Our principal operations are located on a 170-acre corporate campus in Carmel, Indiana, immediately north of Indianapolis. The 11 buildings on the campus (all but one of which are owned) contain approximately 810,000 square feet of space and house Conseco's executive offices and certain administrative operations of its subsidiaries. The campus has ample room for additional buildings to support future growth.
Our supplemental health products are primarily administered from a single facility of 300,000 square feet in downtown Chicago, Illinois, leased under an agreement having a remaining life of 10 years. We also lease approximately 130,000 square feet of warehouse space in a second Chicago facility; this lease has a remaining life of five years. Conseco owns an office building in Kokomo, Indiana (100,000 square 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 leases 24,000 square feet of office space in Bensalem, Pennsylvania, and 4,000 square feet of office space in Sarasota, Florida, for use by our long-term care insurance marketing operations; these leases expire in 2000 and 1998, respectively. Conseco leases 22,000 square feet of office space in Schaumburg, Illinois, for use by our major medical marketing and certain information technology operations. Conseco also leases
Our 1996 operating earnings were $267.7 million, or $1.93 per diluted share, up 104 percent and 53 percent, respectively, over 1995. Operating earnings increased as a result of the LPG Merger, the ALH Stock Purchase, the effect of increased ownership of BLH as a result of purchases of BLH common stock during 1995 and 1996, and profit improvements in each of our segments. Operating earnings for 1996 were not affected by the ATC Merger, the THI Merger or the BLH Merger, all of which were recorded as of December 31, 1996. The percentage increase in operating earnings was greater than the increase in operating earnings per diluted share primarily because of the additional common shares or equivalents outstanding in 1996 resulting from: (i) the LPG Merger; and (ii) the Company's January 1996 offering of Preferred Redeemable Increased Dividend Equity Securities, 7% PRIDES Convertible Preferred Stock ("PRIDES"), which are mandatorily convertible into shares of Conseco common stock.
Net income of $252.4 million in 1996, or $1.82 per diluted share, included: (i) net investment gains (net of related costs, amortization and taxes) of $11.2 million, or 8 cents per diluted share; and (ii) an extraordinary charge of $26.5 million, or 19 cents per share, related to early retirement of debt. Net income of $220.4 million in 1995, or $2.12 per diluted share, included: (i) net investment gains (net of related costs, amortization and taxes) of $16.3 million, or 16 cents per share; (ii) restructuring income of $74.9 million, or 72 cents per share, arising from the release of deferred income taxes previously accrued on income related to CCP and BLH (such deferred tax was no longer required when Conseco's ownership of these companies exceeded 80 percent); and (iii) an extraordinary charge of $2.1 million, or 2 cents per share, related to early retirement of debt.
The following tables and narratives summarize the results of our operations by business segment. All amounts reported in these summaries relate solely to periods after the companies were included in our consolidated financial statements.
General: This segment includes Medicare supplement and long-term care insurance products, primarily sold to senior citizens, and effective January 1, 1997 (as a result of the acquisitions of CAF and THI), specified-disease products. Through December 31, 1996, the supplemental health operations consist solely of Bankers Life's Medicare supplement and long-term care products, distributed through a career agency force. The segment's 1997 results of operations are significantly affected by recent acquisitions (ATC, THI and CAF, effective January 1, 1997; PFS, effective April 1, 1997; and Colonial Penn, effective September 30, 1997). The supplemental health products of THI, CAF, ATC, PFS and Colonial Penn are all distributed through professional independent producers. The profitability of this segment largely depends on the overall level of sales, persistency of in-force business, claim experience and expense management.
Premiums collected by this segment in 1997 were $1,843.7 million, up 127 percent from 1996. Premiums collected in 1996 increased to $810.8 million, up 9.7 percent.
Medicare supplement policies accounted for 43 percent of this segment's collected premiums in 1997, compared with more than 75 percent of this segment's collected premiums in 1996 and 1995. The change in the mix of premiums collected reflects the more diverse supplemental health lines sold by Conseco as a result of the recent acquisitions. Collected premiums on Medicare supplement policies increased 29 percent in 1997, to $796.4 million, and increased 3.6 percent in 1996, to $617.9 million. Such increases primarily reflect the recent acquisitions and a larger base of premiums due to rate increases. The sales of Medicare supplement policies have been affected by: (i) steps taken to improve profitability by increasing premium rates and changing both the commission structure and the underwriting criteria for these policies; and (ii) increased competition from alternative providers, including HMOs.
