.
After nearly two years since its last acquisition, Hilbert raised $68 million in June of 1989 to purchase National Fidelity Life Insurance Co. It moved that concern’s headquarters from Dallas to Carmel. To house its expanding staff and operations in Carmel, Conseco built a 40,000-square-foot data processing center in 1990.
Throughout the 1980s Wall Street perceived Conseco as young and inexperienced. However, the company’s rapid growth finally began to pique the interest of industry analysts and mainstream investors. Hilbert’s strategy seemed relatively simple to most observers: purchase troubled insurance companies with potential and increase their value by turning them around. When Conseco went hunting for acquisition candidates, it looked for organizations with sound asset portfolios. For example, it avoided the many companies that in the 1980s had invested heavily in risky real estate and junk bonds. In addition, Hilbert sought firms that had developed unique insurance and annuity products or had devised innovative distribution systems for their offerings.
Importantly, though, Hilbert also searched for insurers that were inefficient and bloated with excess personnel. He slashed the aggregate work force of the five companies he had purchased between 1985 and 1989, for example, from 850 to 450 by 1993. Conseco’s 1989 annual report boasted that it had eliminated 83 percent of the employees from one of its acquisitions. Many of the cutbacks were accomplished by integrating Conseco’s consolidated marketing, investment, and product development operations into the companies that it purchased. In addition, Conseco typically achieved significant efficiency gains by implementing advanced information and data processing systems.
By 1989, Conseco’s assets were valued at $5.2 billion. Although Conseco’s rise was impressive, rampant acquisition and expansion had a downside for the holding company. By the late 1980s, Conseco had accumulated about twice as much debt as equity. In order to continue acquiring new companies, Hilbert knew that he would have to find a new source of funding that was not linked to debt-burdened Conseco. Therefore, in 1990 Hilbert organized Conseco Capital Partners (CCP), a limited partnership that included several well-financed companies. The company was intended to serve as the primary vehicle for new life insurance acquisitions. CCP’s first acquisition was Great American Reserve Insurance Co. for $135 million. It also purchased Jefferson National Life Group in 1990 ($171 million) and Beneficial Standard Life in 1991 ($141 million).
Continued gains in the value of Conseco holdings combined with the success of CCP investments resulted in dynamic growth during 1990 and 1991. Although many insurers suffered severe setbacks during the U.S. recession and experienced staggering declines in the value of their portfolios, Conseco swelled its asset base to $11.8 billion and doubled its work force to almost 1,100. Indeed, as the insurance industry weathered record insolvencies, Conseco expanded its headquarters and opened an entirely new hub, the Conseco Annuity Center, in Dallas. Entering 1992, the company was valued at over $800 million.
Because Conseco’s performance contrasted so sharply with that of most of its competitors in the early 1990s, many analysts were skeptical. Critics charged that Conseco’s amazing asset growth was largely the result of questionable accounting techniques. They pointed to the company’s relatively low net worth, which was equal to only 2 percent of its total assets in 1991. Some analysts believed that it was just a matter of time before Conseco would fall prey to the asset devaluation that had plagued other fast-growing insurers of the 1980s.
Despite Hilbert’s insistence that Conseco’s success reflected a commitment to sound business practices, skepticism continued. Conseco endured a string of disparaging articles in major business journals in the early 1990s that questioned its integrity. Short-sellers—investors that had bet on Conseco’s downfall— were enraged when its earnings continued to multiply. “This (criticism) goes back to instinct and gut feeling, and no hard facts,” said money manager Martin Lizt in a January 1993 issue of Financial World. “You have to ask the question, ’Have they found a new way to make white bread?’”
As detractors waited for Conseco’s money machine to disintegrate in the early 1990s, Hilbert clung to his original guiding principles. As stated in the company’s 1993 annual report, “Our operating strategy is to consolidate and streamline the administrative functions of the acquired companies, to improve their investment yield through active asset management and to eliminate unprofitable products and distribution channels.”
Indeed, analysts familiar with Conseco’s portfolios attested that the company’s investments were much more liquid, of higher quality, and more conservative than those of most insurers. In addition to avoiding real estate and junk bonds, Conseco’s portfolio managers steered away from other risky and trendy investment vehicles of the 1980s, particularly Guaranteed Investment Contracts. A study of the top U.S. insurers in 1991 showed that only 48 percent of their investments were fixed maturities, whereas over 50 percent were tied up in real estate and other less dependable assets. In contrast, more than 80 percent of Conseco’s portfolio comprised fixed maturities, and only 2 percent consisted of real estate holdings.
In 1992, Conseco founded Conseco Capital Management, Inc. (CCM) to capitalize on its investment expertise. CCM provided a variety of financial and investment advisory services on a fee basis to both affiliated and nonaffiliated insurers. CCM was managing about $19 billion worth of assets going into 1994. Also in 1992, CCP shelled out $600 million to acquire Bankers Life and Casualty Co., one of the nation’s largest writers of individual health insurance policies. In early 1993, Conseco acquired a controlling interest in MDS/Bankmark, a major marketer of annuity and mutual fund products.
The Conseco organization continued to add value to its holdings in the early 1990s and to achieve success with both CCM and CCP. In fact, it experienced stellar growth during 1992 and 1993. The company’s net income increased 46 percent in 1992 to $170 million, and 75 percent in 1993 to $297 million. During the same period, the value of Conseco’s assets ballooned from $11.8 billion to $16.6 billion—a gain of about 30 percent. As Conseco increased its value and expanded its asset base, suspicions about its performance began to wane in 1993 and 1994. Importantly, the company had eliminated much of its debt burden by 1994.
