feet), and two office buildings in Rockford, Illinois (total of 169,000 square feet), which serve as administrative centers for portions of our insurance operations. Conseco owns one office building in Philadelphia, Pennsylvania (127,000 square feet), which serves as the administrative center for our direct response life insurance operations; approximately 60 percent of this space is occupied by the Company, with the remainder leased to tenants. Conseco also leases 223 sales offices and 4 other administrative offices in various states totaling approximately 463,700 square feet; these leases are short-term in length, with remaining lease terms ranging from one to five years.
In this section, we review the consolidated financial condition of Conseco at December 31, 1999 and 1998, the consolidated results of operations for the three years ended December 31, 1999, and where appropriate, factors that may affect future financial performance. We have prepared all financial information to give retroactive effect to the merger with Conseco Finance (the "Conseco Finance Merger") accounted for as a pooling of interests. Please read this discussion in conjunction with the accompanying consolidated financial statements, notes and selected consolidated financial data.
We evaluate performance and base management's incentives on operating earnings which is defined as income before extraordinary charge, net investment gains (losses) of our life insurance and corporate segments (less that portion of amortization of cost of policies purchased and cost of policies produced and income taxes relating to such gains (losses)), and unusual or infrequent items (net of income taxes). Operating earnings are determined by adjusting GAAP net income for the above mentioned items. While these items may be significant components in understanding and assessing our consolidated financial performance, we believe that the presentation of operating earnings enhances the understanding of our results of operations by highlighting net income attributable to the normal, recurring operations of the business and by excluding events that materially distort trends in net income. However, operating earnings are not a substitute for net income determined in accordance with GAAP.
RESULTS OF OPERATIONS BY SEGMENT FOR THE THREE YEARS ENDED DECEMBER 31, 1999:
cost of policies produced in order to reflect reduced future yields (thereby reducing such amortization in future periods); (ii) we can reduce interest rates credited to some products, thereby diminishing the effect of the yield decrease on the investment spread; and (iii) the investment portfolio grows as a result of reinvesting the investment gains. As a result of the sales of fixed maturity investments and realizing gains, our amortization of the cost of policies purchased and the cost of policies produced increased by $15.9 million, $236.5 million and $181.2 million in 1999, 1998 and 1997, respectively. Net realized gains (losses) also include losses related to credit losses and other investment impairments. These losses do not affect the amount of additional amortization we recognize.
Managed receivables include finance receivables transferred to special purpose entities in securitization transactions (whether accounted for as sales or on the portfolio method) and finance receivables recorded on our balance sheet that have not been securitized. Average managed receivables increased to $41.8 billion in 1999, up 29 percent over 1998, and to $32.4 billion in 1998, up 36 percent over 1997.
Under the portfolio method, we recognize interest expense on the securities issued to investors in the securitization trusts. Since these securities typically have higher interest rates than our other debt, we expect our average borrowing rate to increase in the future.
Corporate interest and other expenses were $205.7 million in 1999, $180.4 million in 1998 and $126.8 million in 1997. Interest expense on corporate debt included in that total was $169.6 million in 1999, $165.4 million in 1998 and $109.4 million in 1997, fluctuating in relationship to the average debt outstanding and the average interest rate thereon. The average debt outstanding was $2.8 billion, $2.8 billion and $1.6 billion during 1999, 1998 and 1997, respectively. The average interest rate on such debt was 6.15 percent, 6.01 percent and 6.94 percent during 1999, 1998 and 1997, respectively.
Collected premiums on Medicare supplement policies decreased by .1 percent, to $915.6 million, in 1999 and increased by 15 percent, to $916.7 million, in 1998. Sales of Medicare supplement policies have been affected by: (i) steps taken to improve profitability by increasing premium rates and changing our commission structure and underwriting criteria; (ii) increased competition from alternative providers, including HMOs; and (iii) reduced production in Massachusetts due to our decision to cease writing new business in that state (as announced in the third quarter of 1997).