Premiums collected on specified-disease policies were $383.4 million in 1997, substantially all of which were collected by recently acquired companies.
Insurance policy income comprises premiums earned on the segment's policies and has increased over the last three years consistent with the explanations provided above for premiums collected.
Net investment income increased 311 percent in 1997, to $273.8 million, and did not change materially in 1996 compared with 1995. Such investment income fluctuates when changes occur in: (i) the amount of average invested assets supporting insurance liabilities; and (ii) the yield earned on invested assets. During 1997, the segment's average invested assets increased approximately 278 percent, to $3.4 billion, and the net yield on invested assets increased to 8.0 percent from 7.6 percent. During 1996, the segment's average invested assets increased approximately 5.0 percent, to $.9 billion, and the net yield on invested assets decreased from 8.0 percent to 7.6 percent. Invested assets grew as a result of the growth in insurance liabilities related to the segment's business.
Insurance policy benefits and change in future policy benefits increased in 1997, reflecting recent acquisitions, the larger amount of business in force on which benefits are incurred, and a higher incidence of claims. This account increased in 1996 as a result of the larger amount of business in force on which benefits are incurred, net of the lower incidence of claims. In 1997, the ratio of policy benefits to insurance policy income for the Medicare supplement policies increased to 69.1 percent from 68.2 percent, reflecting the different characteristics of such policies in recently acquired companies as well as fluctuations in claim experience. In 1996, the ratio of policy benefits to insurance policy income for Medicare supplement policies fell 3.5 percentage points to 68.2 percent, reflecting the premium rate increases implemented in 1996 and 1995.
The ratio of policy benefits to insurance policy income for specified-disease policies was 61.6 percent in 1997. Such products were not sold by Conseco prior to the acquisitions of THI and CAF.
Interest expense on investment borrowings was affected by changes in investment borrowing activities during the last three years and the changes in interest rates paid on such borrowings.
Nonrecurring charges for 1997 represent an increase to claim reserves of $41.5 million and the write-off of cost of policies produced and cost of policies purchased of $20.9 million related to Medicare supplement business in the state of Massachusetts. Regulators in that state have not allowed premium increases for Medicare supplement products necessary to avoid losses on the business. We are currently seeking rate increases. We are no longer writing new Medicare supplement business in Massachusetts.
General: This segment includes traditional fixed rate annuity products (SPDAs, FPDAs and SPIAs), market value-adjusted annuity products, equity-indexed annuity products and variable annuities sold through both career agents and professional independent producers. The profitability of this segment largely depends on the investment spread earned (i.e., the excess of investment earnings
over interest credited on annuity deposits), the persistency of in-force business, and expense management. In addition, comparability between periods is affected by: (i) the LPG Merger, effective July 1, 1996; and (ii) the ALH Stock Purchase, effective September 30, 1996.
Premiums collected by this segment in 1997 were $1,689.6 million, up 1.2 percent over 1996. Premiums collected in 1996 were $1,670.3 million, down 1.4 percent from 1995. Increased competition from products such as mutual funds, traditional bank investments, variable annuities and other investment and retirement funding alternatives was a significant factor in the modest increase in annuity premiums collected, despite the full-year impact of the former LPG subsidiaries.
In response to consumers' desire for alternative investment products with returns linked to equities, we introduced an equity- indexed annuity product in June 1996. The accumulation value of these annuities is credited with interest at an annual minimum guaranteed rate of 3 percent, but the annuities provide for higher returns based on a percentage of the change in the S&P 500 Index during each year of their term. We purchase S&P 500 Call Options in an effort to hedge potential increases to policyholder benefits resulting from increases in the S&P 500 Index to which the product's return is linked. Total collected premiums for this product were $387.7 million in 1997 compared with $80.4 million in 1996.
Variable annuities offer contract holders a rate of return based on the specific investment portfolios into which premiums may be directed. The popularity of such annuities has increased recently as a result of the desire of investors to invest in common stocks. In addition, in 1996, we began to offer more investment options for variable annuity deposits, and we expanded our marketing efforts, which resulted in increased collected premiums. Profits on variable annuities are derived from the fees charged to contract holders rather than from the investment spread. Variable annuity collected premiums increased 104 percent in 1997, to $185.2 million, and increased 42 percent in 1996, to $90.9 million.
