All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by Conseco with the Securities and Exchange Commission, press releases, presentations by Conseco or its management or oral statements) relative to markets for Conseco's products and trends in Conseco's operations or financial results, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend," "should," "could," "goal," "target," "on track," "comfortable with," and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (i) general economic conditions and other factors, including prevailing interest rate levels, stock and credit market performance and health care inflation, which may affect (among other things) Conseco's ability to sell its products, its ability to make loans and access capital resources and the costs associated therewith, the market value of Conseco's investments, the lapse rate and profitability of policies, and the level of defaults and prepayments of loans made by Conseco; (ii) Conseco's ability to achieve anticipated synergies and levels of operational efficiencies; (iii) customer response to new products, distribution channels and marketing initiatives; (iv) mortality, morbidity, usage of health care services and other factors which may affect the profitability of Conseco's insurance products; (v) performance of our investments; (vi) changes in the Federal income tax laws and regulations which may affect the relative tax advantages of some of Conseco's products; (vii) increasing competition in the sale of insurance and annuities and in the finance business; (viii) regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products, regulation of the sale, underwriting and pricing of products, and health care regulation affecting health insurance products; (ix) the outcome of the contemplated sale process relating to Conseco Finance Corp.; and (x) the risk factors or uncertainties listed from time to time in Conseco's filings with the Securities and Exchange Commission.
(a) Revenues exclude net investment gains (losses); benefits and expenses exclude amortization related to realized gains.
Commercial loan originations increased by $1.1 billion, or 15 percent, during 1999 and increased by $2.2 billion, or 43 percent, during 1998. The increase primarily reflects higher production in floorplan financing.
Gain on sale of finance receivables is the difference between the proceeds from the sale of receivables (net of related sale costs) and the allocated carrying amount of the receivables sold, including deferred origination fees and costs. The amount relates to the securitizations structured as sales prior to our September 8, 1999, announcement. In those securitizations, we determined such carrying amount by allocating the total carrying amount of the finance receivables between the portion we sell and the interests we retain (generally, securities classified as fixed maturities, interest-only securities and servicing rights), based on each portion's relative fair value at the time of sale. Assumptions used in calculating the estimated fair value of such retained interests are subject to volatility that could materially affect operating results. Prepayment rates may vary from expected rates as a result of competition, obligor mobility, general and
Fee revenue and other income includes servicing income, commissions earned on insurance policies written in conjunction with financing transactions, and other income from late fees. Such income increased by 43 percent, to $372.7 million, in 1999 and by 46 percent, to $260.4 million, in 1998. Our servicing portfolio (on which we earn servicing income) and our net written insurance premiums both grew along with managed receivables. As a result of the change in the structure of our future securitizations announced on September 8, 1999, we no longer record an asset for servicing rights at the time of our securitizations, nor do we record servicing fee revenue; instead, the entire amount of interest income is recorded as investment income. Accordingly, the amount of servicing income will decline in subsequent periods.
During 1999 and early 2000, the Company reevaluated its interest-only securities and servicing rights, including the underlying assumptions, in light of loss experience exceeding previous expectations. The principal change in the revised assumptions resulting from this process was an increase in expected future credit losses, relating primarily to reduced assumptions as to future housing price inflation, recent loss experience and refinements to the methodology of the model. The effect of this change was offset somewhat by a revision to the estimation methodology to incorporate the value associated with the cleanup call rights held by the Company in securitizations. We recognized a $554.3 million impairment charge ($349.2 million after tax) in 1999 to reduce the book value of the interest-only securities and servicing rights.
Merger-related charges of $148.0 million were recognized in 1998 and include: $45.0 million of transaction costs; $71.0 million of severance and other employment related costs; and $32.0 million of other costs. Transaction costs included expenses related to the Merger such as fees paid for investment bankers, attorneys, accountants and printers. Severance and other employment related costs included contractual
Premiums collected on long-term care policies increased by 8.9 percent, to $793.5 million, in 1999 and by 9.7 percent, to $728.4 million, in 1998. The increase reflects increases in premium rates as well as growth from both recently acquired and previously owned companies.
