Through its various subsidiaries, the Company owns and utilizes in its operations offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 77,000 sq. ft.). Subsidiaries of the Company own a facility (totaling approximately 158,500 sq. ft.) primarily used for manufacturing located in Georgia and facilities and land in California and Oregon (totaling approximately 98,000 square feet and 390 acres, respectively) used for winemaking operations.
(c) Source: Best's Aggregates & Averages, Property/Casualty, 1999 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products.
Management's Discussion and Analysis of Financial Condition and - ------ Results of Operations. ---------------------------------------------------------------
During 1999, the Company paid the Dividend of $13.58 per Common Share totaling $811,925,000. Pursuant to a ruling from the Internal Revenue Service, any gain realized on the Dividend will be treated as capital gain income for non-corporate shareholders.
Payment of the Dividend required the Company to make an offer to purchase all of its 8-1/4% Notes and its 7-7/8% Notes at a purchase price of 101% of principal, plus accrued and unpaid interest thereon. Pursuant to such offers, in 1999, the Company repurchased $80,899,000 principal amount of the 8-1/4% Notes and $113,324,000 principal amount of the 7-7/8% Notes for $198,000,000, including accrued interest. Funds received from repayment of $150,000,000 of the Conseco Notes were used for a portion of this repurchase.
in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice.
In September 1999, the Company lent to MK Gold $35,800,000 and entered into a purchase agreement to increase its equity interest to 72.5%. In October 1999, the stock purchase was consummated for approximately $15,800,000 and the loan was reduced by such amount. During 1999, MK Gold acquired Cobre Las Cruces, S.A., a Spanish company that holds the exploration and mining rights to the Las Cruces copper deposit in Spain for total cash consideration of $42,000,000.
The Company has replaced its two corporate owned aircraft it has used for ten years with two newer models of used aircraft. During 1999, the Company paid $43,900,000 of generally available corporate funds to acquire these aircraft, net of $8,500,000 received upon the sale of one of its older aircraft. The Company expects to receive approximately $8,000,000 for its remaining aircraft.
At December 31, 1999, a maximum of $31,900,000 was available to the Parent as dividends from its regulated subsidiaries without regulatory approval. Additional amounts may be available to the Parent in the form of loans or cash advances from regulated subsidiaries, although no amounts were outstanding at December 31, 1999 or borrowed to date in 2000. There are no restrictions on distributions from non-regulated subsidiaries. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Because of the tax loss carryforwards available to the Parent and certain subsidiaries, together with current interest deductions and corporate expenses, the amount paid by the Parent for income taxes has been substantially less than tax sharing payments received from its subsidiaries. Payments from regulated subsidiaries for dividends, tax sharing payments and other services totaled $17,100,000 for the year ended December 31, 1999.
During 1999, the Company acquired substantially all of the assets of Tranex, a subprime automobile lender, for $128,000,000. The Company's banking and lending subsidiary purchased Tranex's subprime automobile portfolio for $67,900,000 and certain other assets for $4,000,000. Another subsidiary of the Company acquired $44,200,000 of residual interests and excess servicing assets of related securitized trusts and $12,000,000 of certain other assets.
The Company and certain of its subsidiaries have loss carryforwards and other tax attributes. The amount and availability of tax loss carryforwards are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of these carryforwards, the Company's certificate of incorporation contains provisions which generally restrict the ability of a person or entity from accumulating at least five percent of the Common Shares and the ability of persons or entities now owning at least five percent of the Common Shares from acquiring additional Common Shares.
Net earned premium revenues of the Empire Group were $145,200,000, $228,600,000 and $275,000,000 for the years ended December 31, 1999, 1998 and 1997, respectively. While earned premiums declined in all lines of business, the most significant reductions during 1999 were in assigned risk automobile
The Empire Group's combined ratios increased in 1999 and 1998 primarily due to the reduction in premium volume at a rate greater than the reduction in net underwriting and other costs. In addition, the reduction in servicing fees negatively affected the expense ratios. Expense ratios were also adversely affected by increased expenditures related to the installation of new information systems, providing Internet access to agents and severance costs. Included in the Empire Group's results for 1999, 1998 and 1997 were $17,000,000, $42,000,000 and $27,000,000, respectively, for reserve strengthening related to losses from prior accident years.
During 1999, the Empire Group experienced unfavorable development due to an increase in severity of 1998 accident year losses in the assigned risk automobile and voluntary private passenger automobile lines, and 1996 accident year losses in certain classes of the commercial automobile line. As a result, the Empire Group increased its reserves by $7,500,000 for assigned risk automobile, $5,000,000 for voluntary private passenger automobile and $4,500,000 for commercial automobile lines. As previously discussed, the Empire Group no longer accepts new policies from certain agents identified as having had poor underwriting results in the voluntary private passenger automobile line of business and, effective January 1, 2000, the Empire Group no longer participates in the assigned risk business. Additionally, the Empire Group no longer offers insurance in those classes of the commercial automobile line that contributed to the unfavorable development.
