Incorporated: 1979 as Security National of Indiana Corp.
Total Assets: $98.4 billion (1999)
Stock Exchanges: New York
Ticker Symbol: CNC
NAIC: 524113 Direct Life Insurance Carriers; 524114 Direct Health and Medical Insurance Carriers; 524126 Direct Property and Casualty Insurance Carriers; 551112 Offices of Other Holding Companies; 52222 Sales Financing
Conseco, Inc. provides insurance, investment, and lending services to more than 12 million customers. Targeting “middle America,” or U.S. households with annual incomes between $25,000 and $75,000, Conseco’s insurance products range from medical to life. Conseco also offers mutual funds and annuities. The company grew quickly during the 1980s and 1990s through some 40 acquisitions. In 1998 Conseco diversified and moved into finance and lending by acquiring Green Tree Financial Corporation, the nation’s leading lender of mobile home loans.
Innovative Beginnings in the Late 1970s and Early 1980s
Stephen C. Hilbert founded the company and guided its meteoric rise. Hilbert had 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, Hubert became restless. “I dropped out to sell encyclopedias,” Hubert explained to Barren’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.”
Hubert 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 Hubert 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, Hubert started knocking on doors in the late 1970s. This time, however, he was looking for seed capital to fund his business startup, Security National of Indiana Corp. Although several regional securities firms laughed Hubert and his five-page business plan back into the street, by the early 1980s he had raised $3 million in capital. In 1982, Hubert 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, Hubert was able to return the ailing insurer to profitability after only one year.
True to his original concept of combining size with innovation, Hubert 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 Hubert’s original concept.
Hubert’s company acquired Consolidated National Life Insurance Co. in August 1983. In December of that year Hubert’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. Hubert, 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.
Rapid Growth: Mid-1980s Through the Early 1990s
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 workforce had grown almost twenty-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 workforce by almost ten percent.
After nearly two years since its last acquisition, Hubert raised $68 million in June 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. Hubert’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, Hubert sought firms that had developed unique insurance and annuity products or had devised innovative distribution systems for their offerings.
Importantly, though, Hubert also searched for insurers that were inefficient and bloated with excess personnel. He slashed the aggregate workforce 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, Hubert knew that he would have to find a new source of funding that was not linked to debt-burdened Conseco. Therefore, in 1990 Hubert 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 workforce 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 two 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 Hubert’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. Shortsellers—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?’
Conseco is dedicated to leading the process of change in the financial services industry by setting the standard for performance in all the markets we serve. We believe strongly that this dedication ensures the best products and services for our customers and distributors, the highest value for our shareholders and the most rewarding careers for our employee associates.
As detractors waited for Conseco’s money machine to disintegrate in the early 1990s, Hubert 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 two 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, Hubert had successfully boosted his status to that of corporate multimillionaire. In 1992, just ten years after starting his business, Hubert 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, Hubert 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 $2,062 in 1993.
Continued Expansion and Growth Through Acquisitions: Mid- to Late 1990s
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 riverboat gambling proposals. In fact, in October 1993 Hubert 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 Indy Car racing team in which Conseco owned a 33 percent share.
To its investors’ 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.
- Stephen C. Hubert forms Security National of Indiana Corp.
- Security National begins operations.
- Company changes name to Conseco, Inc.
- Conseco goes public.
- Conseco forms Conseco Capital Partners.
- Company establishes Conseco Capital Management, Inc.
- Conseco acquires Green Tree Financial Corporation and expands into the financial services sector.
In May 1994, CCP II made the first in a series of expected acquisitions when it agreed to purchase Statesman Group, Inc. for $350 million. In September the company entered into a $344 million partnership with American Life Holdings, Inc., which included subsidiaries American Life and Casualty and Vulcan Life. Conseco acquired the remaining 63 percent interest in American Life in September 1996. Conseco planned to retain its proven strategy of using innovative management techniques to increase the value of acquired holdings. Hubert 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 Hubert planned to sustain his active management role there. “This is what I love to do,” Hubert 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.... It’s their baby.”
Continuing on its acquisition splurge, Conseco entered into agreements to merge with Kemper Corporation, an insurance company much larger than Conseco, for about $2.6 billion. Conseco withdrew from the deal after deciding that the asking price would cause too much accumulation of debt. Termination of the agreement, however, created bank and accounting fees of about $36 million and spurred a Merrill Lynch analyst to downgrade the company’s stock. Conseco subsequently severed its relationship with Merrill Lynch, which had handled Conseco’s initial public offering.
In 1995 Conseco formed a new division, Conseco Global Investments, and purchased the remaining shares of CCP. CCP was then merged into Conseco, and Beneficial Standard Life Insurance and Great American Reserve Insurance, both subsidiaries of CCP, became subsidiaries of Conseco. The company also acquired additional shares of Bankers Life Holding Corp., a holding company for Bankers Life and Casualty, upping its stake to 81 percent in 1995. The following year Conseco increased its share to 90 percent.
Over the next two years Conseco continued to gobble up insurance companies—it acquired eight in 1996 and 1997. Conseco Risk Management acquired Wells & Company, which offered casualty and property insurance products. The purchase created the biggest independent casualty/property agency in the state of Indiana. In July 1996 Conseco bought Life Partners Group, Inc. for about $840 million. The purchase included Massachusetts General Life, Philadelphia Life, Lamar Life, and Wabash Life. At the end of 1996 Conseco made two more acquisitions—American Travellers Corp. for $880 million and Transport Holdings, Inc., for $228 million. American Travellers offered long term care insurance, and Transport provided cancer insurance. Another cancer insurance provider, Capitol American Financial Corp., was purchased by Conseco for $696 million in March 1997. Then, in May, Conseco paid $505 million to acquire Pioneer Financial Services, Inc., a provider of life and health insurance products. Conseco rounded out the year with two additional purchases—Colonial Penn Group, which sold life insurance to elderly American citizens, and Washington National Corp., a provider of life and health insurance and annuities.