Net investment income on general account invested assets (excluding income on separate account assets related to variable annuities and the change in the fair value of S&P 500 Call Options related to equity-indexed products) increased 7.8 percent in 1997, to $960.9 million, and increased 4.7 percent in 1996, to $891.2 million. These increases primarily reflect the increase in general account invested assets acquired in conjunction with the recent acquisitions. The segment's average invested assets increased 11 percent to $12.8 billion in 1997, compared with 1996, and the annualized yield earned on average invested assets decreased from 7.9 percent to 7.5 percent in 1997. The segment's average invested assets increased 10 percent to $11.2 billion in 1996, and the annualized yield earned on average invested assets decreased from 8.4 percent to 7.9 percent in 1996. Cash flows received during 1997 and 1996 (including cash flows from the sales of investments) were invested in lower yielding securities due to a general decline in interest rates.
Net investment income on separate account assets is offset by a corresponding charge to amounts added to policyholder account balances for variable annuity products. Such income and related charge fluctuate in relationship to total separate account assets and the return earned on such assets.
Universal life product collected premiums increased 66 percent in 1997, to $450.9 million, and increased 140 percent in 1996, to $271.1 million.
Traditional life product collected premiums increased 95 percent in 1997, to $258.1 million, and decreased 5.7 percent in 1996, to $132.5 million.
Interest added to financial product policyholder account balances increased 60 percent in 1997, to $154.9 million, and 88 percent in 1996, to $97.0 million. Such expense fluctuates with changes in: (i) the amount of insurance liabilities for universal life products; and (ii) the interest rate credited to such products. During 1997, such average liabilities increased 66 percent, to $3.3 billion, and the rate credited decreased from 5.0 percent to 4.8 percent. During 1996, such average liabilities increased 98 percent, to $2.0 billion, and the rate credited decreased from 5.2 percent to 5.0 percent. Universal life product liabilities increased primarily as a result of the acquisition transactions described above under "General."
Interest expense on investment borrowings is affected by changes in investment borrowing activities during the last three years and the changes in interest rates paid on such borrowings.
Other operating costs and expenses decreased 2.4 percent in 1997, to $89.3 million, and increased 71 percent in 1996, to $91.5 million. The fluctuations correspond to the increases in this segment's business as a result of recent acquisitions, offset in 1997 by expense reductions realized as a result of the consolidation of certain operations.
General: This segment includes individual and group major medical health insurance products. The segment's operations were significantly affected by the PFS Merger, effective April 1, 1997, and to a lesser extent, by the LPG Merger, effective July 1, 1996. The profitability of this business depends largely on the overall persistency of the business in force, as well as claim experience and expense management.
Insurance policy income comprises premiums earned on the segment's policies and fee income earned for group medical risk management services. Fluctuations in premiums earned have been consistent with the fluctuations in premiums collected described above. Fee income (which is earned by a subsidiary acquired in the LPG Merger) was $15.0 million in 1997 and $7.0 million in 1996.
invested assets did not change significantly and the net yield on invested assets decreased from 7.9 percent to 7.6 percent. Average invested assets increased in 1997 as a result of the PFS Merger.
Insurance policy income comprises premiums earned on the segment's policies, and has fluctuated over the last three years consistent with the explanations provided above for premiums collected.
Net investment income increased 97 percent in 1997, to $15.4 million, and decreased 13 percent in 1996, to $7.8 million. Such investment income fluctuated primarily in relationship to the amount of average invested assets supporting this segment's insurance liabilities. During 1997, the segment's average invested assets increased 96 percent, to $199.5 million, and the net yield on invested assets did not change materially. During 1996, the segment's average invested assets decreased approximately 8.6 percent, to $101.6 million, and the net yield on invested assets decreased from 8.1 percent to 7.7 percent.
Nonrecurring charges of $9.3 million in 1997 represent expenses incurred related to the death of an executive officer.
