The disaggregated earnings summarized in the preceding schedule resulted in fully diluted earnings per share as follows:
The following tables and narratives summarize amounts reported in the consolidated statement of operations for the three years ended December 31, 1993, disaggregated as previously described for Conseco's three earnings activities. Many of the changes which occurred in the consolidated statement of operations resulted from: (i) acquisitions of new affiliates; (ii) restructurings that changed Conseco's percentage ownership in the affiliate; and (iii) changes in control of the affiliates that affected the determination of whether the affiliate was to be included in Conseco's statement of operations under the consolidation or the equity method of accounting.
Other operating costs and expenses. The decrease in other operating costs and expenses in 1993 from 1992 was primarily due to the reinsurance recapture by Western National, which was previously discussed. The increase in other operating costs and expenses in 1992 from 1991 was due to several factors including increased guaranty fund assessments and compensation costs.
The carrying value and estimated fair value of fixed maturity investments which were in substantive default (i.e., in default due to nonpayment of interest or principal) as of December 31, 1993, were both $25.3 million, net of recorded writedowns totaling $16.8 million. The Company had no fixed maturity investment in technical (but not substantive) default, (i.e., in default, but not as to the payment of interest or principal). There were no other fixed maturity investments about which management has serious doubts as to the ability of the issuer to comply on a timely basis with the material terms of the instruments.
Preferred stock increased in 1993 due to the public offering of 5.75 million shares of Senior D cumulative convertible preferred stock, net of the retirement of all previously outstanding preferred stock.
Statutory surplus of the Company's insurance subsidiaries and investees is believed to be adequate. Conseco expects that statutory earnings in 1994 will exceed amounts needed by the holding companies for debt service and other requirements. Such excesses will be available to increase statutory capital of the life insurance subsidiaries and investees in order that their internal growth can continue.
/s/ STEPHEN C. HILBERT /s/ ROLLIN M. DICK Stephen C. Hilbert Rollin M. Dick Chairman of the Board, Executive Vice President and President and Chief Financial Officer Chief Executive Officer
Effective December 31, 1993, when the Company recognizes changes in conditions that cause a fixed maturity investment to be transferred to a different category (e.g., actively managed, held to maturity or trading), the security is transferred to the new category at its fair value at the date of the transfer. At the date of transfer, the security's unrealized gain or loss is accounted for as follows:
- For immediate annuities with mortality risks, in relation to the present value of benefits to be paid.
The liability for future policy benefits for accident and health policies consists of active life reserves and the estimated present value of the remaining ultimate net cost of incurred claims. The active life reserves include unearned premiums and additional reserves. The additional reserves are computed on the net level premium method using assumptions for future investment yield, mortality and morbidity experience. The assumptions are based on projections of past experience and reflect provisions for possible adverse deviation.
In July 1992, CCP, a newly organized holding company for the Partnership's first three acquisitions, completed an initial public offering ("IPO") of 8,010,700 shares of common stock, with net proceeds to CCP totaling $111.2 million. The shares issued in the offering represented a 31 percent ownership interest in the common stock outstanding of CCP. The remaining ownership interest in CCP was held by Conseco and others who exchanged their investments in the Partnership and its subsidiaries for common stock of CCP.
On September 30, 1993, Conseco completed the acquisition of 13.3 million shares of common stock of BLH from ICH for $287.6 million. The shares purchased represented 25 percent of the outstanding shares of common stock of BLH, increasing Conseco's ownership of shares of common stock of BLH to 56 percent. The purchase price for the shares acquired from ICH was paid by the surrender for redemption of $50.0 million stated value of ICH preferred stock owned by a Conseco subsidiary and the payment of $237.6 million in cash. The cash payment was funded with available cash and the net proceeds from a $200.0 million senior unsecured loan. As described in Note 16, the loan was repaid in February 1994, using the proceeds from the IPO of Western National Corporation.
At December 31, 1993, the Company had outstanding interest rate swap agreements which expire at various dates through 1999. Under the agreements, the Company receives a fixed rate averaging 6.7 percent on $295.0 million and pays a floating rate based on LIBOR. The estimated fair value of the agreements was approximately $13.7 million at December 31, 1993, which was not recognized in the accompanying consolidated balance sheet.
Conseco's investment in 40 percent of the common stock of CCP is included in the consolidated balance sheet on the equity basis at $244.3 million at December 31, 1993, representing the effect of the transactions described in Note 2 plus equity in CCP's earnings. The closing price of CCP's shares on the New York Stock Exchange on December 31, 1993, was $27.875 per share, indicating a total fair value of the CCP shares owned by Conseco of $322.1 million, compared to the total cost to Conseco of $102.8 million. A substantial portion of the shares of CCP common stock held by Conseco are subject to restrictions on trading.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") was enacted on August 10, 1993. The most significant provision of the Act affecting the Company was the increase in the corporate income tax rate to 35 percent from 34 percent, effective for taxable income reported for the year 1993. As a result of the increase in the tax rate, the Company recognized additional tax expense of $8.9 million consisting of: (i) $5.6 million related to income of 1993; (ii) $1.9 million related to a one-time adjustment to accumulated deferred taxes relating to prior years' income; and (iii) $1.4 million related to unrealized appreciation of securities at the date the new law was enacted. In addition, the equity in earnings of CCP was reduced by $1.6 million as a result of the Company's share of the additional tax expense recorded by CCP related to the increase in the tax rate. The impact of other provisions of the Act was not material to the Company.