As Conseco headed into 1998, the company had a number of accomplishments under its belt. In 1996 the company was named to the Fortune 500, and in 1997 Conseco was added to the S&P 500 Index. The company’s stock had returned an average of 39 percent a year since becoming a public company in 1985. Total revenues, after dropping from $3 billion in 1993 to $2.36 billion in 1994, climbed steadily, rising to $3.56 billion in 1995 and $3.79 billion in 1996. In 1997, total revenues reached $6.85 billion, a significant increase over the previous year.
In 1998 Conseco hoped to continue its growth and strong financial performance. To meet these goals, Conseco in March agreed to acquire Green Tree Financial Corporation, a diversified financial services company that offered home equity and home improvement loans, financing packages for the purchases of recreational vehicles and equipment, and credit cards. Green Tree was best known, however, as the leading U.S. lender for mobile home purchases. Green Tree was Conseco’s first acquisition not related to insurance, and it was also the largest of Conseco’s acquisitions—Conseco reportedly paid about $6 billion in stock for Green Tree. Conseco claimed the acquisition was a perfect fit, as both companies served the same target market, but many industry observers were skeptical, and Conseco’s stock took a plunge. Not only did the company’s stock fall about 15 percent upon announcement of the acquisition agreement, but it continued to drop; from a high of $58.12 a share in April 1998, Conseco stock dropped to about $20 a share in late 1999.
The Green Tree acquisition stirred up numerous questions, including whether Conseco had too much debt and whether Green Tree, which had a past of dubious accounting practices, was growing too rapidly—25 to 30 percent a year—and providing loans to high-risk borrowers. The company’s stock decline also led to a deficit of collateral on company-guaranteed loans used by Conseco executives to purchase Conseco stock. Questions persisted, and in late 1999 Conseco announced plans to pare debt and slow growth. The company said it would divest of non-core assets, and it sold seven percent of its stock to private investment firm Thomas H. Lee Company for $478 million.
Falling stock prices did not completely hinder Conseco, and in 1999 Conseco acquired three health insurance marketing companies with plans to form a new subsidiary dedicated to supplemental health insurance distribution. The companies were Consolidated Marketing Group, Inter-State Service, Inc., and TLC National Marketing Company, which sold products door-to-door. In 1998 Conseco placed additional effort on building brand awareness. Not only did Conseco launch a major advertising campaign pushing the company as the “Wal-Mart of financial services,” but it also sponsored the Indiana Pacers basketball team and the Conseco Fieldhouse, an 18,500-seat facility that opened in late 1999. In 1999 Conseco secured a marketing partnership with the National Association for Stock Car Auto Racing (NASCAR) to become the “Official Financial Services Provider of NASCAR” and entered the second phase of its marketing campaign. In 1998 Stephen Hubert received about $69.7 million in compensation. Though this was significantly lower than his 1997 pay of $119 million, it was enough for Hubert to retain his reputation as one of the highest-paid CEOs in the nation.
Conseco renamed Green Tree Conseco Finance Corp. in 1999 and moved toward the next century intent on strengthening operations. The company, after 20 years in business, had grown tremendously—Conseco’s total managed financial assets expanded from $8.2 billion in 1988 to $87.2 billion a decade later. Moreover, despite the company’s stock price troubles, total revenues continued to grow; for the nine months ended September 30, 1999, revenues reached $5.92 billion, up from $5.75 billion for the comparable period in 1998. Stephen Hubert demonstrated his confidence in the company by acquiring more than 638,000 shares in October 1999, pushing his total stake in Conseco to 10.4 million shares. Hubert could not understand why industry insiders continued to hold reservations about Conseco. Hubert told the Indianapolis Star and News, “Everything at Conseco is hitting on all cylinders except the stock price.... I hate where our stock price is, but I cannot control the market. What’s somewhat baffling is we haven’t missed a [earnings] number. But my net worth’s in Conseco. All I can say is, I’m buying more.” As the company approached its 21st year of operations, Conseco remained confident that it could successfully attain its goals—to provide middle America with a wide array of financial and insurance products and services.
Bankers Life and Casualty Company; Conseco Annuity Assurance Company; Conseco Direct Life Insurance Company; Conseco Health Insurance Company; Conseco Life Insurance Company; Conseco Life Insurance Company of New York; Conseco Medical Insurance Company; Conseco Risk Management, Inc.; Conseco Senior Health Insurance Company; Manhattan National Life Insurance Company; Pioneer Life Insurance Company; United Presidential Life Insurance Company; Washington National Insurance Company; Conseco Capital Management, Inc.; Conseco Variable Insurance Company; Conseco Fund Group; Conseco Finance Corp.
Ambrose, Eileen, “Green Tree Is Deal of Different Color for Conseco,” Indianapolis Star, April 12, 1998, p. El.
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——, “Conseco Pouring Millions into Entertainment Ventures,” Indianapolis Business Journal, October 25, 1993.
——, “Hubert Takes a Bite of the Big Apple,” Indianapolis Business Journal, November 15, 1993.
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“Buoyed by Their Biggest Year Ever, Hubert and Conseco Aim Higher,” Indiana Business Journal, June 7, 1993.
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——, “Conseco’s New Partnership Will Stall Large Companies,” Indianapolis Business Journal, January 17, 1994.
——, “Western National IPO Means More Big Bucks for Conseco,” Indianapolis Business Journal, February 14, 1994.
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“Indiana’s Highest Paid CEOs,” Indiana Business, July 1993.
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—updated by Mariko Fujinaka