Total premiums collected by our business segments during the last three years were as follows:
Fluctuations in premiums collected are discussed above under "Results of operations by segment for the three years ended December 31, 1997." Our recent acquisitions will have a significant effect on future premiums collected. Total premiums collected for all currently consolidated companies (except subsidiaries of WNIC, which were acquired on December 1, 1997) for all periods (including periods prior to ownership by Conseco) are provided below:
Our insurance subsidiaries are regulated by insurance statutes and regulations as to the type of investments that they are permitted to make and the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, Conseco generally seeks to invest in United States government and government-agency securities and corporate securities rated investment grade by established nationally recognized rating organizations or, if not rated, in securities of comparable investment quality.
The following table summarizes investment yields earned over the past three years:
Although investment income is a significant component of total revenues, the profitability of a portion of our insurance products is determined primarily by spreads between interest rates earned and rates credited or accruing to our insurance liabilities. At December 31, 1997, the average yield, computed on the cost basis of our investment portfolio, was 7.5 percent, and the average interest rate credited or accruing to our total insurance liabilities was 5.2 percent, excluding interest bonuses guaranteed only for the first year of the contract.
Our actively managed fixed maturity portfolio at December 31, 1997, included primarily debt securities of the United States government, public utilities and other corporations, and mortgage-backed securities. Mortgage-backed securities included collateralized mortgage obligations ("CMOs") and mortgage-backed pass-through securities.
We periodically evaluate the creditworthiness of each issuer whose securities the Company holds. Special attention is paid to those securities whose market values have declined materially for reasons other than changes in interest rates or other general market conditions. We consider available information to evaluate the realizable value of the investment, the specific condition of the issuer and the issuer's ability to comply with the material terms of the security. Information reviewed may include the recent operational results and financial position of the issuer, information about its industry, recent press releases and other information. Conseco employs a staff of experienced securities analysts in a variety of specialty areas. Among its other responsibilities, this staff is charged with compiling and reviewing such information. If evidence does not exist to support a realizable value equal to or greater than the carrying value of the investment, and such decline in market value is determined to be other than temporary, we reduce the carrying amount to its net realizable value, which becomes the new cost basis; the amount of the reduction is reported as a realized loss. We recognize any recovery of such reductions in the cost basis of an investment only upon the sale, repayment or other disposition of the investment. We recorded writedowns of fixed maturity investments and other invested assets totaling $1.2 million
in 1997, primarily as a result of: (i) changes in the financial condition of a private company in which we had an indirect equity investment; and (ii) changes in the value of the underlying collateral associated with certain notes. These changes caused us to conclude that the decline in fair value of such investments was other than temporary. Our investment portfolio is subject to the risks of further declines in realizable value. However, we attempt to mitigate this risk through the diversification and active management of our portfolio.
Our policy is to discontinue the accrual of interest and eliminate all previous interest accruals for defaulted securities, if it is determined that such amounts will not be ultimately realized in full. Investment income forgone due to defaulted securities was $.2 million in 1997, $3.8 million in 1996 and $1.6 million in 1995.
At December 31, 1997, fixed maturity investments included $6.9 billion of mortgage-backed securities (or 30 percent of all fixed maturity securities). The yield characteristics of mortgage-backed securities differ from those of traditional fixed-income securities. Interest and principal payments occur more frequently, often monthly. Mortgage-backed securities are subject to risks associated with variable prepayments. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages backing the assets to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures.
Planned amortization classes and accretion-directed bonds are some of the most stable and liquid instruments in the mortgage-backed securities market. Planned amortization class bonds adhere to a fixed schedule of principal payments as long as the underlying mortgage collateral experiences prepayments within a certain range. Changes in prepayment rates are first absorbed by support classes. This insulates the planned amortization classes from the consequences of both faster prepayments (average life shortening) and slower prepayments (average life extension).
Support classes absorb the prepayment risk from which planned amortization and targeted amortization classes are protected. As such, they are usually extremely sensitive to prepayments. Most of our support classes are higher-average-life instruments that generally will not lengthen if interest rates rise further, and will have a tendency to shorten if interest rates decline. However, since these bonds have costs below their par values, higher prepayments will have the effect of increasing yields.