Life products are sold through career agents, professional independent producers and direct response distribution channels. Life premiums collected in 1999 were $970.7 million, up 4.5 percent over 1998. Life premiums collected in 1998 were $928.8 million, up 31 percent over 1997. Collections in 1999 included $38.7 million of premiums on reinsurance contracts entered into during the year. We intend to seek other reinsurance opportunities in the future, although the timing of such transactions is not predictable. The 1998 increase reflects premiums collected by recently acquired companies.
The amortized cost and estimated fair value of mortgage-backed securities at December 31, 1999, summarized by type of security, were as follows:
These investments had an estimated fair value of $527.5 million at December 31, 1999, and include equity and equity-type investments made by our subsidiary which engages in venture capital investment activities. At the time we enter into these investments, we believe they have high growth or appreciation potential. We do not participate in the day-to-day management of these investees. These investments are carried at estimated fair value, with changes in fair value recognized as investment income. This income will fluctuate from period-to-period based on changes in estimated market values of our venture capital investments. The fair value of venture capital investments that are publicly traded are generally based upon market prices. When liquidity is limited because of thinly traded securities, limited partnership structures, large-block holdings, restricted shares or other special situations, we adjust quoted market prices to produce an estimate of the attainable fair values. We estimate the fair values of securities that are not publicly traded based upon transactions which directly affect the value of such securities and consideration of the investee's financial results, conditions and prospects.
Based on our current assumptions and expectations as to future events related to the loans underlying our interest-only securities, we estimate receiving cash from these securities of $210 million in 2000, $130 million in 2001, $120 million in 2002, $105 million in 2003, $145 million in 2004, and $1.1 billion in all years thereafter.
We continually monitor the value of our goodwill based on our best estimates of future earnings considering all available evidence. We determine whether goodwill is fully recoverable from projected undiscounted net cash flows from earnings of the business acquired over the remaining amortization period. If we were to determine that changes in such projected cash flows no longer support the recoverability of goodwill over the remaining amortization period, we would reduce its carrying value with a corresponding charge to expense or shorten the amortization period (no such changes have occurred). Cash flows considered in such an analysis are those of the business acquired, if separately identifiable, or the product line of the business acquired, if such earnings are not separately identifiable.
structured as collateralized borrowings ($2.8 billion of which was at fixed rates and $6.5 billion of which was at floating rates). Based on the interest rate exposure and prevalent rates at December 31, 1999, a relative 10 percent decrease in interest rates would increase the fair value of the finance segment's fixed-rate borrowed capital by approximately $70.0 million. The interest expense on this segment's floating-rate debt will fluctuate as prevailing interest rates change.
(b) Principally, the 1984 United States Population Table and the NAIC 1983 Individual Annuitant Mortality Table.
During 1998, we repurchased various senior and senior subordinated debt with: (i) par value of $343.5 million; (ii) interest rates of 8.125 percent to 11.25 percent; and (iii) maturity dates of 2002 to 2004. We recognized an extraordinary charge of $42.6 million (net of income taxes of $24.1 million). During 1997, we repurchased various senior and senior subordinated debt with: (i) par value of $103.8 million; (ii) interest rates of 8.125 percent to 11.125 percent; and (iii) maturity dates of 2003 to 2004. We recognized an extraordinary charge of $6.9 million (net of income taxes of $3.6 million).
The Company rents office space, equipment and computer software under noncancellable operating leases. Rental expense was $61.5 million in 1999, $50.6 million in 1998 and $48.2 million in 1997. Future required minimum rental payments as of December 31, 1999, were as follows (dollars in millions):
Dividends declared on common stock for 1999, 1998 and 1997, were $.580, $.530 and $.313 per common share, respectively. Our accrual for declared but unpaid dividends was $49.2 million at December 31, 1999.