From an encyclopedia salesman in eastern Indiana, Hilbert had successfully boosted his status to that of corporate multimillionaire. In 1992, just ten years after starting his business, Hilbert was one of the highest paid executives in the United States. He received $8.8 million in pay and exercised stock options worth almost $30 million. Although some critics derided his benefits package and called it exorbitant, Hilbert was quick to point out that his compensation was tied to the company’s performance. After all, a $100 investment in Conseco in 1988 would have returned $2062 in 1993.
Entering the mid-1990s, Conseco was poised for continued growth. Its goals for 1994 included increasing its assets under management by 30 percent. To help achieve this objective, Conseco formed a new limited partnership in early 1994, Conseco Capital Partners II, L.P. CCP II included 36 limited partners who had a combined investment potential of $5 billion to $7 billion. In contrast to CCP, the new partnership was designed to focus on the acquisition and improvement of larger companies valued at $350 million to $1.5 billion. The original CCP partnership was changed to CCP Insurance, Inc., in 1993, and began acting as a holding company for its three subsidiaries.
In addition to its insurance and financial management divisions, which accounted for more than 85 percent of Conseco’s operations in 1993, the company was broadening its scope to include some nontraditional ventures. Conseco was investing tens of millions of dollars into new entertainment-related projects late in 1993 and 1994, including some river boat gambling proposals. In fact, in October of 1993 Hilbert formed Conseco Entertainment Inc., a holding company for Conseco’s future entertainment investments. Other ventures included outdoor and indoor theaters in Indiana and Ohio. In addition, in 1992 the company paid $15 million for a 31 percent share of Chicago-based Eagle Credit Corp., an organization formed to provide financing to Harley-Davidson dealers and their customers. It also agreed to commit $5 million in 1993 to Rick Galles Racing, an IndyCar racing team in which Conseco owned a 33-percent share.
To its investor’s chagrin, however, several of Conseco’s past forays into nontraditional investments had not performed as well as its core insurance and financial holdings. In 1989, for instance, Conseco invested in a powdered drink mix developed by an Indiana doctor. The venture failed. Similarly, an investment in a restaurant chain that featured buckets of spaghetti fizzled. “You have to stay where your strengths are,” acknowledged Ngaire E. Cuneo, Executive Vice President of Corporate Development, in the October 25, 1993, issue of the Indianapolis Business Journal. ’ ’We are going to stay away from food and beverage.” Despite a few unwise choices, Conseco was recognized for its highly conservative approach to investing.
In May of 1994, CCP II made the first in a series of expected acquisitions when it agreed to purchase Statesman Group, Inc., for $350 million. Conseco planned to retain its proven strategy of using innovative management techniques to increase the value of acquired holdings. Hilbert moved his main personal office to New York, where he planned to direct Conseco’s CCP II. However, Conseco’s headquarters remained in Carmel, and Hilbert planned to sustain his active management role there. “This is what I love to do,” Hilbert proclaimed in the June 7, 1993, issue of the Indianapolis Business Journal. “I think you’d hear the same thing if you were talking to Bill Gates or anyone else who has achieved success.... Its their baby.”
Bankers National Life Insurance Co.; Bankers Life Holding Corp. (56%); CCP Insurance, Inc. (40%); Conseco Capital Management, Inc.; Conseco Capital Partners II, L.P.; Lincoln National Life Insurance Co.; National Fidelity Life Insurance Co.; Western National Corp. (40%).
Andrews, Greg, “Hilbert Takes a Bite of the Big Apple,” Indianapolis Business Journal, November 15, 1993; “Conseco Move Marks Evolution,” Indianapolis Business Journal, September 20, 1993; “Conseco Pouring Millions into Entertainment Ventures,” Indianapolis Business Journal, October 25, 1993.
“Buoyed by Their Biggest Year Ever, Hilbert and Conseco Aim Higher,” Indiana Business Journal, June 7, 1993.
Conseco Inc. 10th Anniversary 1992; Celebrating a Decade of Growth, Carmel, IN: Conseco Inc., 1992.
Feaver, Christopher, “Western National IPO Means More Big Bucks for Conseco,” Indianapolis Business Journal, February 14, 1994; “Conseco Rolls Dice Again on Riverboat Gambling,” Indianapolis Business Journal, December 6, 1993; “Conseco’s New Partnership Will Stall Large Companies,” Indianapolis Business Journal, January 17, 1994.
“Indiana’s Highest Paid CEOs,” Indiana Business, July 1993.
Laing, Jonathan R., “Deferred Risk? A Hard Look at Conseco, a Fast-Growing Life Insurer,” Barron’s, February 11, 1991.
Miller, James, “Conseco Partnership Agreement to Acquire Statesman for $350 Million,” The Wall Street Journal, May 3, 1994.
Panchapakesan, Meenakshi, and Michael K. Ozanian, “Loaded for Bear: Why High-Flying Conseco Is Proving Its Numerous Detractors Wrong,” Financial World, January 19, 1993.
Rosensteele, James W., “Corporate Profile for Conseco, Inc.,” Business Wire, January 21, 1994.