If we determine that an investment held in the actively managed fixed maturity category will be sold, we will either sell the security or transfer it to the trading account at its fair value and recognize the gain or loss immediately. There were no material transfers in 1997. During 1997, we sold actively managed fixed maturity securities with a $17.8 billion book value, resulting in $342.6 million of investment gains and $41.4 million of investment losses (both before related expenses, amortization and taxes). Such securities were sold in response to changes in the investment environment, which created opportunities to enhance the total return of the investment portfolio without adversely affecting the quality of the portfolio or the matching of expected maturities of assets and liabilities. The realization of gains and losses affects the timing of the amortization of the cost of policies produced and the cost of policies purchased, as explained in note 10 to the consolidated financial statements.
Credit-tenant loans are loans on commercial properties where the lease of the principal tenant is assigned to the lender. The principal tenant, or any guarantor of such tenant's obligations, must have a credit rating at the time of origination of the loan of at least BBB- or its equivalent. The underwriting guidelines consider such factors as: (i) the lease term of the property; (ii) the mortgagee's management ability, including business experience, property management capabilities and financial soundness; and (iii) economic, demographic or other factors that may affect the income generated by the property or its value. The underwriting guidelines also generally require a loan-to-value ratio of 75 percent or less. Credit-tenant loans are carried at amortized cost and totaled $558.6 million at December 31, 1997, or 2.1 percent of total invested assets. The total estimated fair value of credit-tenant loans was $587.2 million at December 31, 1997.
At December 31, 1997, we held mortgage loan investments with a carrying value of $516.2 million (or 1.9 percent of total invested assets) and a fair value of $551.0 million. The balance of mortgage loans included 96 percent commercial loans, 2 percent residential loans and 2 percent residual interests in CMOs. The residual interests in CMOs entitle the Company to the excess cash flows arising from the difference between: (i) the cash flows required to make principal and interest payments on the related senior interests in the CMOs; and (ii) the actual cash flows received on the mortgage loan assets included in the CMO portfolios. If prepayments vary from projections on the mortgage loan assets included in such CMO portfolios, the total cash flows to the Company from such junior and residual interests could change from projected cash flows, resulting in a gain or loss.
Our consolidated balance sheet at December 31, 1997, compared with 1996, reflects growth through operations, changes in the fair value of actively managed fixed maturity securities, and the following capital and financing transactions described in the notes to the consolidated financial statements: (i) the CAF Merger; (ii) the issuance of $800 million of Company-obligated mandatorily redeemable preferred securities of subsidiary trusts; (iii) the repurchase of senior subordinated notes and senior notes with a par value of $130.1 million; (iv) the conversion of convertible debentures acquired in the ATC Merger into Conseco common stock; (v) the conversion of PRIDES into Conseco common stock; (vi) the repurchase of mandatorily redeemable preferred stock of a subsidiary; (vii) the PFS Merger; (viii) the Colonial Penn Purchase; (ix) the WNIC Merger; (x) common stock repurchases; and (xi) the issuance of commercial paper and notes payable.
Our total capital at December 31, 1997 and 1996, was as follows:
We instituted a commercial paper program in April 1997 to lower our borrowing costs and improve our liquidity. Borrowings under our commercial paper program averaged approximately $525.9 million during the period of April 24, 1997 through December 31, 1997. The weighted average interest rate on such borrowings was 5.8 percent during 1997.
Total assets increased by $10.3 billion in 1997, to $35.9 billion, primarily due to the assets acquired in the CAF Merger, the PFS Merger, the Colonial Penn Purchase and the WNIC Merger.
In accordance with SFAS 115, Conseco records its actively managed fixed maturity investments at estimated fair value. At December 31, 1997 and 1996, such investments were increased by $484.4 million and $103.8 million, respectively, as a result of the SFAS 115 adjustment.
Our insurance operating companies generally receive adequate cash flow from premium collections and investment income to meet their obligations. Life insurance and annuity liabilities are generally long-term in nature. Policyholders may, however, withdraw funds or surrender their policies, subject to surrender and withdrawal penalty provisions. We seek to balance the duration of our invested assets with the estimated duration of benefit payments arising from contract liabilities.
Of our total insurance liabilities at December 31, 1997, approximately 17 percent could be surrendered by the policyholder without a penalty. Approximately 59 percent could be surrendered by the policyholder subject to penalty or the release of an insurance liability in excess of surrender benefits paid. The remaining 24 percent are not subject to surrender. Payment characteristics of the insurance liabilities at December 31, 1997, were as follows (dollars in millions):
Approximately 30 percent of insurance liabilities were contracts subject to a fixed interest rate for the life of the contract. The remaining liabilities generally were subject to interest rates that could be reset annually.