During 1998, the Empire Group reviewed the adequacy of the reserves carried for its open claims' files, focusing on workers' compensation, commercial auto and other commercial liability lines of business. As part of the review, substantially all open workers' compensation claim files were reviewed for every accident year up to and including 1998. Additionally, during 1998, the Empire Group reorganized the commercial auto claims department. As part of this realignment, more complex claims files were reviewed by the most experienced claims examiners and assumptions regarding average claims severity and probable ultimate losses were revised. Accordingly, reserves were strengthened by
The 1997 reserve strengthening included $11,000,000 for commercial package lines of business and $7,000,000 for voluntary commercial automobile lines of business. These increases resulted from a review of open claim files and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years.
The reserving process relies on the basic assumption that past experience is an appropriate basis for predicting future events. The probable effects of current developments, trends and other relevant matters are also considered. Since the establishment of loss reserves is affected by many factors, some of which are outside the Company's control or are affected by future conditions, reserving for property and casualty claims is a complex and uncertain process requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, the Company's estimates and judgments may be revised. While the effect of any such changes in estimates could be material to future results of operations, the Company does not expect such changes to have a material effect on its liquidity or financial condition.
Finance revenues and operating profits reflect the level and mix of consumer instalment loans. For 1999, although finance revenues increased due to greater average loans outstanding, operating profit declined primarily due to an increase in the provision for loan losses for the larger volume of loans outstanding. In addition, 1998 results reflected the pre-tax gain of $6,500,000 from the sale of substantially all of the Company's executive and professional loan portfolio, as well as a decline in automobile loan losses. Average loans outstanding for 1999 were $238,600,000 as compared to $148,700,000 for 1998. This increase was primarily due to the purchase of a subprime automobile portfolio in December 1998, the Tranex acquisition in 1999 and increased new loan originations.
Since December 1997, the Company's manufacturing operations have consisted of its plastics division. In 1999, revenues of the plastics division reached a record level of $64,000,000, an increase of 13% over 1998. In addition, despite rising raw material prices, the gross profit increased 16% to $24,900,000. In 1998, the gross profit for the plastics division increased by 14% to $21,400,000. This increase was primarily due to greater sales in most of the division's product lines and lower raw material costs. The decline in manufacturing revenues in 1998 compared to 1997 was due to the sale of certain divisions and the discontinuance of certain non-performing product lines in 1997 and prior years.
Investment and other income in 1999 included the gains on sale of Caja ($120,800,000), The Sperry and Hutchinson Company, Inc. ($18,700,000) and PIB ($29,545,000), and the gain on sale of an equity interest in an associated company ($8,700,000). Investment and other income also increased in 1999 due to increased rent income and gains from sales of real estate properties, of which $49,800,000 related to Fidei. During 1999, Fidei sold 62 real estate properties; 88 properties remain at December 31, 1999, all of which are currently being marketed for sale. Such increases were partially offset by a reduction in investment income resulting primarily from payment of the Dividend and debt repurchases described above, a reduction in investments held by the Empire Group and the gain in 1998 on the sale of the executive and professional loan portfolio. In 1998, investment and other income increased by $16,300,000 primarily due to increased interest income ($63,700,000), the sale of the Company's executive and professional loan portfolio referred to above, ($6,500,000) and increased income from real estate activities ($8,800,000), partially offset by reduced gains from sales of real estate and other assets ($40,700,000) and reduced income relating to the service business ($19,100,000).
During 1998, due to declines in values that were deemed other than temporary, the Company recorded a pre-tax writedown of $75,000,000 related to its investments in Russian and Polish debt and equity securities. Such writedowns are reflected in the caption "Net securities gains (losses)." At December 31, 1999, the remaining book value of the Company's investments in these securities was $10,000,000.
Income taxes for 1999 reflect a benefit of $40,100,000 from the utilization of capital loss carryforwards, of which $33,300,000 was previously included in the valuation allowance. Income taxes for 1999 also reflect a benefit of $3,400,000 for the favorable resolution of certain federal income tax
The number of shares used to calculate basic earnings (loss) per share was 59,338,000, 63,409,000 and 62,205,000 for 1999, 1998 and 1997, respectively. The number of shares used to calculate diluted earnings (loss) per share was 59,352,000, 63,510,000 and 62,205,000 for 1999, 1998 and 1997, respectively.
Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations, competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in foreign and domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, prevailing interest rate levels, weather related conditions that may affect the Company's operations, adverse environmental developments in Spain that could delay or preclude the issuance of permits necessary to develop the Company's Spanish mining rights, and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events.