Changes in the consolidated balance sheet at December 31, 1999, compared to 1998, reflect: (i) our operating results; (ii) our origination of finance receivables; (iii) the sale of finance receivables in securitizations structured as sales (prior to our September 8, 1999, announcement); (iv) the transfer of finance receivables to securitization trusts and sale of notes to investors in transactions accounted for as secured borrowings; (v) changes in the fair value of actively managed fixed maturity securities and interest-only securities; and (vi) various financing transactions. Financing transactions (described in the notes to the consolidated financial statements) include: (i) the issuance and repurchase of common stock; (ii) the issuance of convertible preferred stock; (iii) the issuance and repayment of notes payable and commercial paper; and (iv) the issuance of trust preferred securities.
Total capital shown below excludes debt of the finance segment used to fund finance receivables. Total capital, before the fair value adjustment recorded in accumulated other comprehensive loss, increased $1,117.6 million, or 11 percent, to $11.4 billion.
Book value per common share outstanding decreased to $15.50 at December 31, 1999, from $16.37 a year earlier. Such change was primarily attributable to the factors discussed in the previous paragraph. Excluding accumulated other comprehensive loss, book value per common share outstanding increased to $17.85 at December 31, 1999, from $16.46 a year earlier.
Finance receivables include manufactured housing, home equity, home improvement, general consumer, equipment, commercial finance and revolving credit loans. Commercial finance receivables generally represent dealer floorplan; truck lending and leasing; and small-ticket equipment lending and leasing (such as small-ticket computer, office and telecommunication equipment). Revolving credit loans consist of retail credit card arrangements with merchants, dealers and their customers. We carry finance receivables at amortized cost, net of an allowance for credit losses.
Separate accounts are funds on which investment income and gains or losses accrue directly to certain policyholders. The assets of these accounts are legally segregated. They are not subject to the claims that may arise out of any other business of Conseco. We report separate account assets at market value; the underlying
If the counterparties of these financial instruments fail to meet their obligations, Conseco may have to recognize a loss. Conseco limits its exposure to such a loss by diversifying among several counterparties believed to be strong and creditworthy. At December 31, 1999, all of the counterparties were rated "A" or higher by Standard & Poor's Corporation.
At December 31, 1999, the mortgage loan balance was primarily comprised of commercial loans. Approximately 8 percent, 8 percent, 7 percent, 7 percent, 7 percent and 7 percent of the mortgage loan balance were on properties located in Ohio, New York, Texas, Florida, Pennsylvania and California,
respectively. No other state comprised greater than 5 percent of the mortgage loan balance. Less than 1 percent of the mortgage loan balance was noncurrent at December 31, 1999. At December 31, 1999, our allowance for loss on mortgage loans was $3.8 million.
Conseco had no investments in any single entity in excess of 10 percent of shareholders' equity at December 31, 1999, other than investments issued or guaranteed by the United States government or a United States government agency.
Notes payable and commercial paper (excluding notes payable related to securitized finance receivables structured as collateralized borrowings) at December 31, 1999 and 1998, were as follows (interest rates as of December 31, 1999):
Our current bank credit facilities allow us to borrow up to $2.3 billion, of which $1.5 billion may be borrowed until 2003 and $.8 billion may be borrowed until September 2000. Borrowings under these facilities averaged $1,155.3 million during 1999, at a weighted average interest rate of 5.45 percent. The credit facility requires us to maintain various financial ratios, as defined in the agreement, including: (i) a debt-to-total capitalization ratio less than .45:1 (such ratio was .36:1 at December 31, 1999); and (ii) an interest coverage ratio greater than 2.25:1 for the period October 1, 1999 through September 30, 2001 and greater than 2.50:1 thereafter (such ratio was 5.47:1 for the period ended December 31, 1999). We use unsecured bank credit facilities to support our commercial paper program.
(c) Each FELINE PRIDES includes: (a) a stock purchase contract under which the holder: (i) will purchase a number of shares of Conseco common stock on February 16, 2001 (ranging from .9363 to 1.1268 shares per FELINE PRIDES equivalent to $44.38 to $53.40 per common share) under the terms specified in the stock purchase contract; and (ii) will receive a contract adjustment payment equal to