The following summarizes insurance liabilities for investment contracts by credited rate (excluding interest rate bonuses for the first policy year only) at December 31, 1997 (dollars in millions):
The ability of our insurance subsidiaries to pay dividends is subject to state insurance department regulations. These regulations generally permit dividends to be paid for any 12 month period in amounts equal to the greater of (or in a few states, the lesser of): (i) net gain from operations for the prior year; or (ii) 10 percent of surplus as of the end of the preceding year. Any dividends in excess of these levels require the approval of the director or commissioner of the applicable state insurance department. The amount of dividends that our insurance subsidiaries could pay to non-life parent companies in 1998 without prior approval is approximately $165.1 million.
Statutory operating results and statutory surplus are determined according to accounting practices prescribed or permitted by each state in which the subsidiaries do business. Statutory surplus bears no direct relationship to equity as determined under GAAP. With respect to new business, statutory accounting practices require acquisition costs and reserves for future guaranteed benefit payments and interest in excess of statutory rates to be expensed as the new business is written. These items cause a statutory loss ("surplus strain") on many insurance policies in the year in which they are issued. We manage the effect of such statutory surplus strain by designing our products to minimize such first-year losses, and by controlling the amount of new premiums written.
Note 12 to the consolidated financial statements shows the difference between pretax income reported using statutory accounting practices and GAAP.
Medical cost inflation has had a significant impact on our supplemental health operations. Generally, these costs have increased more rapidly than the Consumer Price Index. Medical costs will likely continue to rise. The impact of medical cost inflation on our operations depends on our ability to increase premium rates. Such increases are subject to approval by state insurance departments. Before Medicare supplement plans were standardized, approximately two-thirds of the states permitted rate plans with automatic escalation clauses. This permitted Conseco, in periods following initial approval, to adjust premium rates for changes in Medicare deductibles and increases in medical cost inflation without refiling with the regulators. Currently, rate changes for all Medicare supplement plans must be individually approved by each state. We seek to price our new standardized supplement plans to reflect the impact of these filings and the lengthening of the period required to implement rate increases.
If interest rates were to increase by 10 percent from their December 31, 1997 levels, our fixed maturity securities and short-term investments (net of corresponding changes in the value of cost of policies purchased, cost of policies produced and insurance liabilities) would decline in fair value by approximately $545 million. The calculations involved in our computer simulations incorporate numerous assumptions, require significant estimates and assume an immediate change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, actual losses could be less than those estimated above.
Conseco's operations in 1998 and in future years will be significantly affected by its recently completed acquisitions. After completing an acquisition, Conseco generally seeks to improve results of operations by centralizing, standardizing and more efficiently performing many functions common to most life insurance companies and by focusing on the sale of profitable products. In the case of Colonial Penn, which is engaged primarily in the sale of life insurance through direct marketing, many activities remain at its Philadelphia facility.
Conseco believes that a number of life insurance companies will become available for acquisition in the next 10 years as a result of strategic restructuring and industry consolidation. The Company may participate in those acquisitions which fit Conseco's strategic growth plan. We evaluate a potential acquisition based on a variety of factors, including its operating results and financial condition, growth potential, management and personnel, potential return on the acquisition in relation to other investment opportunities and internal development of our existing business operations. Conseco's ability to complete acquisitions that achieve those objectives depends on a number of external factors, including: (i) the attitudes of rating agencies toward Conseco's strategic plan and capital structure; (ii) the availability and cost of both debt and equity capital; (iii) pressures that motivate companies to seek to be acquired at a reasonable cost; and (iv) competition from other acquirers, which affects the cost of acquisitions.
Conseco believes it has the resources and capabilities to continue being a successful acquirer of life insurance companies. It also believes that its past record of successfully acquiring, financing and operating life insurance companies will be an advantage compared with others who may attempt to acquire available candidates. However, many acquisition targets that have been available recently did not appear to provide significant strategic benefits and their asking prices were high relative to their expected value. Management believes it is more beneficial to use Conseco's resources to improve the value of its products, distribution capabilities and operating systems rather than to complete acquisitions that do not offer comparable potential returns on its investment.