The Company's principal operations are located on a 150-acre corporate campus in Carmel, Indiana, immediately north of Indianapolis. These facilities contain approximately 416,000 square feet of space in seven buildings which contain Conseco's executive offices and certain administrative operations of its subsidiaries. These facilities include significant capacity for future growth.
Since Conseco commenced operations in 1982, it has acquired 11 life insurance companies, the first seven as wholly owned subsidiaries and the last four through the first partnership. Recent acquisition activity is described in Notes 1 and 2 to the consolidated financial statements. All acquisitions have been accounted for as purchases. Therefore, activities of acquired companies have been included in the results of operations commencing with the date of purchase.
Insurance policy income. Insurance policy income increased $65.1 million, or 5.7 percent, in 1993 over total insurance policy income in 1992. Bankers' insurance policy income was comprised primarily of individual health premiums, which increased as a result of new business, improved persistency and rate increases.
Net realized gains. Net realized gains (after applicable expense, amortization and taxes) often fluctuate from year to year. Fixed maturity investments of $.6 billion, $.9 billion and $.6 billion were sold in 1993, 1992 and 1991, respectively.
Interest expense on annuities and financial products. Interest expense on annuities and financial products decreased from 1992 to 1993 as a result of the reinsurance recapture by Western National. Such expense increased from 1991 to 1992 as a result of increased annuity deposits, offset by reduced rates credited on these products. The average rate credited on all insurance liabilities was approximately 7.0 percent at December 31, 1993 and 1992, and approximately 7.9 percent at December 31, 1991.
Insurance departments in the states where the Company's life insurance subsidiaries are domiciled or do business require insurance companies to make annual and quarterly filings. Prior to the 1992 annual statements, these statutory filings required the establishment of the mandatory securities valuation reserve ("MSVR"), an account designed to stabilize a company's statutory surplus against fluctuations in the market value of stocks and bonds, according to regulations prescribed by the NAIC. Effective for the 1992 annual statements, the NAIC replaced MSVR with two reserves, the interest maintenance reserve ("IMR") and the asset valuation reserve ("AVR"). The new regulations expanded reserve requirements to include all invested assets and to distinguish between investment gains and losses resulting from changes in interest rates and gains and losses resulting from changes in creditworthiness. The IMR captures all investment gains and losses resulting from changes in interest rates and provides for subsequent amortization of such amounts into statutory net income on a basis reflecting the remaining lives of the assets sold. The AVR captures investment gains and losses related to changes in creditworthiness and is also adjusted each year based on a formula related to the quality and loss experience of the Company's investment portfolio. Because the AVR requires expanded reserves for mortgage loans, other invested assets and short-term investments that were not previously considered in the MSVR, the reserve amount required under these regulations increased. Such changes affect the ability of the Company's insurance subsidiaries to reflect future investment gains and losses in statutory earnings and surplus.
As part of its program of exploring opportunities to improve its capital structure, Conseco continually reviews the need and desirability of restructuring the existing debt and equity of the Company and its affiliates.
Consolidated Statement of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991. . . . . . . 52
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Conseco, Inc. and Subsidiaries as of December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles.
On November 9, 1992, the Partnership acquired Bankers Life from I.C.H. Corporation (I.C.H. Corporation and its subsidiaries are collectively referred to herein as "ICH"). The acquisition was completed through BLH, a company formed and controlled by the Partnership.
Following are unaudited pro forma results of operations of the Company as if the Partnership's acquisition of Bankers, the IPOs of BLH and CCP and Conseco's subsequent purchases of additional shares of BLH and CCP had occurred at the beginning of the periods presented. Prior operations of Bankmark are not included in the following table since the effect is not material.
At December 31, 1993 and 1992, the estimated fair values of credit-tenant loans, policy loans and other invested assets were approximately equal to their respective carrying values.
The Company rents office space, equipment and computer software under noncancellable operating leases. Rental expense during 1993, 1992 and 1991, amounted to $11.9 million, $6.2 million and $5.1 million, respectively. Future required minimum rental payments as of December 31, 1993, were as follows (dollars in millions):
Bankers has an incentive stock option plan which is authorized to grant employees or directors options to purchase shares of common stock, stock appreciation rights and limited rights (rights exercisable only in the event of a tender offer for or acquisition of 25 percent or more of BLH's outstanding common stock). The maximum number of shares of common stock which may be issued under options and related rights granted under the plan is 3.5 million, with an exercise price not less than the fair market value of the underlying shares on the date of the grant. Options may become exercisable immediately or over a period of time and remain exercisable for up to 10 years after grant. During 1993, options for 820,000 shares of BLH common stock were granted to employees at a price per share of $22.00 to $23.63. No rights have been granted and no options are vested at December 31, 1993.
In connection with the acquisition of Bankers, the capital of one of the life insurance subsidiaries (Bankers Life Insurance Company of Illinois) was increased by providing cash in exchange for a surplus debenture. The remaining balance of the surplus debenture of $485.0 million at December 31, 1993, is considered a part of statutory capital and surplus of the life insurance subsidiary. Payments to BLH of principal and interest on the surplus debenture may be made from available funds only with the approval of the Illinois Department of Insurance when its Director is satisfied that the financial condition of the subsidiary warrants that action. Such approval may not be withheld provided the surplus of the subsidiary exceeds, after such payment, approximately $128 million. Such subsidiary's surplus at December 31, 1993, was $331 million.
The shares issued in the offering and the related transaction represent a 60 percent interest in WNC. The remaining common shares, which represent a 40 percent interest, are held by Conseco. Net pretax proceeds to Conseco from the repayment of the Conseco Note and the sale of WNC shares totaling $537.9 million were used to repay a $200 million senior unsecured loan and for other general corporate purposes. Effective January 1, 1994, WNC will be included in Conseco's financial statements on the equity method. In the first quarter of 1994 Conseco will report a one-time, after-tax gain of approximately $43 million as a result of the transaction. At February 15, 1994, the WNC shares owned by Conseco had a fair value of approximately $330.6 million (based on the closing price of $13.25 per share) and a net carrying value of approximately $270.0 million.